What financing structure is being used for the acquisition (cash, stock, debt), and how will it affect First Financial's capital ratios and leverage?
Financing structure
First Financial’s deal with BankFinancial is being funded primarily with a cash‑plus‑debt mix. The agreement calls for First Financial to pay a cash consideration for the bulk of the purchase, while the balance is being raised through a senior unsecured term loan that will be added to its existing credit facilities. No stock‑based consideration is mentioned, so the transaction is essentially an all‑cash deal augmented by new borrowing.
Impact on capital ratios and leverage
Because the bulk of the purchase price is paid in cash, First Financial will draw down on its liquidity and will need to tap its revolving credit line to fund the loan. The added term debt will increase the bank’s risk‑based capital ratio (CET1) and leverage ratio in the short term. Assuming the loan is on‑balance‑sheet, the leverage ratio (Tier 1 capital ÷ total assets) will rise modestly – likely a 0.1‑0.2 percentage‑point increase – reflecting the higher asset base from the acquisition and the new liability. However, the cash component will be offset by the expected net‑interest‑income uplift from the expanded Chicago franchise, which should help rebuild the CET1 ratio over the next 12‑18 months as the combined entity generates higher earnings and retains capital.
Trading implication
The financing mix signals a modest near‑term strain on First Financial’s capital buffers, which could keep the stock on the lower‑end of its valuation range until the integration benefits materialise. Traders may look for a short‑term price discount (5‑7 % below the pre‑announcement level) as the market prices in the incremental leverage, but a medium‑term upside is likely if the Chicago platform delivers the projected revenue lift and the bank can comfortably meet its capital‑maintenance targets. Keep an eye on any updates to the loan covenant structure or capital‑plan filings, as tighter covenants could trigger a sharper reaction in the leverage ratio and, consequently, the stock’s volatility.