First Financial Bancorp in Cincinnati will look like a new company once it buys MainSource Financial Group in Greensburg, Ind.
The $8.7 billion-asset company will no longer be considered a community bank by regulators, jumping over a threshold where it will have to perform stress testing and cap interchange fees.
First Financial will also have a new executive in the corner suite thanks to an atypical arrangement under which Archie Brown Jr., the leader of the $4.6 billion-asset MainSource, will be president and CEO after the $1 billion deal closes. Claude Davis, who orchestrated First Financial’s rise over the past 13 years, will serve as executive chairman for three years.
Davis and Brown touted the unusual structure as appropriate given the extra scrutiny First Financial will face when it is bigger.
“There’s a lot of work that needs to be done to bring the companies together because of crossing $10 billion of assets,” Davis said in an interview. “There are a lot of constituents and you have to chart a new strategy. We still have to run the business on a day-to-day basis.”
Still, the management change raised a few eyebrows among industry observers. Analysts were left speculating why Brown would take over for Davis, with some suggesting that a transfer of power was needed to seal the deal. Both executives are 56 and years away from the industry’s typical retirement age.
Social issues and executive titles can be a thorny subject during M&A negotiations, especially when both CEOs are respected leaders in the prime of their careers. Some banks attempt to get around the issue by naming co-CEOs, though that arrangement often falls apart shortly after a deal is completed.
“I’m not a believer in ‘co-’ anything, because then no one is really in charge,” said Michael Iannaccone, president of MDI Investments. “Having a working chairman and an actual CEO is a good solution.”
Davis said he approached Brown with the new management structure, arguing that it was “a good way to manage the organization effectively and provide clarity of management.”
Directors at MainSource were “comfortable” staying independent, Brown said. While having Brown become CEO wasn’t a requirement for selling, directors were pleased to know that several of MainSource’s other executives would serve in leadership roles.
“Our board was comfortable with” the management structure, Brown said. “That really resolved the social issues.”
Davis will handle board integration, strategy, investor relations, corporate development and regulatory and government relations. Brown will focus on business execution and performance.
Investors may need some time to get used to a new face at First Financial, industry observers said.
“I think some are taking a wait-and-see approach on the management team,” said Nathan Race, an analyst at Piper Jaffray. “Investors aren’t familiar with the team form MainSource. … That’s a little unique with this transaction and not something we typically see.”
Davis' decision to stick around through 2021 will likely make First Financial’s investors more at ease with the transition, industry experts said. Brown will likely need to spend the next year on the road meeting with First Financial’s employees and investors.
“The fact that Claude will be working side by side with him for the first several quarters should help make the transition seamless,” Race said. “But there's the uncertainty that the company will be almost three times the size of [MainSource]. There's some risk in that.”
Brown, who has led MainSource since 2008, said he is prepared for the challenge. He helped the bank navigate several difficult tests facing the industry.
Brown is “someone who punches above his weight” and has the “ability to perform well,” said Erik Zwick, an analyst at Stephens. “I don’t have any hesitation on his ability.”
Davis said he isn’t planning on retiring once his three-year stint as executive chairman ends, adding that he would like to stay on the board for “a long time.” He would likely pursue another opportunity, though he wasn’t sure about the field.
Given Davis’ success at First Financial, he would likely be an attractive hire for another bank, industry experts said. While at the company, he upgraded systems and processes, improved efficiency and managed capital levels. At one point, First Financial returned 100% of its earnings to shareholders in the form of a special dividend.
“I’m not really the type to retire,” Davis said. “I’m sure I’ll do something," but stepping down as executive chairman "is three and a half years away. So I have lots of time to think about it.”