Sunday, October 19, 2003

1st Financial's options limited

Bank company CEO's departure leads to questions

By Jeff McKinney
The Cincinnati Enquirer

With the sudden exit of their longtime president and CEO, First Financial Bancorp directors must now craft a strategy to boost profits and lift a stock price that has sagged badly in recent years, Wall Street analysts say.

The departure last week of Stanley Pontius from the $3.9 billion-asset, Hamilton-based banking company and concerns about whether First Financial can increase earnings have raised the ante on whether the company can remain independent or will have to consider a sale.

Those who closely follow First Financial - operator of the Tristate's fifth-largest banking company, with 36 branches and $1.07 billion in deposits - say it is not weighed down by massive credit quality problems or oversight issues that would force it to seek a buyer.

But they also say that with its stock near a five-year low, no great potential to reverse a trend of fairly weak profits in recent quarters, and an apparent leadership gap caused by Pontius' departure, the board's options are more limited than a decade ago when First Financial was viewed as one of the nation's best-performing banks for its size.

An effort to integrate the company's subsidiaries, known as Project Renaissance, as well as other efforts in recent years to cut costs and lift profitability failed and hammered the company's stock, said Scott Valentin, senior vice president at Friedman, Billings, Ramsey in Arlington, Va.

First Financial stock provided investors a return of 27.5 percent, based on its share price appreciation and dividend, from Oct. 17, 2000 through Thursday, he said.

In contrast, the stock of other publicly traded U.S. banks with assets between $1 billion and $5 billion mounted an average return of 108 percent during the same time, according to SNL Financial, a banking research company based in Charlottesville, Va.

"We're telling investors to avoid (First Financial) in the near term, as we believe the upside to the stock is limited to its potential as a takeout," Valentin said in a report issued after Wednesday's announcement of Pontius' departure.

Valentin said the Pontius move likely indicates that First Financial's third-quarter earnings - due out Monday - probably will fall short of expectations, and there are no material signs on the horizon to indicate upward pressure on future profits.

'The ante has been raised'

Fred Cummings of McDonald Investments in Cleveland said Pontius' sudden exit increases the likelihood that First Financial's board could consider selling the company, although another option would be to hire new top management and remain independent. Cummings is predicting First Financial will report earnings of 24 cents a share in the third quarter, off from 27 cents a year ago.

"The ante has been raised because the stock has underperformed, and with no CEO in place running things, it makes it much easier for a deal to happen," he said.

First Financial chairman Bruce Leep, named the bank's interim president and CEO while a replacement for Pontius is sought, said last week that the board's plan is to stay independent.

But he also said if a suitor viewed Pontius' departure as opportunity to pursue the bank, the board would have to consider that. Leep said no suitors have approached First Financial.

Cummings and other analysts also say First Financial is a ripe takeover candidate now because it has a fairly attractive, 102-branch consumer banking franchise in Ohio, Indiana, Michigan and Kentucky, a solid trust business and market value that is affordable for many larger regional banks.

Oh, the possibilities

Wilson Smith of Cohen Brothers & Co. in Philadelphia said potential buyers would likely be most interested in First Financial Bank, the company's flagship bank with No. 1 deposit market share in Butler County, and Sand Ridge Bank, a nearly $900 million-asset bank near the Chicago suburbs in northwestern Indiana.

"There are some regional banks that would like to get into those markets," Smith said.

But Smith also said he is not sure many potential buyers would be willing to pay the 25 percent premium above First First Financial's Friday closing market value of $701.6 million that stockholders could demand. That would lift the price of a buyout to $877 million.

Analysts said that among those most likely interested in First Financial would be Columbus-based Huntington Bancshares Inc. Huntington, with assets of about $30 billion, operates in many First Financial territories, and the match would be a good market extension. "It would be good fit for Huntington because it's in their back yard," Cummings said.


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