First Financial Bankshares, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016 unless otherwise noted. Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions where appropriate.
Business context and reporting period
First Financial is a Texas financial holding company operating a full-service commercial bank, trust and asset management business, investment and insurance subsidiaries. It had 69 financial centers across Texas. The quarter’s year-over-year comparisons include the effects of the July 2015 acquisition of FBC Bancshares/First Bank and the May 2015 4Trust Mortgage asset purchase, neither of which was included for the full comparable period in Q1 2015.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior date |
|---|---|---|
| Net interest income, GAAP | $57.0 million | $51.1 million in Q1 2015 |
| Net interest income, tax-equivalent | $63.1 million | $56.3 million in Q1 2015 |
| Net interest margin | 4.15% | 4.11% in Q1 2015 |
| Noninterest income | $19.8 million | $15.9 million in Q1 2015 |
| Noninterest expense | $41.1 million | $33.9 million in Q1 2015 |
| Provision for loan losses | $2.3 million | $1.3 million in Q1 2015 |
| Net earnings / diluted EPS | $25.7 million / $0.39 | $24.0 million / $0.37 in Q1 2015 |
| Return on average assets / equity | 1.58% / 12.55% | 1.64% / 14.00% in Q1 2015 |
| Efficiency ratio | 49.52% | 47.01% in Q1 2015 |
| Operating cash flow | $72.0 million | $40.4 million in Q1 2015 |
- Balance sheet: Total assets were $6.53 billion, compared with $6.03 billion a year earlier and $6.67 billion at December 31, 2015. Loans held for investment were $3.28 billion, up from $2.93 billion year over year but down from $3.32 billion at year-end. Total deposits were $5.06 billion, up from $4.84 billion year over year and down from $5.19 billion at year-end.
- Liquidity and borrowings: Cash and cash equivalents were $165.6 million, versus $166.0 million a year earlier and $272.9 million at year-end. Short-term borrowings were $525.3 million, compared with $401.9 million a year earlier and $615.7 million at year-end. The company reported $175 million outstanding on its FHLB line and $2.7 million drawn on correspondent-bank lines; its $25 million Frost Bank revolver had no balance outstanding. Management considered liquidity adequate.
- Capital: Shareholders’ equity was $838.6 million, or 12.85% of assets, versus $706.2 million, or 11.72%, a year earlier. At March 31, consolidated total risk-based capital was 17.60%, Tier 1 capital was 16.46%, and Tier 1 leverage was 10.23%; the company and bank exceeded applicable minimum requirements.
- Cash flow: Investing activities provided $47.2 million, compared with $241.2 million used in Q1 2015. Financing activities used $226.5 million, principally reflecting net reductions in deposits and short-term borrowings. Cash and cash equivalents decreased $107.2 million during the quarter.
Material changes versus the prior comparable period
- Net earnings increased 7.1%; tax-equivalent net interest income grew as average earning assets rose $559 million, including growth in average loans and tax-exempt securities. Net interest margin improved 4 basis points.
- Noninterest income rose $3.9 million. Mortgage operations increased to $3.1 million from $1.5 million, primarily reflecting 4Trust; deposit service charges and card fees also increased, partly reflecting First Bank and account growth. Trust fees declined modestly, including lower oil and gas-related fees.
- Noninterest expense increased $7.1 million, driven largely by salaries and benefits, occupancy, equipment and professional fees, in part from the acquired businesses and annual pay increases. The efficiency ratio worsened by 2.51 percentage points.
- The loan-loss provision increased to $2.3 million. Nonaccrual loans were $27.2 million, versus $18.9 million a year earlier; total nonperforming assets were $29.0 million, or 0.88% of loans and foreclosed assets, versus $20.4 million and 0.69%. The allowance was $44.1 million, or 1.34% of loans, versus $37.8 million and 1.29%.
- Available-for-sale securities were $2.76 billion. Their net unrealized gains, after tax, increased shareholders’ equity by $17.4 million during the quarter; management attributed reported unrealized losses to interest rates and did not consider them other-than-temporary.
Outlook, management commentary, risks and contingencies
- Management expected interest rates to remain low, putting continued downward pressure on net interest margin. Its rate simulations estimated net interest income changes of positive 0.23% under a 100-basis-point increase, negative 0.11% under a 200-basis-point increase, and negative 2.00% under a 50-basis-point decrease. Management cautioned these are estimates dependent on assumptions, not forecasts.
- Direct oil and gas exposure was $92.1 million, or 2.79% of loans. Management said these loans faced stress from depressed prices; $36.4 million were classified and $4.9 million were nonaccrual. The company reported enhanced monitoring and appropriate downgrades and charge-offs.
- Management cited economic and real-estate conditions, employment, oil and gas prices, loan demand and credit quality, interest rates, competition, regulation, acquisition integration, goodwill impairment, cybersecurity, and funding/liquidity as risks. It cautioned that first-quarter results are not necessarily indicative of full-year results.
- Off-balance-sheet commercial commitments totaled $757.2 million: $492.0 million of unfunded lines, $233.9 million of unfunded commitments to extend credit, and $31.3 million of standby letters of credit. Management noted many commitments may expire undrawn.
- The board declared a $0.18-per-share dividend on April 26, 2016, payable July 1, a 12.5% increase over the prior-year quarterly dividend. The company reported compliance with Frost Bank facility covenants. There were no material pending legal proceedings, and management reported disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether acquired-business contributions to revenue and expenses persist, and whether cost growth moderates enough to improve the efficiency ratio.
- Credit trends, especially nonaccrual and classified loans, allowance adequacy, and exposure to oil and gas and real estate borrowers.
- Deposit trends, borrowing levels and funding costs, including the use of FHLB advances and pledged collateral.
- Interest-rate sensitivity and whether actual margin performance matches management’s modeled scenarios.
- The value and duration sensitivity of the securities portfolio, including the treatment of unrealized gains and losses in capital and comprehensive income.
- Dividend sustainability in light of earnings, capital needs and the loan covenant limiting dividends to 55% of defined consolidated net income.