First Financial Bankshares: Can Strong Growth Justify a Premium Valuation?

In the world of regional banking, First Financial Bankshares (FFIN) has emerged as a standout performer. Over the past year, the Abilene, Texas-based institution has delivered robust earnings growth, expanded its loan and deposit portfolios, and improved operational efficiency. Yet, as investors consider a potential re-rating for the stock, a critical question looms: Can these strengths justify FFIN's elevated valuation, especially in the face of deteriorating credit quality metrics?

A Growth Story Built on Fundamentals

FFIN's 2024 results paint a picture of a bank capitalizing on favorable macroeconomic conditions. For the full year, net income rose 12.3% to $223.5 million, with diluted earnings per share (EPS) climbing to $1.56. This growth was driven by a 10.7% expansion in its loan portfolio to $7.9 billion and a 10.6% increase in deposits to $12.1 billion. The net interest margin (NIM) also widened to 3.67% in Q4 2024, reflecting the benefits of a rising rate environment and disciplined asset-liability management.

The efficiency ratio, a key measure of operational effectiveness, improved to 46.8% in Q4 2024 from 51.97% a year earlier. This improvement was fueled by higher net interest income and the absence of bond-sale losses that had weighed on 2023 performance. FFIN's management has also invested in critical areas, including middle-market lending and risk management, to support long-term growth.

The Credit Quality Dilemma

Despite these positives, FFIN's credit quality metrics have raised concerns. Nonperforming assets (NPAs) rose to 0.8% of loans in Q4 2024, up from 0.49% a year earlier. Classified loans—those at higher risk of default—increased to $234 million, a 32.7% jump. The allowance for credit losses also grew to $98.3 million, or 1.24% of loans, from $88.7 million in 2023.

While these trends may reflect a more conservative underwriting environment or a tougher economic backdrop, they underscore a potential vulnerability. For a bank with a focus on community banking and relationship lending, a spike in NPAs could erode margins and investor confidence if it persists.

A Valuation at a Premium to Peers

FFIN's valuation metrics are strikingly elevated compared to industry averages. As of July 2025, the stock trades at a price-to-book (P/B) ratio of 3.18 and a price-to-tangible-book (PTBV) ratio of 3.58, far above the regional bank industry medians of 1.11 and 1.04, respectively. The P/E ratio of 21.70 also exceeds peers like Old National Bancorp (P/E of 13.15) and Cadence Bank (P/E of 9.89).

The disconnect between FFIN's valuation and its peers is puzzling. While the bank's return on average equity (15.17%) and dividend yield (4.61%) are attractive, these metrics alone may not justify a 3x P/B multiple in an industry where investors typically demand a margin of safety. The market appears to be pricing in continued growth, but is that optimism warranted?

Weighing the Risks and Rewards

The key to assessing FFIN's valuation lies in reconciling its growth trajectory with its credit quality. The bank's ability to maintain a stable NIM—supported by its diversified loan portfolio and sticky deposit base—could provide a buffer against rising credit costs. However, if economic conditions deteriorate further, FFIN's elevated leverage to credit risk could amplify losses.

For long-term investors, the decision to own FFIN hinges on three factors:
1. Management's ability to control credit risk without sacrificing growth.
2. The sustainability of its NIM in a potential rate-cutting cycle.
3. The market's willingness to reward scale and efficiency in a sector where valuations are typically conservative.

Investment Implications

FFIN's current valuation suggests that the market is betting on a re-rating driven by its asset scale and operational improvements. However, this premium is only justified if the bank can demonstrate that its credit quality concerns are temporary and that its growth is durable. For now, the stock appears overvalued relative to its fundamentals, particularly in a sector where margins are sensitive to macroeconomic shifts.

Investors seeking growth with a margin of safety may want to wait for a pullback or improved credit metrics before committing. For those comfortable with higher risk, FFIN offers a compelling case—if management can prove that its balance sheet is as strong as its top-line results.

In a market that often overvalues growth and underprices risk, FFIN serves as a reminder that even the most promising stories need to deliver on fundamentals. Whether the bank can justify its premium valuation will depend on its ability to balance expansion with prudence—a test that many regional banks have struggled to pass in recent cycles.