First Financial Bankshares, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; comparative results are for Q2 and the six months ended June 30, 2020. The Texas-based financial holding company operated 78 bank locations and generated most revenue from community banking, loans and investments, trust services, and mortgage activity. The filing is unaudited.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $90.9 million | $89.2 million | $179.8 million | $170.1 million |
| Noninterest income | $34.7 million | $36.9 million | $69.5 million | $65.7 million |
| Net earnings | $56.4 million | $53.5 million | $113.3 million | $90.7 million |
| Diluted earnings per share | $0.39 | $0.38 | $0.79 | $0.64 |
| Net interest margin, tax-equivalent | 3.36% | 3.78% | 3.45% | 3.84% |
| Efficiency ratio | 45.94% | 41.32% | 45.65% | 45.17% |
- Q2 net earnings increased 5.4%; six-month earnings increased 24.9%. Q2 return on average assets was 1.89% (2.06% prior year) and return on average equity was 13.38% (14.00%). For the first half, those returns were 1.97% (1.86%) and 13.61% (12.09%), respectively.
- Q2 interest income was $92.6 million and interest expense $1.7 million. Q2 noninterest expense was $59.4 million, up 11.4%; salaries and benefits rose to $35.0 million. Six-month noninterest expense was $117.1 million, up $8.5 million.
- At June 30, total assets were $12.33 billion, loans held for investment $5.30 billion (including $320.4 million of PPP loans), deposits $9.78 billion, borrowings $550.0 million, and shareholders’ equity $1.72 billion. Total assets were $10.34 billion a year earlier; deposits were $8.16 billion.
- Cash and cash equivalents were $844.6 million, including $654.5 million of interest-bearing deposits at banks. Six-month operating cash flow was $148.3 million versus $112.5 million; cash increased $115.5 million. Investing cash outflow was $1.22 billion, largely reflecting net securities purchases, while financing cash inflow was $1.19 billion, principally deposit growth.
- Allowance for credit losses was $62.1 million, or 1.17% of loans held for investment (1.25% excluding PPP). Nonperforming assets were $30.1 million, 0.57% of loans and foreclosed assets, versus $39.7 million and 0.76% a year earlier.
- Consolidated capital ratios remained strong: total risk-based capital 21.12%, Tier 1 and common equity Tier 1 20.04%, and leverage 11.10%. The bank exceeded well-capitalized thresholds.
Material changes versus prior comparable periods
- Q2 net interest income rose modestly as earning assets expanded, but margin fell 42 basis points year over year. Management attributed pressure to low rates, a flat-to-inverted yield curve, and excess liquidity awaiting investment. Tax-equivalent earning-asset yield declined 48 basis points in Q2; the cost of interest-bearing liabilities also declined.
- Q2 provision for credit losses was a $1.2 million reversal, versus an $8.7 million expense in Q2 2020; the six-month provision was a $3.2 million reversal, versus an $18.6 million expense. Management cited an improving Texas economic outlook and better asset quality. The lower provision materially supported earnings.
- Q2 noninterest income declined 6.1%, mainly as mortgage-related income fell $5.4 million and securities gains decreased. Trust fees and card-related fees increased. First-half noninterest income rose 5.9%, led by trust and card-related fees.
- Loan balances increased $133.6 million from year-end 2020, but PPP loans declined as prior-round loans were forgiven. Real estate loans grew $239.1 million from year-end, while commercial loans declined $150.2 million. Total deposits rose $1.11 billion from year-end.
- Nonperforming assets declined from both June 2020 and year-end 2020. However, retail, restaurant and hospitality loans reached $483.1 million, or 9.69% of loans excluding PPP, with $42.6 million classified. Oil and gas loans were $103.2 million, or 2.07% of loans excluding PPP.
Outlook, risks, and unusual items
- The filing provides no earnings or revenue guidance. Management said it could not fully assess COVID-19’s future effects and considered liquidity adequate, citing core deposits and low loan-to-deposit ratios. It reported no known event expected to materially impair liquidity, capital, or operations.
- PPP participation covered 9,709 loans totaling $970.9 million funded through June 30, 2021. Remaining deferred PPP fees were $13.7 million; $11.5 million of PPP loan fees was recognized as interest income in the first half. PPP forgiveness, repayments, and fee amortization affect reported loan balances and interest income.
- Management estimated that debit interchange income could decline by approximately $16 million annually before tax when applicable asset-size rules take effect. Temporary regulatory relief generally gives qualifying banks, including the company, until 2022 to reduce size or prepare for the related standards; management said it was monitoring the issue.
- Interest-rate simulations indicated an asset-sensitive position: an immediate +100-basis-point move was estimated to increase 12-month net interest income 3.57%, while a -100-basis-point move was estimated to reduce it 4.98%. These are model estimates, not forecasts, and depend on assumptions.
- The bank had $1.58 billion of available FHLB credit capacity, no FHLB advances, and no drawn balance on a $25 million parent-company revolving line. The line includes financial and operating covenants; the company reported compliance at quarter-end. Securities sold under repurchase agreements were $531.5 million and generally mature daily.
- On July 27, 2021, after quarter-end, the board renewed its repurchase authorization for up to 5 million shares through July 31, 2023. No shares were repurchased under the authorization during the first half of 2021. The 2020 TB&T acquisition contributed to the balance-sheet scale and goodwill; it was completed January 1, 2020.
- Management identified credit-loss estimates, financial-instrument valuation, economic and COVID conditions, interest rates, collateral values, competition, cybersecurity, and acquisition integration among relevant risks. It reported no material pending legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Whether the credit-loss reversal is sustainable and how loan quality, criticized/classified credits, and reserve coverage evolve as pandemic-related support fades.
- PPP forgiveness and fee recognition effects on loan growth, interest income, and future earnings.
- Net interest margin sensitivity to rates and the deployment and yield of excess liquidity.
- Potential timing and financial effect of debit interchange regulation, particularly the company’s estimated $16 million annual pretax impact.
- Growth and credit performance in retail, restaurant, hospitality, oil and gas, and commercial real estate exposures.
- Deposit stability, reliance on short-term repurchase borrowings, capital ratios, and compliance with the revolving-line covenants.