First Financial: A Rare Banking Gem

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 |  Includes: BAC, FFBC, GS, JPM, WFC
by: Pitbull Trading

I believe that First Financial Bancorp (NASDAQ:FFBC) remains an overlooked company in the banking industry that has much brighter future prospects than many alternatives. FFBC was involved in a government sponsored take-over of a failed bank a couple months ago that greatly improved the company's reach and profit potential.

In total, First Financial has acquired 27 banking centers located in nine states. The transaction also includes approximately $3.2 billion in assets and approximately $2.5 billion in deposits. The deposits are being assumed at a premium of less than 1%. The loan portfolios were purchased under modified offerings by the FDIC whereby all non-performing assets, other real estate owned; acquisition, development and construction loans; and residential and commercial land loans were excluded from the purchased portfolio. All performing loans were purchased at a discount of approximately 25% and are covered by FDIC loss share agreements with a loss share threshold of an aggregate $636 million.Approximately $2.5 billion in assets are covered under these loss share agreements. Generally, losses up to $636 million are covered by the FDIC at 80% and losses beyond the threshold are covered by the FDIC at 95%.

In addition:

First Financial has received "Excellent" ratings from both Bauer Financial (bauerfinancial.com) and IDC Financial Publishing (idcfp.com). Bauer Financial and IDC Financial Publishing are independent organizations that analyze and report on the financial condition of the U.S. banking industry.

Essentially, FFBC acquired all the valuable assets of Irwin Union Bank at a tiny premium (1%) that they will make money off of indefinitely; but don't have to assume any of Irwin's bad assets (non-performing, real estate, etc). The FDIC is basically taking all of the downside risk for FFBC, while allowing it to benefit off the upside potential of the assets. $2.5 billion of the assets are covered under the loss share agreement; this company currently has a market capitalization of only 720 million.

Before the assumption of Irwin Union Bank's assets First Financial had 5.8 billion in deposits, they increased that number by 57% with this deal, while gaining next to nothing in liabilities.

Although this stock has had a great run up from when this news was announced in late September, my logic still tells me this is an undervalued banking company. This is one of the few safe places to park some money in the financial sector in the current environment, and a much better play than buying BAC, JPM, WFC, or even GS.

Disclosure: Author holds a long position in FFBC