First Financial Bankshares, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
First Financial Bankshares is a Texas-based financial holding company operating First Financial Bank, N.A., with 78 Texas locations as of March 31, 2022. Its principal business is community banking. This unaudited filing covers the three months ended March 31, 2022; comparisons below are with Q1 2021 unless otherwise noted. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Net earnings | $56.0; diluted EPS $0.39 | $56.9; diluted EPS $0.40 |
| Net interest income | $95.4 GAAP; $99.2 tax-equivalent | $88.8 GAAP; $92.4 tax-equivalent |
| Net interest margin | 3.22% tax-equivalent | 3.55% in Q1 2021 |
| Provision for credit losses | $4.8 expense | $2.0 reversal |
| Noninterest income / expense | $34.9 / $59.2 | $34.9 / $57.7 |
| Efficiency ratio | 44.16% | 45.36% in Q1 2021 |
| Return on average assets / equity | 1.71% / 13.53% | 2.05% / 13.83% in Q1 2021 |
| Operating cash flow | $86.7 | $96.8 in Q1 2021 |
| Total assets | $13,314.2 | $12,102.9 at March 31, 2021; $13,102.5 at December 31, 2021 |
| Loans held for investment | $5,566.2 gross; $5,499.3 net of allowance | $5,322.6 gross at March 31, 2021; $5,389.0 at year-end 2021 |
| Deposits / borrowings | $10,999.8 / $758.6 | $9,413.4 / $548.6 at March 31, 2021; deposits $10,566.5 and borrowings $671.2 at year-end 2021 |
| Cash and cash equivalents | $597.8 | $1,083.6 at March 31, 2021; $528.6 at year-end 2021 |
| Shareholders’ equity | $1,488.7, including $209.6 net unrealized AFS securities losses | $1,665.4, including $117.0 net unrealized gains at March 31, 2021; $1,759.2 and $99.3 net gains at year-end 2021 |
The allowance for credit losses was $66.9 million, or 1.20% of loans held for investment. Nonperforming loans and foreclosed assets totaled $28.8 million, 0.52% of loans and foreclosed assets, compared with $39.7 million and 0.75% a year earlier. Net charge-offs were 0.02% of average loans, annualized.
Material changes versus comparable periods
- Net earnings declined $0.9 million year over year, while tax-equivalent net interest income increased $6.9 million. Higher earning-asset volumes supported net interest income, partly offset by lower yields and reduced PPP fee amortization.
- Tax-equivalent net interest margin fell 33 basis points year over year, reflecting low short-term rates, a flat-to-inverted yield curve, asset mix and excess liquidity.
- Loans grew $177.2 million from year-end, led by real estate lending; deposits increased $433.3 million. PPP loans fell to $15.7 million from $52.8 million at year-end and $531.8 million a year earlier.
- Available-for-sale securities had fair value of $6.50 billion versus $6.57 billion at year-end. Rising rates shifted the portfolio from a $125.7 million pretax unrealized gain at year-end to a $265.5 million pretax unrealized loss at March 31, 2022. The after-tax change reduced equity through other comprehensive loss.
- Noninterest income was essentially unchanged: stronger trust, deposit-service and card fees offset lower mortgage-related income ($6.3 million versus $9.9 million). Noninterest expense increased 2.6%, although the efficiency ratio improved.
Outlook, commentary, risks and unusual items
- The filing provides no earnings or revenue guidance. Management described liquidity as adequate and reported no known events expected to materially adversely affect liquidity, capital resources or operations.
- Management reported an asset-sensitive interest-rate position. Its modeled estimate shows a 3.15% increase in net interest income for an immediate 100-basis-point rate increase and a 3.66% decrease for a 100-basis-point decline; management cautions these are estimates based on assumptions, not forecasts.
- Management said it could hold the securities portfolio based on liquidity and intent. A further 50-basis-point increase in the five-year Treasury rate was estimated to increase unrealized losses by approximately $138 million pretax. These marks are excluded from regulatory capital ratios under the company’s elected AOCI treatment.
- Effective July 1, 2022, Federal Reserve interchange-fee limits are expected to apply because the company exceeded $10 billion in assets. Management estimated an annual pretax impact of approximately $18 million.
- Capital remained above regulatory minimums: consolidated total risk-based capital was 20.01%, common equity Tier 1 was 19.00%, and the Tier 1 leverage ratio was 10.78% at March 31, 2022. The bank had an undrawn $2.06 billion FHLB line and no balance outstanding on its $25 million revolving line of credit.
- Approximately $3.99 billion of deposits were estimated to be uninsured and uncollateralized. Off-balance-sheet commercial commitments totaled $1.84 billion; the reserve for unfunded commitments was $7.5 million.
- The board declared a Q2 dividend of $0.17 per share on April 26, 2022, up 13.33% from the Q1 dividend. The company reported no material pending legal proceedings and no material change to previously disclosed risk factors.
- Key risks cited include economic and Texas real-estate conditions, inflation and interest rates, credit-loss estimates, severe weather, deposit retention and liquidity, competition, regulatory change, cybersecurity, and COVID-related effects.
Important facts for investors to verify
- How rate changes and deposit repricing affect net interest margin, funding costs and management’s interest-rate sensitivity estimates.
- Whether the AFS securities portfolio’s unrealized losses deepen or recover, and the implications for equity, liquidity and securities sales.
- Progress in loan growth and credit quality, including trends in criticized loans, nonaccruals, charge-offs and the adequacy of the allowance.
- The actual impact of the July 2022 interchange-fee cap on fee income and earnings compared with management’s estimate.
- Deposit stability and liquidity management, particularly uninsured deposits, pledged collateral and reliance on borrowings or contingent funding.
- Whether dividend growth remains consistent with earnings, capital needs and the credit-agreement covenant limiting dividends to 55% of defined consolidated net income.