KBRA Comments on First Financial Bancorp's Proposed Acquisition of Westfield Bancorp

On June 23, 2025, First Financial Bancorp (NASDAQ:FFBC) ("First Financial" or "the company") (KBRA senior unsecured debt rating: BBB+ / Stable Outlook), the parent company of First Financial Bank, announced a definitive agreement to acquire Westfield Bancorp ("Westfield" - $2.2 billion of assets or 11% of pro forma total assets), the holding company of Westfield Bank, FSB, from the ultimate parent, Ohio Farmers Insurance Company, a property and casualty insurance group. Under the terms of the agreement, Westfield will merge with and into First Financial in a cash-and-stock transaction (80% cash / 20% stock) valued at approximately $325 million, or 1.4x price-to-tangible book value at announcement. The acquisition is expected to close in the fourth quarter of 2025, subject to customary regulatory approvals. There are no anticipated changes to First Financial's management team or Board of Directors, though select members of Westfield's executive team are expected to assume leadership roles at the combined company.

Overall, we believe the transaction makes strategic sense for First Financial; acquiring an institution with a similar operating model, including a commercial banking focus. The acquisition accelerates FFBC's expansion plans in Northeast Ohio, particularly in the Cleveland and Akron metro areas, the former being a market the company entered via a loan production office in late 2023. In addition, the transaction is expected to enhance First Financial's specialty lending verticals, which are segments that we view favorably due to their strong risk-adjusted returns and contribution to geographic diversification beyond its core markets. These segments include premium finance, insurance agency, and registered investment advisor (RIA) banking. The deal is expected to bring First Financial's total assets to $20.6 billion and elevate the combined institution to the 8th largest by deposit market share in Ohio (4th among locally headquartered banks and the leader excluding super-regionals). From a near-term financial standpoint, the most notable aspect of the transaction is the expected capital impact, which is relatively meaningful due to the cash-heavy consideration and associated interest and credit marks. The interest rate mark, in particular, is somewhat considerable at 3.3% on the loan and securities portfolio, reflecting the current rate environment. Nevertheless, pro forma capital ratios are expected to remain comfortably within the range appropriate for the company's current rating category (see details below). Finally, while this represents First Financial's first whole-bank acquisition since 2018, we acknowledge its successful track record in prior bank transactions, as well as its demonstrated integration capabilities through recent non-bank acquisitions.

Given the relatively modest size of the proposed transaction, no material changes are expected to First Financial's loan portfolio or deposit franchise. The loan mix will remain primarily concentrated in commercial lending, including a higher concentration in C&I lending, which is going to be strengthened from the addition of Westfield's specialty lending verticals, and a fairly below average investor CRE exposure relative to the peer group. Additionally, FFBC is expected to maintain a solid core deposit base, including an average cost of deposits on a combined basis of 2.17% in the most recent quarter, which compares favorably to its rated peer group. Liquidity is expected to remain healthy, with a loan-to-deposit ratio of 82%, providing ample capacity for future loan growth.

That said, the capital profile is expected to decline post-transaction, including pro forma TCE and CET1 ratios of 7.4% and 10.9%, respectively. Management noted that they intend to rebuild capital ratios following the closing of the deal toward their stated target of a TCE ratio in the 7.5%-8.0% range. While rebuilding toward this level should not pose difficulty given the company's strong ability to internally generate capital via its robust earnings power, which has been demonstrated over the past year with 60 bps of CET1 ratio expansion, we also acknowledge that management remains interested in future M&A opportunities following the integration of Westfield. While management generally prefers to use a higher level of stock its in transactions, they stated they are willing to temporarily dip below its target capital levels for the right opportunity. Altogether, despite the moderate degree of volatility in capital from this current proposed deal and potential future transactions, it appears that management would rebuild capital in a timely manner and continue to operate with a CET1 ratio between the 11%-12% level over time, which is a level that we view as adequate for the rating category, especially in light of FFBC's high-quality franchise, particularly its top-quartile earnings performance, which provides a strong buffer against unexpected credit losses.

Regarding financial performance, the pro forma earnings profile is expected to remain among the strongest in the rating category. Management projects a ROA of 1.4% in 2026, assuming 75% of targeted cost savings are realized from the transaction (modeling for 40% of Westfield's standalone expense base). Revenue diversification is expected to decline modestly, given Westfield's lower proportion of noninterest income (16% of total revenue in 1Q25 compared to 29% for First Financial). While no revenue synergies were formally modeled, management remains optimistic about cross-selling opportunities, notably in fee-generating businesses such as wealth management and foreign exchange. Additionally, Westfield's loan portfolio appears to be of high credit quality, with minimal NPA formation and low net charge-offs (NCO ratio averaging just 5 basis points since 2013). This supports the relatively modest credit mark of 1.1% of total loans. That said, we believe the due diligence process was comprehensive, including a review of approximately 50% of Westfield's commercial loan portfolio. As a result, we view the risk of negative credit surprises as limited, and it is likely that overall credit quality performance will see marginal improvement post-closing.

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