First Financial Bancorp Reports Third Quarter 2011 Financial Results and Continuation of Variable Dividend

Oct 26, 2011, 17:18 ET from First Financial Bancorp

CINCINNATI, Oct. 26, 2011 /PRNewswire/ -- First Financial Bancorp (Nasdaq: FFBC) ("First Financial" or the "Company") announced today financial and operational results for the third quarter 2011 and for the nine month period ended September 30, 2011.

Third quarter 2011 net income was $15.6 million and earnings per diluted common share were $0.27.  This compares with second quarter 2011 net income of $16.0 million and earnings per diluted common share of $0.27 and third quarter 2010 net income of $15.6 million and earnings per diluted common share of $0.27.

The board of directors has also authorized a regular dividend of $0.12 per common share and a variable dividend of $0.15 per common share for the next regularly scheduled dividend.  This is a continuation of the 100% dividend payout ratio first announced in the second quarter 2011 and is expected to continue until capital ratios migrate closer to the Company's previously stated thresholds or capital utilization rates exceed capital generation rates.

During the quarter, the Company incurred pre-tax expenses that are not expected to recur of $3.4 million, or $0.04 per diluted share after taxes.  Approximately $1.8 million, or $0.02 per fully diluted share after taxes, was related to its acquisition of retail banking centers from Liberty Savings Bank ("Liberty") and approximately $1.6 million, or $0.02 per fully diluted share after taxes, was related to staffing and employee benefit costs associated with exit and transition activities.  Excluding these items, net income was $17.7 million and earnings per diluted common share were $0.31.

For the nine month period ended September 30, 2011, net income and net income available to common shareholders were $48.8 million and earnings per diluted common share were $0.83 as compared to net income of $45.0 million, net income available to common shareholders of $43.1 million and earnings per diluted common share of $0.75 for the nine month period ended September 30, 2010.

  • 84th consecutive quarter of profitability
  • Adjusted pre-tax, pre-provision income continued to grow, increasing $2.2 million, or 7.0%, compared to the second quarter 2011
  • Continued strong quarterly performance
    • Return on average assets of 1.01%
    • Return on risk-weighted assets of 1.76%
    • Return on average shareholders' equity of 8.54%
  • Liberty branch acquisition closed and fully integrated on September 23, 2011
    • Assumed total deposits of $341.9 million and acquired total in-market performing loans of $126.5 million at closing
    • Recognized goodwill of $17.1 million and core deposit intangible of $4.0 million
  • Announced an agreement to acquire 22 Indiana-based branch locations from Flagstar Bank
    • Transaction is expected to include approximately $300 million of retail deposits and approximately $200 million of public deposits and is awaiting regulatory approval
    • Significantly accelerates presence and growth strategy in the key market of Indianapolis
  • Capital ratios remain high after closing of Liberty branch acquisition and initiation of variable dividend
    • Tangible common equity to tangible assets of 10.38%
    • Tier 1 capital ratio of 18.81%
    • Total risk-based capital of 20.08%
  • Quarterly net interest margin remained strong at 4.55%
    • Yield on covered loans continues to enhance net interest margin
    • Cost of deposits declined 8 bps resulting from strategic initiatives implemented during the quarter
  • Nonperforming and classified assets continued to improve
    • Total nonperforming assets declined $9.4 million, or 9.6%, compared to the third quarter 2010
    • Nonperforming assets to total assets declined to 1.40% as compared to 1.50% as of June 30, 2011 and 1.59% as of September 30, 2010
    • Total classified assets declined $12.2 million, or 6.6%, compared to the linked quarter and $40.0 million, or 18.8%, compared to September 30, 2010
  • Excluding loans acquired from Liberty, the legacy and originated loan portfolio increased 3.2% on an annualized basis compared to the linked quarter and 1.7% compared to the third quarter 2010
  • Balance sheet risk continues to remain low
    • FDIC loss share coverage on 28.2% of loan portfolio
    • 100% risk-weighted assets continue to represent less than 50% of balance sheet

Claude Davis, President and Chief Executive Officer, commented, "We are pleased to report another strong quarter of operating performance.  Excluding the impact of costs associated with the Liberty transaction and other non-recurring staffing and employee benefit expenses, totaling $3.4 million in the aggregate, we achieved an adjusted return on average assets of 1.15%.  Furthermore, we paid the first variable dividend to our shareholders during the quarter, representing a 100% dividend payout ratio based on our second quarter reported earnings per diluted share and placing First Financial's shares among the highest dividend yielding investments in the banking industry.

"From an acquisition and integration perspective, it was an eventful quarter as we closed the Liberty branch transaction, successfully completing the conversion of the acquired retail and commercial relationships to the First Financial platform.  We can now focus on capitalizing on the growth potential the Dayton market provides as well as exploring opportunities to deepen the relationships we have with our new clients.  We also announced the acquisition of 22 Indiana-based branch locations from Flagstar Bank, 18 of which are located in the Indianapolis area and will substantially boost our presence and brand recognition in this key metropolitan market.  Now that the Liberty transaction is complete, our integration team is focused on the Flagstar transaction and, as we have previously reported, we expect it to close during the fourth quarter subject to appropriate regulatory approvals.

"Like many of our peers in the banking industry, we are actively analyzing a wide range of strategic alternatives intended to maintain and grow our net interest margin in the midst of an uncertain operating environment.  During the quarter, one primary area we focused on was our deposit base, implementing a deposit rationalization strategy designed to enhance our net interest margin while still maintaining a sound liquidity base.  We critically reviewed deposit pricing, customer profitability and the effect of non-core relationships on our cost of funds, including a review of single service time deposit customers.  We began to realize the benefits of our efforts as our total cost of deposit funding for the quarter dropped to 76 basis points, a decline of over 9% from the prior quarter.

"As in prior quarters, loan growth remains challenging as economic recovery in our operating markets continues to move at a slow pace.  Our originated portfolio increased significantly during the quarter, due in large measure to the performing loans we acquired as part of the Liberty transaction.  However, our sales efforts have also produced results as we experienced solid growth in our originated portfolio excluding the impact of the Liberty transaction, driven by our commercial portfolio where we saw an annualized increase of 8.8%.  Total fundings during the quarter in our commercial and commercial real estate portfolios increased significantly year-over-year and, in particular, the volume of new originations was strong, demonstrating our ability to capitalize on the limited amount of new high quality business opportunities in our markets.  Furthermore, our pipeline of outstanding proposals and commitments at the end of the quarter was 14% higher than it was at the end of the second quarter."

SECTION I – RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income on a fully tax-equivalent basis for the third quarter 2011 was $65.5 million as compared to $66.1 million for the second quarter 2011 and $68.1 million as compared to the year-over-year period.  Compared to the linked quarter, total interest income decreased $1.9 million, or 2.4% during the third quarter 2011 due to lower interest income earned on loans, driven primarily by a 7.6% decrease in the balance of average covered loans outstanding, and the reduced yield on the FDIC indemnification asset as a result of better than expected credit performance in the covered loan portfolio.  However, this decline was partially offset by an increase in interest earned on investments.  Total interest expense declined $1.2 million, or 10.2%, due primarily to lower interest expense on deposits and on the $20 million of trust preferred securities redeemed late in the second quarter 2011.

The decrease compared to the year-over-year quarter was primarily driven by the 27.4% decline in average covered loan balances and the reduced yield on the FDIC indemnification asset, offset partially by higher interest income from investments, lower interest expense on deposits and lower funding costs related to wholesale borrowings resulting from the prepayment of $232 million of FHLB advances that occurred during the third quarter 2010.

For the nine month period ended September 30, 2011, net interest income on a fully tax-equivalent basis was $199.1 million as compared to $208.3 million for the comparable period in 2010.  Similar to the quarterly year-over-year items noted above, the decrease was driven by the decline in average covered loan balances and the reduced yield on the FDIC indemnification asset, offset partially by higher interest income from investments and lower funding costs.

NET INTEREST MARGIN

Net interest margin was 4.55% for the third quarter 2011 as compared to 4.61% for the second quarter 2011 and 4.59% for the third quarter 2010.  Net interest margin continued to be negatively impacted by the combination of normal amortization and paydowns in the originated and covered loan portfolios.  However, yields remained strong on covered loans, helping to offset the decline in the balance outstanding.  Average cash balances remained elevated as market volatility during the quarter limited new investment opportunities, placing additional pressure on net interest margin.  The Company used some liquidity to purchase $38.6 million of investment securities as well as realized a full quarter's impact from investment purchases that settled late in the second quarter 2011, though at rates which are low on a historical basis.  During the quarter, the Company implemented several strategic initiatives related to deposits, realized a full quarter's benefit from the redemption of $20 million of trust preferred securities that occurred late in the second quarter and used liquidity to fund the redemption of wholesale borrowings and maturing time deposits, offsetting the margin decline from lower total loan balances.

Net interest margin for the nine month period ended September 30, 2011 decreased slightly to 4.63% as compared to 4.67% for the nine month period ended September 30, 2010.

NONINTEREST INCOME

The following table presents noninterest income for the three months ended September 30, 2011, June 30, 2011 and September 30, 2010 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)

2011

2011

2010

Total noninterest income

$         28,115

$ 41,118

$         44,895

Certain significant components of noninterest income

Items likely to recur:

Accelerated discount on covered loans (1, 2)

5,207

4,756

9,448

FDIC loss sharing income

8,377

21,643

17,800

Other acquired-non-strategic items

98

(485)

44

Items expected not to recur:

Gain on sale of insurance business

-

-

1,356

Other items not expected to recur

288

(152)

(132)

Total excluding items noted above

$         14,145

$ 15,356

$         16,379

(1) See Section II for additional information

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

During the quarterly periods presented above, excluding reimbursements due from the FDIC resulting from loss share agreements, covered loan activity continued to positively impact noninterest income due to loan sales and prepayments.  This activity is discussed in more detail in Section II.

Excluding the items highlighted in Table I, estimated noninterest income earned in the third quarter 2011 was $14.1 million as compared to $15.4 million in the second quarter 2011 and $16.4 million in the third quarter 2010.  The decrease compared to the linked quarter was primarily due to lower client derivative fees.  While this activity continued to generate revenue during the third quarter due to continued low interest rates, second quarter volume was exceptionally high as many clients looked to lock-in fixed rates on their borrowings.  The level of client derivative fees may experience volatility from quarter to quarter.  Partially offsetting this decline was higher gain on sale of residential mortgages.  The decrease compared to third quarter 2010 resulted from lower service charges on deposits and lower gains on sale of residential mortgages and loans originated by the Company's franchise finance unit.

On a comparable basis, estimated noninterest income for the nine months ended September 30, 2011 was $44.4 million as compared to $43.7 million for the nine months ended September 30, 2010.

NONINTEREST EXPENSE

The following table presents noninterest expense for the three months ended September 30, 2011, June 30, 2011 and September 30, 2010 including the estimated effect of 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)

2011

2011

2010

Total noninterest expense

$         53,142

$ 52,497

$         61,310

Certain significant components of noninterest expense

Items likely to recur:

Acquired-non-strategic operating expenses (1)

(407)

2,673

566

Transition-related items (1)

(111)

161

846

FDIC loss share support

1,382

1,369

875

Loss share and covered asset expense

3,755

3,376

-

Items expected not to recur:

Acquisition-related costs (1)

1,875

76

1,505

FHLB prepayment penalty

-

-

8,029

Other items not expected to recur

1,874

1,140

493

Total excluding items noted above

$         44,774

$ 43,702

$         48,996

(1) See Section II for additional information

Noninterest expense continued to be affected by items related to the Company's acquired-non-strategic operations, as discussed in more detail in Section II.

Excluding the items highlighted in Table II, estimated noninterest expense in the third quarter 2011 was $44.8 million as compared to $43.7 in the second quarter 2011 and $49.0 million in the third quarter 2010. The increase of $1.1 million compared to the linked quarter was due to higher salaries and employee benefits expense resulting from a seasonal adjustment related to incentive compensation plans.  The decrease of $4.2 million compared to the third quarter 2010 was driven by lower salaries and employee benefits, occupancy costs and FDIC assessments. Loss share and covered asset expense includes $2.7 million of losses on covered OREO and $1.0 million of other credit-related expenses.  Included in acquisition-related costs are $1.8 million of expenses related to the Liberty acquisition and included in other items not expected to recur are $1.6 million of staffing and employee benefit costs associated with exit and transition activities.  

On a similar basis, estimated noninterest expense for the nine months ended September 30, 2011 was $134.1 million as compared to $144.3 million for the nine months ended September 30, 2010.  The decrease of $10.1 million, or 7.0%, was primarily attributable to lower salaries and benefits, occupancy costs and FDIC assessments, offset by an increase in professional services expenses.

Certain wind-down costs related to subsidiaries acquired in 2009 are expected to continue through 2011 and part of 2012.

INCOME TAXES

For the third quarter 2011, income tax expense was $9.7 million, resulting in an effective tax rate of 38.2%, compared with income tax expense of $8.9 million and an effective tax rate of 35.7% during the second quarter 2011 and $8.8 million and an effective tax rate of 36.2% during the comparable year-over-year period.  The increase in the effective tax rate during the third quarter 2011 was primarily driven by the completion of the 2010 federal and state tax returns and adjustments of this nature are typical for this calendar quarter.

For the nine month period ended September 30, 2011, income tax expense was $27.9 million, resulting in an effective tax rate of 36.3%, compared with income tax expense of $24.6 million and an effective tax rate of 35.4% during the nine months ended September 30, 2010.

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, 2011 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)

2011

2011

2011

2010

2010

Total nonaccrual loans

$         59,150

$ 56,536

$ 62,048

$        62,302

$         66,157

Restructured loans

17,283

17,482

18,532

17,613

13,365

Total nonperforming loans

76,433

74,018

80,580

79,915

79,522

Total nonperforming assets

88,436

90,331

95,533

97,822

97,827

Nonperforming assets as a % of:

Period-end loans plus OREO

3.00%

3.22%

3.42%

3.45%

3.51%

Total assets

1.40%

1.50%

1.51%

1.57%

1.59%

Nonperforming loans as a % of total loans

2.60%

2.65%

2.90%

2.84%

2.88%

Provision for loan and lease losses - uncovered

$           7,643

$   5,756

$      647

$          9,741

$           6,287

Allowance for uncovered loan & lease losses

$         54,537

$ 53,671

$ 53,645

$        57,235

$         57,249

Allowance for loan & lease losses as a % of:

Period-end loans

1.86%

1.92%

1.93%

2.03%

2.07%

Nonaccrual loans

92.2%

94.9%

86.5%

91.9%

86.5%

Nonperforming loans

71.4%

72.5%

66.6%

71.6%

72.0%

Total net charge-offs

$           6,777

$   5,730

$   4,237

$          9,755

$           6,849

Annualized net-charge-offs as a % of average

loans & leases

0.96%

0.83%

0.61%

1.39%

0.97%

Net Charge-offs

Third quarter 2011 net charge-offs were $6.8 million, or 0.96% of average loans and leases, compared with $5.7 million, or 0.83%, for the linked quarter and $6.8 million, or 0.97%, for the comparable year-over-year quarter.  Significant items driving net charge-offs for the quarter included $1.6 million related to three separate residential development credits, $1.5 million related to a multifamily real estate loan and approximately $500,000 related to a recreational facility credit.

For the nine months ended September 30, 2011, net charge-offs were $16.7 million, or 0.80% of average loans and leases, as compared to $25.9 million, or 1.23%, for the nine months ended September 30, 2010.

Nonperforming Assets

Nonperforming loans totaled $76.4 million and nonperforming assets totaled $88.4 million as of September 30, 2011 compared with $74.0 million and $90.3 million, respectively, for the linked quarter and $79.5 million and $97.8 million, respectively, for the comparable year-over-year quarter. The decrease in nonperforming assets was driven by the charge-off activity discussed above as well as a reduction in OREO, partially offset by an increase in nonaccrual loans related primarily to the commercial, commercial real estate and residential real estate portfolios

OREO decreased $4.3 million, or 26.4%, during the third quarter driven primarily by the resolution and sale of one commercial real estate property having a book value of $3.4 million.

Classified assets as of September 30, 2011 totaled $172.6 million as compared to $184.8 million for the linked quarter, representing a decline of 6.6%.  Classified assets, which have declined for five consecutive quarters, are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse.  

Delinquent Loans

Loans 30-to-89 days past due totaled $19.5 million, or 0.66% of period end loans, as of September 30, 2011.  This compares to $26.8 million, or 0.96%, as of June 30, 2011 and $45.1 million, or 1.63%, as of September 30, 2010.  The decrease of $7.3 million, or 27.3%, compared to the linked quarter resulted from reduced delinquencies in the commercial and commercial real estate portfolios, partially offset by an increase in residential real estate delinquencies.

Provision for Loan & Lease Losses

Third quarter 2011 provision expense related to uncovered loans and leases was $7.6 million as compared to $5.8 million during the linked quarter and $6.3 million during the comparable year-over-year quarter.  As a percentage of net charge-offs, third quarter 2011 provision expense equaled 112.8%.

Allowance for Loan and Lease Losses

As of September 30, 2011, the allowance for uncovered loan and lease losses was $54.5 million as compared to $53.7 million as of June 30, 2011 and $57.2 million as of September 30, 2010.  As a percentage of period-end loans, the allowance for loan and lease losses was 1.86% as of September 30, 2011 as compared to 1.92% as of June 30, 2011 and 2.07% as of September 30, 2010.  The allowance for loan and lease losses as of September 30, 2011 reflects management's estimate of credit risk inherent in the Company's uncovered loan portfolio at that time.

LOANS (EXCLUDING COVERED LOANS)

The following table presents the loan portfolio, not including covered loans, as of September 30, 2011, June 30, 2011 and September 30, 2010.

Table IV

As of

September 30, 2011

June 30, 2011

September 30, 2010

Percent

Percent

Percent

(Dollars in thousands)

Balance

of Total

Balance

of Total

Balance

of Total

Commercial

$    822,552

28.0%

$    798,552

28.6%

$    763,449

27.6%

Real estate - construction

136,651

4.7%

142,682

5.1%

178,914

6.5%

Real estate - commercial

1,202,035

40.9%

1,144,368

41.0%

1,095,543

39.6%

Real estate - residential

300,165

10.2%

256,788

9.2%

283,914

10.3%

Installment

70,034

2.4%

63,799

2.3%

73,138

2.6%

Home equity

362,919

12.4%

344,457

12.3%

341,288

12.3%

Credit card

30,435

1.0%

28,618

1.0%

28,825

1.0%

Lease financing

12,870

0.4%

9,890

0.4%

138

0.0%

Total

$ 2,937,661

100.0%

$ 2,789,154

100.0%

$ 2,765,209

100.0%

Loans, excluding covered loans, totaled $2.9 billion at the end of the third quarter 2011, representing a $148.5 million increase compared to the second quarter 2011.  Excluding $125.8 million of loans acquired in connection with the Liberty branch transaction, loans totaled approximately $2.8 billion as of September 30, 2011, representing an increase of $22.7 million, or 3.2% on an annualized basis, compared to the linked quarter and $46.6 million, or 1.7%, compared to September 30, 2010.

During the third quarter 2011, the Company sold approximately $13.8 million of loans originated by its franchise finance unit at a premium, recognizing a gain of approximately $700,000.  As a liquid secondary market exists for these types of credits, the sale was conducted to lessen credit and geographic concentration risk within the franchise portfolio.

INVESTMENTS

The following table presents a summary of the total investment portfolio at September 30, 2011.

Table V

As of September 30, 2011

Book

Percent of

Book

Cost

Market

Gain/

(Dollars in thousands)

Value

Total

Yield

Basis

Value

(Loss)

Agencies

$        5,112

0.4%

5.49

100.00

101.69

$        85

CMOs (agency)

660,240

55.3%

1.94

101.23

102.90

10,706

CMOs (private)

34

0.0%

0.95

100.00

100.38

-

MBSs (agency)

433,005

36.3%

3.34

102.27

106.33

16,533

1,098,391

92.0%

2.51

101.64

104.22

27,324

Municipal

14,266

1.2%

7.22

99.54

102.03

354

Other (1)

81,738

6.8%

3.44

102.85

102.96

82

96,004

8.0%

4.00

102.36

102.81

436

Total investment portfolio

$ 1,194,395

100.0%

2.63

101.69

104.11

$ 27,760

Net Unrealized Gain/(Loss) 

$ 27,760

Aggregate Gains 

28,278

Aggregate Losses 

(518)

Net Unrealized Gain/(Loss) % of Book Value

2.32%

(1) Other includes $71.5 million of regulatory stock

The investment portfolio decreased modestly during the third quarter 2011 compared to the linked quarter as purchases of $38.6 million of agency mortgage backed securities were more than offset by maturities and amortizations.  During the quarter, additional liquidity, excluding the impact of the Liberty transaction, was lower than in previous quarters primarily due to a decrease in net deposit inflows.  Liquidity not utilized to purchase investments was used to fund the redemption of wholesale borrowings and maturing time deposits or was retained in cash.

The Company received $190.7 million of cash upon closing of the Liberty transaction which had not yet been deployed as of September 30, 2011.  Subsequent to the end of the third quarter, the Company began investing these proceeds and has purchased $49.3 million of longer duration agency mortgage backed securities.  The addition of longer duration securities was executed in conjunction with the Company's overall asset/liability structure and interest rate risk modeling activities, and, to a lesser extent, market and rate expectations.  As in past quarters, First Financial has avoided adding to its portfolio any particular securities that would materially increase credit risk or geographic concentration risk.  The Company does, however, include these risks in its total evaluation of current market opportunities that would enhance the overall performance of the portfolio.

DEPOSITS

The following table presents a roll-forward of deposit activity during the third quarter 2011.

Table VI

Deposit Activity - Third Quarter 2011

Balance as of

Acquired-

Balance as of

June 30,

Strategic

Non-Strategic

September 30,

(Dollars in thousands)

2011

Portfolio

Portfolio

2011

Transaction and savings accounts

$ 3,392,807

$ 255,114

$     (6,852)

$ 3,641,069

Time deposits

1,526,731

80,013

(2,522)

1,604,222

Brokered deposits

54,872

(578)

(485)

53,809

Total deposits

$ 4,974,410

$ 334,549

$     (9,859)

$ 5,299,100

The increase in strategic transaction and savings accounts during the third quarter 2011 was driven primarily by deposits assumed in connection with the Liberty branch acquisition, accounting for $188.4 million of the quarterly increase.  Additionally, the increase in strategic time deposits was due to balances assumed from Liberty, totaling $150.8 million at quarter end, offset by a net decrease of $70.8 million in legacy First Financial balances.

Average strategic transaction and savings accounts increased $67.9 million, or 2.0%, during the third quarter 2011 while average strategic time deposits declined $57.6 million, or 3.8%, compared to the linked quarter.  The Company focused on several strategic initiatives related to deposits that impacted the activity during the quarter.  Specifically, the Company actively managed its pricing strategy on all deposit products and initiated a deposit rationalization strategy focused on improving core relationship profitability and reducing non-core relationship deposits.

CAPITAL MANAGEMENT

The following table presents First Financial's regulatory and other capital ratios as of September 30, 2011, June 30, 2011 and September 30, 2010.

Table VII

As of

September 30,

June 30,

September 30,

"Well-Capitalized"

2011

2011

2010

Minimum

Leverage Ratio

10.87%

11.01%

10.50%

5.00%

Tier 1 Capital Ratio

18.81%

20.14%

18.64%

6.00%

Total Risk-Based Capital Ratio

20.08%

21.42%

19.91%

10.00%

Ending tangible shareholders' equity

to ending tangible assets

10.38%

11.11%

10.38%

N/A

Ending tangible common shareholders'

equity to ending tangible assets

10.38%

11.11%

10.38%

N/A

Regulatory capital ratios and tangible common equity decreased during the third quarter 2011 primarily as a result of the goodwill and core deposit intangible asset recognized in connection with the Liberty transaction, which totaled $17.1 million and $4.0 million, respectively.  Further impacting regulatory capital ratios was the increase in risk-weighted assets as a result of the loans acquired in the Liberty transaction.  The variable dividend / 100% payout ratio initiated during the quarter resulted in no contribution to tangible shareholders' equity from second quarter 2011 earnings.  As of September 30, 2011, tangible book value per common share was $11.15 compared to $11.42 as of June 30, 2011 and $10.90 as of September 30, 2010.  Regulatory capital ratios as of September 30, 2011 are considered preliminary pending the filing of the Company's regulatory reports.

SECTION II – SUPPLEMENTAL INFORMATION ON COVERED ASSETS AND ACQUISITION-RELATED ITEMS

To assist in analyzing the effect of the Company's 2009 FDIC assisted transactions and the Liberty branch transaction on the 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 effect of certain acquisition-related items on the results of operations for the three months ended September 30, 2011, June 30, 2011 and September 30, 2010.

Table VIII

For the Three Months Ended

September 30,

June 30,

September 30,

(Dollars in thousands)

2011

2011

2010

Income effect:

Accelerated discount on covered loans (1, 2)

$           5,207

$ 4,756

$           9,448

Acquired-non-strategic net interest income

8,645

8,821

10,586

FDIC loss sharing income (1)

8,377

21,643

17,800

Service charges on deposit accounts related to

acquired-non-strategic operations

59

108

168

Other (loss) income related to acquired-non-strategic operations

39

(593)

(124)

Income related to the accelerated discount on covered

loans and acquired-non-strategic operations

22,327

34,735

37,878

Expense effect:

Provision for loan and lease losses - covered

7,260

23,895

20,725

Acquired-non-strategic operating expenses: (3)

Salaries and employee benefits

-

499

13

Occupancy

(367)

64

91

Other

(40)

2,110

462

Total acquired-non-strategic operating expenses

(407)

2,673

566

FDIC loss share support (3)

1,382

1,369

875

Loss share and covered asset expense (3)

3,755

3,376

-

Acquisition-related costs: (3)

Integration-related costs

488

76

(102)

Professional services fees

127

-

1,174

Other

1,260

-

433

Total acquisition-related costs

1,875

76

1,505

Transition-related items: (3)

Salaries and benefits

14

81

796

Occupancy

-

-

50

Other

(125)

80

-

Total transition-related items

(111)

161

846

Total expense effect

13,754

31,550

24,517

Total estimated effect on pre-tax earnings

$           8,573

$ 3,185

$         13,361

(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 2011, First Financial recognized approximately $5.2 million in accelerated discount from acquired loans.  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 either through 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 declined significantly as costs associated with the exited markets of Michigan and Louisville, KY are substantially complete as well as due to lower professional services and other resolution expenses related to non-strategic acquired subsidiaries.  Acquisition-related costs increased during the quarter due primarily to the previously mentioned $1.8 million of costs incurred related to the Liberty branch acquisition.  Expenses related to transition-related items and other acquisition-related costs, excluding the impact of the Liberty acquisition, continued to decline as planned.

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 and has no impact on net interest margin.  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 legacy and originated loan portfolio, acquired loan portfolio and the FDIC indemnification asset for the three months ended September 30, 2011.

Table IX

For the Three Months Ended

September 30, 2011

Average

Balance

Yield

Legacy and originated loan portfolio

$ 2,800,466

5.07%

Covered loan portfolio accounted for under ASC Topic 310-30 1

1,096,329

11.14%

Covered loan portfolio accounted for under FAS 91 2

99,998

13.92%

FDIC indemnification asset 1

183,801

-4.16%

Total

$ 4,180,594

6.47%

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

2 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.

As part of its on-going valuation procedures, the Company experienced a $2.0 million net improvement in the cash flow expectations related to certain loan pools during the third quarter 2011.  During the quarter, the average yield earned on covered loans was 11.14%.  On a prospective basis and until its next periodic valuation, the Company expects the yield on covered loans to be 11.49%.

This projected improvement in cash flow expectations on loans is partially offset by a related decline in cash flow expectations on the FDIC indemnification asset which is recognized through its yield.  The average yield earned on the indemnification asset during the third quarter 2011 was -4.16%.  On a prospective basis and until its next periodic valuation, the Company expects the yield on the indemnification asset to be -4.62%.

COVERED ASSETS & LOSS SHARE AGREEMENTS

As of September 30, 2011, 28.2% of the Company's total loans were covered loans.  As required under the loss-share arrangements, 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.

When losses are incurred on covered assets that exceed expectations, the Company recognizes the gross credit losses in excess of the valuation mark as either provision expense if related to loans or noninterest expense if related to OREO.  Reimbursements expected from the FDIC under loss share agreements related to these credit losses are recorded as noninterest income.  As such, the net impact on earnings is the difference between the gross credit losses and FDIC reimbursements, representing the Company's proportionate share of the credit losses realized on covered assets.

COVERED LOAN PORTFOLIO

The following table presents estimated activity in the covered loan portfolio by loan type during the third quarter 2011.

Table X

Covered Loan Activity - Third Quarter 2011

Reduction in Recorded Investment Due to:

June 30,

Contractual

Net

Loans With

September 30,

(Dollars in thousands)

2011

Sales

Prepayments

Activity (1)

Charge-Offs (2)

Coverage Removed

2011

Commercial

$       251,753

$ 3,721

$        17,380

$      5,232

$          1,298

$                      240

$    223,882

Real estate - construction

40,811

-

5,237

8,913

768

-

25,893

Real estate - commercial

726,885

-

27,348

3,587

6,832

1,726

687,392

Real estate - residential

134,131

-

3,483

2,193

702

-

127,753

Installment

15,197

-

713

215

91

-

14,178

Home equity

68,664

-

1,771

(1,505)

501

-

67,897

Other covered loans

5,289

-

-

1,218

-

-

4,071

Total covered loans

$    1,242,730

$ 3,721

$        55,932

$    19,853

$        10,192

$                   1,966

$ 1,151,066

(1) Includes partial paydowns, accretion of the valuation discount and advances on revolving loans

(2) Indemnified at 80% from the FDIC

During the third quarter 2011, the total balance of covered loans decreased $91.7 million, or 7.4%, as compared to the previous quarter.  Loans with coverage removed represent loans to primarily high quality borrowers involving a change in loan terms which caused the respective loans to no longer qualify for reimbursement from the FDIC in the event of credit losses.

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, June 30 and March 31, 2011 as well as for the nine month period ended September 30, 2011.

Table XI

As of or for the

As of or for the Three Months Ended

Nine Months Ended

September 30,

June 30,

March 31,

September 30,

(Dollars in thousands)

2011

2011

2011

2011

Balance at beginning of period

$         51,044

$ 31,555

$ 16,493

$                16,493

Provision for loan and lease losses - covered

7,260

23,895

26,016

57,171

Total gross charge-offs

(10,609)

(7,456)

(14,026)

(32,091)

Total recoveries

417

3,050

3,072

6,539

Total net charge-offs

(10,192)

(4,406)

(10,954)

(25,552)

Ending allowance for loan and lease losses - covered

$         48,112

$ 51,044

$ 31,555

$                48,112

The Company has established an allowance for loan losses associated with covered loans based on estimated valuation procedures performed each quarter.  During the third quarter 2011, the Company recognized a provision expense of $7.3 million, representing a decline of $16.6 million, or 69.6%, compared to the linked quarter.  The significant decrease reflects a stabilizing credit outlook related to loan pools with previously recognized impairment.  The allowance for loan losses related to covered loans declined $2.9 million, or 5.7%, compared to the second quarter 2011, also reflecting the stabilized credit outlook in conjunction with the decline in the covered loan portfolio.  As a percentage of total covered loans, the allowance for loan losses totaled 4.18% as of September 30, 2011 compared to 4.11% as of June 30, 2011.

In addition to the provision expense, the Company incurred loss share and covered asset expenses of $3.8 million, including $2.7 million of losses related to covered OREO and $1.0 million of other credit expenses related to covered assets.  The receivable due from the FDIC under loss share agreements of $8.4 million related to total credit costs incurred was recognized as FDIC loss share income and a corresponding increase to the FDIC indemnification asset.

SUMMARY OF ACQUISITIONS

During the third quarter 2009, through FDIC-assisted transactions, First Financial assumed the banking operations of Peoples Community Bank ("Peoples"), Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. (collectively, "Irwin").  In connection with the FDIC-assisted transactions, the Company has loss sharing arrangements with the FDIC.  Under the terms of these agreements, the FDIC will reimburse the Company for losses with respect to certain loans ("covered loans") and other real estate owned ("OREO") (collectively, "covered assets").

During the third quarter 2011, the Company completed its acquisition of the Ohio-based retail banking branches of Liberty Savings Bank, FSB.  This transaction included 16 branch locations, 12 of which are located in the Dayton, OH area and significantly enhanced the Company's presence in this key strategic market.  At closing, First Financial assumed $341.9 million of deposits and acquired $126.5 million of in-market performing loans.  All elements of the business acquired as part of this transaction are considered by the Company to be acquired-strategic (see definition below).

As a result of the acquisitions, the Company's business and operating markets expanded significantly.  To assist readers in understanding the financial and strategic impact of the acquisitions, the combined operations of First Financial's legacy and acquired businesses will be discussed in three categories: "Legacy-Strategic", "Acquired-Strategic" and "Acquired-Non-Strategic".  Definitions of the business categories and other financial items related to the acquisitions can be found below in "Glossary of Terms".  Available on the Company's website at www.bankatfirst.com is a presentation providing supplemental information regarding its quarterly results.

Glossary of Terms

To assist readers in understanding the Company's financial results and the effect of the acquisitions on reported amounts, the following terms are used throughout this release to refer to specific acquisition-related items.  The first three define the business components referred to above and the remaining items define specific covered loan terminology.

Legacy-strategic – Elements of the business that existed prior to the acquisitions and will continue to be supported.

Acquired-strategic – Elements of the business that the Company intends to retain and will continue to support and build.  Legacy-strategic and acquired-strategic are collectively referred to as "strategic."

Acquired-non-strategic – Elements of the business that the Company intends to exit but will continue to support to obtain maximum economic value.  No growth or replacement is expected.

Accelerated discount on covered loans – The acceleration of the unrealized valuation discount.  This item will be ongoing but diminishing as covered loan balances decline over time.

UPB – Unpaid principal balance

Carrying value – The unpaid principal balance of a covered loan less any valuation discount.

Unless otherwise noted, all amounts discussed in this earnings release are pre-tax except net income and per-share data which are presented after-tax. Percentage changes are not annualized unless specifically noted. In some instances, financial data may not add up due to rounding.

Teleconference / Webcast Information

First Financial's senior management will host a conference call to discuss the Company's financial and operating results on Thursday, October 27, 2011 at 9:00 a.m. Eastern Time.  Members of the public who would like to listen to the conference call should dial (866) 524-3160 (U.S. toll free), (866) 605-3852 (Canada toll free) or +1 (412) 317-6760 (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 11, 2011 at (877) 344-7529 (U.S. toll free) and +1 (412) 317-0088 (International); conference number 10006004.  The webcast will be archived on the Investor Relations section of the Company's website through October 27, 2012.

Press Release and Additional Information on Website

This press release as well as supplemental information 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 Statements

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;
  • the effects of the potential delay or failure of the U.S. federal government to pay its debts as they become due or make payments in the ordinary course;
  • 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, such as the U.S. Treasury's TARP and the FDIC's Temporary Liquidity Guarantee Program, 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);
  • inflation and possible changes in interest rates;
  • our ability to keep up with technological changes;
  • 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;
  • 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 and debt 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 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, 2010, 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, 2011, the Company had $6.3 billion in assets, $4.1 billion in loans, $5.3 billion in deposits and $727 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 $2.2 billion in assets under management as of September 30, 2011.  The Company's strategic operating markets are located in Ohio, Indiana and Kentucky where it operates 116 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,

2011

2011

2011

2010

2010

2011

2010

RESULTS OF OPERATIONS

Net income

$15,618

$15,973

$17,207

$14,300

$15,579

$48,798

$44,951

Net income available to common shareholders

$15,618

$15,973

$17,207

$14,300

$15,579

$48,798

$43,086

Net earnings per common share - basic

$0.27

$0.28

$0.30

$0.25

$0.27

$0.85

$0.76

Net earnings per common share - diluted

$0.27

$0.27

$0.29

$0.24

$0.27

$0.83

$0.75

Dividends declared per common share

$0.27

$0.12

$0.12

$0.10

$0.10

$0.51

$0.30

KEY FINANCIAL RATIOS

Return on average assets

1.01%

1.03%

1.11%

0.90%

0.96%

1.05%

0.92%

Return on average shareholders' equity

8.54%

9.05%

10.04%

8.14%

9.03%

9.19%

8.86%

Return on average common shareholders' equity

8.54%

9.05%

10.04%

8.14%

9.03%

9.19%

8.69%

Return on average tangible common shareholders' equity

9.56%

9.84%

10.94%

8.87%

9.87%

10.32%

9.53%

Net interest margin

4.55%

4.61%

4.73%

4.65%

4.59%

4.63%

4.67%

Net interest margin (fully tax equivalent) (1)

4.57%

4.62%

4.75%

4.67%

4.60%

4.65%

4.68%

Ending equity as a percent of ending assets

11.47%

11.95%

11.21%

11.16%

11.23%

11.47%

11.23%

Ending tangible common equity as a percent of:

Ending tangible assets

10.38%

11.11%

10.40%

10.33%

10.38%

10.38%

10.38%

Risk-weighted assets

18.47%

19.65%

19.28%

17.36%

17.61%

18.47%

17.61%

Average equity as a percent of average assets

11.83%

11.38%

11.09%

11.12%

10.68%

11.43%

10.34%

Average common equity as a percent of average assets

11.83%

11.38%

11.09%

11.12%

10.68%

11.43%

10.10%

Average tangible common equity as a percent of

   average tangible assets

10.70%

10.56%

10.28%

10.29%

9.86%

10.32%

9.30%

Book value per common share

$12.48

$12.39

$12.15

$12.01

$11.90

$12.48

$11.90

Tangible book value per common share

$11.15

$11.42

$11.17

$11.02

$10.90

$11.15

$10.90

Tier 1 Ratio (2)

18.81%

20.14%

20.49%

18.45%

18.64%

18.81%

18.64%

Total Capital Ratio (2)

20.08%

21.42%

21.76%

19.72%

19.91%

20.08%

19.91%

Leverage Ratio (2)

10.87%

11.01%

11.09%

10.89%

10.50%

10.87%

10.50%

AVERAGE BALANCE SHEET ITEMS

Loans (3)

$2,800,466

$2,782,947

$2,821,450

$2,804,832

$2,805,764

$2,801,544

$2,820,487

Covered loans and FDIC indemnification asset

1,380,128

1,481,353

1,628,645

1,783,737

1,886,750

1,495,798

2,031,294

Investment securities

1,199,473

1,093,870

1,045,292

798,135

691,700

1,113,443

616,583

Interest-bearing deposits with other banks

306,969

375,434

276,837

405,920

483,097

319,857

477,714

 Total earning assets

$5,687,036

$5,733,604

$5,772,224

$5,792,624

$5,867,311

$5,730,642

$5,946,078

Total assets

$6,136,815

$6,219,754

$6,266,408

$6,270,480

$6,408,479

$6,207,184

$6,558,138

Noninterest-bearing deposits

$735,621

$734,674

$733,242

$741,343

$721,501

$734,521

$745,108

Interest-bearing deposits

4,366,827

4,402,103

4,431,524

4,438,113

4,448,929

4,399,914

4,521,107

 Total deposits

$5,102,448

$5,136,777

$5,164,766

$5,179,456

$5,170,430

$5,134,435

$5,266,215

Borrowings

$195,140

$218,196

$230,087

$213,107

$352,370

$214,347

$419,340

Shareholders' equity

$725,809

$707,750

$695,062

$697,016

$684,112

$709,653

$678,260

CREDIT QUALITY RATIOS (excluding covered assets)

Allowance to ending loans

1.86%

1.92%

1.93%

2.03%

2.07%

1.86%

2.07%

Allowance to nonaccrual loans

92.20%

94.93%

86.46%

91.87%

86.54%

92.20%

86.54%

Allowance to nonperforming loans

71.35%

72.51%

66.57%

71.62%

71.99%

71.35%

71.99%

Nonperforming loans to total loans

2.60%

2.65%

2.90%

2.84%

2.88%

2.60%

2.88%

Nonperforming assets to ending loans, plus OREO

3.00%

3.22%

3.42%

3.45%

3.51%

3.00%

3.51%

Nonperforming assets to total assets

1.40%

1.50%

1.51%

1.57%

1.59%

1.40%

1.59%

Net charge-offs to average loans (annualized)

0.96%

0.83%

0.61%

1.39%

0.97%

0.80%

1.23%

(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, 2011 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,

2011

2010

% Change

2011

2010

% Change

Interest income

 Loans, including fees

$70,086

$75,957

(7.7%)

$216,031

$230,239

(6.2%)

 Investment securities

    Taxable

7,411

5,386

37.6%

21,294

16,226

31.2%

    Tax-exempt

176

240

(26.7%)

566

720

(21.4%)

       Total investment securities interest

7,587

5,626

34.9%

21,860

16,946

29.0%

 Other earning assets

(1,721)

3,101

(155.5%)

(4,059)

13,996

(129.0%)

      Total interest income

75,952

84,684

(10.3%)

233,832

261,181

(10.5%)

Interest expense

 Deposits

9,823

14,457

(32.1%)

31,990

45,413

(29.6%)

 Short-term borrowings

44

25

76.0%

138

61

126.2%

 Long-term borrowings

867

2,034

(57.4%)

2,893

7,147

(59.5%)

 Subordinated debentures and capital securities

0

322

(100.0%)

391

956

(59.1%)

     Total interest expense

10,734

16,838

(36.3%)

35,412

53,577

(33.9%)

     Net interest income

65,218

67,846

(3.9%)

198,420

207,604

(4.4%)

 Provision for loan and lease losses - uncovered

7,643

6,287

21.6%

14,046

23,823

(41.0%)

 Provision for loan and lease losses - covered

7,260

20,725

(65.0%)

57,171

49,147

16.3%

Net interest income after provision for loan and lease losses

50,315

40,834

23.2%

127,203

134,634

(5.5%)

Noninterest income

 Service charges on deposit accounts

4,793

5,632

(14.9%)

14,286

17,098

(16.4%)

 Trust and wealth management fees

3,377

3,366

0.3%

10,809

10,579

2.2%

 Bankcard income

2,318

2,193

5.7%

6,801

6,263

8.6%

 Net gains from sales of loans

1,243

2,749

(54.8%)

3,086

3,391

(9.0%)

 FDIC loss sharing income

8,377

17,800

(52.9%)

53,455

40,538

31.9%

 Accelerated discount on covered loans

5,207

9,448

(44.9%)

15,746

22,954

(31.4%)

 (Loss) Income on preferred securities

0

0

N/M

0

(30)

(100.0%)

 Other

2,800

3,707

(24.5%)

8,708

11,504

(24.3%)

     Total noninterest income

28,115

44,895

(37.4%)

112,891

112,297

0.5%

Noninterest expenses

 Salaries and employee benefits

27,774

28,790

(3.5%)

80,467

88,544

(9.1%)

 Net occupancy

4,164

4,663

(10.7%)

15,517

18,125

(14.4%)

 Furniture and equipment

2,386

2,490

(4.2%)

7,520

7,277

3.3%

 Data processing

1,466

1,191

23.1%

4,157

3,559

16.8%

 Marketing

1,584

1,230

28.8%

4,227

3,904

8.3%

 Communication

772

986

(21.7%)

2,339

3,016

(22.4%)

 Professional services

2,062

2,117

(2.6%)

7,384

6,306

17.1%

 Debt extinguishment

0

8,029

(100.0%)

0

8,029

(100.0%)

 State intangible tax

546

724

(24.6%)

3,147

3,481

(9.6%)

 FDIC assessments

1,211

2,123

(43.0%)

4,484

6,040

(25.8%)

 Other

11,177

8,967

24.6%

34,187

29,109

17.4%

     Total noninterest expenses

53,142

61,310

(13.3%)

163,429

177,390

(7.9%)

Income before income taxes

25,288

24,419

3.6%

76,665

69,541

10.2%

Income tax expense

9,670

8,840

9.4%

27,867

24,590

13.3%

     Net income

15,618

15,579

0.3%

48,798

44,951

8.6%

Dividends on preferred stock

0

0

N/M

0

1,865

(100.0%)

     Income available to common shareholders

$15,618

$15,579

0.3%

$48,798

$43,086

13.3%

ADDITIONAL DATA

Net earnings per common share - basic

$0.27

$0.27

$0.85

$0.76

Net earnings per common share - diluted

$0.27

$0.27

$0.83

$0.75

Dividends declared per common share

$0.27

$0.10

$0.51

$0.30

Return on average assets

1.01%

0.96%

1.05%

0.92%

Return on average shareholders' equity

8.54%

9.03%

9.19%

8.86%

Interest income

$75,952

$84,684

(10.3%)

$233,832

$261,181

(10.5%)

Tax equivalent adjustment

236

222

6.3%

714

646

10.5%

  Interest income - tax equivalent

76,188

84,906

(10.3%)

234,546

261,827

(10.4%)

Interest expense

10,734

16,838

(36.3%)

35,412

53,577

(33.9%)

  Net interest income - tax equivalent

$65,454

$68,068

(3.8%)

$199,134

$208,250

(4.4%)

Net interest margin

4.55%

4.59%

4.63%

4.67%

Net interest margin (fully tax equivalent) (1)

4.57%

4.60%

4.65%

4.68%

Full-time equivalent employees (2)

1,377

1,535

(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.  

(2) Does not include associates from acquisitions that are currently in a temporary hire status.

N/M = Not meaningful.

FIRST FINANCIAL BANCORP.

CONSOLIDATED QUARTERLY STATEMENTS OF INCOME

(Dollars in thousands, except per share)

(Unaudited)

2011

Third

Second

First

% Change

Quarter

Quarter

Quarter

YTD

Linked Qtr.

Interest income

 Loans, including fees

$70,086

$71,929

$74,016

$216,031

(2.6%)

 Investment securities

    Taxable

7,411

7,080

6,803

21,294

4.7%

    Tax-exempt

176

192

198

566

(8.3%)

       Total investment securities interest

7,587

7,272

7,001

21,860

4.3%

 Other earning assets

(1,721)

(1,384)

(954)

(4,059)

24.3%

      Total interest income

75,952

77,817

80,063

233,832

(2.4%)

Interest expense

 Deposits

9,823

10,767

11,400

31,990

(8.8%)

 Short-term borrowings

44

49

45

138

(10.2%)

 Long-term borrowings

867

937

1,089

2,893

(7.5%)

 Subordinated debentures and capital securities

0

197

194

391

(100.0%)

     Total interest expense

10,734

11,950

12,728

35,412

(10.2%)

     Net interest income

65,218

65,867

67,335

198,420

(1.0%)

 Provision for loan and lease losses - uncovered

7,643

5,756

647

14,046

32.8%

 Provision for loan and lease losses - covered

7,260

23,895

26,016

57,171

(69.6%)

Net interest income after provision for loan and lease losses

50,315

36,216

40,672

127,203

38.9%

Noninterest income

 Service charges on deposit accounts

4,793

4,883

4,610

14,286

(1.8%)

 Trust and wealth management fees

3,377

3,507

3,925

10,809

(3.7%)

 Bankcard income

2,318

2,328

2,155

6,801

(0.4%)

 Net gains from sales of loans

1,243

854

989

3,086

45.6%

 FDIC loss sharing income

8,377

21,643

23,435

53,455

(61.3%)

 Accelerated discount on covered loans

5,207

4,756

5,783

15,746

9.5%

 Other

2,800

3,147

2,761

8,708

(11.0%)

     Total noninterest income

28,115

41,118

43,658

112,891

(31.6%)

Noninterest expenses

 Salaries and employee benefits

27,774

25,123

27,570

80,467

10.6%

 Net occupancy

4,164

4,493

6,860

15,517

(7.3%)

 Furniture and equipment

2,386

2,581

2,553

7,520

(7.6%)

 Data processing

1,466

1,453

1,238

4,157

0.9%

 Marketing

1,584

1,402

1,241

4,227

13.0%

 Communication

772

753

814

2,339

2.5%

 Professional services

2,062