First Financial Bancorp. in Cincinnati knows how to drive a bargain.
When it bought the failed bank and thrift units of Irwin Financial Corp. from the Federal Deposit Insurance Corp. last week, First Financial managed to get terms so attractive that others are taking notice.
The deal nearly doubled its assets, to $7 billion. But First Financial did not take Irwin's nonperforming loans — or any of the particularly risky ones, for that matter. And for the assets First Financial did buy, it paid just 75 cents on the dollar and got the FDIC to cover the majority of any losses.
"The structure of the deal was phenomenal," said Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc. This was the second deal that First Financial struck with the FDIC during the current downturn. It also bought the failed $706 million-asset Peoples Community Bank in West Chester, Ohio, from the agency in July.
Claude Davis, First Financial's president and chief executive, said its experience with Peoples positioned it to negotiate a better deal for Irwin.
"Like with anything, the more you do it, the more you become better versed in it," he said. "We just made sure with this bid that we were being compensated for the credit risk, as well as the operational and integration costs that come along with a deal of this size, and we feel good about it."
The market also appears to like the purchase. The company's stock has risen more than 40% since the deal closed Friday, with the shares trading at $11.54 on Thursday.
First Financial had been familiar with the $3.2 billion-asset Irwin before it failed last week, in a scenario similar to the Peoples deal: First Financial was attempting to buy most of Peoples' 19 branches before that bank failed.
With Irwin, it bought a $150 million pool of loans in June and bought three of its branches in August. Additionally, Davis used to work at Irwin, as a senior vice president and the chairman of its bank unit, before he joined First Financial in 2004.
Davis said this familiarity was useful, but was not something First Financial deliberately acquired to get a jump-start on due diligence for FDIC-assisted deals.
"Those aren't things you can really plan, but the fact that we had done a lot of work did help us a lot," he said. "Of course we didn't strike those deals with the intent of being there when they failed, but it definitely was timely."
The Irwin deal included 27 branches in nine states, $3.2 billion in assets and $2.5 billion in deposits from the FDIC. First Financial paid roughly a 1% premium on the deposits of Irwin Union Bank and Trust Co. There was no deposit premium on the deposits of the smaller unit, Irwin Union Bank, a thrift with branches in nine states.
David Barr, a spokesman for the FDIC, said that with such pricing for the deposits, the deal "seems to be in line with other failed banks, but many factors go into bids for failed banks." (By law, the FDIC must accept the bid that minimizes the cost to its insurance fund.)
In addition to Irwin's nonperforming assets, the FDIC kept the lender's repossessed real estate and construction and development loan portfolios.
Because it got the assets at such a steep discount, First Financial said, it expects to realize $341 million of gains. About half of that should show up in this quarter's earnings as negative goodwill, the company said, and the rest will be recognized over time as the acquired assets generate income.
Though not the primary motivation for buyers, such gains can make failures better buys, said Daniel Trigg, a partner at the accounting firm McGladrey & Pullen LLP. "There are a lot of incentives to buying failures," he said. "But if you value the assets properly and come up with a correct price, this is icing on the cake."
Trigg said such gains can occur any time a company buys another for a discount. But analysts said the effect of this deal is particularly pronounced given Irwin's size.
Davis said the single most attractive aspect of the acquisition was the boost it gives his company in Indiana. First Financial catapulted from the 19th largest holder of deposits in the state to fifth, he said. In addition to expanding into nine Indiana markets, the acquisition gave the company a deeper penetration into Indianapolis and Columbus.
"Prior to this, we have been focused on our growth in Indiana," Davis said. "This significantly accelerates that."
Since June 30, First Financial has increased its Indiana network by 63%, to 49 branches. That included the three it bought directly from Irwin last month, 12 that it picked up after Irwin failed and four Peoples branches that were in the state.
The Irwin deal also strengthened the company in Kentucky and its home state of Ohio. It also added offices in neighboring Missouri and Michigan.
However, nine of the Irwin branches were far-flung. Irwin, through its thrift, had expanded into Arizona, California, Nevada, New Mexico and Utah. Davis said those branches will be evaluated in the next 60 to 90 days to determine whether they should be kept.
"We hadn't planned on going into those markets, but it was part of the deal. We will give them a fair review," he said. "We haven't made any decisions yet. There could be some reasons to keep them, but we need to integrate them well."
Analysts were less diplomatic.
"I don't think it is in their best interest to keep them," said Ross Demmerle, an analyst at J.J.B. Hilliard, W.L. Lyons Inc. "The fact that those branches imploded on Irwin is reason enough for First Financial to not want to be there. They don't know those markets and they don't have market share with them."
Chip MacDonald, a partner with the law firm Jones Day who studies every deal for a failed bank, said First Financial was able to get out of a new rule that the FDIC is imposing to prevent acquirers of failed banks from exiting an area within a year of an acquisition. In exchange, however, First Financial agreed to split with the FDIC any premium it receives should it sell any of the Irwin branches.
"This is a really well-conceived purchase agreement," MacDonald said.
Davis said his company would like to do more deals with the FDIC, but for now is concentrating on smooth integration of what it has bought. "We didn't plan to do a second deal so soon, but it was a great strategic fit," he said. "We are just going to focus now on making sure it all goes well."
