Business context and reporting period
First Financial Bankshares, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. The Texas-based financial holding company operates a community banking business through 79 financial centers, alongside trust, wealth management, insurance and related services.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net interest income | $401.4 million | $370.4 million | +8.4% |
| Provision for credit losses | $17.4 million | $(1.1) million reversal | Higher provision |
| Noninterest income | $131.7 million | $142.2 million | -7.4% |
| Noninterest expense | $234.8 million | $241.7 million | -2.9% |
| Net earnings | $234.5 million | $227.6 million | +3.0% |
| Diluted EPS | $1.64 | $1.59 | +$0.05 |
| Net interest margin | 3.29% | 3.40% | -11 basis points |
| Efficiency ratio | 43.30% | 45.84% | Improved |
Fourth-quarter 2022 net earnings were $58.7 million, versus $55.3 million in fourth-quarter 2021; diluted EPS was $0.41 in both periods. Full-year operating cash flow was $323.9 million, compared with $353.2 million in 2021. Investing activities used $838.0 million, primarily reflecting net loan growth and securities activity; financing activities provided $316.2 million.
At year-end, assets were $13.0 billion, down from $13.1 billion; loans held for investment were $6.44 billion, up 19.5%, and deposits were $11.01 billion, up 4.2%. Securities totaled $5.47 billion, down from $6.57 billion. Borrowings were $642.5 million, versus $671.2 million. Cash and cash equivalents were $330.7 million. Shareholders’ equity was $1.27 billion, or 9.76% of assets, compared with $1.76 billion, or 13.43%, a decline largely associated with securities’ unrealized losses.
Credit quality indicators improved: nonperforming assets were $24.3 million, or 0.38% of loans and foreclosed assets, versus $34.2 million, or 0.63%, in 2021. The allowance for credit losses was $75.8 million, or 1.18% of loans; net recoveries were $0.8 million. The company reported regulatory capital ratios of 19.29% total risk-based capital, 18.22% Tier 1 and CET1, and 10.96% leverage; its bank subsidiary was classified as well capitalized.
Material changes versus the prior comparable period
- Net interest income rose with growth in earning assets, but the margin narrowed as funding costs increased. The average rate paid on interest-bearing liabilities rose to 0.41% from 0.09%; the earning-asset yield increased to 3.55% from 3.45%.
- Loan growth was concentrated in real estate and consumer loans. The $1.05 billion increase in year-end loans included $781.5 million in real estate loans; PPP loans declined to $169,000 from $52.8 million.
- Noninterest income fell mainly because mortgage loan gains and fees declined $14.2 million and debit card fees fell $5.6 million. Trust fees rose $3.9 million and deposit service charges rose $3.4 million.
- The allowance provision increased from a $1.1 million reversal to $17.4 million, which management attributed to loan growth, higher unfunded commitments and a modestly less favorable economic forecast.
- Available-for-sale securities recorded a $678.0 million pre-tax unrealized loss at year-end, versus a $125.7 million unrealized gain in 2021. Management attributed the losses to interest-rate changes rather than credit events; no related credit-loss allowance was recorded. AOCI losses, net of tax, were $535.2 million.
Outlook, commentary and risks
Management reported that loan rates had risen with Federal Reserve tightening and that deposit rates were also increasing; it expected deposit rates to continue moving upward in the foreseeable future. The filing provides no quantified earnings or revenue guidance. Management stated it did not anticipate a significant change to its policy of paying cash dividends of approximately 35%–40% of annual net earnings, subject to capital, regulatory and covenant restrictions. The company intends to pursue organic growth, branch opportunities and acquisitions that fit its Texas community-banking strategy.
Key exposures include further rate increases and deposit repricing, potential borrower stress in a slowing economy, Texas market and real-estate conditions, and the value and liquidity effects of unrealized securities losses. The company noted approximately $4.15 billion of uninsured and uncollateralized deposits. Its $2.34 billion FHLB line was undrawn at year-end; the $25 million revolving credit line and $130 million of bank federal-funds lines were also undrawn. Contractual off-balance-sheet commitments totaled $2.06 billion, with a $12.3 million reserve for unfunded commitments. LIBOR-linked adjustable loans totaled $47.2 million across 13 loans, and the company was working to transition them to replacement indexes.
Management said there were no material pending legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the allowance for loan losses was identified as a critical audit matter because of model complexity and judgment in qualitative adjustments.
Important facts for investors to verify
- Whether deposit costs rise faster than loan and securities yields, and the effect on net interest margin.
- Loan growth, real-estate concentration, credit migration, charge-offs and the assumptions underlying the $75.8 million allowance.
- Uninsured deposit levels, deposit retention and available liquidity under stressed conditions.
- Duration and potential realization of the securities portfolio’s unrealized losses; regulatory capital excludes AOCI under the company’s election.
- Whether lower mortgage and debit-card income persists, and the impact of the $10 billion asset threshold on interchange revenue and regulatory costs.
- Future dividend capacity, given subsidiary dividend restrictions and the credit agreement’s 55% payout limit.