2023-12-28 08:12:06 ET
Summary
- First Financial Bankshares is struggling with declining deposits, high uninsured deposit exposure, and declining revenue and profits.
- The bank's debt has increased, while the value of securities has dropped.
- Despite some positive factors like controlled debt levels and a solid track record, the bank's overall outlook is concerning, warranting a 'hold' rating.
Even though I never ended up pulling the trigger on any of them myself (I run a hyper concentrated portfolio, so many of even the best prospects that I see are ones that I end up not buying), some of the most appealing opportunities that I have seen so far this year have been in the banking sector. The plunge that the industry saw in March after an old-fashioned bank run caused the collapse of multiple institutions pushed the shares of pretty much every player down materially. Some have yet to recover.
But this doesn't mean that every bank out there looks attractive. One of the larger ones now that I have looked at is an institution known as First Financial Bankshares (FFIN), which is a financial holding company based out of Texas. In the years leading up to 2022, the bank had a solid track record for growth. But this year has been truly difficult for the enterprise. In addition to dealing with a decline in profitability like many other banks, deposits continue to fall and uninsured deposit exposure is a lot higher than I would like it to be. On top of this, shares of the bank are trading at rather lofty multiples relative to earnings. Given these facts, the very best that I can rate the business at this time is a 'hold', but I was even tempted during the analysis of the institution to rate it a 'sell'.
A sizable bank that has reversed course
As I mentioned already, First Financial has its roots in Texas. In fact, its oldest subsidiary dates back to its opening in Abilene, Texas, back in 1890. From those humble beginnings so long ago, the company has become a multi-pronged financial holding business with a wide array of services that it makes available for its customers. Primarily, though, the institution operates as a full-service commercial banking entity that, as of the end of its latest completed fiscal year, had 79 financial centers spread across Texas.
From these locations, the bank provides customers with general commercial banking services like accepting deposits, cashing checks, making available savings accounts, issuing loans, providing access to ATMs, facilitating online transactions, and so much more. It even provides securities brokerage services than it does in coordination with an unrelated third party. Other services that the bank provides includes trust and wealth management activities. In fact, its trust company has ten different locations that it operates in.
In the past few years, management has done well to grow the bank. The value of loans on its books, for instance, grew from $5.17 billion in 2020 to $6.44 billion in 2022. Loans have continued to grow since then, eventually hitting an all-time high of $6.99 billion as of the end of the third quarter of this year. I do understand that one area that many investors are worried about when it comes to loan exposure involves office properties. High vacancy rates across the country caused by a shift toward remote work has resulted in concerns arising about the ability of landlords to pay their mortgages. The good news is that only about 3.1% of the value of loans on First Financial's books fall under the office category.
There are other areas in which the institution has grown, though these have not continued to experience growth this year. As an example, we need only look at securities. From 2020 through 2022, the institution increased its portfolio of securities from $4.39 billion to $5.47 billion. But starting in the first quarter of this year, likely spurred on by the banking crisis, the value of securities began dropping. By the third quarter of this year, they had fallen to $4.65 billion. That's a decline of $821.9 million from where they were at the end of last year. To be clear, there has been some volatility when it comes to securities in the past. Using year end results, for instance, 2021 was actually the high mark for the company when it boasted $6.57 billion worth of securities in its portfolio. So it is possible that the current course will reverse itself.
Since dropping from $729.1 million in 2020 to $330.7 million in 2022, the value of cash and cash equivalents on the company's books has remained in a fairly narrow range. The low point was the $278.9 million reported in the second quarter of this year. But by the end of the third quarter , cash had risen back up to $388.3 million. The real problem, however, has been on the deposit side of things. From 2020 through 2022, the value of deposits for the institution had grown from $8.68 billion to $11.01 billion. But in every quarter since then, we have seen a decline. At the end of the third quarter, deposits came in at $10.72 billion. That's not a huge drop from where we were at the end of last year. But a decline of any sort is undesirable in this market because it shows weakness. To make matters worse, uninsured deposit exposure has been quite high. We don't have an estimate for 2020. But we do know that by 2022, 37.7% of the value of the bank's deposits were uninsured. This ended up falling to as low as 35.3% in the second quarter of this year. But in the third quarter, it spiked to 48.2%. This is far above the 30% maximum that I prefer in the prospects that I look at potentially buying.
On top of having uninsured deposit exposure that is well above what I am comfortable with, the institution has also seen an increase in the value of debt on its books. From 2020 through 2022, debt rose from $430.1 million to $642.5 million. We saw some drop after that in both the first and second quarters of this year. But in the third quarter, it spiked up to $751.1 million. This is not out of control by any means. However, there is no denying that the trend is undesirable.
With the growth that the institution saw in its assets in the years prior to 2023, there was a corresponding increase in revenue and profits. Net interest income jumped from $330.4 million in 2020 to $384 million in 2022. Although non-interest income dipped slightly during this window of time, that didn't stop net profits from growing from $202 million to $234.5 million. This year, on the other hand, we have seen a downturn. Despite an increase in the value of loans, the drop in securities, combined with rising debt and a mild contraction of the bank's net interest margin, pushed revenue and profitability down year over year. In the first nine months of this year, for instance, First Financial reported net profits of $153 million. That's down from the $175.8 million reported the same time last year.
If we value the company using results from 2022, we would get a price to earnings multiple of 18.3. That is significantly higher than any other bank that I have analyzed so far. And if we annualize results seen so far for 2023, the picture looks even worse with a price to earnings multiple of 21. Even the price to book ratio is quite a bit higher than what else I have seen out there. It currently stands at 3.53 given the $8.69 in book value per share that I calculated for the bank.
Takeaway
Truth be told, I really don't like what I'm looking at here. Based on all the data provided, First Financial is struggling to keep deposits on its books. Uninsured deposit exposure has risen and is well above when I am comfortable with. Revenue and profits are declining. Shares are priced at rather lofty multiples, no matter what lens we look at that picture through. Debt has risen and the value of securities has dropped. It's only by the skin of its teeth that First Financial escaped a more bearish rating from me. Because the debt levels look to be under control, because of the solid track record the bank has had prior to this year, and thanks to growing loan values as well as having almost no exposure to office properties, I have decided to rate this a 'hold' for now. But if anything worsens from here, I might very well downgrade the company.
For further details see:
First Financial Bankshares: An Expensive Way To Play A Cheap Sector