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FFIN > SEC Filings for FFIN > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for FIRST FINANCIAL BANKSHARES INC

Form 10-Q for FIRST FINANCIAL BANKSHARES INC


31-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," and similar expressions, as they relate to us or management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to, those listed in "Item 1A- Risk Factors" in our Annual Report on Form 10-K and the following:

general economic conditions, including our local, state and national real estate markets and employment trends;

volatility and disruption in national and international financial markets;

government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau and the capital ratios of Basel III as adopted by the federal banking authorities;

political instability;

the ability of the Federal government to address the national economy and the fiscal cliff;

competition from other financial institutions and financial holding companies;

the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");

changes in the demand for loans;

fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;

the accuracy of our estimates of future loan losses;

the accuracy of our estimates and assumptions regarding the performance of our securities portfolio;

soundness of other financial institutions with which we have transactions;

inflation, interest rate, market and monetary fluctuations;

changes in consumer spending, borrowing and savings habits;

our ability to attract deposits;

changes in our liquidity position;

changes in the reliability of our vendors, internal control system or information systems;

our ability to attract and retain qualified employees;

acquisitions and integration of acquired businesses;

the possible impairment of goodwill associated with our acquisitions;

consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;

expansion of operations, including branch openings, new product offerings and expansion into new markets;

changes in compensation and benefit plans; and

acts of God or of war or terrorism.


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Such forward-looking statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Introduction

As a financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans and investments are deposits held by our subsidiary bank. Our largest expenses are interest on these deposits, salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income.

The following discussion of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2013 Annual Report on Form 10-K.

Critical Accounting Policies

We prepare consolidated financial statements based on generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions.

We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements.

We deem our most critical accounting policies to be (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on our reported results for a given period. A discussion of (1) our allowance for loan losses and our provision for loan losses and (2) our valuation of securities is included in note 5 and note 4, respectively, to our notes to consolidated financial statements (unaudited) which begins on page 9.

Stock Split

On April 22, 2014, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend effective for shareholders of record on May 15, 2014 that was distributed on June 2, 2014. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock on the consolidated financial statements as of and for the six months ended June 30, 2014.


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Acquisition of Orange Savings Bank, SSB

On February 9, 2013, we entered into an agreement and plan of merger to acquire Orange Savings Bank, SSB. On May 31, 2013, the transaction was completed, which we refer to herein as the "Orange acquisition". Pursuant to the agreement, we paid $39.20 million in cash and issued 420,000 shares of the Company's common stock in exchange for all of the outstanding shares of Orange Savings Bank, SSB.

At closing, Orange Savings Bank, SSB, was merged into First Financial Bank, N.A., Abilene, Texas, a wholly owned subsidiary of the Company. The total purchase price exceeded the estimated fair value of assets acquired by approximately $23.02 million and was recorded by the Company as goodwill.

Results of Operations

Performance Summary. Net earnings for the second quarter of 2014 were $21.21 million compared to $19.49 million for the same period in 2013, or a 8.80% increase.

Basic earnings per share for the second quarter of 2014 were $0.33 compared to $0.31 for the same quarter last year. The return on average assets was 1.59% for the second quarter of 2014, as compared to 1.67% for the same quarter of 2013. The return on average equity was 13.46% for the second quarter of 2014 as compared to 13.53% a year ago.

Net earnings for the six-month period ended June 30, 2014 were $43.54 million compared to $38.07 million for the same period in 2013, or a 14.38% increase.

Basic earnings per share for the first six months of 2014 were $0.68 compared to $0.60 for the same period last year. The return on average assets was 1.66% for the first six months of 2014, as compared to 1.69% for the same period in 2013. The return on average equity was 14.22% for the first six months of 2014 as compared to 13.47% a year ago.

Net Interest Income. Net interest income is the difference between interest income on earning assets and interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-bearing deposits.

Tax-equivalent net interest income was $52.97 million for the second quarter of 2014, as compared to $45.58 million for the same period last year. The increase in 2014 compared to 2013 was largely attributable to the increase in volume of interest earning assets. Average earning assets increased $631.78 million for the second quarter of 2014 over the same period in 2013. Average tax exempt securities and average loans increased $120.15 million and $423.76 million, respectively, for the second quarter of 2014 over the second quarter of 2013. Average interest bearing liabilities increased $465.32 million for the second quarter of 2014, as compared to the same period in 2013. The yield on earning assets increased six basis points during the second quarter of 2014, whereas the rate paid on interest-bearing liabilities decreased one basis point in the second quarter of 2014 primarily due to the effects of lower interest rates.


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Tax-equivalent net interest income was $104.77 million for the first six months of 2014, as compared to $88.05 million for the same period last year. The increase in 2014 compared to 2013 was largely attributable to the increase in volume of interest earning assets. Average earning assets increased $688.28 million for the first six months of 2014 over the same period in 2013. Average tax exempt securities and average loans increased $143.94 million and $500.62 million, respectively, for the first six months of 2014 over the same period in 2013. Average interest bearing liabilities increased $557.91 million for the first six months period of 2014, as compared to the same period in 2013. The yield on earning assets increased ten basis points during the first six months of 2014, whereas the rate paid on interest-bearing liabilities decreased one basis point in the first six months of 2014 primarily due to the effects of lower interest rates.

Table 1 allocates the change in tax-equivalent net interest income between the amount of change attributable to volume and to rate.

Table 1-Changes in Interest Income and Interest Expense (in thousands):



                                            Three Months Ended June 30, 2014                Six Months Ended June 30, 2014
                                             Compared to Three Months Ended                  Compared to Six Months Ended
                                                      June 30, 2013                                  June 30, 2013
                                          Change Attributable to           Total         Change Attributable to          Total
                                          Volume            Rate          Change          Volume             Rate        Change
Short-term investments                  $      (12 )      $     (18 )     $   (30 )    $        (133 )      $   13      $   (120 )
Taxable investment securities                  550              229           779              1,057           430         1,487
Tax-exempt investment securities (1)         1,416              370         1,786              3,450           482         3,932
Loans (1) (2)                                5,339             (395 )       4,944             12,646          (998 )      11,648

Interest income                              7,293              186         7,479             17,020           (73 )      16,947

Interest-bearing deposits                      165              (63 )         102                350          (176 )         174
Short-term borrowings                           -               (11 )         (11 )               30            18            48

Interest expense                               165              (74 )          91                380          (158 )         222

Net interest income                     $    7,128        $     260       $ 7,388      $      16,640        $   85      $ 16,725

(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.

(2) Non-accrual loans are included in loans.

The net interest margin for the second quarter of 2014 was 4.24%, an increase of six basis points from the same period in 2013. The net interest margin for the six months ended June 30, 2014 was 4.28%, an increase of ten basis points from the same period in 2013. Although interest rates have continued to remain at historically low levels, the Company is beginning to see improvements in its net interest margin. This improvement is a result of our continued efforts to mitigate the impact of low short-term interest rates by establishing minimum interest rates on certain of our loans, improving the pricing for loan risk, reducing rates paid on interest bearing deposits and increases in the overall reinvestment rate of our security portfolio. We expect interest rates to remain at the current low levels based on comments made by the Federal Reserve, which will continue to place pressure on our interest margin.


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The net interest margin, which measures tax-equivalent net interest income as a percentage of average earning assets, is illustrated in Table 2.

Table 2-Average Balances and Average Yields and Rates (in thousands, except percentages):

                                                                Three Months Ended June 30,
                                                      2014                                       2013
                                        Average        Income/      Yield/         Average        Income/      Yield/
                                        Balance        Expense       Rate          Balance        Expense       Rate
Assets
Short-term investments (1)            $    60,284      $     89        0.64 %    $    65,251      $    120        0.75 %
Taxable investment securities (2)       1,159,430         7,091        2.45        1,066,586         6,313        2.37
Tax-exempt investment securities
(2)(3)                                  1,037,608        12,599        4.86          917,460        10,813        4.71
Loans (3)(4)                            2,748,023        34,228        5.00        2,324,268        29,282        5.05

Total earning assets                    5,005,345      $ 54,007        4.33 %      4,373,565      $ 46,528        4.27 %
Cash and due from banks                   135,431                                    120,874
Bank premises and equipment, net           96,292                                     89,997
Other assets                               41,749                                     48,249
Goodwill and other intangible
assets, net                                97,457                                     80,414
Allowance for loan losses                 (35,278 )                                  (34,333 )

Total assets                          $ 5,340,996                                $ 4,678,766

Liabilities and Shareholders'
Equity
Interest-bearing deposits             $ 2,867,740      $    955        0.13 %    $ 2,403,899      $    853        0.14 %
Short-term borrowings                     406,913            82        0.08          405,438            93        0.09

Total interest-bearing liabilities      3,274,653      $  1,037        0.13 %      2,809,337      $    946        0.14 %
Noninterest-bearing deposits            1,392,387                                  1,237,335
Other liabilities                          42,287                                     54,267

Total liabilities                       4,709,327                                  4,100,939
Shareholders' equity                      631,669                                    577,827

Total liabilities and shareholders'
equity                                $ 5,340,996                                $ 4,678,766

Net interest income                                    $ 52,970                                   $ 45,582

Rate Analysis:
Interest income/earning assets                                         4.33 %                                     4.27 %
Interest expense/earning assets                                        0.09                                       0.09

Net yield on earning assets                                            4.24 %                                     4.18 %


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                                                                  Six Months Ended June 30,
                                                       2014                                       2013
                                        Average         Income/      Yield/         Average        Income/      Yield/
                                        Balance         Expense       Rate          Balance        Expense       Rate
Assets
Short-term investments (1)            $    57,372      $     176        0.66 %    $   101,400      $    296        0.62 %
Taxable investment securities (2)       1,140,469         14,175        2.49        1,052,723        12,688        2.41
Tax-exempt investment securities
(2)(3)                                  1,015,401         24,817        4.89          871,459        20,885        4.79
Loans (3)(4)                            2,718,910         67,678        5.02        2,218,292        56,030        5.09

Total earning assets                    4,932,152      $ 106,846        4.37 %      4,243,874      $ 89,899        4.27 %
Cash and due from banks                   141,473                                     125,384
Bank premises and equipment, net           95,998                                      87,749
Other assets                               43,351                                      47,339
Goodwill and other intangible
assets, net                                97,474                                      76,214
Allowance for loan losses                 (34,861 )                                   (34,615 )

Total assets                          $ 5,275,587                                 $ 4,545,945

Liabilities and Shareholders'
Equity
Interest-bearing deposits             $ 2,842,600      $   1,895        0.13 %    $ 2,362,645      $  1,721        0.15 %
Short-term borrowings                     416,505            178        0.09          338,549           130        0.08

Total interest-bearing liabilities      3,259,105      $   2,073        0.13 %      2,701,194      $  1,851        0.14 %
Noninterest-bearing deposits            1,360,920                                   1,221,516
Other liabilities                          38,041                                      53,454

Total liabilities                       4,658,066                                   3,976,164
Shareholders' equity                      617,521                                     569,781

Total liabilities and shareholders'
equity                                $ 5,275,587                                 $ 4,545,945

Net interest income                                    $ 104,773                                   $ 88,048

Rate Analysis:
Interest income/earning assets                                          4.37 %                                     4.27 %
Interest expense/earning assets                                         0.09                                       0.09

Net yield on earning assets                                             4.28 %                                     4.18 %

(1) Short-term investments are comprised of Fed Funds sold, interest-bearing deposits in banks and interest-bearing time deposits in banks.

(2) Average balances include unrealized gains and losses on available-for-sale securities.

(3) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.

(4) Non-accrual loans are included in loans.

Noninterest Income. Noninterest income for the second quarter of 2014 was $15.87 million, an increase of $719 thousand over the same period in 2013. Trust fees increased $596 thousand, and ATM, interchange and credit card fees increased $573 thousand. The increase in trust fees reflects an increase in fees from mineral management as well as assets under management over the prior year from both market value growth and growth in assets managed. The fair value of our trust assets managed, which are not reflected in our consolidated balance sheets, totaled $3.63 billion at June 30, 2014 as compared to $3.05 billion a year ago. The increases in ATM, interchange and credit card fees is primarily a result of an increase in the number of accounts and from our Orange acquisition.

Offsetting these increases were decreases in real estate mortgage fees of $349 thousand and service charges on deposits of $142 thousand. The decline in real estate mortgage fees is a result of the overall decline in mortgage refinance activity.


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Noninterest income for the six month period ended June 30, 2014 was $32.28 million, an increase of $3.16 million over the same period in 2013. Trust fees increased $1.38 million and ATM, interchange and credit card fees increased $1.29 million. The increase in trust fees reflects an increase in fees from mineral management as well as assets under management over the prior year from both market value growth and growth in assets managed. The increases in ATM, interchange and credit card fees is primarily a result of an increase in the number of accounts and from our Orange acquisition. Also included in noninterest income in the first six months of 2014 was a $605 thousand gain on the settlement of a bank owned life insurance contract and gains of $499 thousand on the sale of foreclosed assets compared to losses of $299 thousand in the same period a year ago.

Offsetting these increases were decreases in real estate mortgage fees of $708 thousand, primarily resulting from the overall decline in mortgage refinance activity.

Table 3-Noninterest Income (in thousands):



                                                  Three Months Ended                            Six Months Ended
                                                       June 30,                                     June 30,
                                                       Increase                                     Increase
                                          2014        (Decrease)         2013         2014         (Decrease)         2013
Trust fees                              $  4,549      $       596      $  3,953     $  9,125      $      1,379      $  7,746
Service charges on deposit accounts        4,174             (142 )       4,316        8,221                10         8,211
ATM, interchange and credit card fees      4,754              573         4,181        9,197             1,287         7,910
Real estate mortgage operations            1,337             (349 )       1,686        2,361              (708 )       3,069
Net gain (loss) on sale of
available-for-sale securities                 (1 )            (34 )          33           (5 )            (260 )         255
Net gain (loss) on sale of foreclosed
assets                                        47               30            17          499               798          (299 )

Other:
Check printing fees                           47               (2 )          49          104                 5            99
Safe deposit rental fees                     118                6           112          308                31           277
Credit life and debt protection fees          39              (15 )          54           66               (28 )          94
Brokerage commissions                        229               44           185          458               164           294
Interest on loan recoveries                  107               39            68          388                83           305
Gain on sale of assets                        44               43             1           47              (122 )         169
Miscellaneous income                         428              (70 )         498        1,508               525           983

Total other                                1,012               45           967        2,879               658         2,221

Total Noninterest Income                $ 15,872      $       719      $ 15,153     $ 32,277      $      3,164      $ 29,113

Noninterest Expense. Total noninterest expense for the second quarter of 2014 was $35.00 million, an increase of $5.09 million, or 17.02%, as compared to the same period in 2013. An important measure in determining whether a financial institution effectively manages noninterest expense is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income. Lower ratios indicate better efficiency since more income is generated with a lower noninterest expense total. Our efficiency ratio for the second quarter of 2014 was 50.84%, compared to 49.25% from the same period in 2013.

Salaries and employee benefits for the second quarter of 2014 totaled $17.27 million, an increase of $1.12 million compared to 2013. The increase was largely the result of additional employees to staff new branches, annual pay increases, our Orange acquisition and an increase in health care expenses.


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All other categories of noninterest expense for the second quarter of 2014 totaled $17.73 million, an increase of $3.97 million, or 28.84%, as compared to the same period in 2013. The increase in non-interest expense was largely attributable to the Company's recognition of $2.39 million related to a litigation settlement and the deductible from damage sustained in a hail storm in Abilene. Other categories of noninterest expense with increases included net occupancy and equipment expense, ATM, interchange and credit card expense and advertising, primarily all resulting from our Orange acquisition.

Total noninterest expense for the first six months of 2014 was $67.45 million, an increase of $10.07 million, or 17.54%, as compared to the same period in 2013. Our efficiency ratio for the first six months of 2014 was 49.22%, compared to 48.98% from the same period in 2013.

Salaries and employee benefits for the first six months of 2014 totaled $34.69 million, an increase of $3.36 million compared to 2013. The increase was largely the result of additional employees to staff new branches, annual pay increases, our Orange acquisition and an increase in health care expenses.

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