First Financial Bankshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023 unless stated otherwise. The Texas-based financial holding company operates First Financial Bank, N.A., with 79 Texas locations, and related trust, insurance and technology businesses. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $96.3 reported; $99.4 tax-equivalent | Reported $95.4; tax-equivalent $99.2 in Q1 2022 |
| Net earnings; diluted EPS | $52.6; $0.37 | $56.0; $0.39 in Q1 2022 |
| Net interest margin | 3.34% tax-equivalent | 3.22% in Q1 2022 |
| Return on average assets / equity | 1.65% / 16.32% | 1.71% / 13.53% in Q1 2022 |
| Efficiency ratio | 44.93% | 44.16% in Q1 2022 |
| Total assets | $13,008 | $13,314 at March 31, 2022; $12,974 at year-end 2022 |
| Total deposits | $10,936 | $10,999 at March 31, 2022; $11,006 at year-end 2022 |
| Borrowings | $633 | $759 at March 31, 2022; $643 at year-end 2022 |
| Cash and cash equivalents | $446 | $598 at March 31, 2022; $331 at year-end 2022 |
Interest income rose to $121.5 from $97.0, while interest expense increased sharply to $25.2 from $1.6 as deposit and borrowing costs repriced. The allowance for credit losses was $80.8, or 1.23% of loans held for investment, compared with $66.9, or 1.20%, a year earlier. The quarter’s $2.8 credit-loss provision included a $4.7 loan-loss provision partly offset by a $1.9 reversal of the reserve for unfunded commitments.
Operating cash flow was $95.9, investing cash flow was positive $121.7, and financing cash flow was negative $102.0. Cash and cash equivalents increased $115.5 during the quarter. Loan balances grew to $6,576, up $1,010 year over year and $134 since December 31, 2022.
Material changes versus comparable periods
- Net earnings fell 6.1% year over year, while tax-equivalent net interest income was nearly flat. Higher asset yields were substantially offset by higher funding costs; the yield on earning assets rose 92 basis points, while the rate on interest-bearing liabilities rose 125 basis points.
- Noninterest income declined $6.9 to $28.0. Debit-card fees fell $4.0, reflecting the company becoming subject to the Durbin Amendment’s interchange fee limits from July 1, 2022. Mortgage income fell $3.4 amid lower origination volumes and sale margins; foreclosed-asset gains were also lower.
- Noninterest expense decreased $2.0 to $57.3, primarily due to lower compensation costs, partly offset by a $0.8 increase in FDIC assessment fees. Despite lower expense, the efficiency ratio worsened to 44.93%.
- Loans held for investment increased 18.1% year over year, led by residential, commercial real estate and consumer lending. Nonperforming assets were $24.4, down from $28.8 a year earlier and broadly stable against year-end.
- Available-for-sale securities were $5,298.6 at fair value, with $580.5 of pretax net unrealized losses. Net-of-tax accumulated other comprehensive loss improved to $458.2 from $535.2 at year-end, but remained substantially larger than the $209.6 reported a year earlier.
- Shareholders’ equity was $1,372.9, versus $1,488.7 a year earlier. The company stated that unrealized available-for-sale securities losses are excluded from regulatory capital ratios.
Outlook, commentary and risks
- The filing provides no earnings or revenue guidance. Management said it did not anticipate a significant change in its dividend policy, which targets cash dividends of approximately 35%–40% of annual net earnings. On April 25, 2023, the board declared a second-quarter dividend of $0.18 per share, up 5.88% from Q1.
- Management described liquidity as adequate, citing a diversified core deposit base and relatively low loan-to-deposit ratios, while noting it was monitoring effects of recent bank failures. Available capacity included a $2,396.8 FHLB line, $130.0 of federal funds lines and access to Federal Reserve lending programs; no balances were drawn on these lines at quarter-end. The $25.0 Frost Bank revolving line matures June 30, 2023.
- Estimated uninsured and uncollateralized deposits were approximately $3,940. Management identified possible depositor withdrawals, higher liquidity costs and competition, reputational effects, and increased credit risk following bank failures as potential material risks. Government measures may not prevent further market disruption.
- Interest-rate risk remains significant. The company reported an asset-sensitive position in its simulation: a hypothetical immediate 100-basis-point increase was estimated to raise next-12-month net interest income 1.79%, while a 100-basis-point decrease was estimated to reduce it 2.12%. Management cautioned that these are assumption-dependent estimates, not forecasts.
- The filing identifies economic and real-estate conditions, interest rates, deposit competition, credit-loss estimates, securities valuations, severe weather, cyber risk and regulatory changes among other risks. Management reported no material pending legal proceedings and no material change to previously disclosed risk factors other than the banking-industry risk described above.
Important facts for investors to verify
- Whether deposit balances and funding costs remain stable, particularly given the approximately $3.94 billion of uninsured and uncollateralized deposits.
- How higher rates, deposit repricing and balance-sheet mix affect net interest margin and earnings in subsequent quarters.
- Whether loan growth is accompanied by changes in delinquency, risk ratings, nonaccrual loans or required credit-loss reserves.
- How available-for-sale securities values and accumulated other comprehensive losses respond to interest-rate changes, and the assumptions supporting management’s intent and ability to hold securities.
- The status or renewal of the Frost Bank line of credit maturing June 30, 2023, and continued access to other contingent liquidity sources.