Scott Crawley - Corporate Controller Claude Davis - CEO John Gavigan - CFO Tony Stollings - COO.

Jon Arfstrom - RBC Capital Markets Erik Zwick - Stephens Inc. Kevin Reevey - D.A. Davidson Andy Stapp - Hilliard Lyons Chris McGratty - KBW Nathan Race - Piper Jaffray.

Good day, everyone. And welcome to the First Financial Bancorp Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please do note that today's event is being recorded.

I would now like to turn the conference over to Scott Crawley. Please go ahead..

Thank you, William. Good morning, everyone and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter financial results. Participating on today’s call will be Claude Davis, Chief Executive Officer; John Gavigan, Chief Financial Officer and Tony Stollings, Chief Banking Officer.

Both the press release we issued yesterday and the accompanying slide presentation are available on our website www.bankatfirst.com under the Investor Relations section. We will make reference to the slides contained in the accompanying presentation during today’s call.

Additionally, please refer to the forward-looking statement disclosure contained in the third quarter 2017 earnings release as well as our SEC filings for a full discussion of the Company’s risk factors.

The information we will provide today is accurate as of September 30, 2017, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll turn the call over to Claude Davis.

Thanks Scott and thanks to those joining the call today. Yesterday afternoon we announced our financial results for the third quarter. As shown on Slide 3 of the Investor Presentation we had a solid quarter performance representing our 108-consecutive quarter of profitability.

Our third quarter results reflect strong loan and deposit growth, stable credit quality and positive early returns from our performance improvement efforts. As detailed on Slide 7, performance improvement efforts during the quarter were focused on improving operating efficiency, physical distribution, deposit costs and balance sheet management.

These efforts coupled with the continued execution of our premier business bank strategy resulted in 8% earnings growth on a GAAP basis compared to the linked quarter, 58% efficiency ratio, a 1.13% return on average assets and a 14.1% return on average tangible common equity.

Loan production was solid as period and loan balances grew $103 million or 7% annualized from the linked quarter, driven by our commercial finance, commercial and commercial real estate lines as well as $28 million of consumer loans acquired through a cleanup call previously off-balance sheet securitizations.

While we continue to see solid credit demand and financial performance from our clients and prospects, elevated payoff continue to weigh on growth and we expect to finish the year with long growth in the mid-single-digits.

On the deposit front, average balances increased approximately $110 million or nearly 7% from the linked quarter with solid growth in both commercial and personal deposits and minimal attrition from the deposit strategies discussed on Slide 7. Capital ratios also remained strong and position us well to support future growth.

The company is well-positioned to benefit from the actions taken by management during the quarter to improve performance. We anticipate both margin improvement and benefits from a reduced expense base in the fourth quarter and going forward.

In addition to our solid third quarter performance, we continue to be excited about our pending merger with MainSource Financial Group. Together our two companies made great progress on working through the regulatory and shareholder approval processes and initial integration planning as detailed on Slide 8.

We have updated and increased our expected net cost saves from $43 million to $48 million. The financial impact will continue to be updated as we work through integration.

Earlier this week, we announced a five-year $1.7 billion community investment plan, solidifying our commitment to serve the areas of our footprint that are most in need of assistance. We are pleased with the integration progress at this point and believe we remain on track to close the merger during the first quarter of 2018.

Finally, as we look to close out 2017, our primary focus remains the execution of our premier business bank strategy.

It is equally important that we continue to diligently coordinate our integration efforts to build a high performing Midwest focused community bank that successfully meets the lending, economic development and financial needs of the communities that we serve. With that, I'll now turn the call over to John..

Thank you, Claude and good morning, everyone. Slide 4 and 5 provide an overview of our quarterly performance including net income of $24.8 million or $0.40 per diluted share for the quarter. As Claude mentioned, we are encouraged by our third quarter results and believe we are on track for a strong close to 2017.

Turning your attention to Slide 6, we provide a reconciliation of our GAAP earnings to adjusted earnings, highlighting items we believe are significant to understanding our quarterly performance.

For the third quarter, adjusted net income was $24.4 million or $0.39 per share, which excludes income related to sales of investment securities and the exercise of a cleanup call on securitizations associated with our 2009 FDIC assisted transactions as well as severance, merger-related costs and provision expense related to the consumer loans acquired through the clean-up call.

Severance cost during the period were driven by the performance improvement efforts Claude referenced earlier, while merger-related costs largely consisted of professional service fees incurred during the quarter.

Turning to Slide 10 and 11, net interest income for the third quarter was $70.5 million increasing $2 million or approximately 3% compared to the linked quarter, primarily driven by higher average earning asset balances and interest margin was relatively stable during the quarter increasing one basis point to 3.57% on a fully tax equivalent basis as higher earning asset yields offset a modest decline in loan fees and higher funding costs.

Consistent with our comments during our second quarter earnings call, we implement these strategies intended to lower deposit cost during the third quarter, which included converting approximately $1.5 billion of previously indexed money market deposits to manage rates, lowering the rates paid on these products by a weighted average 35 basis points and refocusing our sales efforts on growing low-cost core deposit relationships.

The majority of these changes were fully implemented by late September, so while we are pleased with the initial results, we expect to realize the full financial impact in the fourth quarter, which we believe will be approximately four to six basis points of improvement to the basic net interest margin, excluding potential impact from loan fee volatility.

Slide 12 details our noninterest income mix. Noninterest income increased $5.5 million from the linked quarter to $22.9 million, primarily driven by $5.8 million of income related to the securitization clean-up call.

Deposit service charges and client derivative fees were also stronger in the quarter, offsetting a slight decline in bankcard income during the period. Turning to Slide 13, noninterest expense increased $2.9 million or 5.6% from the linked quarter to $54.4 million on a GAAP basis.

The linked quarter increase was primarily driven by $3.8 million of severance costs related to the previously mentioned efficiency efforts as well as $800,000 of merger-related costs. Excluding these items, noninterest expense totaled $49.8 million for the quarter, slightly better than our targeted $50 million quarterly run rate.

Turning to Slide 15, credit performance remains solid, with a modest decrease in the allowance driven by declines in nonperforming and classified loan balances.

Net charge-offs increased to $3.3 million or 22 basis points of average loans, primarily driven by the resolution of a single franchise credit that was substantially provided for in prior periods.

Provision expense increased to $3 million during the period, driven by net charge-offs and loan growth, including the consumer loans acquired through the securitization clean-up call. Overall our credit metrics remain at historically low levels and our credit outlook remains stable.

Finally, I'd like to highlight our updated outlook for 2017 on Slide 9, including expectations for mid-single-digit full-year loan growth, a four to six basis point increase in the basic net interest margin during the fourth quarter, a $50 million quarterly operating expense base and detail regarding the potential impact of historic tax credit investments that may be recognized late in the fourth quarter.

This concludes my remarks and I'll now turn the call back to Claude..

Thank John and William, we'll open the call up for questions now..

Yes sir. We'll now begin the question-and-answer session. [Operator instructions] And our first questioner will be Jon Arfstrom with RBC Capital Markets. Please go ahead..

Thanks. Good morning, guys..

Hey Jon..

Good morning, Jon..

Maybe a bigger picture question for you Claude. You talked a little bit about payoffs and paydowns, but you also had pretty good commercial, actually really good commercial growth and commercial real estate growth.

Could you maybe give us big picture what you're seeing in terms of lending opportunities and what's driving some of that growth?.

You bet Jon. Yeah no actually we headed into the third quarter, throughout the third quarter now heading into the fourth quarter, we've seen good activity on the origination front. It was really solid as you mentioned.

In the third quarter, we saw a slight pick-up in line utilization, which was good to see, but what we've been seeing over really the last year, year and a half is what offsets that is some payoffs and it's not really us losing client relationships.

It's more been related to on the real estate side, projects going to secondary market faster or projects selling because of improved cap rates. And on the commercial side, we're seeing a lot more, just our clients either selling their business or some other type of liquidity event.

So that's been really the headwind, but to your point, I think we've seen nice origination activity and that really has continued in our pipelines in the fourth quarter..

Okay. Good. And then maybe one for you John on deposits, there is a lot going on deposit costs and potential changes in deposit costs and maybe give us an early assessment of how the change from the indexed to the managed rate product has gone and what kind of attrition you're seeing there and then maybe touch on just overall deposit cost pressures..

Hey Jon. This is Tony. I'll take that one..

Hi Tony..

We obviously needed to get better control of our deposit cost and the dynamics of the portfolio.

So, we actually started the process in June when we launched and managed account was very competitively priced, client reaction was good and certainly good enough for us to feel comfortable to move the managed or the indexed account into the managed account.

And it is still a very competitively priced product and we've also wrapped a few products around that from a DDA standpoint and several CD programs that really provides a very competitive bundle of or a suite of products for clients. Outflows have been within -- well within any acceptable model range that we had.

So, we're pretty optimistic about our ability to retain clients and accounts..

Okay. And then just other deposit pricing pressures, it looks like rates were up generally across some of the other products..

They have been, we're starting to see a little more activity and attempts to extend clients through some CD programs, but not as much pressure outside of like some teaser programs on the short end yet..

Yeah and Jon, this is Claude. The other thing I would add to that is we've been trying to look at the competition and see who's starting to move rates up and what we've seen in a couple of cases has been more of those high loan-to-deposit banks, which is where we feel like we'll see some pressure here over the next few quarters.

Back to your first question, if we begin to see just general industry loan growth, than those that are at a higher loan-to-deposit ratio we think will start to move their rates up and it just depend on what everybody else does as to how we react to that..

Okay. Good. Okay. Numbers look really good. Thank you..

Thanks Jon..

And the next questioner today will be Erik Zwick with Stephens Inc. Please go ahead..

Good morning, guys..

Hey Erik..

Thanking maybe about the fourth quarter net interest margin and absent the four to six basis points improvement from the recent deposit strategy efforts, what are your thoughts on the direction of the NIM in this current rate environment?.

Well I think, I'd say relatively consistent with our guidance heading into 3Q Erik, it's a little bit tough for me to separate the changes we've made on the deposit side that Tony was just speaking to because of the significance of those changes.

I would say we're solidly asset sensitive with the changes we made on the funding side of the balance sheet, number of pieces moving there in the margin and ultimately our sensitivity and how that plays out to the margin going forward will depend on how we manage through competitive pressures on both sides of the balance sheet on loans and deposits.

We don't feel the need to move on deposit costs. We'll monitor competition to Claude's point earlier and we'll react accordingly..

Okay.

And maybe thinking about new origination yields on loans, let's say where are those coming on versus the average rate in your existing book?.

They're coming on -- it moves around a little bit quarter-to-quarter, but I'd say generally in line with a slightly better than payoff yields..

Okay. And then on the MainSource acquisition, you raised the cost savings target from $43 million to $48 million.

Where are those -- what areas are the additional $5 million in savings coming from?.

Erik, this is Claude. It's predominately that first bucket that we've talked about has been on the staffing side. We're still in the stage through all of our technology assessment work as well as some of the other areas of non-staffing.

And it's the combination of both of us getting deeper into the integration process, but it also includes some of the performance improvement efforts that we made at First Financial in 3Q. So that additional five is predominately in staffing or personnel-related costs..

Got it. And just to make sure I'm clear on the timing, you expect the entire $48 million to be fully realized by the end of 3Q '18..

Erik, it will be consistent with our -- the guidance we gave on timing and our merger announcement back in July. We expect 75% of the cost saves to be realized within the first 12 months post close..

Okay. It was bottom of Slide 8, I know it's cost saves realized during the third quarter. Okay. So, 75%. Okay. That's it. I'll step aside for now. Thanks guys for taking my questions..

Thanks Erik..

And the next questioner will be Kevin Reevey with D.A. Davidson. Please go ahead..

Good morning, gentlemen..

Hi Kevin..

So, John, it looks like you guys had really strong performance on the service charge line item, how should we think about that line item going into the fourth quarter given the strong performance that you experienced in the third quarter?.

Yeah Kevin, I think what you're seeing on the deposit service charges is really it's the fee income strategies that we talked about implementing probably 12 to 18 months ago and what we guided to then was that it wasn’t going to be a significant jump up in the run rate.

But what we expected was that we would see marginal improvement over time as those strategies decode and I think we're seeing the benefit of that here and we expect that to continue..

And then on the client derivative fees, I know that can be a little lumpy, how should we think about that going into the fourth quarter?.

I think the driver there Kevin is really it's tied to commercial loan growth. That's where the bulk of those fees are tied to commercial production. So, it really moves in line with commercial loan growth and more specifically the majority of it comes from the commercial real estate production..

Yeah and Kevin, just so we're clear, we actually saw an increase in derivative fees in the third quarter about $300,000. So, it was actually a pretty solid quarter for us and to John's point, that number jumps around quarter-to-quarter based on commercial originations and especially based on commercial real estate originations.

And earlier question, going into fourth quarter our commercial real estate originations still looks pretty solid in the fourth quarter..

Great. And then my last question is on the line utilization, it looks like -- it sounds like you had some pick up in the line utilization on the commercial side, which is I think so for the companies that I cover, you're one of the few that have actual experienced it.

Do you actually have a number what it was in the third quarter versus the second quarter?.

It was a point or two as I recall. I don't have that number right in front of me. Two points is what guys are telling me. So, we saw about a 2% improvement. It's still running in the low 50%-line utilization number. I was just glad to see it actually tick up a little bit.

So, I wouldn't say it was a material move, but at least it was a move in the right direction..

No. I would agree. Thanks for the color guys. Great quarter..

Thanks..

[Operator instructions] And the next questioner will be Andy Stapp with Hilliard Lyons. Please go ahead..

Good morning..

Good morning, Andy..

The core level of salaries and benefits ex severance costs, good base for modeling purposes and related question just when did the branch consolidations occurred in the quarter?.

Yeah, I think on the salaries and benefits front Andy, I think to your point excluding the one-time cost during the period here is generally a decent run rate. It can move around a little bit quarter-to-quarter depending on health insurance costs and things like that.

But I think overall excluding the one times is a pretty decent indication and then Tony will speak to this..

Yeah Andy and this is Tony. On the branch side, those locations are still open. They're not excuse me, scheduled to close until early December. So not a big impact on that yet in the numbers. Then I think post fourth quarter then we'll see the improvement in our expense run rate of the branch saves post fourth quarter. So, going into '18..

Okay. And then what about the -- is that related to the Q4 consolidation that you're talking about? That's a separate event right the Q4 branch consolidations..

No. That's that same. We have online -- eight locations to be closed before the end of the year..

Okay. Got you.

And do you anticipate additional consolidations in 2018 beyond those related to MainSource?.

No. Well, what we've said Andy is 45 to 50 is the number that we expect to occur as a part of the merger. The eight we've announced, the eight we've announced are part of that 45 to 50..

Okay. I got you. Okay..

So, what we're trying to do both First Financial and I think MainSource is trying to the same is to close those that we would've otherwise closed that do have premerger just to avoid the workload and the resource constraint once we closed the deal..

Okay. And then little confused about the MainSource close date. If I heard you correctly, the prepared remarks were 1Q '18 consistent what you said before, but in the slide deck it says 2Q '18..

Andy just to be, yeah 2Q '18 is when we expect to convert these systems..

Oh. Okay. Got you..

We're hoping to close in 1Q and those in late 2Q..

Okay. Great. Thanks..

And the next questioner today will be Chris McGratty with KBW. Please go ahead..

Hey. Good morning, everybody..

Hey Chris. Good morning..

Hey. John, maybe a question on the balance sheet and kind of in preparation for the deal we've seem banks their growth are meaningful transaction, restructure the balance sheet a bit with the investment portfolio. I am interested in how you're thinking about your own portfolio and also MainSource's heading into the close next quarter.

Should we -- I guess, what should we be assuming in terms of the size of your legacy book and what's coming over? Is it simple is just add the two together or do you maybe use some of the cash flows given where the investment rates are to fund loan growth that way, thanks..

Sure Chris. I think to the tail end of your comments there, I think you're consistent with how we're viewing the securities portfolio today. We did start to shrink the size of the securities portfolio a little bit in September.

You don't see it so much in the average balances, but on a period end basis and that was tied to some of the deposit strategies that we implemented during the quarter and in anticipation of potentially some deposit outflows related to that.

And we'll continue to manage with that kind of framework here in the fourth quarter and monitoring the impact on deposits from the strategies we implemented in 3Q and then I'd say in terms of combined securities portfolio, we're having conversations with our counterparts at MainSource to that regard right now.

Probably too soon to really talk about any significant change in strategy there..

And Chris to that point, we're really looking -- going to look at the whole balance sheet and say okay, is there -- are there any opportunities here to optimize that's beyond just combining the two..

Okay. That's helpful thanks.

Maybe a follow-up, anything on earnings credit rates yet given that we've seen a few interest rate increases? Any conversations with your clients or asking for adjustments or how you're thinking about that, thanks?.

Chris, this is Tony. No, nothing that I would say is a global or systemic few one-offs, but nothing on a broader scale..

Okay. That's all I got. Thanks a lot..

Okay. Thanks Chris..

And the next questioner today will be Nathan Race with Piper Jaffray. Please go ahead..

Hey guys. Good morning..

Hey Nathan..

Good morning, Nathan..

Just going back to your commentary earlier about commercial loan growth, I appreciate the commentary around the uptick in line utilization. I guess I am just curious, it sounds like you've heard from some of your competitors in the franchise space that some of those dynamics in that area has changed.

So, I am just curious how much you're going to especially lending areas will contribute to the commercial growth that will result as well..

In the specialty or commercial finance space, what we saw is on the -- it was a little bit in the -- they do several -- basically five verticals, franchise being one, a couple of insurance verticals being the second and third. They lend in the RIA CPA space and they had a pretty good mix.

I would say it's always dominated by the insurance and the franchise and so there is a mix of the two, franchises being more of the flat portfolios we've talked about in the past because we've seen the margins in that business come down 50 to 100 basis points over the last three or four years.

So that portfolio has been more flattish, but they had some nice originations in 3Q and in the insurance business it's continued to perform well and we've seen good growth there in 3Q and they have a nice pipeline heading into 4Q..

Okay. Got it. And John just going back to discussion on the securities portfolio, which securities have -- what drove the jump in yields this quarter? I am not sure if that was related to some of the off-balance sheet of items in the quarter as well..

I would say Nathan, it was a combination of a little bit of benefit from the rate move in June as well as just continued reinvestment in the portfolio looking at positions and moving -- circulating positions through the portfolio where we see opportunity to pick up yield and enhance the profile of the portfolio from a credit risk duration and total return perspective..

And I would say the good part of that is that we've kept the duration of the investment portfolio continues to be in that 3.1, 3.2 years, which has been our intact for the last couple of years..

Okay. Got it. And lastly, just to clarify, the cost that were identified and expected this quarter, that is not contemplated in the 48..

It is in the 48..

Okay. Got it. Thank you..

This will conclude the question-and-answer session. I'd like to turn the conference back over to Claude Davis for any closing remarks..

Great. Thanks William and again thanks everyone for your interest in First Financial and joining the call today. Thank you..

And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect..