October 25, 2012 at 16:07 PM EDT
First Financial Bancorp Reports Third Quarter 2012 Financial Results

CINCINNATI, Oct. 25, 2012 /PRNewswire/ -- First Financial Bancorp (Nasdaq: FFBC) ("First Financial" or the "Company") announced today financial and operational results for the third quarter 2012.

Third quarter 2012 net income was $16.2 million and earnings per diluted common share were $0.28.  This compares with second quarter 2012 net income of $17.8 million and earnings per diluted common share of $0.30 and third quarter 2011 net income of $15.6 million and earnings per diluted common share of $0.27.

The board of directors has authorized a regular dividend of $0.15 per common share and a variable dividend of $0.13 per common share for the next regularly scheduled dividend, payable on January 2, 2013 to shareholders of record as of November 30, 2012.  This is a continuation of the 100% dividend payout ratio first announced in the second quarter 2011 and is expected to continue through 2013 unless the Company's capital position materially changes or capital deployment opportunities arise.

The board of directors also approved a share repurchase plan under which the Company has the ability to repurchase up to 5,000,000 shares.  Under the plan, the Company expects to repurchase approximately 1,000,000 shares annually beginning in the fourth quarter 2012.  This annual target will be subject to market conditions and quarterly evaluation by the board as well as balance sheet composition and growth.  The Company expects to disclose a summary of total shares repurchased on a quarterly basis in future periods.  The share repurchase plan is not expected to impact the variable dividend and as a result the return of capital to shareholders is expected to exceed 100% of earnings through 2013.  Subsequent to the expiration of the variable dividend, the Company expects to return to shareholders a target range of 60% - 80% of earnings through a combination of its regular dividend and share repurchases while still maintaining capital ratios that exceed internal target thresholds, current regulatory capital requirements and proposed capital requirements under Basel III.

  • 88th consecutive quarter of profitability
  • Continued solid quarterly performance
    • Return on average assets of 1.05%
    • Return on average risk-weighted assets of 1.72%
    • Return on average shareholders' equity of 9.01%
  • Capital ratios remain strong
    • Tangible common equity to tangible assets of 9.99%
    • Tier 1 capital ratio of 16.93%
    • Total risk-based capital ratio of 18.21%
  • Quarterly net interest margin declined to 4.21% from 4.49% for the linked quarter
    • Yield earned on covered loans declined 59 bps
    • Decline in investment portfolio yield due to elevated prepayment and redemption activity
    • Cost of interest-bearing deposits declined 4 bps during the quarter to 0.57%
  • Total uncovered loan portfolio growth of 7.1% on an annualized basis
    • Solid growth in C&I and commercial real estate loan balances
    • Specialty finance product lines continue to grow
  • Provision for loan and lease losses related to the uncovered loan portfolio totaled $3.6 million for the third quarter 2012, declining $4.8 million, or 56.8%, compared to the linked quarter
  • Significant improvement in nonperforming assets and continued downward trend in classified assets
    • Total nonperforming assets declined $10.9 million, or 11.1%, compared to the linked quarter
    • Nonperforming assets to total assets declined to 1.41% from 1.57% as of June 30, 2012
    • Total classified assets declined $12.2 million, or 8.4%, compared to the linked quarter and $39.2 million, or 22.7%, compared to September 30, 2011

During the third quarter 2012, the Company completed a comprehensive efficiency study across all business lines and support functions.  As a result, it identified approximately $17.1 million of annualized cost savings impacting several expense categories, inclusive of the estimated $3.0 million of net operating expenses associated with 2012 banking center consolidations previously announced in the second quarter.  Realization of the identified cost savings is anticipated to begin during the fourth quarter 2012, however the Company does not expect to recognize net savings during 2012 as one-time costs associated with implementing the efficiency plan are expected to offset estimated savings.  Related to such costs, the Company incurred $0.4 million of pre-tax employee benefit expenses associated with the efficiency plan during the third quarter.  Furthermore, the Company continues to review its operational structure as part of an on-going process, similar to its branch franchise and market evaluations, and will provide detail in future periods as additional cost savings opportunities are identified.

Claude Davis, President and Chief Executive Officer, commented, "Our operating results for the quarter were impacted by declines in both net interest income and net interest margin which were affected by the convergence of several events.  The combination of a decline in the yield earned on our covered loan portfolio and elevated prepayments and redemptions related to our investment portfolio contributed to the $5.0 million decrease in net interest income and 28 bp decline in net interest margin compared to the linked quarter.

"On the positive side, our credit results related to the uncovered portfolio for the quarter were solid as we showed meaningful improvement in almost all performance ratios.  The level of classified assets continued to decline and nonperforming assets dropped to its lowest level since the fourth quarter 2009.  While net charge-offs still remain somewhat elevated at 71 bps of average loans, the 21.6% decline in net charge-offs compared to the prior quarter was encouraging.

"Additionally, our uncovered loan portfolio continued to grow, increasing 7.1% on an annualized basis during the quarter as a result of solid performance in our commercial, commercial real estate, specialty finance and residential mortgage portfolios.  Third quarter originations and renewals were solid and consistent with the prior quarter and our pipeline of new business opportunities remains strong.

"We completed an in-depth analysis of our cost structure during the quarter and specifically identified approximately $17.1 million of cost reductions across all business lines and support areas.  In addition to the previously announced banking center consolidations, we began implementing certain other initiatives as early as the second quarter and continued to do so in the third quarter parallel with completion of the study.  Our expectation is that all initiatives will be in place by the end of the second quarter 2013 with actual savings realization following closely behind.  Executing an efficient operating model is a strategic priority for First Financial and many of the processes we employed during the quarter to identify efficiencies will be performed on a continual basis to ensure long term positive operating leverage.

"We are pleased to announce that the board of directors has approved a share buyback plan under which we expect to repurchase approximately 1,000,000 shares annually over a five year period.  We will implement the plan during the fourth quarter 2012 and are also pleased to report that share repurchases are not anticipated to impact the variable dividend, which we expect to continue through 2013 unless the Company's capital position changes materially or capital deployment opportunities arise that move us towards our capital thresholds sooner than expected.  Despite returning greater than 100% of our earnings to shareholders through 2013 and targeting a long term return of 60% - 80% of the capital we generate through dividends and share repurchases, we expect to maintain a sufficient level of capital to support growth initiatives."

NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the third quarter 2012 was $59.8 million as compared to $64.8 million for the second quarter 2012 and $65.2 million as compared to the year-over-year period.  Compared to the linked quarter, total interest income decreased $5.6 million, or 7.8%, and total interest expense declined $0.6 million, or 8.9%.  Net interest margin was 4.21% for the third quarter 2012 as compared to 4.49% for the second quarter 2012 and 4.55% for the third quarter 2011.  The declines in net interest income and net interest margin were significantly impacted by activity in the Company's covered loan and investment securities portfolios.

Contributing to the lower interest income earned on loans and decline in net interest margin was an 8.8% decline in the average balance of covered loans outstanding as well as a 59 bp decrease in the yield earned on the portfolio compared to the linked quarter.  The decline in the yield earned on covered loans was partially driven by the full amortization of discounts associated with certain loans accounted for under ASC Topic 310-20 late in the second quarter 2012.  Additionally, a large credit in the same portfolio that had previously been classified as nonaccrual paid off in full during the second quarter 2012 with all accrued interest recognized, positively impacting the yield in that quarter as well.

Interest income earned on investment securities declined as a result of a $107.2 million decrease, or 6.3%, in average balances as well as a 37 bp decrease in the yield earned on the portfolio compared to the linked quarter.  Elevated prepayment activity related to higher yielding mortgage-backed securities impacted both the average balances and portfolio yield during the quarter.  The prepayment activity also resulted in accelerated premium amortization, negatively affecting interest income and contributing to 5 bps of the decline in net interest margin.  Additionally, a significant portion of the Company's higher-yielding investment grade single-issuer trust preferred securities were redeemed by the issuers' early in the quarter, also impacting interest income and net interest margin.

While average uncovered loan balances increased 4.8% during the quarter on an annualized basis, and new loan origination activity was strong, payoff activity was also elevated.  As a result of the low interest rate environment and heightened competition, loan originations during the quarter were recorded at yields approximately 94 bps lower than loans that paid off during the quarter, muting the impact of increased balances on interest income earned and net interest margin.

Interest income and net interest margin were also negatively impacted, to a lesser extent, by a decline in loan fees.

Interest expense and net interest margin continued to benefit from the impact of deposit pricing and rationalization strategies as the average balance of interest-bearing deposits declined 4.7% and the cost of funds related to these deposits decreased 4 bps to 57 bps compared to 61 bps for the linked quarter.  Additionally, net interest margin benefitted from the impact of a lower earning asset base, which declined 2.7% compared to the second quarter 2012.

NET INTEREST MARGIN OUTLOOK
The Company's expectation for net interest margin in future periods is that the quarterly declines will be less severe than the third quarter's results as compared to the linked quarter.  In the third quarter, there were linked quarter changes in the yield earned on the investment portfolio due to prepayments and on the covered loan portfolio.  Similar changes are not expected to have the same magnitude in future periods.  Expected margin headwinds should impact fourth quarter 2012 net interest margin by approximately 8 to 15 bps.  Prepayment activity, if experienced as expected, should have a negligible linked quarter impact on net interest margin; but could have as much as a 5 bp impact in some accelerated scenarios.

NONINTEREST INCOME
The following table presents noninterest income for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011 highlighting the estimated impact of covered loan activity and other transition items on the Company's reported balance.

  



Table I










For the Three Months Ended





September 30,


June 30,


September 30,




(Dollars in thousands)

2012


2012


2011













Total noninterest income

$         30,830


$ 33,545


$         28,115













Certain significant components of noninterest income


















Items likely to recur:


















Accelerated discount on covered loans 1, 2

3,798


3,764


5,207




FDIC loss sharing income

8,496


8,280


8,377




(Loss) income related to transition/non-strategic operations

(32)


91


98













Items not expected to recur:


















Other items not expected to recur

2,617


5,000


288













Total noninterest income excluding items noted above

$         15,951


$ 16,410


$         14,145






















1  See Selected Financial Information for additional information







2  Net of the corresponding valuation adjustment on the FDIC indemnification asset











Excluding the items highlighted in Table I, noninterest income earned in the third quarter 2012 was $16.0 million compared to $16.4 million in the second quarter 2012 and $14.1 million in the third quarter 2011.  The decline compared to the linked quarter was driven by a decrease in client derivative fees and bankcard income, partially offset by an increase in service charges on deposits and gain on sale of loans from mortgage originations.  Other items not expected to recur consist of $2.6 million of gains on sales of investment securities which are discussed in more detail in Investments.

NONINTEREST EXPENSE
The following table presents noninterest expense for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011 including the estimated effect of covered asset activity, acquired-non-strategic operations, acquisition-related costs and other transition items.

  



Table II












For the Three Months Ended







September 30,


June 30,


September 30,






(Dollars in thousands)

2012


2012


2011

















Total noninterest expense

$         55,286


$ 57,459


$         53,142

















Certain significant components of noninterest expense






















Items likely to recur:






















Loss share and covered asset expense

3,559


4,317


3,755






FDIC loss share support

951


1,014


1,382






Acquired-non-strategic operating expenses1

19


19


(407)






Transition-related items1

-


-


(111)

















Items not expected to recur:






















Acquisition-related costs1

78


78


1,875






Other items not expected to recur

374


2,870


1,874

















Total noninterest expense excluding items noted above

$         50,305


$ 49,161


$         44,774







































1  See Selected Financial Information for additional information


























Excluding the items highlighted in Table II, noninterest expense in the third quarter 2012 was $50.7 million as compared to $49.2 million in the second quarter 2012 and $44.8 million in the third quarter 2011.  The increase of $1.1 million compared to the linked quarter was due to higher uncovered OREO expenses, marketing expenses and data processing costs, partially offset by lower salaries and employee benefits and professional services expenses.  Loss share and covered asset expense includes $3.6 million of credit-related expenses, offset by a small amount of net recoveries on covered OREO.  Other items not expected to recur consist primarily of $0.4 million of employee benefit costs associated with execution of the efficiency plan.

INCOME TAXES
For the third quarter 2012, income tax expense was $8.9 million, resulting in an effective tax rate of 35.4%, compared with income tax expense of $8.7 million and an effective tax rate of 32.8% during the second quarter 2012 and $9.7 million and an effective tax rate of 38.2% during the comparable year-over-year period.  The increase in the effective tax rate during the third quarter 2012 compared to the second quarter 2012 resulted from the lower rate recognized during the prior quarter driven by a one-time adjustment related to state income taxes at the subsidiary level.

CREDIT QUALITY – EXCLUDING COVERED ASSETS
The following table presents certain credit quality metrics related to the Company's uncovered loan portfolio as of September 30, 2012 and for the trailing four quarters.

  



Table III















As of or for the Three Months Ended






September 30,


June 30,


March 31,


December 31,


September 30,





(Dollars in thousands)

2012


2012


2012


2011


2011



















Total nonaccrual loans

$         49,404


$ 63,093


$ 55,945


$        54,299


$         59,150





Troubled debt restructurings - accruing

11,604


9,909


9,495


4,009


4,712





Troubled debt restructurings - nonaccrual

13,017


10,185


17,205


18,071


12,571





Total troubled debt restructurings

24,621


20,094


26,700


22,080


17,283





Total nonperforming loans

74,025


83,187


82,645


76,379


76,433





Total nonperforming assets

87,937


98,875


97,681


87,696


88,436



















Nonperforming assets as a % of:














Period-end loans plus OREO

2.86%


3.27%


3.28%


2.94%


3.00%





Total assets

1.41%


1.57%


1.52%


1.31%


1.40%





Nonperforming assets ex. accruing TDRs as a % of:














Period-end loans plus OREO

2.48%


2.94%


2.96%


2.81%


2.84%





Total assets

1.22%


1.42%


1.37%


1.25%


1.32%



















Nonperforming loans as a % of total loans

2.41%


2.76%


2.79%


2.57%


2.60%



















Provision for loan and lease losses - uncovered

$           3,613


$   8,364


$   3,258


$          5,164


$           7,643



















Allowance for uncovered loan & lease losses

$         49,192


$ 50,952


$ 49,437


$        52,576


$         54,537



















Allowance for loan & lease losses as a % of:














Period-end loans

1.60%


1.69%


1.67%


1.77%


1.86%





Nonaccrual loans

99.6%


80.8%


88.4%


96.8%


92.2%





Nonaccrual loans plus nonaccrual TDRs

78.8%


69.5%


67.6%


72.7%


76.0%





Nonperforming loans

66.5%


61.3%


59.8%


68.8%


71.4%



















Total net charge-offs

$           5,373


$   6,849


$   6,397


$          7,125


$           6,777





Annualized net-charge-offs as a % of average














loans & leases

0.71%


0.93%


0.87%


0.95%


0.96%

















  

Net Charge-offs
For the third quarter 2012, net charge-offs declined $1.5 million, or 21.6%, compared to the linked quarter.  Significant items driving net charge-offs for the quarter included $0.8 million related to the disposition of a commercial loan and $2.3 million related to valuation adjustments of three commercial real estate credits.

Nonperforming Assets
Nonaccrual loans, including nonaccrual troubled debt restructurings, decreased $10.9 million, or 14.8%, to $62.4 million as of September 30, 2012 from $73.3 million as of June 30, 2012 driven primarily by the finalization of resolution strategies related to credits in the commercial and construction and land development portfolios, including transfers to OREO, dispositions and net charge-offs, as well as $3.4 million of paydowns on a commercial line of credit during the quarter.

OREO decreased $1.8 million to $13.9 million during the third quarter as resolutions and valuation adjustments of $2.7 million exceeded $0.9 million of additions during the quarter.  There were no individually significant items included in either the additions or resolutions for the quarter.

Classified assets as of September 30, 2012 totaled $133.4 million as compared to $145.6 million for the linked quarter and $172.6 million as of September 30, 2011, representing declines of 8.4% and 22.7%, respectively.  Classified assets, which have declined for eight consecutive quarters, are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse.

Delinquent Loans
As of September 30, 2012, loans 30-to-89 days past due decreased to $17.0 million, or 0.55% of period-end loans, as compared to $26.0 million, or 0.86%, as of June 30, 2012 and $19.5 million, or 0.66%, as of September 30, 2011.  The decrease compared to the linked quarter was driven primarily by lower delinquencies in the commercial real estate portfolio.

Provision for Loan & Lease Losses
Third quarter 2012 provision expense related to uncovered loans and leases was $3.6 million as compared to $8.4 million during the linked quarter and $7.6 million during the comparable year-over-year quarter.  Provision expense is a result of the Company's modeling efforts to estimate the period-end allowance for loan and lease losses.  The decrease relative to the linked and comparable quarters was driven primarily by the continued positive migration trends in classified assets as well as the finalization of resolution strategies on certain loans during the quarter.  As a percentage of net charge-offs, third quarter 2012 provision expense equaled 67.2%.

LOANS (EXCLUDING COVERED LOANS)
The following table presents the loan portfolio, not including covered loans, as of September 30, 2012, June 30, 2012 and September 30, 2011.

  



Table IV

















As of






September 30, 2012


June 30, 2012


September 30, 2011








Percent




Percent




Percent





(Dollars in thousands)

Balance


of Total


Balance


of Total


Balance


of Total





















Commercial

$    834,858


27.2%


$    823,890


27.3%


$    822,552


28.0%





















Real estate - construction

91,897


3.0%


86,173


2.9%


136,651


4.7%





















Real estate - commercial

1,338,636


43.7%


1,321,446


43.9%


1,202,035


40.9%





















Real estate - residential

299,654


9.8%


292,503


9.7%


300,165


10.2%





















Installment

59,191


1.9%


61,590


2.0%


70,034


2.4%





















Home equity

368,876


12.0%


365,413


12.1%


362,919


12.4%





















Credit card

31,604


1.0%


31,486


1.0%


30,435


1.0%





















Lease financing

41,343


1.3%


30,109


1.0%


12,870


0.4%





















Total

$ 3,066,059


100.0%


$ 3,012,610


100.0%


$ 2,937,661


100.0%



















Loans, excluding covered loans, totaled $3.1 billion as of September 30, 2012, increasing $53.4 million, or 7.1% on an annualized basis, compared to the linked quarter and $128.4 million, or 4.4%, compared to the third quarter 2011.

INVESTMENTS
The following table presents a summary of the total investment portfolio at September 30, 2012.

  



















Table V


















As of September 30, 2012






Securities


Securities


Other


Total


Percent


Tax Equiv.




(Dollars in thousands)


HTM


AFS


Investments


Securities


of Portfolio


Yield




















Agencies


$   20,844


$   26,163


$              -


$      47,007


3.0%


3.61%




CMO - fixed rate


505,288


202,218


-


707,506


44.7%


2.17%




CMO - variable rate


-


221,640


-


221,640


14.0%


0.70%




MBS - fixed rate


121,698


150,567


-


272,265


17.2%


2.50%




MBS - variable rate


172,597


56,207


-


228,804


14.4%


1.94%




Municipal


1,892


6,478


-


8,370


0.5%


3.45%




Corporate


-


14,552


-


14,552


0.9%


4.36%




Other AFS securities


-


11,855


-


11,855


0.7%


2.48%




Regulatory stock


-


-


71,492


71,492


4.5%


3.59%






















$ 822,319


$ 689,680


$     71,492


$ 1,583,491


100.0%


2.13%


















The investment portfolio decreased $86.1 million, or 5.2%, during the third quarter 2012 as $133.8 million of purchases late in the quarter were offset by sales, amortizations and paydowns, including elevated prepayment activity related to fixed rate MBS.  The Company sold $84.3 million of lower-yielding agency MBS during the quarter in order to reduce liquidity, interest rate cap and prepayment risks, recognizing a pre-tax gain of $2.6 million.  As of September 30, 2012, the overall duration of the investment portfolio was 1.8 years, consistent with June 30, 2012.  The yield earned on the portfolio during the quarter declined to 2.09% from 2.46% for the linked quarter.  As of September 30, 2012, the market value of the portfolio classified as available-for-sale resulted in a net unrealized gain of $16.9 million which is included in other comprehensive income.

The investment purchases mentioned above were made late in the quarter and had little impact on net interest income and net interest margin for the quarter.  Additionally, the Company has purchased $256.9 million of securities during the fourth quarter 2012.  Collectively, these purchases consist primarily of fixed rate agency CMOs and tax-exempt pass-through securities and, to a lesser extent, variable rate agency CMOs.  To mitigate prepayment and premium risk, the majority of these purchases consisted of securities with lower premiums.  Additionally, a large percentage of these purchases were collateralized by higher LTV loans originated under the HARP program as well as lower balance mortgages which together should exhibit more favorable prepayment protection in a low interest rate environment.

The Company's current investment strategy consists of a "barbelled" approach under which both short and long duration securities are targeted to provide a weighted average duration and yield profile approximating an intermediate duration security.  This strategy will provide current income from the longer duration securities which benefit from the steepness of the yield curve while also mitigating interest rate risk with shorter duration variable rate securities which will reset when interest rates begin to rise.

DEPOSITS
Non-time deposit balances totaled $3.7 billion as of September 30, 2012, representing a decrease of $24.7 million, or 0.7%, compared to June 30, 2012.  The decline was driven primarily by a $37.7 million decrease in public fund balances.  Offsetting this activity was an increase of $29.2 million in core business and commercial account balances.

Total time deposit balances decreased $132.5 million, or 9.9%, compared to the linked quarter as the Company continued to focus on reducing non-core relationship deposits in connection with its deposit rationalization strategies.

The Company's rationalization strategies related to deposit pricing continued to have a positive impact as the total cost of deposit funding declined to 45 bps for the quarter, a decrease of 8.2% compared to the prior quarter and 40.8% compared to the third quarter 2011.  The composition of the Company's deposit base has also improved as non-time deposits comprised 75.7% of total deposits as of September 30, 2012 compared to 68.7% as of September 30, 2011.

CAPITAL MANAGEMENT
The following table presents First Financial's regulatory and other capital ratios as of September 30, 2012, June 30, 2012 and September 30, 2011.

  



Table VI












As of





September 30,


June 30,


September 30,


"Well-Capitalized"





2012


2012


2011


Minimum















Leverage Ratio

10.54%


10.21%


10.87%


5.00%















Tier 1 Capital Ratio

16.93%


17.14%


18.81%


6.00%















Total Risk-Based Capital Ratio

18.21%


18.42%


20.08%


10.00%















Ending tangible shareholders' equity











to ending tangible assets

9.99%


9.91%


10.38%


N/A















Ending tangible common shareholders'











equity to ending tangible assets

9.99%


9.91%


10.38%


N/A













The Company's leverage and tangible common equity ratios increased during the quarter as total tangible assets declined and tangible common equity remained essentially unchanged compared to June 30, 2012.  As of September 30, 2012, tangible book value per common share was $10.47, consistent with June 30, 2012 and compared to $11.15 as of September 30, 2011.  Regulatory capital ratios as of September 30, 2012 are considered preliminary pending the filing of the Company's regulatory reports.

Teleconference / Webcast Information
First Financial's senior management will host a conference call to discuss the Company's financial and operating results on Friday, October 26, 2012 at 9:00 a.m. Eastern Time.  Members of the public who would like to listen to the conference call should dial (877) 317-6789 (U.S. toll free), (866) 605-3852 (Canada toll free) or +1 (412) 317-6789 (International) (no passcode required).  The number should be dialed five to ten minutes prior to the start of the conference call.  The conference call will also be accessible as an audio webcast via the Investor Relations section of the Company's website at www.bankatfirst.com.  A replay of the conference call will be available beginning one hour after the completion of the live call through November 12, 2012 at (877) 344-7529 (U.S. toll free) and +1 (412) 317-0088 (International); conference number 10019897.  The webcast will be archived on the Investor Relations section of the Company's website through October 26, 2013.

Press Release and Additional Information on Website
This press release as well as supplemental information and any non-GAAP reconciliations related to this release is available to the public through the Investor Relations section of First Financial's website at www.bankatfirst.com/investor.

Forward-Looking Statement
Certain statements contained in this news release which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the ''Act'').  In addition, certain statements in future filings by First Financial with the SEC, in press releases, and in oral and written statements made by or with the approval of First Financial which are not statements of historical fact constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items, statements of plans and objectives of First Financial or its management or board of directors and statements of future economic performances and statements of assumptions underlying such statements.  Words such as ''believes,'' ''anticipates,'' "likely," "expected," ''intends,'' and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.  However, such performance involves risks and uncertainties that may cause actual results to differ materially.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

  • management's ability to effectively execute its business plan;
  • the risk that the strength of the United States economy in general and the strength of the local economies in which we conduct operations may continue to deteriorate resulting in, among other things, a further deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio, allowance for loan and lease losses and overall financial performance;
  • U.S. fiscal debt and budget matters;
  • the ability of financial institutions to access sources of liquidity at a reasonable cost;
  • the impact of recent upheaval in the financial markets and the effectiveness of domestic and international governmental actions taken in response, and the effect of such governmental actions on us, our competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including potentially higher FDIC premiums arising from increased payments from FDIC insurance funds as a result of depository institution failures;
  • the effect of and changes in policies and laws or regulatory agencies (notably the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act);
  • the effect of the current low interest rate environment or changes in interest rates on our net interest margin and our loan originations and securities holdings;
  • our ability to keep up with technological changes;
  • failure or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers;
  • our ability to comply with the terms of loss sharing agreements with the FDIC;
  • mergers and acquisitions, including costs or difficulties related to the integration of acquired companies and the wind-down of non-strategic operations that may be greater than expected, such as the risks and uncertainties associated with the Irwin Mortgage Corporation bankruptcy proceedings and other acquired subsidiaries;
  • the risk that exploring merger and acquisition opportunities may detract from management's time and ability to successfully manage our Company;
  • expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
  • our ability to increase market share and control expenses;
  • the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the SEC;
  • adverse changes in the securities, debt and/or derivatives markets;
  • our success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;
  • monetary and fiscal policies of the Board of Governors of the Federal Reserve System (Federal Reserve) and the U.S. government and other governmental initiatives affecting the financial services industry;
  • our ability to manage loan delinquency and charge-off rates and changes in estimation of the adequacy of the allowance for loan and lease losses; and
  • the costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

In addition, please refer to our Annual Report on Form 10-K for the year ended December 31, 2011, as well as our other filings with the SEC, for a more detailed discussion of these risks and uncertainties and other factors. Such forward-looking statements are meaningful only on the date when such statements are made, and First Financial undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events.

About First Financial Bancorp
First Financial Bancorp is a Cincinnati, Ohio based bank holding company.  As of September 30, 2012, the Company had $6.2 billion in assets, $3.9 billion in loans, $4.9 billion in deposits and $716 million in shareholders' equity.  The Company's subsidiary, First Financial Bank, N.A., founded in 1863, provides banking and financial services products through its three lines of business: commercial, retail and wealth management.  The commercial and retail units provide traditional banking services to business and consumer clients.  First Financial Wealth Management provides wealth planning, portfolio management, trust and estate, brokerage and retirement plan services and had approximately $2.4 billion in assets under management as of September 30, 2012.  The Company's strategic operating markets are located in Ohio, Indiana and Kentucky where it operates 122 banking centers.  Additional information about the Company, including its products, services and banking locations is available at www.bankatfirst.com.

 

 

 

FIRST FINANCIAL BANCORP.

CONSOLIDATED FINANCIAL HIGHLIGHTS















(Dollars in thousands, except per share)

(Unaudited)


































Three months ended,






Nine months ended,


Sep. 30,


Jun. 30,


Mar. 31,


Dec. 31,


Sep. 30,


Sep. 30,


2012


2012


2012


2011


2011


2012


2011















RESULTS OF OPERATIONS














Net income

$16,242


$17,802


$16,994


$17,941


$15,618


$51,038


$48,798

Net earnings per share - basic 

$0.28


$0.31


$0.29


$0.31


$0.27


$0.88


$0.85

Net earnings per share - diluted 

$0.28


$0.30


$0.29


$0.31


$0.27


$0.87


$0.83

Dividends declared per share

$0.30


$0.29


$0.31


$0.27


$0.27


$0.90


$0.51















KEY FINANCIAL RATIOS














Return on average assets

1.05%


1.13%


1.05%


1.09%


1.01%


1.08%


1.05%

Return on average shareholders' equity

9.01%


9.98%


9.67%


9.89%


8.54%


9.56%


9.19%

Return on average tangible shareholders' equity

10.53%


11.68%


11.37%


11.59%


9.56%


11.17%


10.32%















Net interest margin

4.21%


4.49%


4.51%


4.32%


4.55%


4.40%


4.63%

Net interest margin (fully tax equivalent) (1)

4.23%


4.50%


4.52%


4.34%


4.57%


4.42%


4.65%















Ending shareholders' equity as a percent of ending assets

11.48%


11.41%


11.14%


10.68%


11.47%


11.48%


11.47%

Ending tangible shareholders' equity as a percent of:














    Ending tangible assets

9.99%


9.91%


9.66%


9.23%


10.38%


9.99%


10.38%

    Risk-weighted assets

16.16%


16.39%


16.42%


16.63%


18.47%


16.16%


18.47%















Average shareholders' equity as a percent of average assets

11.62%


11.32%


10.91%


11.05%


11.83%


11.28%


11.43%

Average tangible shareholders' equity as a percent of














    average tangible assets

10.12%


9.84%


9.43%


9.58%


10.70%


9.80%


10.32%















Book value per share

$12.24


$12.25


$12.21


$12.22


$12.48


$12.24


$12.48

Tangible book value per share

$10.47


$10.47


$10.41


$10.41


$11.15


$10.47


$11.15















Tier 1 Ratio(2)

16.93%


17.14%


17.18%


17.47%


18.81%


16.93%


18.81%

Total Capital Ratio(2)

18.21%


18.42%


18.45%


18.74%


20.08%


18.21%


20.08%

Leverage Ratio(2)

10.54%


10.21%


9.94%


9.87%


10.87%


10.54%


10.87%















AVERAGE BALANCE SHEET ITEMS













Loans (3)

$3,037,734


$2,995,296


$2,979,508


$2,983,354


$2,800,466


$3,004,302


$2,801,544

Covered loans and FDIC indemnification asset

1,002,622


1,100,014


1,179,670


1,287,776


1,380,128


1,093,768


1,495,798

Investment securities

1,606,313


1,713,503


1,664,643


1,257,574


1,199,473


1,661,285


1,113,443

Interest-bearing deposits with other banks

11,390


4,454


126,330


485,432


306,969


47,260


319,857

  Total earning assets

$5,658,059


$5,813,267


$5,950,151


$6,014,136


$5,687,036


$5,806,615


$5,730,642

Total assets

$6,166,667


$6,334,973


$6,478,931


$6,515,756


$6,136,815


$6,326,272


$6,207,184

Noninterest-bearing deposits

$1,052,421


$1,044,405


$931,347


$860,863


$735,621


$1,009,548


$734,521

Interest-bearing deposits

4,013,148


4,210,079


4,545,151


4,630,412


4,366,827


4,255,239


4,399,914

  Total deposits

$5,065,569


$5,254,484


$5,476,498


$5,491,275


$5,102,448


$5,264,787


$5,134,435

Borrowings

$257,340


$234,995


$161,911


$174,939


$195,140


$218,225


$214,347

Shareholders' equity

$716,797


$717,111


$706,547


$719,964


$725,809


$713,497


$709,653















CREDIT QUALITY RATIOS (excluding covered assets)













Allowance to ending loans

1.60%


1.69%


1.67%


1.77%


1.86%


1.60%


1.86%

Allowance to nonaccrual loans

99.57%


80.76%


88.37%


96.83%


92.20%


99.57%


92.20%

Allowance to nonperforming loans

66.45%


61.25%


59.82%


68.84%


71.35%


66.45%


71.35%

Nonperforming loans to total loans

2.41%


2.76%


2.79%


2.57%


2.60%


2.41%


2.60%

Nonperforming assets to ending loans, plus OREO

2.86%


3.27%


3.28%


2.94%


3.00%


2.86%


3.00%

Nonperforming assets to total assets

1.41%


1.57%


1.52%


1.31%


1.40%


1.41%


1.40%

Net charge-offs to average loans (annualized) 

0.71%


0.93%


0.87%


0.95%


0.96%


0.83%


0.80%















(1)The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate.  Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provide useful information to investors by allowing them to make peer comparisons.  Management also uses these measures to make peer comparisons.

















(2)September 30, 2012 regulatory capital ratios are preliminary.





(3) Includes loans held for sale.














 

FIRST FINANCIAL BANCORP.

CONSOLIDATED STATEMENTS OF INCOME





(Dollars in thousands, except per share)

(Unaudited)










Three months ended,


Nine months ended,


Sep. 30,


Sep. 30,


2012


2011


% Change


2012


2011


% Change

Interest income












  Loans, including fees

$59,536


$70,086


(15.1%)


$189,362


$216,031


(12.3%)

  Investment securities












     Taxable

8,358


7,411


12.8%


29,254


21,294


37.4%

     Tax-exempt

111


176


(36.9%)


366


566


(35.3%)

        Total investment securities interest

8,469


7,587


11.6%


29,620


21,860


35.5%

  Other earning assets

(1,700)


(1,721)


(1.2%)


(5,657)


(4,059)


39.4%

       Total interest income

66,305


75,952


(12.7%)


213,325


233,832


(8.8%)













Interest expense












  Deposits

5,730


9,823


(41.7%)


19,827


31,990


(38.0%)

  Short-term borrowings

54


44


22.7%


103


138


(25.4%)

  Long-term borrowings

675


867


(22.1%)


2,030


2,893


(29.8%)

  Subordinated debentures and capital securities

0


0


N/M


0


391


(100.0%)

      Total interest expense

6,459


10,734


(39.8%)


21,960


35,412


(38.0%)

      Net interest income

59,846


65,218


(8.2%)


191,365


198,420


(3.6%)

  Provision for loan and lease losses - uncovered

3,613


7,643


(52.7%)


15,235


14,046


8.5%

  Provision for loan and lease losses - covered

6,622


7,260


(8.8%)


25,620


57,171


(55.2%)

      Net interest income after provision for loan and lease losses

49,611


50,315


(1.4%)


150,510


127,203


18.3%













Noninterest income












  Service charges on deposit accounts

5,499


4,793


14.7%


15,784


14,286


10.5%

  Trust and wealth management fees

3,374


3,377


(0.1%)


10,542


10,809


(2.5%)

  Bankcard income 

2,387


2,318


3.0%


7,502


6,801


10.3%

  Net gains from sales of loans

1,319


1,243


6.1%


3,391


3,086


9.9%

  FDIC loss sharing income

8,496


8,377


1.4%


29,592


53,455


(44.6%)

  Accelerated discount on covered loans

3,798


5,207


(27.1%)


11,207


15,746


(28.8%)

  Gain on sale of investment securities

2,617


0


N/M


2,617


0


N/M

  Other

3,340


2,800


19.3%


15,665


8,708


79.9%

      Total noninterest income

30,830


28,115


9.7%


96,300


112,891


(14.7%)













Noninterest expenses












  Salaries and employee benefits

27,212


27,774


(2.0%)


85,121


80,467


5.8%

  Net occupancy

5,153


4,164


23.8%


15,560


15,517


0.3%

  Furniture and equipment 

2,332


2,386


(2.3%)


6,899


7,520


(8.3%)

  Data processing 

2,334


1,466


59.2%


6,311


4,157


51.8%

  Marketing

1,592


1,584


0.5%


3,984


4,227


(5.7%)

  Communication

788


772


2.1%


2,595


2,339


10.9%

  Professional services

1,304


2,062


(36.8%)


5,602


7,384


(24.1%)

  State intangible tax

961


546


76.0%


2,957


3,147


(6.0%)

  FDIC assessments

1,164


1,211


(3.9%)


3,597


4,484


(19.8%)

  Loss (gain) - other real estate owned

1,372


(287)


578.0%


2,681


3,198


(16.2%)

  (Gain) loss - covered other real estate owned

(25)


2,707


(100.9%)


2,500


8,440


(70.4%)

  Loss sharing expense

3,584


1,048


242.0%


8,420


1,862


352.2%

  Other 

7,515


7,709


(2.5%)


22,296


20,687


7.8%

      Total noninterest expenses

55,286


53,142


4.0%


168,523


163,429


3.1%

Income before income taxes

25,155


25,288


(0.5%)


78,287


76,665


2.1%

Income tax expense

8,913


9,670


(7.8%)


27,249


27,867


(2.2%)

      Net income

16,242


15,618


4.0%


51,038


48,798


4.6%

























ADDITIONAL DATA












Net earnings per share - basic

$0.28


$0.27




$0.88


$0.85



Net earnings per share - diluted

$0.28


$0.27




$0.87


$0.83



Dividends declared per share

$0.30


$0.27




$0.90


$0.51















Return on average assets

1.05%


1.01%




1.08%


1.05%



Return on average shareholders' equity

9.01%


8.54%




9.56%


9.19%















Interest income

$66,305


$75,952


(12.7%)


$213,325


$233,832


(8.8%)

Tax equivalent adjustment

255


236


8.1%


689


714


(3.5%)

   Interest income - tax equivalent

66,560


76,188


(12.6%)


214,014


234,546


(8.8%)

Interest expense

6,459


10,734


(39.8%)


21,960


35,412


(38.0%)

   Net interest income - tax equivalent

$60,101


$65,454


(8.2%)


$192,054


$199,134


(3.6%)













Net interest margin

4.21%


4.55%




4.40%


4.63%



Net interest margin (fully tax equivalent) (1)

4.23%


4.57%




4.42%


4.65%















Full-time equivalent employees 

1,475


1,377





















(1)The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provided useful information to investors by allowing them to make peer comparisons.  Management also uses these measures to make peer comparisons.  

 

N/M = Not meaningful.

 

FIRST FINANCIAL BANCORP.

CONSOLIDATED QUARTERLY STATEMENTS OF INCOME



(Dollars in thousands, except per share)

(Unaudited)






2012


Third

Quarter


Second

Quarter


First

Quarter


YTD


% Change

Linked Qtr.

Interest income










  Loans, including fees

$59,536


$63,390


$66,436


$189,362


(6.1%)

  Investment securities










     Taxable

8,358


10,379


10,517


29,254


(19.5%)

     Tax-exempt

111


121


134


366


(8.3%)

        Total investment securities interest

8,469


10,500


10,651


29,620


(19.3%)

  Other earning assets

(1,700)


(1,967)


(1,990)


(5,657)


(13.6%)

       Total interest income

66,305


71,923


75,097


213,325


(7.8%)











Interest expense










  Deposits

5,730


6,381


7,716


19,827


(10.2%)

  Short-term borrowings

54


37


12


103


45.9%

  Long-term borrowings

675


675


680


2,030


0.0%

      Total interest expense

6,459


7,093


8,408


21,960


(8.9%)

      Net interest income

59,846


64,830


66,689


191,365


(7.7%)

  Provision for loan and lease losses - uncovered

3,613


8,364


3,258


15,235


(56.8%)

  Provision for loan and lease losses - covered

6,622


6,047


12,951


25,620


9.5%

   Net interest income after provision for loan and lease losses

49,611


50,419


50,480


150,510


(1.6%)











Noninterest income










  Service charges on deposit accounts

5,499


5,376


4,909


15,784


2.3%

  Trust and wealth management fees

3,374


3,377


3,791


10,542


(0.1%)

  Bankcard income 

2,387


2,579


2,536


7,502


(7.4%)

  Net gains from sales of loans

1,319


1,132


940


3,391


16.5%

  FDIC loss sharing income

8,496


8,280


12,816


29,592


2.6%

  Accelerated discount on covered loans

3,798


3,764


3,645


11,207


0.9%

  Gain on sale of investment securities

2,617


0


0


2,617


N/M

  Other

3,340


9,037


3,288


15,665


(63.0%)

      Total noninterest income

30,830


33,545


31,925


96,300


(8.1%)











Noninterest expenses










  Salaries and employee benefits

27,212


29,048


28,861


85,121


(6.3%)

  Net occupancy

5,153


5,025


5,382


15,560


2.5%

  Furniture and equipment 

2,332


2,323


2,244


6,899


0.4%

  Data processing 

2,334


2,076


1,901


6,311


12.4%

  Marketing

1,592


1,238


1,154


3,984


28.6%

  Communication

788


913


894


2,595


(13.7%)

  Professional services

1,304


2,151


2,147


5,602


(39.4%)

  State intangible tax

961


970


1,026


2,957


(0.9%)

  FDIC assessments

1,164


1,270


1,163


3,597


(8.3%)

  Loss - other real estate owned

1,372


313


996


2,681


338.3%

  (Gain) loss - covered other real estate owned

(25)


1,233


1,292


2,500


(102.0%)

  Loss sharing expense

3,584


3,085


1,751


8,420


16.2%

  Other 

7,515


7,814


6,967


22,296


(3.8%)

      Total noninterest expenses

55,286


57,459


55,778


168,523


(3.8%)

Income before income taxes

25,155


26,505


26,627


78,287


(5.1%)

Income tax expense

8,913


8,703


9,633


27,249


2.4%

      Net income

$16,242


$17,802


$16,994


$51,038


(8.8%)











ADDITIONAL DATA










Net earnings per share - basic

$0.28


$0.31


$0.29


$0.88



Net earnings per share - diluted

$0.28


$0.30


$0.29


$0.87



Dividends declared per share

$0.30


$0.29


$0.31


$0.90























Return on average assets

1.05%


1.13%


1.05%


1.08%



Return on average shareholders' equity

9.01%


9.98%


9.67%


9.56%













Interest income

$66,305


$71,923


$75,097


$213,325


(7.8%)

Tax equivalent adjustment

255


216


218


689


18.1%

   Interest income - tax equivalent

66,560


72,139


75,315


214,014


(7.7%)

Interest expense

6,459


7,093


8,408


21,960


(8.9%)

   Net interest income - tax equivalent

$60,101


$65,046


$66,907


$192,054


(7.6%)











Net interest margin

4.21%


4.49%


4.51%


4.40%



Net interest margin (fully tax equivalent) (1)

4.23%


4.50%


4.52%


4.42%













Full-time equivalent employees 

1,475


1,525


1,513















(1)The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate.  Management believes that it is a standard practice in the banking industry to present net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provided useful information to investors by allowing them to make peer comparisons.  Management also uses these measures to make peer comparisons.

 

N/M = Not meaningful.

 

FIRST FINANCIAL BANCORP.

CONSOLIDATED QUARTERLY STATEMENTS OF INCOME




(Dollars in thousands, except per share)

(Unaudited)






2011



Fourth 


Third


Second


First


Full



Quarter


Quarter


Quarter


Quarter


Year

Interest income











  Loans, including fees


$69,658


$70,086


$71,929


$74,016


$285,689

  Investment securities











     Taxable


6,945


7,411


7,080


6,803


28,239

     Tax-exempt


201


176


192


198


767

        Total investment securities interest


7,146


7,587


7,272


7,001


29,006

  Other earning assets


(1,819)


(1,721)


(1,384)


(954)


(5,878)

       Total interest income


74,985


75,952


77,817


80,063


308,817












Interest expense











  Deposits


8,791


9,823


10,767


11,400


40,781

  Short-term borrowings


25


44


49


45


163

  Long-term borrowings


693


867


937


1,089


3,586

  Subordinated debentures and capital securities


0


0


197


194


391

      Total interest expense


9,509


10,734


11,950


12,728


44,921

      Net interest income


65,476


65,218


65,867


67,335


263,896

  Provision for loan and lease losses - uncovered


5,164


7,643


5,756


647


19,210

  Provision for loan and lease losses - covered


6,910


7,260


23,895


26,016


64,081

      Net interest income after provision for loan and lease losses


53,402


50,315


36,216


40,672


180,605












Noninterest income











  Service charges on deposit accounts


4,920


4,793


4,883


4,610


19,206

  Trust and wealth management fees


3,531


3,377


3,507


3,925


14,340

  Bankcard income 


2,490


2,318


2,328


2,155


9,291

  Net gains from sales of loans


1,172


1,243


854


989


4,258

  FDIC loss sharing income


7,433


8,377


21,643


23,435


60,888

  Accelerated discount on covered loans


4,775


5,207


4,756


5,783


20,521

  Gain on sale of investment securities


2,541


0


0


0


2,541

  Other


2,778


2,800


3,147


2,761


11,486

      Total noninterest income


29,640


28,115


41,118


43,658


142,531












Noninterest expenses











  Salaries and employee benefits


26,447


27,774


25,123


27,570


106,914

  Net occupancy


5,893


4,164


4,493


6,860


21,410

  Furniture and equipment 


2,425


2,386


2,581


2,553


9,945

  Data processing 


1,559


1,466


1,453


1,238


5,716

  Marketing


1,567


1,584


1,402


1,241


5,794

  Communication


864


772


753


814


3,203

  Professional services


2,252


2,062


3,095


2,227


9,636

  State intangible tax


436


546


1,236


1,365


3,583

  FDIC assessments


1,192


1,211


1,152


2,121


5,676

  Loss (gain) - other real estate owned


773


(287)


163


3,322


3,971

  Loss - covered other real estate owned


784


2,707


2,621


3,112


9,224

  Loss sharing expense


1,738


1,048


755


59


3,600

  Other 


8,738


7,709


7,670


5,308


29,425

      Total noninterest expenses


54,668


53,142


52,497


57,790


218,097

Income before income taxes


28,374


25,288


24,837


26,540


105,039

Income tax expense


10,433


9,670


8,864


9,333


38,300

      Net income


$17,941


$15,618


$15,973


$17,207


$66,739












ADDITIONAL DATA











Net earnings per share - basic


$0.31


$0.27


$0.28


$0.30


$1.16

Net earnings per share - diluted


$0.31


$0.27


$0.27


$0.29


$1.14

Dividends declared per share


$0.27


$0.27


$0.12


$0.12


$0.78












Return on average assets


1.09%


1.01%


1.03%


1.11%


1.06%

Return on average shareholders' equity


9.89%


8.54%


9.05%


10.04%


9.37%












Interest income


$74,985


$75,952


$77,817


$80,063


$308,817

Tax equivalent adjustment


265


236


240


238


979

   Interest income - tax equivalent


75,250


76,188


78,057


80,301


309,796

Interest expense


9,509


10,734


11,950


12,728


44,921

   Net interest income - tax equivalent


$65,741


$65,454


$66,107


$67,573


$264,875












Net interest margin


4.32%


4.55%


4.61%


4.73%


4.55%

Net interest margin (fully tax equivalent) (1)


4.34%


4.57%


4.62%


4.75%


4.57%












Full-time equivalent employees 


1,508


1,377


1,374


1,483














(1)The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income on a fully tax equivalent basis.  Therefore, management believes, these measures provided useful information to investors by allowing them to make peer comparisons.  Management also uses these measures to make peer comparisons.

 

FIRST FINANCIAL BANCORP.

CONSOLIDATED STATEMENTS OF CONDITION















(Dollars in thousands)

(Unaudited)






























Sep. 30,

2012


Jun. 30,

2012


Mar. 31,

2012


Dec. 31,

2011


Sep. 30,

2011


% Change

Linked Qtr.


% Change

Comparable Qtr.

ASSETS














     Cash and due from banks

$154,181


$126,392


$125,949


$149,653


$108,253


22.0%


42.4%

     Interest-bearing deposits with other banks

21,495


9,187


24,101


375,398


369,130


134.0%


(94.2%)

     Investment securities available-for-sale

689,680


724,518


736,309


1,441,846


1,120,179


(4.8%)


(38.4%)

     Investment securities held-to-maturity

822,319


873,538


917,758


2,664


2,724


(5.9%)


              N/M

     Other investments

71,492


71,492


71,492


71,492


71,492


0.0%


0.0%

     Loans held for sale

23,530


20,971


21,052


24,834


14,259


12.2%


65.0%

     Loans














       Commercial

834,858


823,890


831,101


856,981


822,552


1.3%


1.5%

       Real estate - construction

91,897


86,173


104,305


114,974


136,651


6.6%


(32.8%)

       Real estate - commercial

1,338,636


1,321,446


1,262,775


1,233,067


1,202,035


1.3%


11.4%

       Real estate - residential

299,654


292,503


288,922


287,980


300,165


2.4%


(0.2%)

       Installment

59,191


61,590


63,793


67,543


70,034


(3.9%)


(15.5%)

       Home equity

368,876


365,413


359,711


358,960


362,919


0.9%


1.6%

       Credit card

31,604


31,486


31,149


31,631


30,435


0.4%


3.8%

       Lease financing

41,343


30,109


21,794


17,311


12,870


37.3%


221.2%

          Total loans, excluding covered loans

3,066,059


3,012,610


2,963,550


2,968,447


2,937,661


1.8%


4.4%

       Less














          Allowance for loan and lease losses

49,192


50,952


49,437


52,576


54,537


(3.5%)


(9.8%)

             Net loans - uncovered

3,016,867


2,961,658


2,914,113


2,915,871


2,883,124


1.9%


4.6%

       Covered loans

825,515


903,862


986,619


1,053,244


1,151,066


(8.7%)


(28.3%)

       Less














          Allowance for loan and lease losses

48,895


48,327


46,156


42,835


48,112


1.2%


1.6%

             Net loans - covered

776,620


855,535


940,463


1,010,409


1,102,954


(9.2%)


(29.6%)

                Net loans

3,793,487


3,817,193


3,854,576


3,926,280


3,986,078


(0.6%)


(4.8%)

     Premises and equipment

146,603


142,744


141,664


138,096


120,325


2.7%


21.8%

     Goodwill

95,050


95,050


95,050


95,050


68,922


0.0%


37.9%

     Other intangibles

8,327


9,195


10,193


10,844


8,436


(9.4%)


(1.3%)

     FDIC indemnification asset

130,476


146,765


156,397


173,009


177,814


(11.1%)


(26.6%)

     Accrued interest and other assets

278,447


245,632


262,027


262,345


290,117


13.4%


(4.0%)

       Total assets

$6,235,087


$6,282,677


$6,416,568


$6,671,511


$6,337,729


(0.8%)


(1.6%)















LIABILITIES














     Deposits














       Interest-bearing demand

$1,112,843


$1,154,852


$1,289,490


$1,317,339


$1,288,721


(3.6%)


(13.6%)

       Savings

1,568,818


1,543,619


1,613,244


1,724,659


1,537,420


1.6%


2.0%

       Time

1,199,296


1,331,758


1,491,132


1,654,662


1,658,031


(9.9%)


(27.7%)

          Total interest-bearing deposits

3,880,957


4,030,229


4,393,866


4,696,660


4,484,172


(3.7%)


(13.5%)

       Noninterest-bearing

1,063,654


1,071,520


1,007,049


946,180


814,928


(0.7%)


30.5%

          Total deposits

4,944,611


5,101,749


5,400,915


5,642,840


5,299,100


(3.1%)


(6.7%)

     Short-term borrowings














       Federal funds purchased and securities sold














         under agreements to repurchase

88,190


73,919


78,619


99,431


95,451


19.3%


(7.6%)

       FHLB short-term borrowings

283,000


176,000


0


0


0


60.8%


              N/M

          Total short-term borrowings

371,190


249,919


78,619


99,431


95,451


48.5%


288.9%

     Long-term debt

75,521


75,120


75,745


76,544


76,875


0.5%


(1.8%)

          Total borrowed funds

446,711


325,039


154,364


175,975


172,326


37.4%


159.2%

     Accrued interest and other liabilities

127,799


139,101


146,596


140,475


139,171


(8.1%)


(8.2%)

       Total liabilities

5,519,121


5,565,889


5,701,875


5,959,290


5,610,597


(0.8%)


(1.6%)















SHAREHOLDERS' EQUITY














     Common stock

578,129


576,929


575,675


579,871


578,974


0.2%


(0.1%)

     Retained earnings 

330,014


331,315


330,563


331,351


329,243


(0.4%)


0.2%

     Accumulated other comprehensive loss

(18,855)


(18,172)


(18,687)


(21,490)


(3,388)


3.8%


456.5%

     Treasury stock, at cost

(173,322)


(173,284)


(172,858)


(177,511)


(177,697)


0.0%


(2.5%)

       Total shareholders' equity

715,966


716,788


714,693


712,221


727,132


(0.1%)


(1.5%)

       Total liabilities and shareholders' equity

$6,235,087


$6,282,677


$6,416,568


$6,671,511


$6,337,729


(0.8%)


(1.6%)















N/M = Not meaningful.














 

FIRST FINANCIAL BANCORP.

AVERAGE CONSOLIDATED STATEMENTS OF CONDITION















(Dollars in thousands)

(Unaudited)


































Quarterly Averages






Year-to-Date Averages


Sep. 30,


Jun. 30,


Mar. 31,


Dec. 31,


Sep. 30,


Sep. 30,


2012


2012


2012


2011


2011


2012


2011

ASSETS














     Cash and due from banks

$118,642


$121,114


$123,634


$121,603


$110,336


$121,121


$113,700

     Interest-bearing deposits with other banks

11,390


4,454


126,330


485,432


306,969


47,260


319,857

     Investment securities

1,606,313


1,713,503


1,664,643


1,257,574


1,199,473


1,661,285


1,113,443

     Loans held for sale

26,035


19,554


19,722


21,067


9,497


21,786


11,358

     Loans














       Commercial

811,998


827,722


850,092


851,006


794,447


829,872


798,152

       Real estate - construction

92,051


99,087


112,945


135,825


141,791


101,327


146,422

       Real estate - commercial

1,322,369


1,279,869


1,235,613


1,206,678


1,145,195


1,279,441


1,137,864

       Real estate - residential

293,423


290,335


287,749


293,158


258,377


290,513


261,582

       Installment

60,691


62,846


65,302


68,945


63,672


62,938


65,632

       Home equity

365,669


361,166


358,360


360,389


346,486


361,746


342,905

       Credit card

31,977


31,383


31,201


30,759


29,505


31,522


28,775

       Lease financing

33,521


23,334


18,524


15,527


11,496


25,157


8,854

          Total loans, excluding covered loans

3,011,699


2,975,742


2,959,786


2,962,287


2,790,969


2,982,516


2,790,186

       Less














          Allowance for loan and lease losses

51,486


50,353


53,513


55,157


55,146


51,783


56,661

             Net loans - uncovered

2,960,213


2,925,389


2,906,273


2,907,130


2,735,823


2,930,733


2,733,525

       Covered loans

866,486


950,226


1,020,220


1,113,876


1,196,327


945,355


1,303,097

       Less














          Allowance for loan and lease losses

51,150


47,964


47,152


51,330


51,955


48,764


38,246

             Net loans - covered

815,336


902,262


973,068


1,062,546


1,144,372


896,591


1,264,851

                Net loans

3,775,549


3,827,651


3,879,341


3,969,676


3,880,195


3,827,324


3,998,376

     Premises and equipment

145,214


143,261


140,377


128,168


116,070


142,959


116,774

     Goodwill

95,050


95,050


95,050


77,158


52,004


95,050


51,882

     Other intangibles

8,702


9,770


10,506


9,094


4,697


9,656


5,047

     FDIC indemnification asset

136,136


149,788


159,450


173,900


183,801


148,413


192,701

     Accrued interest and other assets

243,636


250,828


259,878


272,084


273,773


251,418


284,046

       Total assets

$6,166,667


$6,334,973


$6,478,931


$6,515,756


$6,136,815


$6,326,272


$6,207,184















LIABILITIES














     Deposits














       Interest-bearing demand

$1,164,111


$1,192,868


$1,285,196


$1,388,903


$1,153,178


$1,213,876


$1,124,393

       Savings

1,588,708


1,610,411


1,682,507


1,617,588


1,659,152


1,627,068


1,627,284

       Time

1,260,329


1,406,800


1,577,448


1,623,921


1,554,497


1,414,295


1,648,237

          Total interest-bearing deposits

4,013,148


4,210,079


4,545,151


4,630,412


4,366,827


4,255,239


4,399,914

       Noninterest-bearing

1,052,421


1,044,405


931,347


860,863


735,621


1,009,548


734,521

          Total deposits

5,065,569


5,254,484


5,476,498


5,491,275


5,102,448


5,264,787


5,134,435

     Short-term borrowings














       Federal funds purchased and securities sold














          under agreements to repurchase

81,147


80,715


85,891


98,268


100,990


82,579


95,316

       Federal Home Loan Bank short-term borrowings

100,758


78,966


0


0


0


60,057


0

          Total short-term borrowings

181,905


159,681


85,891


98,268


100,990


142,636


95,316

     Long-term debt

75,435


75,314


76,020


76,671


94,150


75,589


105,435

     Other long-term debt

0


0


0


0


0


0


13,596

       Total borrowed funds

257,340


234,995


161,911


174,939


195,140


218,225


214,347

     Accrued interest and other liabilities

126,961


128,383


133,975


129,578


113,418


129,763


148,749

       Total liabilities

5,449,870


5,617,862


5,772,384


5,795,792


5,411,006


5,612,775


5,497,531















SHAREHOLDERS' EQUITY














     Common stock

577,547


576,276


578,514


579,321


578,380


577,446


578,524

     Retained earnings 

330,368


332,280


324,370


323,624


331,107


329,011


319,553

     Accumulated other comprehensive loss

(17,756)


(18,242)


(20,344)


(5,396)


(6,013)


(18,777)


(9,891)

     Treasury stock, at cost

(173,362)


(173,203)


(175,993)


(177,585)


(177,665)


(174,183)


(178,533)

       Total shareholders' equity

716,797


717,111


706,547


719,964


725,809


713,497


709,653

       Total liabilities and shareholders' equity

$6,166,667


$6,334,973


$6,478,931


$6,515,756


$6,136,815


$6,326,272


$6,207,184

 

FIRST FINANCIAL BANCORP.

NET INTEREST MARGIN RATE/VOLUME ANALYSIS






(Dollars in thousands)

(Unaudited)



 Quarterly Averages 


 Year-to-Date Averages 



Sep. 30, 2012


Jun. 30, 2012


Sep. 30, 2011


Sep. 30, 2012


Sep. 30, 2011



Balance


Yield


Balance


Yield


Balance


Yield


Balance


Yield


Balance


Yield

Earning assets





















   Investment securities


$1,606,313


2.09%


$1,713,503


2.46%


$1,199,473


2.51%


$1,661,285


2.38%


$1,113,443


2.62%

   Interest-bearing deposits with other banks


11,390


0.45%


4,454


0.18%


306,969


0.27%


47,260


0.29%


319,857


0.34%

   Gross loans(2)


4,040,356


5.68%


4,095,310


6.02%


4,180,594


6.47%


4,098,070


5.99%


4,297,342


6.57%

   Total earning assets


5,658,059


4.65%


5,813,267


4.96%


5,687,036


5.30%


5,806,615


4.91%


5,730,642


5.46%






















Nonearning assets





















   Allowance for loan and lease losses


(102,636)




(98,317)




(107,101)




(100,547)




(94,907)



   Cash and due from banks


118,642




121,114




110,336




121,121




113,700



   Accrued interest and other assets


492,602




498,909




446,544




499,083




457,749



   Total assets


$6,166,667




$6,334,973




$6,136,815




$6,326,272




$6,207,184
























Interest-bearing liabilities





















   Total interest-bearing deposits


$4,013,148


0.57%


$4,210,079


0.61%


$4,366,827


0.89%


$4,255,239


0.62%


$4,399,914


0.97%

   Borrowed funds





















   Short-term borrowings


181,905


0.12%


159,681


0.09%


100,990


0.17%


142,636


0.10%


95,316


0.19%

   Long-term debt


75,435


3.55%


75,314


3.59%


94,150


3.65%


75,589


3.59%


105,435


3.67%

   Other long-term debt


0


N/M


0


N/M


0


N/M


0


N/M


13,596


3.84%

   Total borrowed funds


257,340


1.12%


234,995


1.22%


195,140


1.85%


218,225


1.31%


214,347


2.13%

   Total interest-bearing liabilities


4,270,488


0.60%


4,445,074


0.64%


4,561,967


0.93%


4,473,464


0.66%


4,614,261


1.03%






















Noninterest-bearing liabilities





















   Noninterest-bearing demand deposits


1,052,421




1,044,405




735,621




1,009,548




734,521



   Other liabilities


126,961




128,383




113,418




129,763




148,749



   Shareholders' equity


716,797




717,111




725,809




713,497




709,653



   Total liabilities & shareholders' equity


$6,166,667




$6,334,973




$6,136,815




$6,326,272




$6,207,184
























Net interest income(1)


$59,846




$64,830




$65,218




$191,365




$198,420



Net interest spread(1)




4.05%




4.32%




4.37%




4.25%




4.43%

Net interest margin(1)




4.21%




4.49%




4.55%




4.40%




4.63%






















(1)Not tax equivalent.
















(2)Loans held for sale, nonaccrual loans, covered loans,

and indemnification asset are included in gross loans.






















N/M = Not meaningful.





















 

FIRST FINANCIAL BANCORP.

NET INTEREST MARGIN RATE/VOLUME ANALYSIS




















(Dollars in thousands)

(Unaudited)









































 Linked Qtr. Income Variance 


 Comparable Qtr. Income Variance 


 Year-to-Date Income Variance 



Rate


Volume


Total


Rate


Volume


Total


Rate


Volume


Total

Earning assets



















   Investment securities


$   (1,564)


$     (467)


$  (2,031)


$   (1,263)


$    2,145


$       882


$     (2,008)


$     9,768


$     7,760

   Interest-bearing deposits with other banks


3


8


11


142


(337)


(195)


(114)


(600)


(714)

   Gross loans(2)


(3,449)


(149)


(3,598)


(8,327)


(2,007)


(10,334)


(18,625)


(8,928)


(27,553)

   Total earning assets


(5,010)


(608)


(5,618)


(9,448)


(199)


(9,647)


(20,747)


240


(20,507)

Interest-bearing liabilities



















   Total interest-bearing deposits


$      (435)


$     (216)


$     (651)


$   (3,588)


(505)


$   (4,093)


$   (11,489)


$      (674)


$ (12,163)

   Borrowed funds



















   Short-term borrowings


10


7


17


(14)


24


10


(69)


34


(35)

   Long-term debt


(8)


8


0


(25)


(167)


(192)


(61)


(802)


(863)

   Other long-term debt


0


0


0


0


0


0


0


(391)


(391)

   Total borrowed funds


2


15


17


(39)


(143)


(182)


(130)


(1,159)


(1,289)

   Total interest-bearing liabilities


(433)


(201)


(634)


(3,627)


(648)


(4,275)


(11,619)


(1,833)


(13,452)

         Net interest income(1)


$   (4,577)


$     (407)


$  (4,984)


$   (5,821)


$       449


$   (5,372)


$     (9,128)


$     2,073


$   (7,055)




















(1)Not tax equivalent.



















(2)Loans held for sale, nonaccrual loans, covered

loans, and indemnification asset are included in gross loans.

 

FIRST FINANCIAL BANCORP.

CREDIT QUALITY

(excluding covered assets)















(Dollars in thousands)

(Unaudited)
























Nine months ended,


Sep. 30,


Jun. 30,


Mar 31,


Dec. 31,


Sep. 30,


Sep. 30,


Sep. 30,


2012


2012


2012


2011


2011


2012


2011















ALLOWANCE FOR LOAN AND LEASE LOSS ACTIVITY













Balance at beginning of period

$50,952


$49,437


$52,576


$54,537


$53,671


$52,576


$57,235

  Provision for uncovered loan and lease losses

3,613


8,364


3,258


5,164


7,643


15,235


14,046

  Gross charge-offs














    Commercial 

1,340


1,129


1,186


1,742


879


3,655


1,694

    Real estate - construction

180


717


1,787


2,105


1,771


2,684


4,174

    Real estate - commercial

2,736


3,811


2,244


2,505


2,997


8,791


7,877

    Real estate - residential

565


191


604


473


564


1,360


1,078

    Installment

134


116


60


115


162


310


411

    Home equity

380


915


644


488


510


1,939


1,695

    Other

469


259


297


363


291


1,025


1,078

      Total gross charge-offs 

5,804


7,138


6,822


7,791


7,174


19,764


18,007

  Recoveries














    Commercial 

202


48


72


348


92


322


414

    Real estate - construction

0


0


0


5


0


0


27

    Real estate - commercial

38


68


113


68


168


219


241

    Real estate - residential

33


9


28


3


4


70


42

    Installment

72


75


123


96


87


270


267

    Home equity

31


28


24


71


9


83


46

    Other

55


61


65


75


37


181


226

      Total recoveries

431


289


425


666


397


1,145


1,263

  Total net charge-offs

5,373


6,849


6,397


7,125


6,777


18,619


16,744

Ending allowance for uncovered loan and lease losses

$49,192


$50,952


$49,437


$52,576


$54,537


$49,192


$54,537















NET CHARGE-OFFS TO AVERAGE LOANS AND LEASES (ANNUALIZED)













  Commercial 

0.56%


0.53%


0.53%


0.65%


0.39%


0.54%


0.21%

  Real estate - construction

0.78%


2.91%


6.36%


6.13%


4.96%


3.54%


3.79%

  Real estate - commercial

0.81%


1.18%


0.69%


0.80%


0.98%


0.89%


0.90%

  Real estate - residential

0.72%


0.25%


0.81%


0.64%


0.86%


0.59%


0.53%

  Installment

0.41%


0.26%


(0.39%)


0.11%


0.47%


0.08%


0.29%

  Home equity

0.38%


0.99%


0.70%


0.46%


0.57%


0.69%


0.64%

  Other

2.51%


1.46%


1.88%


2.47%


2.46%


1.99%


3.03%

Total net charge-offs 

0.71%


0.93%


0.87%


0.95%


0.96%


0.83%


0.80%















COMPONENTS OF NONPERFORMING LOANS, NONPERFORMING ASSETS, AND UNDERPERFORMING ASSETS







  Nonaccrual loans














    Commercial 

$4,563


$12,065


$5,936


$7,809


$10,792


$4,563


$10,792

    Real estate - construction

2,536


7,243


7,005


10,005


13,844


2,536


13,844

    Real estate - commercial

33,961


36,116


35,581


28,349


26,408


33,961


26,408

    Real estate - residential

5,563


5,069


5,131


5,692


5,507


5,563


5,507

    Installment

284


319


377


371


322


284


322

    Home equity

2,497


2,281


1,915


2,073


2,277


2,497


2,277

   Nonaccrual loans

49,404


63,093


55,945


54,299


59,150


49,404


59,150

  Troubled debt restructurings (TDRs)














    Accruing

11,604


9,909


9,495


4,009


4,712


11,604


4,712

    Nonaccrual

13,017


10,185


17,205


18,071


12,571


13,017


12,571

   Total TDRs

24,621


20,094


26,700


22,080


17,283


24,621


17,283

   Total nonperforming loans

74,025


83,187


82,645


76,379


76,433


74,025


76,433

  Other real estate owned (OREO)

13,912


15,688


15,036


11,317


12,003


13,912


12,003

   Total nonperforming assets

87,937


98,875


97,681


87,696


88,436


87,937


88,436

  Accruing loans past due 90 days or more

108


143


203


191


235


108


235

   Total underperforming assets

$88,045


$99,018


$97,884


$87,887


$88,671


$88,045


$88,671

Total classified assets

$133,382


$145,621


$154,684


$162,372


$172,581


$133,382


$172,581















CREDIT QUALITY RATIOS (excluding covered assets)














Allowance for loan and lease losses to














   Nonaccrual loans

99.57%


80.76%


88.37%


96.83%


92.20%


99.57%


92.20%

   Nonaccrual loans plus nonaccrual TDRs

78.81%


69.53%


67.58%


72.65%


76.04%


78.81%


76.04%

   Nonperforming loans

66.45%


61.25%


59.82%


68.84%


71.35%


66.45%


71.35%

   Total ending loans

1.60%


1.69%


1.67%


1.77%


1.86%


1.60%


1.86%

Nonperforming loans to total loans

2.41%


2.76%


2.79%


2.57%


2.60%


2.41%


2.60%

Nonperforming assets to














   Ending loans, plus OREO

2.86%


3.27%


3.28%


2.94%


3.00%


2.86%


3.00%

   Total assets

1.41%


1.57%


1.52%


1.31%


1.40%


1.41%


1.40%

Nonperforming assets, excluding accruing TDRs to














   Ending loans, plus OREO

2.48%


2.94%


2.96%


2.81%


2.84%


2.48%


2.84%

   Total assets

1.22%


1.42%


1.37%


1.25%


1.32%


1.22%


1.32%

 

FIRST FINANCIAL BANCORP.

CAPITAL ADEQUACY















(Dollars in thousands, except per share)

(Unaudited)


























Nine months ended,


Sep. 30,


Jun. 30,


Mar. 31,


Dec. 31,


Sep. 30,


Sep. 30,


Sep. 30,


2012


2012


2012


2011


2011


2012


2011

PER COMMON SHARE














Market Price














  High

$17.86


$17.70


$18.28


$17.06


$17.12


$18.28


$18.91

  Low

$15.58


$14.88


$16.11


$13.40


$13.34


$14.88


$13.34

  Close

$16.91


$15.98


$17.30


$16.64


$13.80


$16.91


$13.80















Average shares outstanding - basic

57,976,943


57,933,281


57,795,258


57,744,662


57,735,811


57,902,102


57,674,250

Average shares outstanding - diluted

58,940,179


58,958,279


58,881,043


58,672,575


58,654,099


58,930,570


58,699,952

Ending shares outstanding

58,510,916


58,513,393


58,539,458


58,267,054


58,256,136


58,510,916


58,256,136















REGULATORY CAPITAL

Preliminary










Preliminary



Tier 1 Capital

$641,828


$640,644


$637,612


$636,836


$661,838


$641,828


$661,838

Tier 1 Ratio

16.93%


17.14%


17.18%


17.47%


18.81%


16.93%


18.81%

Total Capital

$690,312


$688,401


$684,838


$683,255


$706,570


$690,312


$706,570

Total Capital Ratio

18.21%


18.42%


18.45%


18.74%


20.08%


18.21%


20.08%

Total Capital in excess of minimum 














  requirement

$387,115


$389,367


$387,954


$391,623


$425,128


$387,115


$425,128

Total Risk-Weighted Assets

$3,789,957


$3,737,920


$3,711,053


$3,645,403


$3,518,026


$3,789,957


$3,518,026

Leverage Ratio

10.54%


10.21%


9.94%


9.87%


10.87%


10.54%


10.87%















OTHER CAPITAL RATIOS














Ending shareholders' equity to ending














  assets

11.48%


11.41%


11.14%


10.68%


11.47%


11.48%


11.47%

Ending tangible shareholders' equity














  to ending tangible assets

9.99%


9.91%


9.66%


9.23%


10.38%


9.99%


10.38%

Average shareholders' equity to














  average assets

11.62%


11.32%


10.91%


11.05%


11.83%


11.28%


11.43%

Average tangible shareholders' equity














  to average tangible assets

10.12%


9.84%


9.43%


9.58%


10.70%


9.80%


10.32%

SUPPLEMENTAL INFORMATION ON COVERED ASSETS AND ACQUISITION-RELATED ITEMS

To assist in analyzing the effect of the Company's 2009 FDIC assisted transactions and 2011 branch transactions on its financial results, supplemental information that segregates the estimated impact on pre-tax earnings of certain acquisition-related items and provides additional detail on the covered loan portfolio follows.

SUMMARY OF SIGNIFICANT ACQUISITION-RELATED ITEMS
The following table illustrates the estimated income and expense effects of certain direct acquisition-related items for the three months ended September 30, 2012, June 30, 2012 and September 30, 2011.

  



Table VII










For the Three Months Ended





September 30,


June 30,


September 30,




(Dollars in thousands)

2012


2012


2011













Income effect:









Accelerated discount on covered loans1, 2

$           3,798


$   3,764


$           5,207




Acquired-non-strategic net interest income

7,931


7,117


8,645




FDIC loss sharing income 1

8,496


8,280


8,377




Service charges on deposit accounts related to









acquired-non-strategic operations

35


42


59




Other (loss) income related to transition/non-strategic operations

(67)


49


39




Total income effect

$         20,193


$ 19,252


$         22,327













Expense effect:









Provision for loan and lease losses - covered

$           6,622


$   6,047


$           7,260




Loss share and covered asset expense 3

3,559


4,317


3,755




FDIC loss share support3

951


1,014


1,382




Acquired-non-strategic operating expenses: 3

19


19


(407)




Acquisition-related costs:3

78


78


1,875




Transition-related items:3

-


-


(111)













Total expense effect

$         11,229


$ 11,475


$         13,754






















1  Included in noninterest income









2  Net of the corresponding valuation adjustment on the FDIC indemnification asset




3  Included in noninterest expense
















ACCELERATED DISCOUNT ON LOAN PREPAYMENTS AND DISPOSITIONS
During the third quarter 2012, First Financial recognized approximately $3.8 million in accelerated discount from acquired loans, net of the corresponding adjustment on the FDIC indemnification asset.  Accelerated discount is recognized when acquired loans, which are recorded on the Company's balance sheet at an amount less than the unpaid principal balance, prepay at an amount greater than their recorded book value.  Prepayments can occur through either customer driven payments before the maturity date or loan sales.  The amount of discount attributable to the credit loss component of each loan varies and the recognized amount is offset by a related reduction in the FDIC indemnification asset.  Accelerated discount recognized during the quarter resulted primarily from loan prepayments.

OPERATING EXPENSES AND OTHER ACQUISITION-RELATED COSTS
Acquired-non-strategic operating expenses, acquisition-related costs and transition-related items have declined significantly as costs associated with acquisitions, including market exit costs and professional services and other resolution expenses related to non-strategic acquired subsidiaries, have continued to wind down over the past several quarters.

NET INTEREST MARGIN IMPACT
Net interest margin is affected by certain activity related to the acquired loan portfolio.  The majority of these loans are accounted for under ASC Topic 310-30 and, as such, the Company is required to periodically update its forecast of expected cash flows from these loans.  Impairment, as a result of a decrease in expected cash flows, is recognized as provision expense in the period it is measured and has no impact on net interest margin.  Improvements in expected cash flows, in excess of any prior impairment, are recognized on a prospective basis through an upward adjustment to the yield earned on the portfolio.  Impairment and improvement are both partially offset by the impact of changes in the value of the FDIC indemnification asset.  Impairment is partially offset by an increase to the FDIC indemnification asset as a result of FDIC loss sharing income.  Improvement, which is reflected as a higher yield, is partially offset by a lower yield earned on the FDIC indemnification asset until the next periodic valuation of the loans and the indemnification asset.  The weighted average yield of the acquired loan portfolio may also be subject to change as loans with higher yields pay down more quickly or slowly than loans with lower yields.

The following table shows the estimated yield earned by the Company on its covered and uncovered loan portfolios and the FDIC indemnification asset for the three months ended September 30, 2012.

  



Table VIII


For the Three Months Ended






September 30, 2012






Average






(Dollars in thousands)


Balance


Yield












Loans, excluding covered loans 1


$ 3,037,734


4.70%












Covered loan portfolio accounted for under ASC Topic 310-302


785,446


10.70%












Covered loan portfolio accounted for under ASC Topic 310-203


81,040


11.87%












FDIC indemnification asset2


136,136


(5.01%)












Total


$ 4,040,356


5.68%




















1  Includes loans with loss share coverage removed








2  Future yield adjustments subject to change based on required, periodic valuation procedures




3  Includes loans with revolving privileges which are scoped out of ASC Topic 310-30 and certain loans which the Company elected to treat under the cost recovery method of accounting







LOSS SHARE AGREEMENTS
As of September 30, 2012, 21.2% of the Company's total loans were covered loans.  As required under the loss-share agreements, First Financial must file monthly certifications with the FDIC on single-family residential loans and quarterly certifications on all other loans.  To date, all certifications have been filed in a timely manner and without significant issues.

COVERED LOAN PORTFOLIO
The following table presents the covered loan portfolio as of September 30, 2012, June 30, 2012 and September 30, 2011.

  



Table IX


















As of







September 30, 2012


June 30, 2012


September 30, 2011









Percent




Percent




Percent






(Dollars in thousands)

Balance


of Total


Balance


of Total


Balance


of Total























Commercial

$ 121,745


14.7%


$ 142,009


15.7%


$    223,882


19.4%























Real estate - construction

12,898


1.6%


15,333


1.7%


25,893


2.2%























Real estate - commercial

512,320


62.1%


556,673


61.6%


687,392


59.7%























Real estate - residential

105,113


12.7%


111,720


12.4%


127,753


11.1%























Installment

9,892


1.2%


11,641


1.3%


14,178


1.2%























Home equity

60,502


7.3%


63,162


7.0%


67,897


5.9%























Other

3,045


0.4%


3,324


0.4%


4,071


0.4%























Total

$ 825,515


100.0%


$ 903,862


100.0%


$ 1,151,066


100.0%





















During the third quarter 2012, the total balance of covered loans decreased $78.3 million, or 8.7%, as compared to the previous quarter.

ALLOWANCE FOR LOAN AND LEASE LOSSES - COVERED
Under the applicable accounting guidance, the allowance for loan losses related to covered loans is a result of impairment identified in on-going valuation procedures and is generally recognized in the current period as provision expense.  However, if improvement is noted in a loan pool that had previously experienced impairment, the amount of improvement is recognized as a reduction to the applicable period's provision expense.  Additional improvement beyond previously recorded impairment is reflected as a yield adjustment on a prospective basis.  The timing inherent in this accounting treatment may result in earnings volatility in future periods.

The following table presents activity in the allowance for loan losses related to covered loans for the three months ended September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011.

  



Table X



























As of or for the Three Months Ended







September 30,


June 30,


March 31,


December 31,






(Dollars in thousands)

2012


2012


2012


2011



















Balance at beginning of period

$         48,327


$ 46,156


$ 42,835


$        48,112



















Provision for loan and lease losses - covered

6,622


6,047


12,951


6,910



















Total gross charge-offs

(9,058)


(5,163)


(10,118)


(13,513)



















Total recoveries

3,004


1,287


488


1,326



















Total net charge-offs

(6,054)


(3,876)


(9,630)


(12,187)



















Ending allowance for loan and lease losses - covered

$         48,895


$ 48,327


$ 46,156


$        42,835

















The Company has established an allowance for loan losses associated with covered loans based on estimated valuation procedures performed each quarter.  The allowance for covered loan losses increased $0.6 million, or 1.2%, during the third quarter.  As a percentage of total covered loans, the allowance for loan losses totaled 5.92% as of September 30, 2012 compared to 5.35% as of June 30, 2012.

Net charge-offs on covered loans during the third quarter 2012 were $6.1 million compared to $3.9 million for the second quarter 2012, an increase of $2.2 million, or 56.2%.  During the third quarter 2012, the Company recognized provision expense of $6.6 million, representing an increase of $0.6 million, or 9.5%, compared to the linked quarter.  The difference between provision expense and net charge-offs primarily relates to the quarterly re-estimation of cash flow expectations required under ASC Topic 310-30.  The net present value of expected cash flows is influenced by both the amount and timing of such cash flows.  The Company continues to refine its expectations with respect to both factors as the covered portfolio ages.

In addition to the provision expense, the Company incurred loss share and covered asset expenses of $3.6 million, consisting primarily of credit expenses related to covered assets offset by a small amount of gains related to covered OREO.  The receivable due from the FDIC under loss share agreements of $8.5 million related to total credit costs incurred was recognized as FDIC loss share income and a corresponding increase to the FDIC indemnification asset.

SOURCE First Financial Bancorp

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