First Financial Bankshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company operates a Texas community banking business through First Financial Bank, N.A. and related trust, insurance and technology subsidiaries; the bank had 78 locations.
Financial performance and condition
| Metric | Q3 / September 30, 2021 | Comparable period |
|---|---|---|
| Net interest income | $95.8 million for Q3; $275.6 million for nine months | Q3 2020: $89.2 million; nine months 2020: $259.3 million |
| Net earnings | $58.9 million for Q3; $172.2 million for nine months | Q3 2020: $52.9 million; nine months 2020: $143.6 million |
| Diluted earnings per share | $0.41 for Q3; $1.20 for nine months | Q3 2020: $0.37; nine months 2020: $1.01 |
| Net interest margin, tax-equivalent | 3.41% for Q3; 3.43% for nine months | Q3 2020: 3.75%; nine months 2020: 3.81% |
| Noninterest income / expense | $37.7 million / $62.9 million for Q3 | Q3 2020: $38.6 million / $55.6 million |
| Efficiency ratio | 45.88% for Q3; 45.73% for nine months | Q3 2020: 42.45%; nine months 2020: 44.21% |
| Total assets | $12.54 billion | September 30, 2020: $10.57 billion; December 31, 2020: $10.90 billion |
| Deposits / borrowings | $9.89 billion / $648.7 million | September 30, 2020: $8.29 billion / $503.2 million |
| Loans held for investment | $5.29 billion, including $139.3 million of PPP loans | September 30, 2020: $5.29 billion, including $703.7 million of PPP loans |
| Allowance for credit losses | $63.4 million, or 1.20% of loans | September 30, 2020: $76.0 million, or 1.44% |
| Shareholders’ equity | $1.73 billion; 13.82% of assets | September 30, 2020: $1.62 billion; 15.33% of assets |
For the first nine months, operating cash flow was $265.9 million, investing cash outflow was $1.82 billion and financing cash inflow was $1.38 billion. Cash and cash equivalents ended at $561.1 million, down $167.9 million from year-end 2020.
At September 30, consolidated regulatory capital ratios were 20.76% total risk-based capital, 19.71% Tier 1 and common equity Tier 1, and 11.19% leverage. The bank’s corresponding ratios were 18.65%, 17.60% and 10.00%. The bank reported a $1.64 billion available FHLB line with no amount outstanding, and the company had no balance drawn on its $25 million revolving credit line.
Material changes versus prior periods
- Q3 net earnings rose 11.5% year over year; nine-month net earnings rose about 20.0%. Tax-equivalent net interest income increased as earning assets grew, although the yield on earning assets and net interest margin declined.
- Average earning assets increased to $11.58 billion in Q3 from $9.80 billion a year earlier. Management attributed growth largely to investment securities and PPP-related deposits. Lower deposit and borrowing costs partly offset lower asset yields.
- Q3 noninterest expense rose 13.2%, including higher salaries, incentive compensation and other expenses; the efficiency ratio consequently worsened. Mortgage-related income declined amid lower origination volume. Trust fees and card-related fees increased.
- Asset quality improved: nonperforming assets were $25.3 million, 0.48% of loans and foreclosed assets, versus $43.1 million and 0.81% at September 30, 2020. The nine-month credit-loss provision was a $3.2 million reversal, compared with $27.6 million expense in 2020, reflecting management’s improved economic outlook and asset quality assessment.
- PPP loans outstanding fell substantially as forgiveness accelerated. The company reported $970.9 million of total PPP originations and $19.1 million of PPP fee income recognized in the first nine months of 2021.
- Available-for-sale securities increased to $6.12 billion from $4.39 billion at year-end 2020. A decline in unrealized securities gains contributed to accumulated other comprehensive earnings falling to $109.4 million from $170.4 million at year-end.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said low short-term rates, a flat-to-inverted yield curve and excess liquidity were pressuring net interest margin; $561.1 million of cash and equivalents remained available at quarter-end. Management cited loan floors, risk-based pricing and lower deposit costs as mitigants.
- The company described itself as asset-sensitive in its interest-rate simulations: a modeled 100-basis-point increase was estimated to raise next-12-month net interest income 3.04%, while a 100-basis-point decrease was estimated to reduce it 5.57%. Management cautioned that these are assumptions-based estimates, not forecasts.
- COVID-19, supply-chain disruption, economic and employment conditions, severe weather, oil and gas prices, interest rates, competition, credit quality, liquidity, cybersecurity and vendor reliability are among the stated risks. Management said it could not fully assess COVID’s ultimate effects.
- Oil and gas loans, excluding PPP, totaled $96.5 million (1.87% of non-PPP loans), with $10.8 million classified and $3.1 million on nonaccrual. Retail, restaurant and hospitality loans totaled $496.5 million (9.65% of non-PPP loans), including $34.3 million classified and $2.0 million on nonaccrual.
- Because assets exceeded $10 billion at September 30, the company discussed the potential effect of federal debit interchange fee limits, estimated by management at approximately $16 million in annual pretax income once applicable. Temporary regulatory relief generally gives the company until 2022 to address the threshold.
- The filing states no material pending legal proceedings, no material change to previously reported risk factors, and no material adverse liquidity or capital event known to management. The company renewed a share-repurchase authorization for up to 5 million shares through July 31, 2023; it had not repurchased shares under the new authorization through quarter-end.
Important facts for investors to verify
- Whether margin pressure and excess liquidity persist, and how quickly cash and new deposits can be deployed at attractive yields.
- The sustainability of earnings growth given lower mortgage activity, higher operating expenses and the contribution from PPP fee amortization and loan recoveries.
- Credit performance as PPP forgiveness continues, particularly in commercial real estate, oil and gas, and retail, restaurant and hospitality exposures; also monitor allowance adequacy and nonperforming loans.
- The timing and financial impact of any debit interchange fee limits associated with the company’s asset size.
- Liquidity and funding trends, including deposit growth, short-term borrowings, pledged collateral and the securities portfolio’s interest-rate sensitivity.