First Financial Bankshares, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. The Texas-based financial holding company operates First Financial Bank, N.A., with 80 locations in Texas; community banking is its principal business.
Key financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $135.4 million | $112.7 million | $385.9 million | $311.7 million |
| Net interest income (GAAP) | $94.1 million | $103.2 million | $286.3 million | $297.4 million |
| Provision for credit losses | $2.3 million | $3.2 million | $10.6 million | $13.4 million |
| Noninterest income | $28.1 million | $30.9 million | $86.0 million | $103.1 million |
| Noninterest expense | $59.5 million | $59.4 million | $174.4 million | $177.0 million |
| Net earnings | $49.6 million | $59.3 million | $153.0 million | $175.8 million |
| Diluted EPS | $0.35 | $0.41 | $1.07 | $1.23 |
- Tax-equivalent net interest margin was 3.22% in Q3, down from 3.38%; for the nine months it was 3.28%, versus 3.30%. The efficiency ratio increased to 47.62% from 43.10% in Q3 and to 45.75% from 42.94% year to date.
- Q3 return on average assets was 1.53% (1.76% prior year); return on average equity was 14.51% (17.31%). Nine-month returns were 1.59% and 15.22%, respectively, versus 1.77% and 15.88%.
- At September 30, total assets were $12.78 billion; loans held for investment were $6.99 billion, up $552.8 million from year-end 2022; deposits were $10.72 billion, down from $11.01 billion at year-end and $11.14 billion a year earlier. Cash and cash equivalents were $388.3 million.
- Shareholders’ equity was $1.24 billion, or 9.71% of assets. Consolidated regulatory capital ratios were 19.49% total risk-based capital, 18.35% Tier 1 and common equity Tier 1, and 12.00% leverage. These exceeded the stated Basel III minimums.
- Borrowings totaled $751.5 million, including $621.8 million under customer repurchase agreements and $108.7 million in short-term borrowings. The company reported $226.1 million of operating cash flow for the nine months; cash increased $57.6 million to $388.3 million.
- The allowance for loan losses was $89.7 million, or 1.28% of loans, versus $75.8 million and 1.18% at December 31, 2022. Nonperforming assets were reported at $39.7 million, 0.57% of loans and foreclosed assets.
Material changes and management commentary
- Higher loan yields and loan growth lifted interest income, but the cost of deposits and borrowings rose faster. Q3 interest expense increased to $41.2 million from $9.6 million; the average rate paid on interest-bearing liabilities rose to 2.07% from 0.49%. Management attributed margin pressure to rate increases and the changing mix of earning assets and funding.
- Noninterest income declined, notably due to lower debit-card revenue following the company becoming subject to the Federal Reserve’s interchange fee limits in July 2022, weaker mortgage production and margins, and losses rather than gains on securities sales. Nine-month debit-card fees fell to $16.7 million from $24.4 million; mortgage loan gains and fees fell to $10.0 million from $16.1 million.
- Management said Q3 securities sales of $113.1 million, at an average book yield of 3.53%, generated a $972,000 loss; proceeds were intended to fund organic loan growth yielding about 8%, with an anticipated earn-back period under six months.
- Available-for-sale securities had a September 30 fair value of $4.65 billion against $5.46 billion amortized cost, with $810.8 million of gross unrealized losses. After-tax accumulated other comprehensive loss was $639.9 million. Management attributed losses primarily to interest rates, said it intended and was able to hold the securities, and stated unrealized AFS losses are excluded from regulatory capital.
- Nonaccrual loans rose to $38.8 million from $24.3 million at year-end 2022. Management described nonperforming assets as manageable and said it knew of no material undisclosed classified credits. Net charge-offs were 0.04% of average loans in Q3, compared with net recoveries in the prior-year quarter.
- Liquidity sources include cash, deposit funding, a $2.54 billion available FHLB line (with $45 million used for letters of credit), access to Federal Reserve lending programs, and other credit lines. The filing also reports $100 million in overnight Federal Reserve discount-window borrowings. Management considered liquidity adequate and said it knew of no event likely to materially impair liquidity, capital or operations.
- Management gave no specific earnings or balance-sheet guidance. It described the company as asset-sensitive in its interest-rate model; a parallel 100-basis-point increase was estimated to raise next-12-month net interest income 1.14%, while a 100-basis-point decrease was estimated to reduce it 1.76%. Management cautioned that these are assumptions-based estimates, not forecasts.
- The board renewed the authorization to repurchase up to 5 million shares through July 31, 2024; 101,337 shares were repurchased in September at an average $26.99. The Q3 dividend was $0.18 per share, up from $0.17. Management said it did not anticipate a significant change in dividend policy; the credit agreement limits dividends to 55% of defined net income.
- Key stated risks include interest-rate and market changes, deposit competition and liquidity, loan and collateral quality, economic conditions in Texas, severe weather, cybersecurity and vendor risks, regulatory changes, and geopolitical events. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Track deposit levels and mix, deposit pricing, and the estimated $5.16 billion of uninsured and uncollateralized deposits; assess the company’s ability to retain and fund deposits.
- Monitor margin performance as funding costs reprice, and compare realized results with management’s interest-rate sensitivity assumptions.
- Review AFS securities duration, unrealized losses, pledged collateral and available borrowing capacity, including the reported Federal Reserve borrowing and FHLB usage.
- Follow increases in nonaccrual loans and past-due balances, especially real estate and commercial exposures, and test whether the allowance remains adequate as credit conditions evolve.
- Assess whether the reported securities-sale reinvestment strategy achieves the stated loan yields and earn-back period, and whether lower debit-card and mortgage income persists.
- Reconcile the filing’s asset-quality disclosures: it reports $39.7 million of nonperforming assets in MD&A, while a note separately reports $15,000 of other real estate owned and the MD&A table lists $597,000 of foreclosed assets.