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First Financial Bankshares Inc. (FFIN - Snapshot Report) shares gained 1.2% since it reported second-quarter 2014 results after the market closed last Thursday. Earnings per share of 33 cents missed the Zacks Consensus Estimate by 2 cents. However, it compared favorably with the year-ago earnings of 31 cents. Notably, the prior-year per share information has been adjusted on account of the 2-for-1 stock split in June.

Results were adversely affected by elevated operating expenses and provision for credit losses. Also, declining profitability ratios were among the negatives. However, growth in the top line and consistent upturn in loans and deposits salvaged the results to some extent.

The company’s net income of $21.2 million in the reported quarter reflects an increase of 8.8% from the year-ago quarter.

 

 

Performance in Detail

The company’s total revenue came in at $65.1 million, up 13.1% from the prior-year quarter. However, revenues lagged the Zacks Consensus Estimate of $68.0 million.

Net interest income rose 16.2% to $48.2 million from the year-ago quarter. Further, on a taxable equivalent basis, net interest margin increased 6 basis points (bps) year over year to 4.24%.

Non-interest income totaled $15.9 million, up 4.7% year over year. The increase was mainly attributable to higher trust fees and ATM, interchange and credit card fees. However, it was partly offset by a fall in real estate mortgage fees and service charges on deposits.

Non-interest expense climbed 17.0% from the prior-year quarter to $35.0 million. The surge was primarily driven by rise in salary and employees benefit costs as well as higher personnel expenses related to the Orange acquisition. However, it was slightly offset by lower profit sharing expense.

The efficiency ratio rose 159 bps to 50.84% year over year. A rise in efficiency ratio indicates lower profitability.

As of Jun 30, 2014, total loans were $2.8 billion, up 8.1% year over year, while total deposits also grew 10.2% to $4.3 billion.

Asset Quality

First Financial’s asset quality reflected mixed results. The allowance for loan losses increased 5.3% year over year to $35.9 million. However, the ratio of allowance for loan losses to period end loans declined 3 bps to 1.29%.

Annualized net recoveries were 0.01% of average loans compared with net charge-offs of 0.24% in the prior-year quarter. Total nonperforming assets decreased 16.2% to $26.0 million, whereas provision for credit losses surged 35.1% year over year to $1.1 million.

Profitability and Capital Ratios

First Financial’s capital ratios remained strong. As of Jun 30, 2014, Tier-1 risk-based capital ratio was 16.15%, compared with 15.2% as of Jun 30, 2013. Moreover, total risk-based capital ratio came in at 17.3% against 16.31% at the end of the year-ago quarter.

Return on average assets came to 1.59%, down 8 bps year over year, while return on average equity dipped 7 bps to 13.46%.

Our Viewpoint

First Financial’s failure to curtail expenses overshadowed the expectations from its inorganic activities. Also, rising allowance for loan losses along with average asset quality resulted in an unimpressive quarter for the company.

However, the company’s efforts to enhance organic growth and its robust balance sheet may prove to be helpful in reviving profitability going forward.

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

First Financial carries a Zacks Rank #4 (Sell).

Other Regional Banks

KeyCorp.’s (KEY - Analyst Report) second-quarter earnings surpassed the Zacks Consensus Estimate owing to prudent expense management and higher non-interest income. Also, Commerce Bancshares, Inc. (CBSH - Analyst Report) outpaced the Zacks Consensus Estimate driven by growth in the top line.

Prosperity Bancshares Inc. (PB - Analyst Report) is slated to release second-quarter earnings results on Jul 25.
 

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