First Financial Bankshares, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
First Financial Bankshares is a Texas-based financial holding company whose primary business is community banking through First Financial Bank, N.A., which operated 79 Texas locations at June 30, 2023. This summary covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to June 30, 2022 and December 31, 2022. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income (GAAP) | $95.9 | $98.8 | $192.2 | $194.2 |
| Net interest income, tax-equivalent | $98.8 | $102.9 | $198.2 | $202.1 |
| Provision for credit losses | $5.6 | $5.4 | $8.4 | $10.1 |
| Noninterest income | $29.9 | $37.3 | $58.0 | $72.2 |
| Noninterest expense | $57.6 | $58.3 | $114.9 | $117.6 |
| Net earnings | $50.9 | $60.5 | $103.4 | $116.5 |
| Diluted earnings per share | $0.36 | $0.42 | $0.72 | $0.81 |
| Tax-equivalent net interest margin | 3.29% | 3.30% | 3.32% | 3.26% |
| Efficiency ratio | 44.74% | 41.61% | 44.84% | 42.86% |
- Q2 return on average assets was 1.58% versus 1.82%; return on average equity was 14.89% versus 17.26%. For the first half, those returns were 1.62% versus 1.77% and 15.58% versus 15.24%, respectively.
- Six-month operating cash flow was $153.0, investing cash flow was positive $95.4, and financing cash flow was negative $300.2. Cash and cash equivalents declined $51.8 from year-end to $278.9.
- At June 30, total assets were $12.83 billion; loans held for investment were $6.78 billion, up from $6.44 billion at year-end and $5.88 billion a year earlier. Deposits were $10.81 billion, down from $11.01 billion at year-end and $11.12 billion a year earlier.
- Borrowings were $587.7, down from $642.5 at year-end and $768.4 a year earlier. Shareholders’ equity was $1.37 billion, or 10.66% of assets. The consolidated total risk-based capital ratio was 19.62%; the bank’s ratio was 17.73%.
- The allowance for credit losses on loans was $86.5, or 1.28% of loans, versus $75.8 and 1.18% at year-end. Nonperforming assets totaled $29.2, or 0.43% of loans and foreclosed assets, versus $24.3 at year-end. Net charge-offs were 0.05% of average loans in Q2; the prior-year quarter had net recoveries.
Material changes versus comparable periods
- Q2 net earnings fell 15.9% year over year; first-half earnings declined 11.2%. Higher interest income was more than offset by sharply higher funding costs: Q2 interest expense rose to $33.1 from $3.2, and first-half interest expense rose to $58.4 from $4.8.
- Management attributed net interest income pressure to higher deposit and borrowing rates and a shift in earning-asset mix. Average loan balances grew substantially, but average securities and short-term investments declined. The Q2 tax-equivalent margin was down one basis point year over year; the first-half margin improved six basis points.
- Noninterest income declined, notably from lower debit-card fees following the Company becoming subject to the Federal Reserve’s Durbin Amendment limit on interchange fees effective July 1, 2022, lower mortgage activity amid higher rates, and fewer securities-sale gains and loan-recovery interest than in 2022. Deposit service charges increased with account growth.
- The available-for-sale securities portfolio had fair value of $5.07 billion. Its gross unrealized losses were $621.5 at quarter-end, which management attributed to interest rates rather than credit deterioration; no credit-loss allowance was recorded for these securities. Net-of-tax accumulated other comprehensive loss was $490.3, improved from $535.2 at year-end but worse than $400.5 a year earlier.
Outlook, risks, contingencies and unusual items
- 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, subject to capital and other constraints. The first-half cash dividend payout ratio was 48.31%. The Q2 dividend was $0.18 per share, payable July 3, 2023.
- Management described liquidity as adequate, citing a diversified core deposit base and relatively low loan-to-deposit ratios. Available facilities included a $2.52 billion FHLB line, $130 million in correspondent-bank federal-funds lines, a $25 million unsecured revolving line with Frost Bank, and access to Federal Reserve lending programs; none had amounts drawn at June 30. Approximately $3.81 billion of deposits were estimated to be uninsured and uncollateralized.
- Interest-rate risk remains significant. The Company reported an asset-sensitive position in its simulations, but cautioned that actual results may differ materially from model estimates. Its securities portfolio had a 5.85-year modified duration; a 100-basis-point increase in the five-year Treasury rate was estimated to increase unrealized losses by approximately $256 million before taxes.
- Commercial commitments totaled $2.02 billion, including $1.17 billion of unfunded lines, $810.7 million of unfunded commitments to extend credit, and $35.1 million of standby letters of credit. The related reserve for unfunded commitments was $9.4 million. Such commitments may not all be drawn.
- Key risks identified include economic and Texas real-estate conditions, interest-rate and funding-cost changes, deposit competition and liquidity, borrower and collateral deterioration, market value changes in securities, weather and commodity exposure, cyber and operational risks, and regulatory changes. The filing reported no material pending legal proceedings and no material change in previously disclosed risk factors.
- After quarter-end, the Board renewed the authorization to repurchase up to 5 million shares through July 31, 2024. No shares were repurchased in the first half of 2023. The filing also noted that management was monitoring the effects of recent bank failures on the financial system.
Most important facts for investors to verify
- Whether deposit pricing and the mix of noninterest-bearing versus interest-bearing deposits continue to pressure net interest margin and earnings.
- Trends in uninsured deposits, deposit balances, available borrowing capacity, and liquidity under stress scenarios.
- Credit-quality developments, particularly nonperforming loans and allowance adequacy as loan growth continues, including in commercial real estate and construction-related portfolios.
- The duration, valuation and potential capital or liquidity implications of the large unrealized losses in the available-for-sale securities portfolio.
- The sustained earnings impact of the Durbin Amendment, lower mortgage activity and reduced nonrecurring securities gains or loan-recovery income.
- Capital, dividend and share-repurchase decisions, including compliance with the Frost Bank credit agreement covenants.