Why Invest in First Financial Bankshares: A Portfolio Manager’s Perspective
In her 43-year career in Financial Services, Sally Pope Davis has spent most of that time working in, analyzing, or investing in the U.S. banking sector. Sally is a former managing director for Goldman Sachs and co-led a successful small cap value fund for the last 15 years. First Financial was one of the first bank stocks Davis selected for her team’s small-cap portfolio and one that they held continually while she worked on that strategy.
First Financial was honored to have Davis as a keynote speaker at our 2024 Annual Shareholders Luncheon, where she outlined her analysis of investing in First Financial Bankshares stock, which she considers one of her “favorite long-term investments.”
Here were some key points from her speech:
Investing Philosophy
Davis emphasized her long-term investing approach, seeking companies that can compound returns over time. First Financial Bankshares (FFIN) stood out as a core holding due to its consistent earnings growth and strong valuation metrics.
Growth Criteria
Davis highlighted the importance of earnings per share (EPS) growth, noting that in the banking sector growth is driven by expanding balance sheets through loans, deposits, customer acquisition, earnings quality, and consistency are key.
Asset Quality
She stressed the significance of asset quality, especially in managing loan losses. Davis sited FFIN's history of minimizing loan losses and detailed loan portfolios were key factors in its success.
“First Financial has one of the industry’s best long-term track records of low net charge-offs, low levels of problem loans, and a granular portfolio well-diversified across a variety of loans to consumers and businesses in communities across Texas,” said Davis.
Management Quality
Davis noted that management quality is the most critical factor in financial stock investments. FFIN's management team demonstrated strong capital allocation, risk management, and expense control, leading to higher and consistent returns.
Balance Sheet Strength
FFIN's robust balance sheet with a high common equity ratio and strong loss reserves contributed to its resilience and the company has generated a higher return on equity (ROE) on that equity base compared to industry peers.
Selective Acquisitions
Davis highlighted FFIN's strategic, accretive, and selective bank acquisitions as an additional strength.
“Acquiring other companies at attractive prices has been an important component to many banking companies’ growth,” said Davis. She added her view that FFIN is among the best at acquisition decisions.
Outstanding Customer Service & Employee Empowerment
Davis acknowledged the role of FFIN's employees in delivering differentiated results through outstanding customer service. She also emphasized FFIN’s strong leadership and alignment with shareholders through profit-sharing plans.
“This is a highly competitive business and First Financial has been able to able to differentiate clearly how it delivers service to its customers and underscores to me how and why community banking is so important,” said Davis. “They have a deep commitment to and have built highly specific processes around delivering exceptional customer service. This is key to their ability to attract quality long-term customers to the bank.”
The FFIN Difference
Overall, Davis praised FFIN for its ability to deliver attractive returns on equity consistently over time, attributing its success to strong management, asset quality, and customer service.
“First Financial has been one of the most consistently profitable banks, as measured by ROE, in the industry,” said Davis. “They have been able to use that high return to expand their shareholder’s equity, grow their loan portfolio and balance sheet, and compound earnings in the great state of Texas, and do so in a safe and consistent manner over time. This compounding of earnings, and thus retained earnings, is what drives a stock price over time and made First Financial one of the best performing bank stocks in our portfolio over a multi-year period.
First Financial is grateful for Sally Pope Davis and all of our shareholders for being part of our relationship-centered mission. We strive every day to put YOU first.