First Financial called one of best-capitalized banks

April 1, 2011

Business Courier: Date: Friday, April 1, 2011, 6:00am EDT

Have you ever had so much money that you didn’t know what to do with it?

First Financial Bancorp has just that high-class problem, although it has a pretty clear idea of what its priorities are for investing its excess capital.

Raymond James analyst David Long calls downtown-based First Financial the best- capitalized bank of any he covers in the Midwest or West, a group of more than a dozen similarly sized banks. First Financial is the fourth-largest bank in Greater Cincinnati according to deposits, at $2.2 billion.

Frank Hall, First Financial’s CFO, won’t quantify the bank’s excess capital, but said “We have sufficient capital to pursue growth. We’re capitalized at a level beyond most of our peers.”

The bank’s tangible common equity ratio, a common gauge of capital, is 10.3 percent of assets. The average Midwestern bank is around 7 percent to 8 percent. Long figures First Financial has about $145 million to spare if it brought that ratio down to its target level of 8 percent. Its tier 1 capital, a regulatory measure, is at 18.5 percent. Regulators consider banks well-capitalized if they have one-third of that.

Now the bank has to put that money to work. First Financial CEO Claude Davis has set priorities for what he sees as the bank’s main options for deploying its extra capital. It can invest the capital to grow on its own, adding people and branches. It can pay dividends. It can make acquisitions. Or it can buy back stock.

‘In a position to be opportunistic’
Whatever it does, investors and business owners stand to gain from the bank’s capital position. And depending on how it uses its extra capital, it could boost earnings by 20 percent to 40 percent, analysts say.

How did it get in this spot? The big hit was the acquisition of Columbus, Ind.-based Irwin Financial Corp. it made in mid-2009. It recorded a $383 million gain after the deal. That’s how much less it paid than the true value of the assets it acquired from the troubled bank.
“That was a home run for them,” said John Rodis, a St. Louis-based analyst at Howe Barnes Hoefer & Arnett. “Now they’re in a position to be opportunistic.”

Start with so-called organic growth. That’s its first choice, Hall said. First Financial could look to expand in markets within its current footprint, which encompasses chunks of Ohio, Kentucky and Indiana. Both Long and Hall pointed to Indianapolis as a possible growth market.

“We’re a relatively new entrant,” Hall said. “There’s a lot of opportunity for growth.”

Long wrote in a recent report that he expects First Financial to “aggressively add commercial bankers” in Indianapolis.

Small-business owners should see an impact because more capital means First Financial has more money to lend. When banks have excess capital, they can take advantage of market opportunities as they occur, said LaVaughn Henry, senior regional officer at the Cincinnati branch of the Federal Reserve Bank of Cleveland.“The major market opportunity right now is lending,” he said.

Expect First Financial to keep pushing for business lending growth. It has added several top commercial lenders over the past few years. And commercial loans rose 5 percent from the third quarter to the fourth quarter.

First Financial just boosted its dividend by 20 percent in March. It’s still paying about 30 percent less than what it was at the end of 2008, before it cut the dividend. But don’t look for a major move anytime soon. It has targeted paying 40 percent to 60 percent of its normalized earnings to shareholders in the form of dividends, Hall said. It’s around 35 percent now.

“Unless they start to earn more, I wouldn’t expect much more of an increase,” Rodis said.

It’s “absolutely” looking for acquisitions, too, Hall said. It will only consider deals that are focused on its primary markets, involve little operational risk and that are priced to provide enough returns to shareholders. One bigger name that has been bandied about by analysts is Evansville, Ind.-based Integra Bank Corp. It has had financial problems and could be seeking a buyer.

If none of those work, it might be likely to buy back shares. That boosts current shareholders’ value, because then they own the same amount of a smaller pie.

But Long said First Financial will get a bigger benefit from deploying its capital in other ways. He figures his earnings estimate for this year would rise 20 percent if it used all of the excess capital to buy back stock. But it would jump 40 percent if it were to invest it in other ways.

Steve Watkins covers banking and finance for the Business Courier. Contact him at or (513) 337-9441. Read his blog postings at Cincy Biz Blog.

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