FFBC

Business Context and Reporting Period

Company: First Financial Bancorp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: The reporting period was defined by two major FDIC-assisted acquisitions: Peoples Community Bank (July 31, 2009) and Irwin Union Bank and Trust Company/Irwin Union Bank, F.S.B. (September 18, 2009). These transactions significantly expanded the company's footprint, adding 46 banking centers and nearly doubling its asset base. The results are heavily influenced by a $383.3 million bargain purchase gain recognized from the Irwin acquisition.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisition Impact: The most significant change was the acquisition of Irwin Union Bank, which resulted in a $383.3 million bargain purchase gain recorded in noninterest income. This single item drove the vast majority of the net income increase compared to Q3 2008.
• Balance Sheet Expansion: Total assets increased from $3.70 billion at year-end 2008 to $7.26 billion at September 30, 2009. Total loans grew from $2.68 billion to $4.93 billion, with "Covered Loans" (subject to FDIC loss sharing) totaling $2.06 billion.
• Provision Expense: The provision for loan losses increased significantly to $26.7 million in Q3 2009 (up from $3.2 million in Q3 2008) due to deteriorating credit quality in the commercial real estate and construction sectors, despite the FDIC loss sharing agreements covering the majority of acquired loans.
• Capital Raise: In June 2009, the company completed a public offering of 13.8 million shares of common stock, raising approximately $98.0 million in net proceeds.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The $383.3 million gain on the Irwin acquisition is a non-recurring item. Excluding this gain and other acquisition-related items, core noninterest income declined slightly year-over-year due to lower trust fees and bankcard income.
• Outlook & Strategy: Management plans to divest 10 banking centers in the western United States acquired from Irwin, as these markets do not align with long-term strategic plans. The company intends to focus on metropolitan markets in Ohio, Indiana, Michigan, and Kentucky.
• Risks:
  • Credit Quality: Continued deterioration in commercial real estate and construction loans is expected. Nonperforming loans (excluding covered assets) rose to $63.6 million.
  • Integration: Risks associated with integrating the acquired entities, including potential loss of customers and employees, and the realization of expected cost savings.
  • FDIC Loss Sharing: While the FDIC covers 80-95% of losses on covered assets, the company retains some risk and must adhere to strict servicing procedures to qualify for reimbursement.
  • Regulatory: The company is subject to TARP restrictions, including limits on dividends and executive compensation, and is evaluating the redemption of Treasury preferred stock.
• Liquidity: The company received approximately $948.3 million from the FDIC in connection with the acquisitions, providing sufficient liquidity to fund potential deposit outflows. Unused overnight wholesale funding capacity was approximately $2.5 billion.

Investor Verification Checklist

• Acquisition Accounting: Verify the final determination of fair values for acquired assets and liabilities, which are currently preliminary and subject to adjustment for up to one year.
• Credit Quality Trends: Monitor the allowance for loan losses ratio (currently 1.94% excluding covered loans) and net charge-offs, particularly in the commercial real estate sector.
• FDIC Loss Sharing Compliance: Confirm adherence to FDIC servicing procedures to ensure eligibility for loss reimbursement on the $2.06 billion covered loan portfolio.
• Divestiture Progress: Track the timeline and financial impact of the planned divestiture of western U.S. banking centers.
• TARP Redemption: Watch for updates on the company's decision regarding the redemption of the $80 million in preferred stock issued to the U.S. Treasury.