First Financial Bancorp (FFBC) 2009 Q3 法說會逐字稿

Good morning and welcome to the First Financial Bancorp third-quarter 2009 earnings conference call and webcast.

All participants will be in listen-only mode.

(Operator instructions) Please note this event is being recorded.

I would now like to turn the conference over to Patti Forsythe, Investor Relations with First Financial Bank Corp.

Please go ahead.

Thank you, Amy.

I would also like to thank everyone for joining us on today's call to discuss First Financial Bancorp's third-quarter 2009 results.

Joining me on today's call are Claude Davis, President and Chief Executive Officer of First Financial, and Frank Hall, Executive Vice President and Chief Financial Officer of First Financial.

I would like to remind everyone that our discussion today may involve certain forward-looking-statements, which are not statements of historical fact.

I would also like to mention that the news release we issued yesterday is located at the Investor Relations section of our Web site at bankatfirst.com/investor.

An investor presentation that will be referenced on our call this morning is also located at our Web site.

Our third-quarter 2009 earnings release should be read in conjunction with the consolidated financial statements, notes, and tables attached and in the First Financial Bancorp's Annual Report on Form 10-K for the year ended December 31, 2008.

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, including management's ability to effectively integrate recent acquisitions; the risk that the strength of the US economy, in general, and the strength of the local economies in which First Financial conducts its operations may be different than expected; and the effects of and changes in policies and laws of regulatory agencies, inflation, and interest rates.

For a further discussion of certain factors that may cause such forward-looking-statements to differ materially from actual results, please refer to our 2008 Form 10-K and other public documents that we have filed with the Securities and Exchange Commission.

Those documents are available within the Investor Relations section of our Web site and also on the Securities and Exchange Commission's Web site at sec.gov.

Please note that the content of this call contains time-sensitive information that is accurate only as of today, Friday, November 6, 2009.

I will now turn the call over to Claude Davis.

Claude?

Great.

Thank you, Patti, and thank you to those joining the call today.

This is a very exciting quarter for First Financial, as we have announced the successful acquisition of two banking organizations with the assistance of the FDIC.

Peoples Community Bank in Greater Cincinnati and Irwin Union Bank in Indiana both add substantial strategic and financial value to our franchise.

On July 31, 2009, we announced the Peoples Community Bank transaction, which adds approximately $566 million in assets and a net 16 new offices.

We now have over 50 offices serving greater Cincinnati, an important market for our future and our headquarters market.

On September 18th, just 49 days ago, we acquired the banking operations of Irwin Union Bank & Trust, formerly headquartered in Columbus, Indiana, and Irwin Union Bank FSB, formerly headquartered in Louisville, Kentucky.

With these transactions, we added approximately $1.8 billion in loans at estimated fair value and approximately $2.5 billion in both consumer and commercial deposits.

We also added 13 new offices in our primary Midwestern markets of Indiana and Kentucky and 4 new markets in Michigan.

The strategic value of these transactions is tremendous.

These are key metropolitan markets for our future success and ones where we had preexisting plans for expansion.

Frank will discuss some of the details surrounding the transactions, but as a result of the gain on the Irwin deal, we have increased our tangible book value by $3.87 per share, an increase of approximately 59% from the second quarter without any dilution to our existing shareholders.

Also, as a result of the transactions, we have significantly increased our earning assets, which, in turn, increases our expected earnings again without diluting our existing shareholders.

We continue to have strong capital ratios, with our tangible common equity at 7.48% and total risk-based capital at 17.46%.

With the completion of the final accounting for the acquisition transactions, we will be initiating conversations with our board and our regulators on the proper timing for repaying the CPP to the treasury.

Our capital ratios, excluding the CPP capital, are strong, exceed our internal targets, and significantly exceed the minimum regulatory standards.

We have not yet filed a formal application for repayment, but we will provide an update to investors when the timing for repayment is determined.

Our integration efforts for the Peoples Community transaction recently concluded with a full and successful technology conversion.

All First Financial clients can now transact their business at any of our 50 locations in Greater Cincinnati.

Our plans for the technology component of the Irwin integration will be sometime in the first or second quarter of 2010.

All sales staff decisions were accomplished within the first 30 days of the transaction and all client-facing transition activities are complete.

Our ability to successfully integrate our acquisitions will help ensure that we maximize shareholder value and improve the client experience with First Financial.

Our staff, both existing and newly hired, have worked tirelessly to make sure that our clients are well served throughout this transition and I thank them for their efforts.

We have made some near-term strategic decisions regarding the acquisition -- acquisitions, excuse me.

First, in October, we merged three offices and have plans for two future consolidations in the Cincinnati market where there is overlap between First Financial and former Peoples Community offices.

Secondly, we have decided to exit the nine western markets of the former Irwin Union.

The former Irwin markets, including the St.

Louis office and West, are not part of the core of our Midwest strategy and will be exited either through coordination with a financial institution in the local western market and our market president or in an outright closure, when permissible under the terms of our FDIC agreements.

Cumulatively, the western markets had $495 million in deposits and $730 million in loans at acquisition.

The loans are covered under the loss share agreement and will be serviced by a centralized dedicated team covering the western markets.

Also included in the Irwin acquisition is a specialty lending business that caters to quick-service and causal-dining franchises.

We have purchased participations in these loans in the past and are glad to have the whole team as part of this transaction.

It provides a risk-appropriate, geographically diversified earning asset that has a strong history of performance.

This portfolio of approximately $675 million is covered by an FDIC loss share agreement as well.

We intend to support this business and manage it to a size that is commensurate with the risk appetitive of First Financial.

We will provide more specifics about this business as we develop the full plan.

Excluding credit, our core operating metrics were stable.

Net interest margin was stable and net interest income increased approximately $6 million due to a partial quarterly impact of the Peoples deal and the first Irwin acquisition.

Fee income was up approximately 10% from the second quarter due to the improvement in service charges on deposits.

And operating expenses included several unusual items related to the acquisitions, which Frank will discuss.

The core expense level, however, was stable, with the addition of staff-related costs for the Peoples deal and the first Irwin acquisition.

Moving to the credit quality of our legacy loan portfolio, we have reported an elevated level of nonperforming loans and a commensurate increase in our allowance for loan loss.

Reserves are carried only on our legacy loan portfolio, whereas our acquired portfolio is booked at fair market value and therefore has no reserves.

As such, our credit quality metrics will be disclosed, excluding the impact of FDIC covered loans.

Nonperforming loans have increased to $64 million from $38 million in the prior quarter due to stress in the commercial and commercial construction categories.

The majority of the increase was the result of six credit relationships.

The largest relationship was three land loans for a total of $13.6 million.

The most recent appraisals indicate we are fully secured, although until the land is liquidated actual value realization may differ.

There were four separate residential developments, which totaled $7.4 million, and the final deal was a $1.2 million construction project which has not performed up to expectations.

Consistent with many in the industry, we expect further stress in the commercial real estate portfolios, as the economic data continues to remain weak.

Our ending allowance to nonperforming loans was approximately 92%, and our allowance to ending non-covered loans was 1.94%.

Our annualized net charge-off rate for the quarter was 1.31%, including the 30 basis point impact of the sale of our entire shared national credit portfolio.

Excluding the impact of the decision to sell the shared national credit portfolio, net charge-offs were approximately 1%.

We did see an improvement in our ORE portfolio, down slightly to $4.3 million.

Our nonperforming assets to total assets level actually declined from last quarter to 0.94% from 1.14% due to increased asset levels as the result of the three acquisitions.

As we manage our loan portfolio in the future, it is important to recognize that approximately 40% of our loan portfolio will be covered by an FDIC loss share agreement.

As such, we have dedicated considerable resources to building the appropriate compliance and management infrastructure to support this now significant component of our franchise.

First Financial has established separate and dedicated teams of legal, finance, credit, and technology staff to execute and monitor all activity related to each loss share agreement.

After some additional integration work on Irwin, we will still have an interest in assisted transactions, as we have developed a scalable compliance infrastructure and an effective transition playbook.

Our evaluation approach remains disciplined in that any opportunity will be evaluated, first, for the long-term strategic value; secondly, for the incremental operational risks; and lastly, for the financial aspects of the transaction.

This approach has served us well thus far and will remain in place for the foreseeable future.

With that, I will turn the call over to Frank for further discussion on our financial performance for the quarter and for additional detail on our transactions.

Frank?

Thank you Claude.

I will discuss some of the details of our third quarter performance and provide additional information about our FDIC-assisted transactions.

But first I would like to note some significant items in the quarter.

As previously noted by Claude, the purchase accounting for the Irwin transactions resulted in an estimated $383 million pre-tax bargain-purchase gain or negative goodwill, as the fair value of the assets purchased exceeded the fair value of the liabilities assumed.

The purchase accounting for Peoples Community Bank resulted in positive goodwill of approximately $18.7 million.

This amount is greater than originally projected due to the alignment of certain market-based assumptions applied to all acquired portfolios.

As we discuss the acquisitions this quarter, I want to highlight the fact that the numbers presented are preliminary and subject to further review and refinement as we finalize the acquired portfolios with the FDIC and continue to evaluate the assumptions used in estimating their fair values.

These amounts will be subject to further review for up to one year.

For the third-quarter results, I will address the core elements of each performance category excluding the effect of the acquisitions and then highlight any impact of the acquisition on the category.

I will then wrap up with some general guidance on our future performance.

Net interest margin was a reported non-tax equivalent 3.59% for the third quarter, down 1 basis point from the linked quarter.

Our quarterly margin was negatively impacted by approximately 11 basis points due to the large cash balance received from the FDIC and the settlements from our assisted acquisitions.

Overall, net interest income grew 20% as a direct result of the increase in earning assets in the quarter.

Our balance sheet is expected to remain asset-sensitive, and the pre-acquisition portfolio has re-priced to reflect the full impact from the last Fed rate cuts with an emerging expansion in margin, as expected.

Our overall balance sheet composition will also be reevaluated in light of the material changes to its size.

We intend to manage our interest rate risk position in a manner consistent with our pre-acquisition views.

Our end-of-period loans have nearly doubled in the quarter.

The loans associated with the acquisitions have unique purchase accounting and risk characteristics and, as a result, the reported margin and loss metrics will vary substantially from previous periods.

We will provide additional clarity on our core performance, both short term and long term, in our future releases so that the future value components of our acquisitions are more readily apparent.

We've included in the accompanying slides filed with this release the loan portfolio composition at the recorded fair value.

The most significant change to the overall mix is among the home equity, residential real estate, and installment categories.

Commercial and commercial real estate still represent approximately 30% and 45%, respectively, of the total loan portfolio.

As we exit the western markets and realign portfolios, we expect some near and mid-term decline for both the loan and deposit portfolios.

We do not expect our core market growth rate to be sufficient to offset this expected runoff.

Our deposit portfolio, excluding the impact of the acquisitions, performed consistently with our expectations and grew on a linked-quarter basis.

We have achieved our greatest success in our core business transaction accounts.

All other categories remain stable with modest growth.

The acquired deposit portfolios have been re-priced, as permitted by the FDIC.

Runoff has been slightly better than our expectations and well within our ability to manage from a liquidity perspective.

Approximately $1 billion in combined retail and brokered CD portfolios were re-priced down by a weighted average 228 basis points and have lost approximately 46% of the balances through redemptions and maturities.

The most significant runoff has occurred in the Irwin Thrift portfolio, as expected.

Our end-of-period deposit mix has changed slightly between timed deposits and savings, but will likely shift back to our historical mix, as CD runoff is expected to continue.

The quarterly weighted average rate on the deposit portfolio has decreased three basis points to 1.26%, with additional reductions expected, as we have only a partial quarter impact from the acquisitions in the third quarter.

The increase in investment portfolio balances during the third quarter of 2009 was due to the acquired investment portfolios from the Peoples and Irwin's transactions.

Investments were purchased at market value as of the date of the transactions.

The investments purchased are consistent with our risk appetite and internal policies.

We have made no other investment portfolio purchases since the first quarter of 2009 due to market pricing.

The investment portfolio, in total, had an unrecognized pretax gain of approximately $19 million, or 3% of the book value of the portfolio at the end of the second quarter.

Core noninterest income, excluding the impact of the acquisitions, was strong relative to the second quarter, driven almost exclusively by higher service charges on deposit accounts.

Approximately $750,000 of the $1.1 million increase was attributable to the legacy First Financial portfolio.

All other categories remained relatively flat.

As we continue to integrate and align pricing across the franchise, our expectation is that the consolidated portfolio will have similar performance characteristics when compared to our legacy portfolio.

Our core normalized noninterest expenses for the third quarter and for the full year remain relatively flat with prior period variances due largely to the effects of the costs associated with our acquisitions and nonrecurring external factors such as FDIC insurance premiums.

Over the next several quarters, we will arrive at a new core run rate for our expense base.

The acquisitions have moved us well forward in utilizing the excess capacity that we have mentioned in previous quarters.

Our long-term target efficiency ratio remains at 55% to 60%.

The integration plan for the Irwin transaction is expected to be complete in the first half of 2010 and should contribute to the achievement of this target.

As Claude mentioned earlier, our capital ratios remain strong.

The reported tangible common equity ratio has improved further still since the end of the third quarter, as expected runoff continues.

Our regulatory capital ratios are further enhanced due to the risk weighting of the covered assets at 20%.

We expect that as the covered assets mature and are potentially replaced with higher risk-weighted assets that earnings over the same time horizon will provide the adequate capital support for the replacement loans.

We will disclose in a future filing additional information about how our strategic decisions will impact future financial performance and in sufficient detail to answer portfolio-level questions.

As such, we are offering no earnings guidance at this time.

Generally speaking, however, we expect our margins to improve; our earning assets to shrink in the near term due to strategic rebalancing; our service charges on deposit accounts should have similar performance as the legacy portfolio; our normalized expenses should be 55% to 60% of our normalized revenue; and our credit costs should improve as the economy improves.

We will not discuss any more detailed expectations than this, as it is still too soon to predict with precision and the final purchase balance sheet is still being assessed.

I will now turn the call back over to Claude.

Great.

Thanks, Frank.

Amy, we're now ready to take questions.

Thank you.

(Operator instructions) Our first question comes from Scott Siefers at Sandler O'Neill.

Good morning, guys.

Hi, Scott.

Hi, Scott.

Let's see, I guess, Frank, maybe -- there was obviously some noise in the expense number.

I wonder if you can quantify just what, when you talk about some of the unusual expenses, if you're able to qualify -- quantify exactly what impact those had on the third quarter-number?

Sure.

I would just say in a general sense, Scott, we view the core expense base to have been flat on a linked-quarter basis.

So that the variances that you're seeing are related to either Peoples integration work, acquisition activities, the related employment decisions that have been made as a result of that.

So a fair amount of noise.

But stripping all of that away, we really view our core expenses as having remained flat.

Okay.

And I guess maybe in a little different way, can you -- are you able to say how much of the total dollar value of expenses came from the new acquisitions?

Scott, are you talking about in terms of the increased costs that we would expect on a run rate basis?

No.

Just in -- you had sort of a $46 million expense number this quarter.

How much of that came from either Peoples or Irwin, the various transactions?

Right.

So, again, if you're looking at it relative to our previous quarters, which is where I would guide you to, our core expenses for the fourth, or excuse me, for the third quarter were relatively flat compared to our core expenses in previous quarters.

Okay, so basically all of them, I guess.

Right.

That's right.

Okay.

Perfect.

Okay, I think that does it for me.

Thank you.

Great.

Thanks, Scott.

The next question comes from David Peppard at Janney Montgomery Scott.

Hi, guys, how are you doing?

Good, David.

Good morning.

Looking at the loan portfolio, what percentage of loans are floating rate right now?

Let's see; on the loan portfolio, we are still asset-sensitive on a combined basis.

And there wasn't too much of a shift in the acquired portfolios.

So I'll get the final number for you here, but roughly 30% or so of the portfolio is still fixed rate and the rest would be variable.

Okay.

And I'll circle back with you on a tighter number there as I pull it up.

Okay.

And in relation to the margin, do you expect the amount of liquidity on the balance sheet to be maintained or where do you see that going forward?

David, this is Claude.

On the liquidity side, we expect the liquidity to decline, as Frank referenced.

We've seen some CD maturity and runoff on the part that we've re-priced, especially in some of the western markets.

And so we're using that liquidity to, in effect, to de-lever the liability side related to the CD re-pricing, as well as we've paid off some short-term maturities on some of the borrowings that were disclosed in the release.

Okay.

And circling back, the split that I gave you is correct.

It's about a 60/40 split.

60/40, okay.

And switching over to asset quality, you talked about the commercial real estate portfolio a little bit in the release and on the call here.

Could we just get some more granularity on exactly what you're seeing there and -- going forward?

Sure.

The -- I'd say commercial real estate is the area that causes us the most concern and I think is the area that is the most stressed.

And as I described in my script, that is the area that we saw the nonperforming asset increase.

And I think that's going to be the stress area over the next, you call it, four to six quarters, whatever it takes us to get through this difficult economic period.

So that's the category we're watching the closest and it's why we took what we believe to be an appropriate and significant additional reserve due to the significant recessionary impact of the commercial real estate downturn.

Other areas continue to be stressed.

Although I would say with some of our C&I clients, we have seen more of a stabilization in the last quarter related to some of their revenue and performance metrics.

So that part has been more encouraging for us, but commercial real estate continues to be the stressed area.

Okay.

And I say that not just with us, I'm talking about economically.

Okay.

And same question related to the real estate construction portfolio.

Yes.

Are you seeing the same kind of stresses that you are with CRE there or what are you seeing?

Sure, yes.

Yes, I mean we have lots of commercial real estate projects that are stabilized doing just fine.

But, clearly, those areas where it's residential development, land development, construction projects that are reliant on lease-up.

We have a lot of construction business that are owner-occupied construction projects, which are fine.

It's more those that require lease-up or some level of tenant acquisition that is more challenged.

Okay.

I'll jump off here.

I'll jump back on if I have more questions.

Okay.

Thank you.

Thank you.

The next question comes from Eileen Rooney of KBW.

Good morning, everyone.

Hi, Eileen.

Hi, Eileen.

I guess just maybe just a big picture question.

I know you mentioned that you have the capacity to do, and expertise to do, more deals.

Can you just maybe elaborate on that a little bit in terms of what the timing might be on something like that?

And also areas you would be interested in.

Sure.

The timing issue is really open, and I think a lot of that depends on when we are substantially complete with the Irwin integration.

Obviously, right now, just 49 days post that deal, we're still well in the midst of just doing the primary integration work and planning for the data conversion.

So we have a lot more work to do there before we would be prepared to do another deal.

But I would tell you, Eileen, it's -- the Irwin integration has gone as well as I could have hoped.

We're very pleased with the quality of the people that were a part of that transaction, how they've embraced us as an acquirer, and how the clients have responded to us.

So, so far, we just -- we're extremely happy with how that deal has gone.

What we also kind of speak to, though, is the fact that we've done two large deals, is that we are building an infrastructure and a certain knowledge base around what I would call the intricacies of doing a deal with the FDIC, which is good to work with them, I mean they are very good to work with, but there are just certain details around that process that you don't know until you get into it.

And we're building the infrastructure that's dedicated to those deals that would allow us the ability to do more in the future.

Where we would do them is really focused on our Midwest core.

Similar to the strategic decisions we made to exit the western markets.

We view ourselves as a Midwestern commercial bank and that's where we'll focus.

Okay.

Related to that, just wondering about the branches in Michigan, does that fit with the overall strategy?

We view Michigan as a part of the core of our Midwest strategy.

Obviously, it's new for us, so we're going to be working with those market presidents to understand those markets better, to look at what the market opportunities are.

We're all aware, as are they, of the stresses in the Michigan economy that we'll want to understand better.

And then we'll evaluate it for really what's the -- what are the growth opportunities in that marketplace.

Okay.

And then maybe just one last question related to the sale of the western branches.

Could you just maybe tell us a little bit about how that would work in terms of any gain, how that would relate to FDIC or what portion goes to you?

Sure.

Sure, Eileen; this is Frank.

Actually what we are contemplating for the western states is not a sale.

So what we've asked each of the market presidents to do is to find a local market president, or excuse me, find a local financial institution that they want to work with to refer business.

So we intend to close the offices, but we intend to do it in a way where we're referring the existing business to a new financial institution.

It is not a sale transaction.

If the local financial institution, if found, is interested in any of the loans, we need to follow the guidelines as established by the FDIC as it relates to handling any type of a loan sale.

So that's the intended approach there.

And I would just add, Eileen, to that that the reason for that is we don't see the value being available in the marketplace today for a premium or certainly kind of significant premium.

And the resource constraint for us of trying to sell individual multiple markets and go through related de-conversions, negotiations of purchase agreements, etc.

is not a good use of our resources.

So our focus is really to take care of the clients and the staff in those locations and have it be a seamless transition.

Okay, that's great.

Thanks, guys.

The next question comes from Dennis Klaeser at Raymond James.

Good morning.

Good morning, Dennis.

Hi, Dennis.

I know you're cautious on giving us guidance on the -- on some of the key fundamentals.

One, I'm wondering if you could talk a bit more about your net interest margin trends and what are the sort of key items that will add to or subtract from margin going forward?

And I guess, in particular, the potential margin contribution for the new loan portfolio coming on?

Sure.

Dennis, this is Frank.

Our expectation for the margin is that there is expansion.

Even without the acquired portfolios our legacy portfolio was moving in that direction.

The acquired portfolios, the attributes are somewhat similar to our legacy portfolio.

So, again, we do expect some expansion.

I just don't want to guide on a number.

Okay, but in terms of sort of the average yield on those loans relative to your existing portfolio, was it roughly in line with your portfolio or was it a higher yielding portfolio?

The yield on the acquired portfolio will actually be affected by the purchase accounting.

So that's something that we will disclose in a future release, what the expected yields on those acquired portfolios is.

The coupon was comparable to slightly higher than our core portfolio.

That's right.

Right.

And previously I had expected your bargain purchase gain to be a little bit less, or -- about $100 million less.

So, because that bargain purchase gain is much higher, I would expect that that go-forward yield on that acquired portfolio will be a bit more moderate than the previous expectation.

Yes.

I don't know what your previous expectation was as far as the yield on the acquired portfolio, but given what you just described, yes, your model should yield a lower expected yield on that acquired portfolio.

Right, because of the bigger gain up front.

Okay.

With regards to the franchise finance business, I guess that's a little bit more than 10% or so of your loan portfolio.

Is there a range that you're comfortable with there in terms of the size of that business?

That's something that we're still evaluating.

It is a good, strong, profitable business, but we're obviously sensitive to any criticism around concentration there.

So that's something that we're evaluating both as it relates to the capital that's allocated to that business and also the size of that loan portfolio relative to the total.

But, as Claude mentioned, we've -- as we mentioned in the release, we've actually acquired loans, participations, from them in the past.

Right.

And what's the typical nature of the loan?

Is it a working capital loan for the franchisee or is it for them to purchase the franchise in the first place?

It can really be a combination of kind of operating funds as well as acquisition funds, but most importantly, regardless of the initial use, it's based on the cash flow of the underlying franchise.

And that's the basis on which their underwriting decisions are made.

Sure.

So is this a directly under -- a directly originated portfolio or is this indirect?

It's direct.

Direct?

Okay.

And in terms of the franchise brands, is there particular concentrations or groups of brands that you're doing business with?

It's limited to a select number.

I think there are roughly ten names that are actively lending to.

So that is something that is considered in the underwriting.

And the management of the portfolio overall is which -- they're referred to as concepts -- which concepts, the number of concepts.

And then, as Claude mentioned, the underwriting for the use typically goes to borrowers that have multiple franchises and years of experience in the business.

Okay.

Sorry.

There's construction going above me here.

Yes, that's all right.

So -- well, that covers it for me.

Thanks very much.

All right.

Thank you.

The next question comes from Justin Mauer at Lord Abbett.

Morning, guys.

Hi, Justin.

Good morning.

Just quick on the NIM.

Claude, you said the coupon is slightly higher at the acquired loans.

I'm not trying to pin your down, just kind of directionally.

It should only be enhanced as the purchase discount accretes to the margin, right?

We will -- we'll provide the details on the expected yields on those portfolios.

It depends on the portfolio.

Each portfolio was evaluated separately to determine the fair value.

So I don't want to make any global statements about expected yields there, but we will -- we'll share that information in a future release.

Okay.

But is there any reason why it wouldn't be that way?

Is there an anecdote or something that you can say that -- and obviously it could be affected by runoff and so on, but --

Right.

I really want to guide you at this point on a specific there.

Okay.

Any kind of guideposts as to asset and/or deposit runoff?

In terms of, do you think most of it will happen through this past quarter and coming quarter?

How do you kind of think about it and structural liquidity surrounding that?

Sure.

The -- we've shared with you the size of the western market.

Yes.

And, as you might imagine, deposits will run off faster than will the loan portfolios.

And we've got a dedicated team established to service the western market loans.

But the deposit portfolios is where you're going to see the runoff occur at a faster pace.

So -- and that's in the $400-plus million.

And then the re-pricing of the CD portfolios will have some effect.

So I want to be careful not to give you too much in specifics there, but I think we've provided some --

Yes.

-- some good information there that should give you a general sense.

The other portfolio we did re-price was the broker CD portfolio, which we disclosed in the release and what that level was.

Yes.

And so you would expect to see some runoff in that portfolio as well.

Okay.

And the loans have the potential, obviously, of being stickier, if you can't find anybody to take them off your hands, though, right?

You're obviously just going to service them and as they turn over, they turn over.

Correct.

Correct.

Yes, okay.

You talked about the folks, kind of your SWAT team of people set up to deal with the FDIC.

Where did those folks come from?

Are they all Irwin and Peoples people?

Just -- obviously with MPAs moving up a bit and making sure that the attention stays focused on that stuff relative to all of the work that's required on the acquisitions.

Right.

One of the important decisions we think we made early on in this process was that the -- outside of the chief credit officer, who oversaw the broader piece of it, the staff that we had working on our legacy loan portfolio, so both the relationship managers as well as our regional credit officers, who approved new credit and then finally the special assets team, none of those individuals have been involved in the FDIC process.

So we've kept them focused on the core legacy portfolio and the issues associated with that.

The team that we've established on the credit side to manage the new portfolio of covered assets, if you will, is a combination of people that we've selected that were previously part of the First Financial team as well as individuals that we interviewed and selected from Irwin as well as from the Peoples team, and we may even add some that we recruit externally to that group as well.

So it's been a combination, but we have separated staffs working on the legacy portfolio from those working on the covered loan portfolios.

Yes, yes, okay.

And then expenses, and I know this is also another tough area, but is there a way, I mean I hear what you're saying, you're giving us kind of the qualitative evidence of core is flat and all this stuff is incremental, is there a way to break that out though?

Because at the end of the day, I mean we appreciate the color, but we're going to be taking your word for it I guess in terms of seeing it on paper relative to just where the trends are going and stuff?

Sure.

This is Frank.

I would just, again, guide you to what our expectation is related to the efficiency ratio.

Yes.

And, as we've said previously, part of the reason for our higher efficiency ratio is due largely to the, what we call, unused capacity that we had in the franchise.

So where we've acquired is in our Midwestern strategic footprint.

So we have, in essence, utilized that unused capacity.

So we're able to service a much larger asset base without adding significant incremental costs.

Sure.

So we think we're going to get to that 55% to 60% efficiency ratio much faster now.

I mean is that -- I know you guys don't want to be pinned down at all, but is that a run rate end of 2010 type of event or --?

Yes.

So we will have -- we'll have the majority of the integration work complete in the first half of 2010.

Okay.

And the most significant piece of that is really marked by the data processing conversion.

Yes.

So -- and that should be, again be completed in the first half of 2010.

Got you.

Okay.

Thanks a lot, guys.

Good luck.

Thank you.

Thanks.

Your next question comes from Ross Demmerle at Hilliard Lyons.

Good morning.

Hi, Ross.

Hi, Ross.

The FDIC insurance expense this quarter, would that have been based on deposits at June 30th or at September 30th?

That would have been based on, I believe, June 30.

Okay, thanks.

And do you have a figure for period-end earning assets?

I mean there's some unusual items in there.

I'm not -- I guess I'm trying to find out what the base component for the -- for that interest margin is going to be.

Right.

So end-of-period loan balances were $4.9 billion.

And end-of-period --

I mean just -- you add the loans and the securities and that's basically it?

That is it, yes.

And the indemnification.

The indemnification.

And the indem - -- I'm sorry.

I guess I -- you said add the indemnification in there as well?

Correct.

Okay.

Okay.

So, Ross, if you look at the rate volume, which is included in our -- it's listed average, but if you take end-of-period balances for those categories that will get you there.

Okay.

All right, thanks.

Our next question comes form Joe Stieven at Stieven Capital.

Morning, guys.

Hey, Joe.

Morning, Joe.

Actually my two final questions just got answered.

I think you just gave us everything we needed to model it out, but great quarter.

Way to go, guys.

Thank you.

(Operator instructions) That concludes our question-and-answer session for today.

I'd like to turn the conference back over to Mr.

Claude Davis for any closing remarks.

Great.

Thanks, Amy.

I just had a few final comments that I would make.

We are very excited by where we are as a company.

We feel like the last 90 to 120 days presented us opportunities that we've been positioning ourselves for over the last four years.

And while we know that the legacy portfolio of credit is certainly more challenging right now, we feel like the strength of our balance sheet, and really the improved strength of it and the improved earnings power gives us the ability to manage that with stable to improving core operating metrics.

And I think, more importantly, the three acquisitions have significantly expanded our franchise in strategic markets, have improved the earning asset base in a low-risk fashion that's now covered 40% by the FDIC.

And with future earnings power significantly improved, we feel very good about where we are as a company.

And being able to do these strategic initiatives without diluting our current shareholder base is what we're probably the most pleased with.

So we appreciate the interest and the support today and we'll look forward to talking on future calls.

Thank you.

The conference is now concluded.

Thank you attending today's presentation.

You may now disconnect.