First Financial Bankshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company is a Texas-based financial holding company operating a community bank with 78 Texas locations. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / date |
|---|---|---|
| Net earnings | $56.9; diluted EPS $0.40 | Q1 2020: $37.2; diluted EPS $0.26 |
| Net interest income | $88.8 | Q1 2020: $80.9 |
| Net interest margin, tax-equivalent | 3.55% | Q1 2020: 3.91% |
| Noninterest income / expense | $34.9 / $57.7 | Q1 2020: $28.7 / $55.3 |
| Efficiency ratio | 45.36% | Q1 2020: 49.63% |
| Total assets | $12,102.9 | March 31, 2020: $9,701.1; December 31, 2020: $10,904.5 |
| Loans held-for-investment, gross | $5,322.6 | March 31, 2020: $4,639.4; December 31, 2020: $5,171.0 |
| Total deposits | $9,413.4 | March 31, 2020: $7,210.5; December 31, 2020: $8,675.8 |
| Borrowings | $548.6 | March 31, 2020: $857.9; December 31, 2020: $430.1 |
| Cash and cash equivalents | $1,083.6 | March 31, 2020: $267.9; December 31, 2020: $729.1 |
| Shareholders’ equity | $1,665.4 | March 31, 2020: $1,526.4; December 31, 2020: $1,678.2 |
| Operating cash flow | $96.8 | Q1 2020: $31.2 |
- Net earnings increased 52.9% year over year. Management attributed the improvement mainly to higher net interest income and noninterest income, along with a reversal of credit-loss provision.
- Tax-equivalent net interest income was $92.4 million, versus $82.7 million in Q1 2020. Higher average earning assets and lower funding costs supported growth, while lower asset yields and excess liquidity contributed to margin compression.
- Noninterest income rose 21.4%, led by mortgage loan income, card fees and trust fees. Mortgage gain and fees were $9.9 million, up from $3.9 million. Service charges declined by $1.1 million, primarily due to lower overdraft fees.
- Noninterest expense increased 4.4%. Higher compensation costs were partly offset by lower other expenses; Q1 2020 included $3.8 million of technology termination and conversion costs related to the TB&T acquisition.
- Q1 provision for credit losses was a net reversal of $2.0 million, comprising a $3.4 million loan-loss provision reversal and a $1.4 million provision for unfunded commitments. Q1 2020 had a $9.9 million provision expense.
- Net charge-offs were 0.01% of average loans on an annualized basis, compared with 0.16% in Q1 2020. Nonperforming assets were $39.7 million, or 0.75% of loans and foreclosed assets, down from $40.4 million and 0.87% a year earlier.
- The allowance for credit losses was $63.0 million, or 1.18% of loans; excluding PPP loans, the ratio was 1.31%. The reserve for unfunded commitments was $6.9 million.
- Cash flow from operations was $96.8 million; investing activities used $581.8 million and financing activities provided $839.6 million. Cash and cash equivalents rose $354.5 million during the quarter. Management identified $1.08 billion in cash as excess liquidity pending investment.
- Consolidated regulatory capital ratios remained well above stated minimums: total capital 21.47%, Tier 1 and common equity Tier 1 each 20.32%, and leverage 11.55%. Total shareholders’ equity was 13.76% of assets, compared with 15.73% a year earlier.
Material changes and notable items
- Assets, deposits and loans were materially higher than a year ago. Management cited deposit growth, including customer deposits of PPP proceeds, and expanded investment securities as contributors to balance-sheet growth.
- PPP lending totaled 8,546 loans and $920.1 million originated through March 31, 2021; $531.8 million remained outstanding. The company recognized $6.25 million of PPP loan-fee income in Q1 and had approximately $16 million of deferred PPP fees remaining.
- Unrealized gains on available-for-sale securities, net of tax, declined to $117.0 million from $170.4 million at year-end 2020. The decline contributed to comprehensive earnings of $3.5 million, despite net earnings of $56.9 million. Management said unrealized losses on securities were attributable to interest-rate movements rather than credit events.
- Borrowings were down year over year but increased from year-end, mainly reflecting changes in repurchase agreements and federal funds purchased. No FHLB advances were outstanding at quarter-end.
- The TB&T Bancshares acquisition closed January 1, 2020; its results are included in the 2020 and 2021 comparative periods. The acquisition generated $141.9 million of goodwill.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management reported continued pressure on net interest margin from historically low short-term rates, a flat-to-inverted yield curve and excess liquidity; it described efforts to mitigate this through loan pricing and lower deposit costs.
- Management considered liquidity adequate, citing the core deposit base and low loan-to-deposit position. At quarter-end, available sources included a $1.53 billion FHLB line, $130 million of correspondent-bank federal funds lines and an undrawn $25 million parent-company revolver maturing June 30, 2021. The company reported compliance with the revolver’s covenants.
- Interest-rate sensitivity modeling showed an asset-sensitive position: a simulated +100 basis-point change was associated with a 4.51% increase in net interest income, while a -100 basis-point change corresponded to a 4.72% decrease. Management cautioned that model estimates rely on assumptions and actual outcomes may differ materially.
- Potential risks include COVID-19 effects on borrowers and operations; economic, employment, real estate and commodity-market conditions; credit-loss estimation; interest-rate and securities valuation changes; deposit and liquidity trends; cyber and vendor risks; competition; regulation; and acquisition integration.
- Oil and gas loans, excluding PPP, were $105.3 million, or 2.20% of loans excluding PPP. Retail, restaurant and hospitality exposures were $430.2 million, or 8.98%; $45.2 million were classified and $6.6 million were nonaccrual.
- Because quarter-end assets exceeded $10 billion, management estimated that debit-card interchange regulation could reduce annual pretax income by approximately $14 million when applicable. The filing cites temporary regulatory relief for certain institutions, generally through 2022, and says management is monitoring the issue.
- The company reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls as of March 31, 2021.
Important facts for investors to verify
- Whether deposit and PPP-related liquidity can be deployed at yields sufficient to stabilize net interest margin.
- How PPP forgiveness, deferred-fee amortization and new loan production affect future interest income and reported loan growth.
- Whether credit quality continues to improve, particularly in commercial real estate and retail, restaurant and hospitality exposures, and whether the allowance remains adequate under changing economic forecasts.
- How interest rates affect securities valuations, accumulated other comprehensive income and net interest income; verify the sensitivity-model assumptions against subsequent results.
- The timing and financial effect of any debit interchange restrictions, including the status of temporary regulatory relief.
- Whether the $25 million revolver is renewed or otherwise addressed at its June 30, 2021 maturity, and whether capital, dividends and liquidity remain within applicable regulatory and contractual limits.