First Financial Bancorp is passing the plate back to shareholders, and it's brimming.

With its coffers at capacity, the capital-flush Cincinnati company said recently it would raise its dividend to equal 100% of its quarterly earnings. First Financial said it has all the capital it needs and plans to keep paying out its earnings each quarter until it finds a better way to use the money.

First Financial may be the first community bank to use the tactic, but it probably won't be the last. Analysts note that healthy companies have raised a considerable amount of capital with few alluring ways of deploying it, an equation that should lead to higher dividends, special dividends and stock repurchase programs.

"The question of what are you going to do with your excess capital is coming up more and more," said Matthew Schultheis, an analyst at Boenning & Scattergood Inc., who does not cover First Financial but spoke broadly about excess capital. "For those banks that have raised capital and can't find ways to deploy it, this is becoming a fairly common problem."

Compared with its peers, First Financial has been both lucky and good. It has ample equity while others are overturning the proverbial couch cushions for capital. Like so many, though, First Financial is grappling with a sluggish economy where loan growth is tepid and an expected wave of acquisitions has yet to pan out.

"We have enough capital today to support internal growth, some level of acquisitive growth and still maintain a capital cushion," said Claude Davis, the president and chief executive of the $6 billion-asset company, in an interview last week. "We don't see a reason to add to that position."

Davis said he hasn't stopped looking at deals. In fact, the company said in June it would buy Liberty Savings Bank's 16 branches in Dayton, Ohio. The company also struck large deals in 2009 with the Federal Deposit Insurance Corp. for failed banks.

"We are looking for opportunities, and we continue to believe they are out there, but until our capital ratios begin to move to our internal thresholds, we figured we would reward our shareholders," Davis said.

At June 30, First Financial's tangible common equity ratio was 11.1%. Through growth, the company wants to pare that ratio down to around 7%, Davis said.

Shareholders and analysts want growth, but are happy for some lagniappe in the meantime.

"I believe all shareholders feel positive about what management is doing," said Joseph A. Stieven, the chief executive of Stieven Capital Advisors LP in St. Louis, Mo., with a 0.65% stake in First Financial. "It works out to a 7% dividend yield, which is fabulous."

Stieven, who spoke to American Banker from KBW Inc.'s 12th Annual Community Bank Conference last week, said First Financial's dividend plan was the buzz of the conference.

"Many, many, many banks here have taken great notice," Stieven said. "I do think that there will be those that try this. I think they are the first in the country, and I think they may have set a new bar."

First Financial has excess capital for a few reasons. It has remained profitable throughout the downturn. It raised $103.5 million in June 2009 to prepare for acquisitions. It returned to the market in January 2010 to raise roughly $95 million to redeem the stock it issued to the Treasury Department for the Troubled Asset Relief Program.

The company also booked $260 million in bargain purchase gains for its 2009 acquisitions of three failed institutions: Peoples Community Bank, Irwin Union Bank and Trust Co. and Irwin Union Bank. Such gains stem from the difference between the value of the portfolio compared to the loss-share agreement with the FDIC. Beyond the up-front gains, First Financial still reaps the benefits of those acquisitions as customers pay off their loans.

"The FDIC deals, particularly the ones for the Irwin banks, are widely recognized as some of the best FDIC deals we've seen," said Scott Siefers, an analyst at Sandler O'Neill & Partners LP.

Davis said the company considered a buyback but decided against it because pricing such a deal can be choppy and has the potential to dilute tangible book value.

Rather, First Financial structured the dividend as a recurring dividend of 12 cents, or about 40% to 60% of its earnings, with a variable dividend to equal the remainder of quarterly earnings.

In the case of the second quarter, that variable dividend was 15 cents, totaling 27 cents, which will be paid on Oct. 1.

Linda Margolin, the president of Margolin & Associates Inc., an investor relations firm, said she liked the approach compared to a buyback, and said the payout will likely make First Financial popular among investors.

"The dividend is there as a sign of stability when everything else is going nuts," she said.

Jeff Marsico, an executive vice president at Kafafian Group, a bank consulting firm in New Jersey, said the only danger he sees is that shareholders might come to expect a perpetual payout, instead of one that could end if a great acquisition comes along or when loan growth picks up. Still, he said that First Financial could soon be a darling of retail investors.

"I think institutional shareholders tend to prefer buybacks, but retail investors love the dividend," Marsico said. "I bet they will have retirees flocking to them."

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