Gator Capital Management: First Financial Bancorp (FFBC) Investment Case
Introduction
In their Q3 2025 investor letter, Gator Capital Management introduces First Financial Bancorp as a new position initiated in September, highlighting it as a well-run commercial bank trading too cheap relative to its earnings power and peer group. Gator Capital, led by Portfolio Manager Derek Pilecki and known for delivering 22.25% annualized returns since 2008 inception through intensive bottom-up fundamental research on small and mid-cap financials, presents FFBC as a “better than average bank” benefiting from broad regional bank sector tailwinds. The letter emphasizes the firm’s approach of owning banks with above-average return metrics, strong credit cultures, and management focused on growing tangible book value per share, typically trading at 8x next year’s earnings versus normal 10-14x range. Gator’s decision to invest in FFBC reflects their conviction that the bank’s high return on assets (1.40% ROA), strong profitability (20%+ ROTCE), and recent strategic acquisitions expanding into Cleveland and Chicago markets are underappreciated, with shares trading at the same price as 2016 despite earning twice as much per share.
Investment Highlight: First Financial Bancorp (FFBC)
Business Overview
- $18 billion asset commercial bank headquartered in Cincinnati, OH
- Founded 1863 (over 160 years of history)
- LED by CEO Archie Brown, who previously sold his bank (MainSource Financial) to FFBC
- Several fee-related businesses contributing to high returns
- Plain vanilla loan portfolio with solid credit culture
- Recent strategic expansion into Cleveland and Chicago markets through acquisitions
Market Position
- Strong presence in Midwestern commercial banking markets
- Competitive positioning among high-performing regional banks
- Good mix of fee-related businesses differentiating from pure lending models
- Established franchise with long operating history
Performance Analysis
- Cheap Absolute Valuation:
- Shares trading at same stock price as 2016 despite doubling earnings per share
- P/E multiple compressed from 18x to 8x over period
- Trading at 7.41x 2026 P/E, well below normal 10-14x regional bank range
- 1.50x price-to-tangible book value
- High Return on Assets Bank:
- Return on Assets (ROA) of 1.40% – solid number reflecting high-performing commercial bank
- Banks successfully generating high ROA typically have strong fundamental characteristics:
- High percentage of fee-related revenues
- Higher than normal spreads from cheap deposits or premium loan yields
- Very efficient operations
- Banks with ROAs in this range historically traded at higher valuations
- Return on Tangible Common Equity (ROTCE) greater than 20% (specifically 19.11%)
- Tangible Common Equity to Tangible Assets (TCE/TA) of 8.87%
- Non-performing assets (NPAs) at 0.41% – manageable level
- Discount to High-Performing Peer Group:
- With 1.40% ROA and 20%+ ROTCE, FFBC trades at lower valuation than comparable high-performing Midwestern commercial bank peers
- Peer comparison (2026 estimates):
- FFBC: 7.41x P/E, 1.50x P/TB, 1.40% ROAA, 19.11% ROTCE, 8.87% TCE/TA, 0.41% NPAs
- NIC: 10.49x P/E, 2.14x P/TB, 1.63% ROAA, 19.01% ROTCE, 9.56% TCE/TA, 0.21% NPAs
- BFC: 13.97x P/E, 2.76x P/TB, 1.60% ROAA, 17.09% ROTCE, 10.30% TCE/TA, 0.21% NPAs
- GABC: 10.44x P/E, 2.04x P/TB, 1.30% ROAA, 17.21% ROTCE, 8.86% TCE/TA, 0.28% NPAs
- HBT: 8.94x P/E, 1.47x P/TB, 1.56% ROAA, 16.52% ROTCE, 10.56% TCE/TA, 0.14% NPAs
- CBSH: 12.23x P/E, 2.01x P/TB, 1.80% ROAA, 15.90% ROTCE, 11.27% TCE/TA, 0.05% NPAs
- SYBT: 13.67x P/E, 2.30x P/TB, 1.51% ROAA, 18.15% ROTCE, 9.16% TCE/TA, 0.20% NPAs
- LKFN: 13.66x P/E, 1.96x P/TB, 1.43% ROAA, 13.99% ROTCE, 10.78% TCE/TA, 0.28% NPAs
- FFBC trades at significant discount despite comparable or superior return metrics
- Fee-Related Business Mix:
- Several fee-related businesses contribute to high returns
- Fee businesses help bank’s valuation potential
- Can grow without significant capital investment
- Diversifies revenue streams beyond net interest income
- Solid Credit Culture:
- Plain vanilla loan portfolio reduces complexity and risk
- Net charge-offs ranged from 10 basis points to 33 basis points over last 10 years
- Consistent, disciplined underwriting standards
- NPAs at 0.41% – manageable and not alarming
- Smart Footprint Expansion Through Acquisitions:
- Announced two small acquisitions summer 2025 expanding into Cleveland and Chicago markets
- Both acquisitions smaller in size, providing platform for strong organic growth in new markets
- Low prices paid for both acquisitions – attractive valuations
- Strategic expansion into attractive Midwestern markets
- Conservative Financial Projections – Upside Potential:
- Management may have understated positive financial impact of BankFinancial acquisition (Chicago)
- Normal for banks to ignore potential revenue synergies in acquisition forecasts
- BankFinancial loans and securities earn low yields
- FFBC will liquidate these portfolios and reinvest proceeds into higher yielding assets
- Management did not include this upside in financial forecast
- Reinvesting BankFinancial assets could add 20 cents per share to FFBC’s 2026 EPS
- Significant unrecognized value creation opportunity
- CEO Track Record – Previous Bank Sale:
- Archie Brown previously sold his bank (MainSource Financial) to FFBC
- Executives who have sold banks previously more likely to sell again
- Aligns management interests with maximizing shareholder value
- Increases probability of eventual strategic transaction/premium exit
Sector Tailwinds – Regional Banks
- Steeper Yield Curve and Lower Short-Term Rates: Federal Reserve cutting rates; yield curve expected to steepen, providing nice tailwind for bank earnings
- Loan Repricing: Almost all banks suffered from large 2022 rate move; as older fixed-rate loans mature, banks repricing them 2-3% higher than old rates – added tailwind to margins through middle of 2027
- Improved Regulatory Environment: Bank mergers approved on shorter timeframes; encourages more M&A activity, increasing investor interest; fewer requests/orders from regulators means marginally lower administrative costs and senior management can focus more on operations than regulatory responses
- Attractive Sector Valuation: Regional banks as group trade at 8x next year’s estimated earnings versus normal 10-14x range
Growth Runway
- Organic growth opportunities in new Cleveland and Chicago markets from recent acquisitions
- Fee-related businesses can grow without capital investment
- Loan repricing tailwind through 2027 as older loans mature
- Margin expansion from steepening yield curve
- Potential additional value from conservative BankFinancial acquisition projections
Valuation
- Current: 7.41x 2026 P/E, 1.50x price-to-tangible book
- Compressed from historical 18x P/E to current 8x despite doubled EPS
- Trading at same absolute stock price as 2016 with 2x earnings power
- Significant discount to peer group (peers average 10-14x P/E, 2.0-2.8x P/TB)
- Market cap: $2.2 billion
Risks
- Industry-Wide Credit Concerns: Economy appearing to slow; more credit issues emerging at different banks; credit overhang may pressure bank stock performance
- Recent Sector Volatility: October saw regional bank volatility from fraud losses at First Brands and Tricolor; mildly disappointing credit quality at several banks during earnings season
- Gator’s Increased Caution: Firm has become “more bearish in the last couple of weeks”; sold shares of banks with surfacing credit issues; reduced net exposure to banking sector; remaining flexible as evaluating new data
- Typical Commercial Banking Risks:
- Competitive intensity increasing within banking industry
- Increased competition from outside banking (private credit, capital markets, non-bank firms offering banking products)
- Asymmetrical risk/reward in lending books
- Acquisition Integration Risk: Two acquisitions announced 2025 pose integration risks; potential future acquisitions could result in overpaying and destroying shareholder value
- Credit Quality Trends: Not trending in right direction currently; net charge-offs historically 10-33 bps but near-term uncertainty
- Economic Slowdown Risk: While banking system strong with high capital/liquidity (any slowdown should be shallow), credit deterioration possible
- Execution Risk: Organic growth in new Cleveland and Chicago markets not guaranteed
- BankFinancial Upside Uncertain: 20 cents per share potential upside from asset repricing is estimate and may not materialize fully
Other Key Points
- Gator overweight small and mid-cap regional banks since Silicon Valley Bank and First Republic failures
- Investment thesis: own banks with above-average returns, strong credit cultures, management focused on growing tangible book value per share
- Portfolio positioning: looking forward to conference season to meet with dozens of banks for more color on credit outlook
- Derek Pilecki invests over 80% of personal liquid net worth in fund
- FFBC market cap $2.2 billion makes it mid-cap regional bank
- Regional banks should benefit as Fed cuts rates and yield curve steepens
Gator Capital Management views First Financial Bancorp as a well-run, better-than-average commercial bank trading too cheap at 7.41x 2026 P/E (versus 10-14x normal range and peer average), citing its high return metrics (1.40% ROA, 19.11% ROTCE) that match or exceed peer performance, solid credit culture with net charge-offs of 10-33 basis points over decade, smart strategic expansion into Cleveland and Chicago through low-priced acquisitions providing organic growth platforms, and conservative financial projections that may understate 20 cents per share upside from BankFinancial asset repricing as key factors. With shares trading at the same price as 2016 despite doubling earnings per share (P/E compressed from 18x to 8x), CEO Archie Brown’s track record of previously selling a bank increasing likelihood of eventual strategic transaction, and broad regional bank tailwinds from steepening yield curve, loan repricing adding 2-3% margins through 2027, and improved regulatory environment encouraging M&A, Gator sees significant valuation upside despite acknowledging increased near-term caution on credit quality trends requiring flexible positioning and ongoing monitoring through conference season meetings with management teams.
