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Shares of First Financial Bankshares Inc. (FFIN - Snapshot Report) declined marginally after it reported fourth-quarter 2013 earnings per share of 66 cents, missing the Zacks Consensus Estimate by 4 cents. However, it compared favorably with the year-ago earnings of 58 cents.

For full-year 2013, First Financial’s earnings per share of $2.47 missed the Zacks Consensus Estimate by 2.5% while it surpassed the prior-year figure by 4.7%.

Results were adversely affected by an increase in operating expenses and higher provision for credit losses. However, increase in net interest and non-interest income, along with rise in loans and deposits were the positives for the quarter.

The company’s net income of $21.2 million in the reported quarter reflects an increase of 16.0% from the year-ago quarter. Also, for 2013, it climbed 6.3% year over year to $78.9 million.

Performance in Detail

The company’s total revenue came in at $63.5 million, up 16.1% from the prior-year quarter figure. However, revenues lagged the Zacks Consensus Estimate of $66.0 million.

For 2013, total revenue stood at $238.4 million, up 9.9% year over year, while it missed the Zacks Consensus Estimate by 1.5%.

Net interest income rose 20.5% year over year to $46.7 million. Further, on a taxable equivalent basis, net interest margin rose 10 basis points (bps) year over year to 4.27%.

Non-interest income came in at $15.8 million, up 5.7% year over year. The increase was primarily attributable to a rise in trust fees and ATM, interchange and credit card fees.

Non-interest expense increased 15.6% from the prior-year quarter to $33.1 million. The rise was primarily driven by higher personnel expenses, profit sharing expenses and costs related to advertising and public relations.

The efficiency ratio declined to 49.42% from 49.86% in the prior-year quarter. A fall in efficiency ratio indicates improved profitability.

As of Dec 31, 2013, total loans were $2.7 billion, up 29.3% year over year, while total deposits increased 13.8% to $5.2 billion.

Asset Quality

Asset quality was a mixed bag in the quarter. The allowance for loan losses declined 2.7% year over year to $33.9 million. The ratio of allowance for loan losses to period end loans dipped 41 bps to 1.26%.

Net charge-offs were 0.15% of average loans on an annualized basis, up 1 bps from the prior-year quarter. Total nonperforming assets increased 22.3% to $31.1 million. Further, provision for credit losses surged 82.4% year over year to $1.2 million.

Profitability and Capital Ratios

First Financial’s capital ratios remained strong while profitability ratios improved partially in the quarter. As of Dec 31, 2013, Tier-1 risk-based capital ratio was 15.82%, compared with 17.43% as of Dec 31, 2012. Moreover, total risk-based capital ratio came in at 16.92% against 18.68% at the end of the year-ago quarter.

Return on average assets declined 3 bps year over year to 1.65%, while return on average equity increased 138 bps to 14.47%.

Our Viewpoint

Though First Financial’s results do not reflect an impressive year, we remain optimistic on the company’s performance going forward owing to its strategic acquisitions, organic growth and a strong balance sheet.

However, the prevailing low interest-rate environment, sluggish economic growth, non-diverse footprint and a stringent regulatory landscape may continue to pressurize the company’s financials in the near term.

First Financial carries a Zacks Rank #3 (Hold).

Performance of Other Regional Banks

Prosperity Bancshares Inc. (PB - Analyst Report) beat the Zacks Consensus Estimate in its latest release. While PrivateBancorp, Inc. (PVTB - Snapshot Report) surpassed the Zacks Consensus Estimate driven by growth in top line and lower provision, KeyCorp (KEY - Analyst Report) outpaced the Zacks Consensus Estimate due to prudent expense management.

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