After 15 months spent making major structural changes, First Financial Bancorp of Hamilton, Ohio, is ready to cash in.
Claude E. Davis, the $3.7 billion-asset company's president and chief executive officer, said its bottom line should improve in the second half.
"The work we have been doing is repositioning the company to have … more of a growth-oriented, higher-return business model," he said.
Bradley Ness, an analyst with Friedman, Billings, Ramsey & Co., said the changes, combined with First Financial's solid operations in Cincinnati and Dayton, make it a potential takeover target.
"They have a decent footprint and are particularly strong in the Cincinnati area," he said.
Mr. Davis, who has been on the job since October 2004, downplayed the deal talk. He would not say whether First Financial has been approached by possible buyers, but he did say a sale was probably not in his company's immediate future.
"We're focused on managing the business for the long term," he said.
What that means for the short term is that First Financial will restructure its balance sheet, selling securities and paying off Federal Home Loan Bank advances. As part of the restructuring, it expects to record up to $6 million of charges in the first half of this year.
Mr. Davis said the balance-sheet changes should improve First Financial's net interest margin, which was 3.72% at yearend.
"We don't have stated goals around the margin. Ours has been declining with the flat yield curve, and we want to see it move back up," he said.
In addition to a widening spread, Mr. Davis said his company is aiming for an efficiency ratio of about 60% and a near-term return on equity of 12% to 14%.
Its long-term ROE goal is 16% to 18%, but he would not set a timetable for reaching it.
"We haven't defined it in terms of time, because we want to make sure we accomplish what we need to accomplish in the time frame that is appropriate," he said.
Last year First Financial's return on average shareholders' equity was 10.4%, and its efficiency ratio hit 70%.
Mr. Davis said that First Financial has not ruled out making an acquisition or two, but that organic growth, particularly in the Cincinnati and Dayton markets, is more likely. (According to June 30 data from the Federal Deposit Insurance Corp., First Financial had a 3.6% share of the Cincinnati area's $37 billion of deposits.)
First Financial reported last week that its fourth-quarter earnings plunged 72% from a year earlier, to $2.8 million. Diluted earnings per share sank 70%, to 7 cents. For the year, its earnings fell 8%, to $37.9 million. Diluted earnings per share dropped 6%, to 88 cents.
The drops were caused largely by the changes Mr. Davis has instituted: collapsing the company's six banking charters into one; quitting the indirect auto lending business; and hiring 16 commercial lenders, seven wealth management salespeople, and five market presidents.
In the next phase Mr. Davis aims to build First Financial's commercial loan portfolio, core deposits, and wealth management business. In the first half of this year he plans to complete the balance-sheet restructuring, hire even more lenders, and look for markets to enter.
"We really don't see lack of product as an issue as much as expansion and extension of our sales force," he said.
Daniel E. Cardenas, the director of research at Howe Barnes Investments Inc. in Chicago, said Mr. Davis has taken the right steps. However, Mr. Cardenas' outlook for this year is not as optimistic as the CEO's.
"It looks like there is still a lot of work that needs to be done in '06," Mr. Cardenas said. "Hopefully, he finishes it up and … [First Financial] returns to profitability in late '06 and early '07."
Mr. Ness agreed that the company has more work to do, and he said he would like its new lenders to generate loan growth, which has been a problem over the past few years. Last year total loans fell 6%, to $2.6 billion.
Before Mr. Davis' hiring, First Financial's earnings had steadily dropped for several years; from 2000 to 2003 they shrank 35%, to $37.9 million. First Financial attributed that drop to Ohio's sluggish economy.
