First Financial Bancorp (“FFBC”)

In September, we purchased a position in First Financial Bancorp (“FFBC”). First Financial is an $18 billion asset commercial bank headquartered in Cincinnati, OH. We think FFBC is a well-run commercial bank that is trading too cheap. We don’t think FFBC is extraordinary, but we believe it is a better than average bank and small-to-mid cap bank stocks are attractive.

1.    Cheap valuation – FFBC shares are trading at the same stock price as 2016, but the bank is going to earn twice as much per share as it did then. FFBC’s P/E multiple has declined from 18x to 8x. Absolute valuation is cheap.

2.    High return on asset bank – FFBC has a return on assets (“ROA”) of 1.40%. This is a solid number and reflects a high performing commercial bank. Banks that successfully generate such a high ROA tend to have strong fundamental characteristics: 1) they have high percentage of fee-related revenues, 2) they have higher than normal spreads from either cheap deposits or premium loan yields, or 3) they operate very efficiently. Banks with ROAs in this range have historically traded at higher valuations.

3.    Discount to other high-performing commercial bank peers – With a Return on Assets (“ROA”) of 1.40% and a Return on Tangible Common Equity (“ROTCE”) of greater than 20%, FFBC trades at a lower valuation than comparable high-performing bank peers. Here’s a table making the comparison of FFBC to its Midwestern high-performing commercial bank peer group.

Source: CapIQ and company reports

4.    Good mix of fee-related businesses – FFBC has several fee-related businesses. These businesses help contribute to the bank’s high returns. Having these businesses should help the bank’s valuation. They also can grow without capital investment.

5.    A solid credit culture – We believe FFBC has a solid credit culture and a plain vanilla loan portfolio. Net charge-offs have ranged from 10 bps to 33 bps over the last 10 years.

6.    Smart expansion of footprint through acquisitions – FFBC announced two small acquisitions this summer that help expand the bank’s footprint into the Cleveland and Chicago markets. We like how both acquisitions are smaller and give the bank a platform to have strong organic growth in these new markets. We also like the low prices paid for both acquisitions.

7.    Financial projections from recent mergers may be conservative – We think FFBC management understated the positive financial impact of the BankFinancial acquisition in Chicago. It is normal for a bank to ignore potential revenue synergies when calculating the financial impact of an acquisition. However, BankFinancial loans and securities earn low yields. FFBC will liquidate these portfolios and reinvest the proceeds into higher yielding assets, but FFBC management did not include this upside in their financial forecast of the acquisition. We believe reinvesting BankFinancial assets could add 20 cents per share of earnings to FFBC’s 2026 earnings per share.

8.    CEO has sold a bank previously – Archie Brown is the CEO of FFBC. He came to FFBC after selling his previous bank, MainSource Financial, to FFBC. We like banks run by executives who have sold banks previously. They are more likely to sell again.

9.    General tailwinds for regional banks – As we stated in the previous section of the letter, there are tailwinds for regional banks: 1) a steeper yield curve and lower short-term rates, 2) loan repricing of loans made before 2023, 3) a more benign regulatory environment that will reduce compliance costs and reduce management’s time focused on responding to request from regulators, and 4) a more active M&A environment, which will increase investor interest in the sector.

Risks
There are always risks with any stock. Here are the most prominent risks we see with buying FFBC, but there may be other risks not mentioned.

1.    Industry-wide credit concerns – Because the economy looks as if it is slowing, we are starting to see more credit issues appear at different banks. Bank stocks may not perform well with this credit overhang.

2.    Typical commercial banking risks – Because FFBC is a commercial bank, we see it having the same industry risks facing all commercial banks: 1) banking is a competitive intensity is increasing from within the banking industry, 2) banks face increased competition from outside the banking industry as private credit, capital markets, and other banking products are offered by non-bank firms, 3) banks always face asymmetrical risk/reward in their lending books.

3.    Acquisition risk- FFBC has announced two acquisitions this year and may attempt to make additional acquisitions in the coming year. Although we believe both of the recent FFBC acquisitions were well-priced and will help the bank create value, they both pose integration risks. Potential future acquisitions also pose risk as FFBC management may overpay and destroy shareholder value.

Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.

Not all research is for securities currently held. Any securities for which research is provided herein may be reduced, completely closed out, or not purchased at all without notice of any kind.