First Financial Bankshares, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Texas-based financial holding company operating a community bank with 78 locations, alongside trust, insurance and technology subsidiaries. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are to the same 2021 periods unless stated otherwise. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $98.8 | $90.9 | $194.2 | $179.8 |
| Net interest income, tax-equivalent | $102.1 | $94.6 | $201.4 | $187.0 |
| Provision for credit losses | $5.4 | $(1.2) reversal | $10.1 | $(3.2) reversal |
| Noninterest income | $37.3 | $34.7 | $72.2 | $69.5 |
| Noninterest expense | $58.3 | $59.4 | $117.6 | $117.1 |
| Net earnings | $60.5 | $56.4 | $116.5 | $113.3 |
| Diluted EPS | $0.42 | $0.39 | $0.81 | $0.79 |
| Net interest margin, tax-equivalent | 3.28% | 3.36% | 3.25% | 3.45% |
| Efficiency ratio | 41.83% | 45.94% | 42.97% | 45.65% |
- Growth and earnings drivers: Q2 net earnings rose 7.3%; six-month earnings rose 2.8%. Higher net interest income and fee revenue contributed, partly offset by increased credit-loss provisioning. Q2 tax-equivalent net interest income increased with larger average earning assets and a favorable asset mix; lower PPP fee amortization partly offset the increase. Average earning assets rose to $12.49 billion in Q2 from $11.30 billion a year earlier.
- Fee income and costs: Q2 trust fees, deposit service charges and card-related fees increased year over year; mortgage income fell to $5.7 million from $8.3 million as origination volumes declined. Salaries and benefits decreased, mainly with lower mortgage compensation and profit-sharing costs, while other operating costs increased.
- Assets and funding at June 30: Total assets were $13.26 billion; deposits were $11.12 billion, including $4.10 billion noninterest-bearing. Loans held for investment totaled $5.88 billion, up $489.6 million from year-end 2021; real estate loans increased $390.6 million. Available-for-sale securities were $6.22 billion at fair value. Borrowings were $768.4 million, up from $671.2 million at year-end.
- Credit quality: Allowance for credit losses was $71.9 million, or 1.22% of held-for-investment loans, versus $63.5 million and 1.18% at year-end. Nonperforming loans and foreclosed assets totaled $25.5 million (0.43% of loans and foreclosed assets), down from $34.2 million (0.63%) at year-end. The company reported net loan recoveries in the first half; the higher provision primarily reflected loan growth and a slight deterioration in the projected economic forecast.
- Cash flow and liquidity: Six-month operating cash flow was $158.3 million; investing activities used $805.0 million, principally reflecting securities purchases and loan growth; financing activities provided $583.6 million. Cash and cash equivalents ended the period at $465.6 million, down $63.0 million from year-end. The bank reported an undrawn $2.09 billion FHLB line and no outstanding balance on its $25 million Frost Bank revolving facility. Estimated uninsured and uncollateralized deposits were approximately $4.11 billion.
- Capital: Shareholders’ equity was $1.33 billion, or 10.02% of assets, compared with $1.76 billion, or 13.43%, at year-end. The decline primarily reflected a $500 million after-tax decline in accumulated other comprehensive income from available-for-sale securities. Consolidated total risk-based capital was 19.54%, CET1 was 18.50%, and Tier 1 leverage was 10.65%; the bank remained above regulatory well-capitalized thresholds.
Material changes versus comparable periods
- Net interest income and net earnings increased, but the tax-equivalent net interest margin compressed by 8 basis points in Q2 and 20 basis points for the first half.
- Available-for-sale securities shifted from a $99.3 million after-tax unrealized gain at December 31, 2021 to a $400.5 million after-tax unrealized loss at June 30, 2022, primarily due to rising market interest rates. Management stated the losses were rate-related rather than credit-related and that it had the ability and intent to hold the securities.
- Loans expanded, especially construction and development real estate loans, while PPP loans fell to $2.3 million from $52.8 million at year-end 2021 and $320.4 million a year earlier.
- Mortgage income declined as origination volumes fell. The company also began repurchasing shares under its authorization: 191,987 shares for $7.4 million during the quarter.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management said deposit rates had begun rising and expected them to continue moving upward. Variable-rate loan yields and approximately $1.1 billion of municipal and related deposits indexed to short-term Treasury rates were also responding to rate increases.
- Management cautioned that an increasingly inverted yield curve could affect net interest income and margin. Its interest-rate simulation estimated that an immediate parallel 100-basis-point increase would raise next-12-month net interest income by 2.63%, while a 100-basis-point decrease would reduce it by 2.85%; the filing notes these are assumptions-based estimates, not forecasts.
- Beginning July 1, 2022, the company became subject to the regulatory cap on debit interchange fees for institutions with at least $10 billion in assets. Management estimated an approximately $18 million annual pretax impact.
- Other disclosed risks include economic and Texas real-estate conditions, inflation and interest-rate volatility, credit-loss estimation, severe weather, deposit competition and retention, cyber and vendor risks, and regulatory changes. Management reported no material pending legal proceedings, no material change to previously disclosed risk factors, and no material adverse liquidity or capital event known as of the report date.
- The second-quarter dividend was $0.17 per share, up 13.3% year over year. Management said it did not anticipate a significant change to its stated dividend policy, subject to capital, regulatory and loan-covenant constraints.
Important facts for investors to verify
- Whether deposit repricing and funding costs outpace loan and securities yield increases, particularly given the inverted yield curve and rate-sensitive deposits.
- How the debit interchange fee cap affects fee income and whether the estimated $18 million annual pretax impact is offset by other revenue or cost actions.
- Whether loan growth—particularly in construction and development real estate—changes credit quality, provisioning needs or concentrations.
- Whether the large unrealized securities losses remain manageable, and how interest-rate changes affect equity, liquidity and potential securities sales.
- Trends in uninsured deposits, deposit retention, available borrowing capacity and the company’s ability to maintain dividend and capital levels.