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First Financial's Winning Formula

First Financial Bankshares of Abilene, Texas has sailed through the credit crisis with stellar earnings performance and strong loan quality.

Story updated with comments from First Financial's CEO.

ABILENE, Texas (


) -- The announced deal to expand its market presence through an acquisition of a small institution in Huntsville, Texas underscores the strength of

First Financial Bankshares

(FFIN) - Get Free Report

and the company's stellar performance through the credit crisis.

The company announced late Thursday an agreement to acquire the privately-held

Sam Houston Financial

, the holding company of

First State Bank

of Huntsville, for $22.2 million in stock and cash. In a conversation with


, First Financial's CEO F. Scott Dueser described First State Bank as a strong performer and added that the Huntsville area was very attractive because of its "vibrant economy," including Sam Houston State University, which he described as "the fastest-growing in Texas," and the Texas Department of Criminal Justice, which employs 5,000 workers in the area.

The deal will be First Financial's first acquisition since 2005. The company's strategy includes maintaining the separate charters of acquired subsidiary banks, and when the Sam Houston Financial deal is completed, First Financial will have 11 separate banking charters and 52 offices "in Texas that span from Hereford in the Panhandle to Huntsville in Southeast Texas."

In contrast, the troubled

Synovus Financial

of Columbus, Ga. consolidated 28 of its 30 bank charters during the second quarter to simplify its capital and credit management and reduce regulatory costs.

Dueser said that maintaining separate charters has been an advantage for First Financial, since "in Texas people want their community banks," and decision making by separate boards of directors has helped the company to leverage local knowledge and maintain strong loan quality. He also said that First Financial is "actively looking for other banks to buy."

Here's a quick look at First Financial's numbers, and the stock:

Company Profile

First Financial's shares closed at $45.78 Thursday, down 14% year-to-date. Based on a quarterly dividend payout of 34 cents, the shares were yielding 2.97%.

Income Statement

The company reported second-quarter net income of $14.2 million, or 68 cents a share, increasing from $13.7 million, or 66 cents a share, the previous quarter and $13.6 million, or 65 cents a share, in the second quarter of 2009.

First Financial's return on average equity (ROA) based on net income before extra items for the second quarter was 1.70% according to SNL Financial, and has remained above 1.50% for every quarter over the past three years.

Balance Sheet

First Financial had $3.3 billion in total assets as of June 30, an 8% increase from a year earlier. Nonperforming assets - including loans past due 90 days or more or in nonaccrual status (less government-guaranteed balances) and repossessed real estate - comprised just 0.67% of total assets, compared to a national aggregate "noncurrent assets" ratio of 3.31% as of June 30 reported by the

Federal Deposit Insurance Corporation


Loan losses have also remained low, as the company's annualized ratio of net charge-offs to average loans was 0.73% for the second quarter, compared to the national aggregate charge-off ratio of 2.74%. First Financial's net charge-off ratio ranged from 0.08% and 0.36% from 2007 through 2009.

The company was strongly capitalized, with a Tier 1 leverage ratio of 10.64% and a total risk-based capital ratio of 19.47%. That second ratio was nearly doubled the 10% required for most banks and thrifts to be considered


by regulators.

First Financial Bankshares did not participate in the Troubled Assets Relief Program.

Stock Ratios

As of Thursday's market close, the shares were trading for 2.6 times tangible book value according to SNL Financial, which may look a bit expensive when considering that roughly two-thirds of banks stocks (excluding the Pink Sheets) were trading below book value, but Frst Financial has often traded well above three times tangible book over the past several years.

The shares were trading for 17.5 times trailing earnings. The price-to-forward earnings ratio based on the consensus earnings estimate for 2011 among analysts polled by Thomson Reuters was 16.4, dropping to 15.3 based on the 2012 consensus and 14.7 for 2013.

Analyst Ratings

All eight analysts covering First Financial recommend holding the shares. Even though the stock dropped 14% this year through Thursday, the stock price ratios looked a bit high compared to many other holding companies.

Then again, you get what you pay for. None of the companies profiled in


10 Cheapest Bank Stocks for 2011

have recent earnings performance that matches First Financial, which has been an amazingly consistent performer. First Financial's dividend yield is also attractive and the company has plenty of excess capital and earnings to consider a dividend increase and of course, continued expansion.

First Financial's a conservative play and despite relatively high valuations is worth keeping an eye on. Investors may also consider going in slowly, taking advantage of the volatile market for bank stocks to build a position on dips in price.


10 Bank Acquisition Targets >>

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10 Cheapest Bank Stocks for 2011 >>


Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn


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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.