Matthew Keating - Barclays Capital

Good morning and welcome to the First Financial Bancorp, third quarter 2011 earnings conference call and webcast. I would now like to turn the conference over to Ken Lovik, Vice President, Investor Relations and Corporate Development. Mr. Lovik, please go ahead. Kenneth Lovik Thank you, Sue. Good morning everyone and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s third quarter 2011 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Frank Hall, Executive Vice President, Chief Financial Officer and Chief Operating Officer. Before we get started, I would like to mention that both the press release we issued yesterday announcing our financial results for the quarter and the accompanying supplemental presentation are available on our website at www.bankatfirst.com under the Investor Relations section. Please refer to the forward-looking statement disclosure contained in the third quarter 2011 earnings release, as well as our SEC filings for a full discussion of the company’s risk factors. The information we provide today is accurate as of September 30, 2011 and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I will now turn the call over to Claude Davis.

Thank you Ken and thank you to those joining the call today. We reported net income of $15.6 million or $0.27 per diluted common share for the second quarter, representing a return on assets of 1.01% and a return on equity of 8.54%. During the quarter we incurred $3.4 million of expenses not expected to recur, related to the Liberty branch acquisition and other exit and transition activity, which reduced earnings per share by $0.04. Excluding these items net income totaled $17.7 million and earnings per share were $0.31, representing an adjusted return on assets of 1.15% and return on equity of 9.68%. Our adjusted pre-tax pre-provision earnings were $33 million for the third quarter, representing an increase of $2.2 million or 7% over the second quarter. Our provision for uncovered loans totaled $7.6 million, an increase of $1.9 million compared to the second quarter and represented almost 113% of quarterly net charge-offs. From an acquisition perspective, the third quarter continued to be a busy one as we announced the second branch purchase with the signing and agreement to acquire 22 Indiana based banking centers from Flagstar Bank, 18 of which are located in the Indianapolis area. We are extremely excited about the opportunity this acquisition provides as it significantly enhances our presence in an important metropolitan market, with increased brand recognition expected to drive growth across all business lines serving the central Indiana area. We are well into our integration activities and are still on track to close the transaction during the fourth quarter. We also closed the Liberty branch transaction during the quarter, successfully completing all integration activities and transferring the retail and commercial relationships acquired to the First Financial brand. We are pleased to welcome the new associates joining First Financial from Liberty and look forward to…

Thank you Claude. Now we’ll start by providing a few comments on some of the operating results of the quarter and the major components of performance. We have also provided supplemental information furnished separately that is available on our website bankatfirst.com in the Investor Relations section or in the 8-K we filed last night. As in previous quarters, this supplement is crucial to establishing and maintaining a clear understanding of our reported results, as well as the concepts that have a material affect on our current and future performance. As many of you know from following our company, our operating results are materially impacted by unique accounting and reporting requirements and the strategic distinctions we have made related to our 2009 acquisitions; however, to aid in the clear understanding of our strategic activities, we will focus primarily on the ongoing or strategic aspects of our business on this call. Our earnings release and our supplemental information should provide sufficient information and transparency into the purchase accounting details in the impact of non-strategic components of our results. These complexities have also been discussed at length in our previous earnings calls and the technical accounting call that we hosted on February 4 of this year. This information is also available on our website. Third quarter 2011 GAAP earnings per diluted share were $0.27. Our operating results are best summarized on the pre-tax pre-provision income slide, which is page three of our earnings supplement. Our pre-tax pre-provision income, net of FDIC loss share income, purchase accounting gains and certain other items not expected to recur was up approximately 7%. The primary reason for the earnings increase is due to lower non-interest expenses, primarily professional services, state intangible taxes and occupancy expenses. Net interest income on a fully tax equivalent basis for the third…

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Our first question comes from Chris Mcgratty of KBW. Please go ahead.

Good morning guys.

Hi Chris, good morning.

Just a question Frank on credit spreads. Can you maybe talk about what your seeing kind of in the market today. You know, where is new commercial production being put on in terms of spreads and maybe compared to where we were a few quarters ago.

Yes, I would just say generally, there hasn’t been – I mean, there has been some impact, but I would say overall nothing of significance.

And then in terms of may be the size of the balance sheet, can you give any color on how should we be thinking about any intricate detail and what you are doing in the securities book and you are getting loan demand. You know all the you know low double or low single digits. But how should we think about the overall side of the balance sheet going forward.

Yes, I think overall the size of the balance sheet will be dependent on the results of our deposit rationalization efforts as we’ve listed the intentional runoff that we expect to have from non-strategic deposits. But I think it will really depend on what client reaction is to some of our deposit strategies. You know as we talked about single service CDs, optimally what we’d like to do is broaden the client relationship there beyond just the CD, but we are also acknowledging that perhaps the client outcome may be that they just leave. So I think it will really depend on the outcome of those efforts.

Okay. Thank you.

Thanks Chris.

The next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.

Thanks. Good morning guys.

Hi Jon.

Just one follow-up on the deposit rationalization. How much of that $1.6 billion in time deposits do you think would be attributable to you know call it single service, single product customer.

Yes, we haven’t disclosed that number, but we will try to provide some additional clarity on that in the Q.

Okay, you know that would be helpful. Just – I guess the thing I’m getting at is what’s possible from the deposit rationalization strategy, so that’s the reason for that question. Claude a question for you on the pipeline, the CNI and CRE pipeline, you talked about it up 14 percent over the previous quarter. You historically have been pretty conservative I think in the loan, organic loan growth outlook. Are you feeling a little bit better about that? That seems like a pretty material increase.

You know it has been, Jon. We’ve been encouraged, we’ve been aggressively calling for well over a year now. We’ve always been actively calling, but we’ve really stepped up our sales efforts and I think that’s begun to bear fruit for us. Its also one and its an interesting dynamic at lest that we see in a lot our client base, where a lot of our, I would say non-real-estate clients are doing extremely well and yet I think the uncertainty of the environment, you know that’s caused them to be a little more conservative than maybe in years passed. But we are seeing the need for some of them to invest and to look for new opportunities, but its also one that I’m always cautious about just because of the environment and the constant 24/7 media chatter about how bad things are. So we are encouraged, we felt good about our third quarter of loan growth and we are going into the fourth quarter I think with a good pipeline, now to get that in the closing table and get it booked. But we do feel more encouraged I would say than I have been in probably two years about those opportunities.

Okay.

Jon, this – I’m sorry this is Frank, I just want to circle back on your first question. A little more color on that. Roughly a third of our CD book or time deposits are in that single service.

Okay. So the primary goal is to try to turn that into a core customer, if it doesn’t perhaps just reprise them up.

That’s right.

Okay and then I guess the last question, a could of updates. If you can update us on how its going in Dayton thus far and then in terms of Indi, what steps do you think you need to take with those Flagstar branches in terms of hiring or repositioning to get them to where you where you want them to be.

Certainly, the Dayton activity has gone terrific. The conversion you know went remarkably well. I mean they are never without bumps, but our team and the Liberty teams did, I think an outstanding job of having that integration go well. You know we are now in the stage that we always go through with these, which is to begin to train that staff on how we approach sales and selling and client service. We are also beginning to step up our marketing in the Dayton area to really build or build upon the band we already have there. So still early, but we are encouraged by the client reaction to the change. In the case of Indianapolis opportunity, we’ll follow a similar path. Obviously we need to work with Flagstar on the integration, as well as you know finalizing regulatory approval. But once that’s complete, then we’ll begin to really step up our brand awareness advertising and marketing, as well as with our commercial team that we already have in place there, really begin calling more actively into that base that we acquire from Flagstar. And you know Jon, the way we think about it is that we just have our own unique approach and it takes several months to get people trained and indoctrinated into that process, but I think we are encouraged by both of those markets and what opportunities are there with those acquisitions, not just in the retail deposits, but in commercial and mortgage, small business as well.

Just one question, I don’t know if you’ve disclosed this, but you know what the loan balances are in Indi at this point.

As far as what we are acquiring?

Just post acquisitions, what would the total loan exposure be in Indi.

No we haven’t – the Flagstar transaction has no loans associated with it. But our current market book there, I don’t think we’ve disclosed by market.

All right. Thank you.

Yes.

Your next question comes from Scott Siefers of Sandler O'Neill. Please go ahead.

Good morning guys.

Hi Scott.

Frank I was hopping – I mean you gave a lot of good color on the kind of things you are doing to help preserver the margin. But I guess that you know at the top level you have a lot of liquidity coming in from the already closed branch seal, the pending one, but then on the other side we have a number of these margin preservation activities. So I guess a couple of questions; one can you just talk about – you know, do you think you can hold the margin at the current level or should we expect kind of a continued tail-off and if so, order of magnitude if you could. And then separately just in you know extending the duration of the securities portfolio, are you open to or thinking about things like going into different types of products I guess than you have traditionally or is it going to be more ‘manage it the same way, but simply send the duration.’

Sure. So as we continue to guide, just generally speaking, you know our margin enjoys the benefit of a very high yield uncovered loan portfolio, which continues to run off, so the margin percentage will continue to be under pressure. Now as we’ve noted that those loans that have that high yield are on our boats at a discount, so when they renew with a higher balance at discounts, albeit at a lower yield. So net interest income impact maybe offset somewhat by that, but the margin percentage itself absolutely will continue to be under pressure because of that event alone. This was the magnitude of change. We will offer guidance in that direction, but there should be sufficient detail and what it was to help the reader and the analyst form their own view on that. As we make the investment portfolio and types of securities, we are looking at all options, but keep in mind it’s in the context of a very conservative posture. So we certainly want to be mindful of what the opportunities are, but we’ll continue to maintain a fair amount of conservatism as we look at the opportunities there.

Okay, perfect, thank you. And then Claude, I just wanted to ask you, kind of a top level M&A question. I mean you guys have obviously been pretty active on the brand side more recently and I guess you know this is how I look at things. On the FDIC front there probably aren’t a lot of you know very obvious targets out there right now that you would be interested in, so I’m curious how your thinking about that kind of dynamic and then, just given all of the factors in the market, whether it’s slow growth, tough stock prices you know for sellers, it’s all the social and quantitative issues. You know what kind of trends do you see at a very top level on the M&A side right now?

Yes, I mean I think you kind of hit all the right issues Scott and what you just described in your question is, certainly, we are always open to good strategic opportunities. I would tell you just at a high level as it relates to us, we are not in a position where we feel like we have to do anything, especially now in getting the Dayton, Indianapolis deals. One completed and hopefully one to be completed here soon that we are well positioned and we think in all of our key markets to grow organically and assuming that the economy eventually picks back up, you know we feel very good about our position there. Yes, as it relates to unassisted M&A on whole bank deals, I think it’s going to be continued stress there from that standpoint, but I mean stress is impediments to deals predominantly from what sellers expectations are around price, buyers expectations or view of the credit portfolios of the sellers and as we are well aware of the complexities related to the accounting and you know what the outlook is on the credit side. I mean I think it’s – there’s always a different in view it seems between the buyer and the seller and the quality of the credit portfolios, so I personally from a industry perspective, I’m not expecting a lot of unassisted M&A.

Okay, that’s helpful color. Thank you very much.

You bet.

Our next question comes from David Long of Raymond James. Please go ahead.

Good morning guys.

Good morning.

A couple of questions here; looking at the pipeline up 14% you said, where is that coming from? Are there any specific geographies and then the second to that, any specific industry sectors that you are really seeing a pick-up in.

No specific geographies. We’ve been pleased that it’s been a fairly balanced kind of sales effort on our part, so you know our markets are pretty well balanced in that regard, so no specific geography and really no specific industry type and we’ve even continued to do some good investment commercial real-estate when the project made sense and we had a good operator and a good sponsor. But we are clearly seeing with a lot of our, I’ll call it the non-real-estate clients, a lot of good performance and good opportunities that we’ve been able to step in and help in financing. So no, I would say no specific areas or focus point and that comes in the context even of currently kind of status and usually low line usage level by many of our commercial clients. We’re still at historically low levels of line utilization. So, you know we think there’s some opportunities assuming that the economy you know stays out of a recession.

Okay and then my second question, regarding the large commercial real-estate property that you sold in the quarter, was there – I think you said that came out of OREO, correct?

Correct.

And was there another charge off on that or that have been in the expense line.

There was one when we originally took the property and had it appraised, but at the sale point, I don’t believe there was a small – actually there was small – I’m just looking at the detail. I think there was a small gain actually from what we had originally written it down to.

Okay, perfect. And then lastly, non-performers were down, criticized loans were down, yet you’ve built your reserve in the quarter. I just wanted to – if you can maybe walk me though the rest now there.

Sure, this is Frank. You know, we put all the information into our allowance model, but keep in mind that we also acquired loans of the Liberty transaction. So part of that provision expense was due to the acquired loans.

All right, great. Thanks guys.

Thanks David.

The next question comes from Matthew Keating or Barclays Capital. Please go ahead.

Thanks. Good morning guys. Just a quick one for you Frank on the tax rate increase this quarter. I know you noted that its due to traditional 3Q kind of through ups I guess, but is the current 38% effective tax rate a good sort of go forward metric at this point?

The year-to-date number would be the one that you should focus on, not what the effective rate was for the quarter.

Okay great, thanks very much.

You bet.

This now concludes our question-and-answer session. I would like to turn the conference back over to Claude Davis for any closing remarks.

Great. Thank you Sue and thank you for all who are on the call and your continued interest in First Financial. Thank you.