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Shares of First Financial Bankshares Inc. (FFIN - Snapshot Report) gained 0.9% since the company reported a top-line growth in its third-quarter 2013 result release on Oct 17. Earnings per share of 61 cents however missed the Zacks Consensus Estimate by 4 cents. This also compares unfavorably with the year-ago earnings of 63 cents.

Results were adversely affected by an increase in operating expenses, deteriorating profitability ratios and higher provision for credit losses. However, increase in net interest and non-interest income, and an improved asset quality were the positives for the quarter.

Net income for the quarter came in at $19.6 million, declining 1.2% year over year.

Performance in Detail

The company’s total revenue came in at $63.7 million, up 14.2% from $55.8 million in the prior-year quarter. Further, revenues marginally beat the Zacks Consensus Estimate of $63.0 million.

Net interest income increased 16.3% year over year to $45.5 million. However, on a taxable equivalent basis, net interest margin declined to 4.25% from 4.26% in the prior-year quarter.

Non-interest income rose 10.17% year over year to $17.18 million. The increase was primarily attributable to a rise in trust fees, ATM, interchange and credit card fees as well as real estate mortgage income.

Non-interest expense came in at $35.53 million compared with $27.20 million in the year-ago quarter. The increase reflects technology contract termination and conservation costs of $3.40 million owing to the acquisition of Orange Savings Bank and increase in personnel, legal, tax and professional fees.

The efficiency ratio increased to 53.10% from 46.61% in the prior-year quarter. A rise in efficiency ratio indicates deterioration in profitability.

As of Sep 30, 2013, total loans were $2.6 billion, up 30% from $2.0 billion as of Jun 30, 2012. Total deposits increased 16.3% year over year to $4.0 billion.

Asset Quality

Asset quality exhibited an improvement in the quarter. The allowance for loan losses marginally decreased from $34.9 million to $34.8 million year over year. The ratio of allowance for loan losses to total loans dipped to 1.33% from 1.74% in the prior-year quarter.

Net charge-offs were 0.10% of average loans on an annualized basis, down from 0.12% in the prior-year quarter. Total nonperforming assets were $28.5 million, down 7.2% from the year-ago period. Moreover, nonperforming assets were 0.56% of total assets, down from 0.71% in the prior-year quarter.

However, provision for credit losses increased to $1.3 million from $0.9 million in the year-ago quarter.

Profitability and Capital Ratios

First Financial’s capital and profitability ratios deteriorated in the third quarter. As of Sep 30, 2013, Tier-1 risk-based capital ratio was 15.37%, compared with 17.66% as of Sep 30, 2012. Moreover, total risk-based capital ratio came in at 16.49% against 18.92% at the end of the year-ago quarter.

Tier 1 leverage ratio was 9.77%, compared with 10.49% at the end of the year-ago quarter.
Our Viewpoint

First Financial’s strategic acquisitions and organic growth is quite impressive. Moreover, the company’s strong balance sheet is expected to bode well for its overall expansion going forward.

However, the prevailing low interest-rate environment, sluggish economic growth, non-diverse footprint and a stringent regulatory landscape are expected to adversely affect the company’s financials in the subsequent quarters.

First Financial carries a Zacks Rank #2 (Buy).

Some other Southwest banks worth considering include Banc of California, Inc. (BANC - Snapshot Report), Prosperity Bancshares Inc. (PB - Analyst Report) and Bancfirst Okla (BANF - Snapshot Report). While Banc of California carries a Zacks Rank #1 (Strong Buy), the other two hold a Rank #2 (Buy). 

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