When others were growing, First Financial Bancorp was retooling.
Now, as the industry aches, the Cincinnati company is pouncing.
The $3.8 billion-asset First Financial missed out on the boom years, spending the middle part of the decade quitting unprofitable business lines and markets, and shedding employees.
Intended simply to ensure survival, this restructuring has now made the company, in effect, an accidental champion, able to use admirable credit quality and a strong capital base to exploit the unexpected downturn in the banking industry.
First Financial's biggest acquisition opportunity could be considered another lucky break. When Peoples Community Bank failed on Friday, First Financial bought the West Chester, Ohio, thrift's 19 branches, its $598.2 million of deposits and most of its $706 million of assets from the Federal Deposit Insurance Corp.
It was a deal that First Financial could not pass up, said its president and chief executive, Claude Davis. The company had already agreed to buy most of those branches from Peoples, in a deal announced in May. But it ended up getting the whole operation from the government on much more favorable terms: a 1.5% premium on the deposits, instead of the 5% it had agreed to pay Peoples directly, and loss-sharing with the FDIC on the $657.6 million of assets it bought.
"We worked hard to get the first deal closed, but when that looked as if it wasn't going to happen, we decided to bid on the whole bank," Davis said. "We are certainly pleased with the deal," which increased his company's branches in the Cincinnati market to 57 and propelled it to the No. 4 spot in deposits.
Davis joined First Financial in 2004 and implemented a string of changes to improve profitability, including consolidating five of its charters. The company ditched indirect car lending, sold problem assets and got out of markets in Michigan, Indiana and Ohio. In 2006, First Financial laid off 200 employees, but the retooling wasn't all cuts. The company hired 30 lenders then and expanded in Cincinnati and Dayton, Ohio.
"It was the right thing to do," Davis said. "But it just so happened to be fortunate timing because it positioned us to be in a strong financial and strategic position to take advantage of the opportunities now," such as the deal for Peoples.
Regulators had given Peoples until July 14 to recapitalize or face seizure. A spokesman for the Office of Thrift Supervision said the branch deal with First Financial was not enough to keep Peoples in business. Davis noted that, though regulators did not approve the deal with Peoples, they did not reject it, either.
"The proposed sale would not have dealt with the problem assets," the spokesman said. "We saw this as the least costly route for the deposit insurance fund. … The other deal wouldn't have been beneficial."
Though First Financial got more than it had originally bargained for, and at a lower price, experts agreed that the FDIC probably benefited, too.
Ken Thomas, a banking consultant in Miami, said letting Peoples close its deal with First Financial probably would have only bought the thrift time but ultimately saddled the FDIC with a less valuable institution to sell.
"It may have delayed the inevitable, but what would have been left for the FDIC?" Thomas said.
First Financial has made deals with another troubled institution, Irwin Financial Corp. in Columbus, Ind., which has been struggling to raise capital. In late June, the companies announced that First Financial had bought $145 million of loans from Irwin and agreed to buy three of its branches in suburban Indianapolis, an area Davis said is a growth market for his company. The branch sale is expected to close this year.
For now, Davis said his company will focus on digesting the Peoples and Irwin acquisitions. "We have to commit to integrating them well," he said. But at the same time, "we have to keep our eyes open to opportunity."
The retooled First Financial has not been immune to credit woes. On Monday it reported a second-quarter profit of $1.5 million, down 80% from a year earlier. The drop was driven primarily by a loan-loss provision of $10.3 million. Nonperforming assets totaled $42.9 million, up 125% from a year earlier.
Largely because of credit trends, Ross Demmerle, an analyst at J.J.B. Hilliard, W.L. Lyons Inc., said he hopes First Financial focuses more on leveraging growth at its new branches rather than looking for more acquisitions.
Demmerle and other analysts said that, with nonperforming assets at 1.14% of total assets in the second quarter, First Financial is in much better shape than most large community banks in the Midwest or anywhere in the country. In the first quarter, First Financial Bank had noncurrent loans at 0.91% of total loans, compared to an average of 2.06% for Ohio banks with $1 billion to $10 billion of assets, according to FDIC data. Nationwide, banks of that size averaged a ratio of 3.83%.
"Credit costs were higher than expected, but they are still pretty modest," said Chris McGratty, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc.
The company also has a significant capital cushion. After a $98 million common equity sale last quarter, the company had a total risk-based capital ratio of 16.02%, well above the 10% regulators require. Its tangible equity ratio was above 9.06%. It said this ratio would drop roughly 100 basis points after the integration of Peoples and the Irwin branches; even so, it would be safely above the 5% that causes concern among analysts.
Another sign of strength: During a conference call Tuesday, Davis said the board will discuss this quarter repaying the $80 million First Financial got from the Troubled Asset Relief Program.
"It is a real reverse scenario for them," McGratty said. "They are seeing the dividends today from the actions taken a few years back."