First Financial Bankshares, Inc. — Q1 2012 Form 10-Q
Business context and period. Texas-based multi-bank financial holding company operating 53 financial centers. The unaudited quarter ended March 31, 2012; comparative results are for the quarter ended March 31, 2011 unless stated otherwise. Dollar amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period |
|---|---|---|
| Net interest income | $38.3; tax-equivalent $41.8 | $37.3; tax-equivalent $40.5 |
| Net interest margin | 4.39% | 4.72% |
| Net earnings | $17.8 | $16.3 |
| Basic and diluted EPS | $0.56 | $0.52 |
| Noninterest income / expense | $13.3 / $26.5 | $12.8 / $26.2 |
| Efficiency ratio | 48.08% | 49.07% |
| Loans held for investment | $1,793.2 | $1,678.4 |
| Total deposits | $3,398.1 | $3,131.9 |
| Total assets | $4,227.3 | $3,828.2 |
| Shareholders’ equity | $517.0 | $456.2 |
| Cash and cash equivalents | $226.5 | $226.0 |
| Short-term borrowings | $237.6 | $192.2 |
- Net earnings increased 9.0%. Net interest income rose as average earning assets grew, while lower funding costs partly offset declining asset yields.
- Loans increased 6.8% and deposits 8.5% year over year. Against December 31, 2011, loans increased $17.3 million and deposits increased $63.3 million.
- Q1 operating cash flow was $36.7 million versus $37.5 million. Investing activities used $147.0 million, principally reflecting $222.9 million of securities purchases; financing activities provided $85.9 million. Cash and cash equivalents declined $24.3 million during the quarter.
- Loan-loss provision was $1.3 million, down from $2.1 million. Net charge-offs were $1.1 million, or 0.24% of average loans annualized, versus $0.7 million and 0.18%. Allowance for loan losses was $34.5 million, or 1.92% of loans.
- Nonperforming assets were $28.9 million (1.60% of loans and foreclosed assets), versus $24.3 million (1.44%) a year earlier. Nonaccrual loans rose to $21.0 million from $15.4 million; allowance coverage of nonaccrual, 90-days-past-due accruing and restructured loans was 164.3%, versus 210.7%.
- Available-for-sale securities totaled $1,960.8 million. Unrealized losses were $1.6 million; management attributed them to interest rates and did not consider them other-than-temporary.
- Capital was reported well above regulatory “well capitalized” thresholds: total risk-based 18.99%, Tier 1 risk-based 17.73%, and leverage 10.31%. Equity was 12.23% of assets.
Changes, outlook, risks and unusual items
- Growth in average earning assets supported tax-equivalent net interest income, but net interest margin fell 33 basis points year over year as earning-asset yields declined 45 basis points. Management cited the low-rate environment and expected rates to remain low until 2014, as then indicated by the Federal Reserve; it anticipated continued margin pressure.
- Trust fees, mortgage operations and card-related fees increased; deposit service charges decreased, primarily with lower overdraft use and regulatory changes. Trust assets under management, not recorded on the balance sheet, were $2.63 billion versus $2.38 billion a year earlier.
- Management cited ongoing weakness in real estate markets and the national and Texas economies as drivers of elevated problem assets, while describing asset quality as manageable. It warned that further economic or employment deterioration could increase nonperforming assets, charge-offs and provisions.
- Noninterest expense included increased operational and other losses associated with recurring customer debit-card losses and a cyberattack on a customer’s computer system. The company said it was implementing additional security measures and evaluating insurance protection.
- Management’s interest-rate simulations estimated net interest income changes over 12 months of +0.30% for a 100-basis-point rate rise, +0.72% for a 200-basis-point rise, and -2.30% for a 50-basis-point decline, relative to the base case. The filing cautions these estimates rely on assumptions and may differ materially from actual outcomes.
- No specific earnings or revenue guidance was provided. Results for the quarter are not necessarily indicative of full-year results, given seasonality, economic and credit conditions, interest rates, and regulatory changes.
- Liquidity was described as adequate. The company had $237.6 million in short-term borrowings, an undrawn $25 million parent-company revolving line, and subsidiary-bank Federal Home Loan Bank lines totaling $213.3 million; $79.7 million of FHLB letters of credit were outstanding. Commercial commitments totaled $376.8 million, including $285.9 million of unfunded lines of credit.
- The board’s authorization to repurchase up to 750,000 shares through September 30, 2014 remained unused through March 31, 2012. Shareholders approved increasing authorized common shares to 80 million on April 24, 2012.
Important facts for investors to verify
- Whether nonaccrual loans and total nonperforming assets stabilize or continue rising, particularly in real estate lending, and whether reserve coverage remains adequate.
- Whether loan and deposit growth can sustain earnings as low interest rates pressure net interest margin.
- How much of reported earnings depends on securities gains, trust and mortgage activity, and other noninterest sources.
- Whether cyber-related and debit-card losses recur, and what costs or insurance recoveries result from security measures.
- Current liquidity, borrowing and commitment exposures, and any changes in regulatory capital, dividend capacity or credit-line covenants.