First Financial Bankshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a Texas-based financial holding company operating First Financial Bank, N.A., with 78 Texas locations. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $103.2 | $95.8 | $297.4 | $275.6 |
| Provision for credit losses | $3.2 | $0 | $13.4 | $(3.2) reversal |
| Noninterest income | $30.9 | $37.7 | $103.1 | $107.3 |
| Noninterest expense | $59.4 | $62.9 | $177.0 | $180.0 |
| Net earnings | $59.3 | $58.9 | $175.8 | $172.2 |
| Diluted EPS | $0.41 | $0.41 | $1.23 | $1.20 |
| Tax-equivalent net interest margin | 3.32% | 3.41% | 3.27% | 3.43% |
| Efficiency ratio | 43.76% | 45.88% | 43.23% | 45.73% |
| Return on average assets | 1.76% | 1.90% | 1.77% | 1.94% |
| Return on average equity | 17.31% | 13.43% | 15.88% | 13.55% |
- Balance sheet at September 30: Assets were $13.11 billion; deposits $11.14 billion; borrowings $774.6 million; and shareholders’ equity $1.13 billion. Loans held for investment were $6.26 billion, up $866.5 million from year-end 2021. Deposits increased $575.6 million from year-end.
- Credit and liquidity: Loan allowance was $74.1 million, or 1.18% of loans. Nonperforming assets were $24.6 million, 0.39% of loans and foreclosed assets, compared with $34.2 million and 0.63% at year-end 2021. Cash and cash equivalents totaled $365.8 million. The bank reported no borrowing outstanding on its $2.26 billion FHLB line; it also had $130 million in correspondent-bank federal funds lines and an undrawn $25 million parent-company revolver.
- Cash flow, nine months: Operating activities provided $254.4 million; investing activities used $1.03 billion, including $862.6 million of net loan growth; financing activities provided $608.5 million. Cash and cash equivalents declined $162.8 million to $365.8 million.
- Capital: Consolidated total risk-based capital was 19.07%, Tier 1 leverage was 10.79%, and the bank’s corresponding ratios were 17.09% and 9.62%. The bank remained above applicable “well-capitalized” thresholds.
Material changes and management commentary
- Net earnings increased modestly year over year, while diluted Q3 EPS was unchanged. Growth in net interest income reflected increased average loans and taxable securities and a shift away from low-yield PPP loans. Higher deposit and borrowing costs and lower PPP-related income partly offset those gains.
- Q3 noninterest income fell $6.8 million, chiefly because mortgage gains and fees declined $4.7 million and debit-card fees declined $3.6 million. The Federal Reserve’s debit interchange cap applied to the bank beginning July 1, 2022; management estimated an approximately $18 million annual pretax impact.
- Mortgage income declined with lower origination volumes and margins as interest rates rose. Trust fees and deposit service charges increased; management attributed trust-fee growth mainly to higher oil and gas revenue.
- Noninterest expense declined, primarily from lower mortgage compensation and profit-sharing costs. The efficiency ratio improved, although the net interest margin declined year over year.
- Available-for-sale securities were carried at $5.75 billion fair value versus $6.55 billion amortized cost. The resulting $801.0 million pretax unrealized loss contributed to a $632.4 million after-tax accumulated other comprehensive loss and lower GAAP equity. Management attributed the losses to higher interest rates, stated it had the ability and intent to hold the securities, and said unrealized AFS gains and losses were excluded from regulatory capital under its elected treatment.
- Management described the balance sheet as asset sensitive: its model estimated a 2.30% increase in next-12-month net interest income under an immediate 100-basis-point rate increase, and a 2.80% decrease under a 100-basis-point decline. These are assumptions-based estimates, not forecasts. Management expected deposit rates to continue rising in the foreseeable future and reported no known event likely to materially impair liquidity.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management said it did not anticipate a significant change in its dividend policy; the long-term target is dividends of approximately 35%–40% of annual net earnings, subject to regulatory and contractual restrictions. Q3 dividend was $0.17 per share.
- Key stated risks include economic and Texas real estate conditions, interest-rate and securities valuation changes, loan demand and credit losses, deposit gathering and liquidity, inflation, severe weather, commodity prices, cyber and vendor risks, regulation, and competition. Management cautioned that actual results may differ materially from forward-looking statements.
- Unfunded lines of credit, commitments to extend credit, and standby letters of credit totaled $2.00 billion. The related reserve for unfunded commitments was $10.9 million. Approximately $4.2 billion of deposits were estimated to be uninsured and uncollateralized, including accrued interest.
- The company reported no material pending legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls as of September 30, 2022. It was in compliance with its parent-company credit agreement covenants.
Most important facts for investors to verify
- Whether rising deposit costs and the repricing of variable-rate loans support net interest income and margin in subsequent quarters.
- The pace and credit quality of loan growth, especially in real estate and construction and development; changes in the allowance, criticized loans, and unfunded-commitment reserve.
- The effect of the debit interchange cap and continued mortgage-market weakness on fee income, including management’s estimated annual debit-card revenue impact.
- The implications of the securities portfolio’s unrealized losses for equity, liquidity, and potential realized losses if securities must be sold; verify pledged collateral and available funding capacity.
- Deposit stability, including the large uninsured-deposit balance, and the bank’s continued access to contingent liquidity sources.