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First Financial Bancorp (NASDAQ:FFBC)

Q4 2010 Earnings Call

January 27, 2011 09:00 am ET

Executives

Claude Davis -- President and Chief Executive Officer

Frank Hall -- Executive Vice President and Chief Financial Officer.

Richard Barbercheck – Chief Credit Officer

Ken Lovik – Vice President of Investor Relations and Corporate Development

Analysts

Scott Siefers – Sandler O’Neill

Jon Arfstrom – RBC Capital Markets

Justin Maurer -- Lord Abbett

Eileen Rooney – KBW

Matthew Keating -- Barclay’s Capital

Bryce Rowe -- Robert W. Baird

John Rodis with Howe Barnes

Joe Steven – Steven Capital

Operator

Good morning, and welcome to the First Financial Bancorp’s Fourth Quarter and full year 2010 Earnings Conference Call and Webcast. All participants will be in a listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Vice President of Investor Relations and Corporate Development, Ken Lovik. Please go ahead, sir.

Ken Lovik

Thank you, Sue. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s Fourth Quarter and full year 2010 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer, and Frank Hall, Executive Vice President and Chief Financial Officer.

Before we get started, I would like to mention that both the press release we issued yesterday announcing our financial results and the accompanying supplemental presentation are available on our website at www.bankatfirst.com under the Investor Relations section. Please refer to the forward-looking statement disclosure contained in the Fourth Quarter of 2010 Earnings Release, as well as our SEC filings for a full discussion of the company’s risk factors. The information we provide today is accurate as of December 31, 2010, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call.

I will now turn the call over to Claude Davis.

Claude Davis

Thank you, Ken, and thank you to those joining the call today. Other than a high level overview of our financial results, I will be speaking to the strategic elements impacting our performance for the quarter, and Frank will address the financial items in greater detail. We are pleased to announce another solid quarter of performance, reporting net income of $14.3 million or $0.24 per diluted common share. For the full year 2010 we earned net income of $57.4 million or $0.99 per diluted common share, representing a return on average assets of 91 basis points, and a return on average shareholder’s equity of 8.68%. During 2010 we earned $276 million of net interest income, compared to $176 million during 2009, an increase of 57%, demonstrating the strong revenue contribution from our 2009 acquisitions.

Our net interest margin remains strong for the quarter at 4.65%, and our non covered portfolio credit metrics continue to stabilize, and in most cases showed marked improvement in Q4. Although we did not make any new acquisitions during the year, 2010 was a significant year for First Financial, as we demonstrated our ability to successfully integrate the 2009 acquisitions while remaining focused on the execution of our strategic plan.

Our primary objective is to increase earnings and shareholder value through a combination of organic growth, running our business lines efficiently, and taking advantage of strategic opportunities when they arise. While loan growth throughout the year was challenging because of the continued economic environment, we implemented a number of strategic initiatives designed to drive revenue growth. A key component of our organic growth strategy is a strong focus on sales throughout all of our business lines.

These efforts began to pay off during Q4, as we were able to achieve considerable gains in certain areas of our business. As I mentioned on the Q3 earnings call, we have made a significant investment in our residential mortgage business. This investment began to contribute at a higher level during Q4 as our still growing team of seasoned originators pursued new business opportunities aggressively and grew origination 60% over Q3 levels. Our commercial lenders were also committed to the sales efforts, as we experienced the first linked quarter growth in our legacy portfolio during 2010.

During the quarter, originations and renewals in our commercial loan portfolio exceeded $210 million, and in the commercial real estate book exceeded $138 million. At quarter end, commercial loans were up 4.8% compared to the prior quarter. Our sales focus was also evident on the funding side of our business as we continued to build our core deposit franchise. Strategic retail transaction savings balances increased over $80 million, or 5% compared to the prior quarter, and total strategic transactional and savings accounts increased over 7%.

Please note however, that we achieved this growth while maintaining discipline in the pricing of our deposit products. With regard to credit quality, our resolution efforts during the quarter resulted in significant improvement in our overall metrics, as non-performing loans decreased over 11% to $70.6 million and non-performing assets decreased over 9% to $88.5 million. Due to our continued aggressive efforts in identifying problem credit, we were able to finalize resolution strategies on a number of non-accrual and delinquent loans.

These strategies encompassed a combination of improvements in the status of certain borrowers, cash payments, and charge-offs, which accounted in the increase of net charge-offs for the quarter. Note that one-third of our total net charge-offs are represented by one relationship which was fully resolved and for which we received cash proceeds on a portion of the total exposure. For the quarter, our provision for loan losses equaled nearly 100% of total net charge-offs. As a result, our allowance was essentially flat quarter over quarter, but as previously noted, our credit ratios improved as a result of the lower non-performers.

While we feel cautiously optimistic about our credit heading into 2011, we also recognize that complete economic recovery is still a longer term event, and the timing of a key driver of economic improvements, higher employment levels, is still hard to predict. Once again, our capital levels remain strong and well above regulatory minimums for well capitalized status, and well above our peers. We remain committed to deploying our capital in a manner that most benefits long term shareholder value. As part of that commitment return of capital to the shareholders, we are pleased to announce the Board of Directors has decided to increase the quarterly dividend by 20%, to $0.12 per share.

Our earnings power and consistency over the past several quarters provides the capacity to support a higher payout ratio to our shareholders. Despite the higher dividend, we still feel comfortable that our capital levels going forward will provide sufficient ability to take advantage of strategic opportunities while also insuring that we are well positioned to manage uncertainty surrounding any potential changes to regulatory capital guidelines. While organic growth remains our top priority, we are receptive to transactions; either traditional acquisitions, FDIC assisted deals, or branch acquisitions, should they meet our specific strategic operational and financial criteria.

Before I turn things over to Frank to further discuss our performance, I want to reiterate a few things regarding First Financial as we head into 2011. First of all, due to regulatory requirements and financial reform legislation, we expect that the combination of higher cost of compliance and restrictions on consumer fee revenue will put pressure on earnings in future periods. Furthermore, we have seen competition heat up in our market, and as a result we expect the banking environment to be extremely competitive as the economy recovers, and as survivors pursue growth opportunities.

In order to be well positioned to compete, we remain keenly focused on expense control, and have initiatives underway to ensure that we are managing our business as efficiently as possible. Additionally, we are constantly evaluating strategic opportunities, both transaction oriented, such as the Q3 pre-payment of federal home loan bank advances, and market oriented, such as the market changes and branch consolidation plans we announced during Q4, to ensure that our resources are being deployed appropriately, and in a shareholder friendly manner.

Finally, I want to remind everyone that our balance sheet risk still remains low. We still enjoy FDIC loss share coverage on 35% of our loan portfolio, and less than 50% of our balance sheet consists of 100% risk weighted assets. As previously announced, we made improvements in our asset quality during Q4, and our metrics compare even more favorably to our peers. As we head into 2011, we remain confident that our client focused banking model and disciplined approach to managing our business will allow us to take advantage of growth opportunities going forward, while also maintaining a high level of performance our shareholders have come to expect. I will now turn the call over to Frank for further discussion on our financial performance.

Frank Hall

Thank you Claude. I will start by providing a few comments on some of the operating results of the quarter, and the major components of performance, making reference at times to the supplemental information that was furnished separately, and is available either on our website, bankatfirst.com in the investor relation section, or in the 8-K we filed this morning. As in previous quarters, this supplement is crucial to establishing a clear understanding of our reported results, as well as the concepts that have a material effect on our current and future performance.

Q4 2010 GAAP earning per diluted share were $0.24. The most significant items affecting our earnings for Q4 as compared to the prior quarter, excluding the Federal home loan bank prepayment penalty and the gain we recognized in conjunction with the sale of franchised loans during Q3, were a higher provision for loan losses and lower income from the accelerated discount associated with covered loans.

As we discuss our results, we remain sensitive to the fact that when reading our earnings release, it is easy to get lost in the details of the accounting for acquired loans, and the impact that our non-strategic operations has on our overall performance. We continue to try to simplify such concepts as best we can, and I would summarize our underlying strategic performance for the quarter as consistent with our expectations. One particular area of complexity is the impact of the accelerated discount on earnings and whether or not there is any way to reasonably forecast what the effects will be in future periods.

As we have previously discussed, we can reasonably estimate what the total impact will be over the expected life of recovered loans, but we cannot predict the timing of accelerated discount quarter to quarter, as the majority of this revenue is driven by pre-payments, which are client driven, and each loan has a different discount percentage based on its underlying characteristics. Whether the recorded discount is recognized through acceleration associated with pre-payments or attrited over time through net interest margins, both are attrited to tangible book value.

Looking at page four of the supplement, you will see a quarterly progression of pre-tax, pre-provision income that excludes accelerated discounts as well as certain other non-returning items. After backing the volatility of the accelerated discount, you will see that we have produced a fairly consistent run rate over the past five quarters, and earned $28.7 million of adjusted pre-tax, pre-provision earnings in Q4. This table does not exclude all the non-returning items listed in Table 9, which further supports our conclusion of stable trending results.

Net interest margin increased to 4.65% for the quarter due to lower funding costs, that helped to offset the impact of continued pay-downs and amortization of acquired loans. As in prior quarters, we put our excess liquidity to use purchasing over $362 million of agency mortgage backed securities during Q4. However, a vast majority of those purchased did not settle until the latter half of Q4, with a sizable portion settling during the last two weeks of the quarter.

Had those investments been purchased at the beginning of the quarter, our Q4 net interest margin would have additionally benefitted by approximately nine basis points. As noted earlier, provision expense related to our legacy portfolio was one of the key drivers influencing the change in earnings relative to Q3, increasing 55%. Provision nearly equaled total net charge-offs for the quarter.

Our ending allowance for uncovered loans remained flat, and is reflective of our overall credit view, as many borrowers are still under stress. Our allowance represented 2.03% of total loans and almost 92% of non-accrual loans. Non-interest income for the quarter remained flat on an adjusted basis, however we began to see what we can assume were the effects of financial service reform on key revenue as service charges on deposits declined approximately 9.6% quarter over quarter.

Non-interest expense also remained flat after adjusting for acquisition related items and other items not expected to recur. We did experience an increase in acquisition related cost during the quarter, accounting for the overall increase in non-interest expenses after excluding the Federal home loan bank pre-payment penalty. The drivers of this increase include the impact from both lease and contract termination fees, minor subsystem conversion costs, several property valuation adjustments as well as wind down expenses related to acquired subsidiaries.

We do expect additional acquired non-strategic operating expenses during 2011, due to our exit of the Michigan and Louisville markets and continued acquired subsidiary activity. I also want to discuss today our Q4 revaluation of certain acquired loans, the results of which we highlight in Table 1 of the earnings release, and on page three of the supplement.

Before I get into the details, I want to point out that it is difficult to compare the balances of loans with improvement, and loans with impairment on a quarter to quarter basis due to the nature of the valuation procedures in the accounting treatment for loans with improvement versus loans with impairment. Also impacting the comparison is the amortization of pre-payment of acquired loans. During Q4, our credit expectations have improved on loan pools totaling $691 million, or 51% of the revalued portfolio.

Loans with improved credit expectations include both those which have solely experienced improvement to date as well as loans which were determined to be impaired during a prior valuation and have since improved, recapturing prior impairment. The value of impairment recaptured by these loans total $4.4 million for the quarter, and is recorded as an offset provision expense. Total improvement for the quarter equals $17.3 million, which is recognized prospectively as an upward yield adjustment, as shown on the Table on page three of the supplement.

Going forward, and until our next periodic valuation, these loans will have an approximate yield of 9.94%. Loans with previous impairment incurred $14.6 million of additional impairment as a result of the quarter’s revaluation. However, this was partially offset as certain of these loan pools experienced some improvement, recapturing $5.3 million of prior impairment.

When combined with the $4.4 million of improvement discussed above, this resulted in a $5 million Q4 net impairment, and was recognized as provision expense on covered loans. Actual net charge-offs for the quarter total $9 million resulting in total provision expense on covered loans for the quarter of $14 million. Two important items of note; first, the yield on the portfolio with impairment will have no change in yields due to revaluation, and second, a significant amount of the covered loan provision expense is offset by FDIC loss share income shown in non-interest income.

Though it may seem unusual, lower FDIC loss share income is desirable, as it is derived by related credit losses in the covered loans portfolio. In other words, the FDIC loss share income will always be overshadowed by a higher related amount of provision expense on covered loans, as we only receive an 80% indemnification from the FDIC. The prospective yield on the entire revalued portfolio will be 10.41% until our next periodic valuation.

Revaluation procedures related to the FDIC indemnification assets indicated a continued decline in the expected future cash flows, which is a by-product of improved cash flow expectations on the covered loans. This results in a prospective negative yield of approximately 76 basis points. On a combined basis, the revalued portfolio and the FDIC indemnification assets weighted average yield is expected to be approximately 8.84% until the next periodic valuation.

As I mentioned earlier, excluding the impact of the accounting treatment related to certain acquisition related items, our performance was in line with our expectations. While our credit costs were higher compared to the past two quarters, they were in part driven by the finalization of resolution strategies related to non-performing credits and the result is a stronger credit profile as we remain focused on executing our strategic plan heading into 2011.

As to 2011 performance, we will not offer specific earnings guidance, not specific information on any of the key drivers. We will, however, continue to offer insights and additional information about the key drivers, so that each of you can reach your own conclusions. As Claude previously mentioned, we are beginning to see improvements in both our sales activity and in our overall credit picture and as such, expect 2011 to be a year of organic improvement.

Before I turn the call back over to Claude, I would like to announce that First Financial will hold a technical call next week in order to provide greater clarity on the issues surrounding acquired loans and FDIC loss share coverage. We will go into greater detail on these complex issues and discuss how they impact earnings, our balance sheet, our capital, and our future performance. If there are topics or specific questions you would like to have addressed in that call, please email Ken Lovik in Investor Relations, and we will be sure to include them. Additional information about this call will be made available later this week. I will now turn the call back over to Claude.

Claude Davis

Thanks Frank, and Sue, we’re happy to now open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Our first question comes from Scott Siefers of Sandler O’Neill. Please go ahead.

Scott Siefers – Sandler O’Neill

Good morning guys. First, just on the dividend raise, can you kind of remind us what kind of payout ratio you guys are targeting?

Claude Davis

Yeah Scott, we’ve communicated in the past that the payout ratio we’ve targeted is 40 to 60%. Obviously that can vary based on the current economic conditions and earnings level, but that’s been our stated level.

Scott Siefers – Sandler O’Neill

Okay, perfect. And then Frank, you gave pretty good color on a number of those items, particularly on the fee side, I guess, the items that are labeled items likely to recur. I guess on the expense side, just in past calls I recall you making comments such as xyz would decline to something over the next several months or several quarters. Are you able to make any qualitative comments like that, just so we can get a sense for some of these numbers, where we should be expecting them to trend over the next few quarters?

Frank Hall

You know, as far as anything forward looking, just in general, if you’re looking at Table 3 from the release, if we’re looking at acquisition related cost, as we indicated those are likely to be a little choppy, though again, the further in to the acquisition integration we are the less you would expect to see there. Other items expected not to recur, the increase on a linked quarter there relate partially to the Michigan and Louisville exit, and some other items there, but again the deeper into the integration that we get and the further into the work out or disposition of the non-strategic components of the business you expect to see those eventually make their way to zero, but over what time horizon I couldn’t say.

Scott Siefers – Sandler O’Neill

Okay, and then that acquired non-strategic operating expenses, which I think got kind of hit because the announcement—the market exit announcement from early in the quarter—would that similarly just be expected to trend down pretty steadily?

Frank Hall

Yes.

Scott Siefers – Sandler O’Neill

Okay, and then a final question on the margin here. You’d mentioned the nine additional basis points of improvement that you would have gotten had there been some timing differences in there. Are you feeling like otherwise the margin was pretty stable, and therefore we could expect some kind of high single-digit improvement going forward?

Frank Hall

I would say absent the item that I noted there it was relatively stable but again you’ve got the same drivers impacting our margin going forward as you’ve had historically in that we have a very high yielding acquired loan portfolio that continues to shrink. Again, I wouldn’t want to give guidance but there have been no significant changes in any of the drivers.

Scott Siefers – Sandler O’Neill

Okay, perfect, thank you very much.

Frank Hall

Thank you, Scott.

Operator

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

Jon Arfstrom – RBC Capital Markets

Thanks, good morning. Just a follow up on that one, Frank, what were the average yields on the MPS purchases generally?

Frank Hall

Sure, the weighted average yields on the purchases was 1.85%.

Jon Arfstrom – RBC Capital Markets

Thanks, Claude, maybe a question for you. In the release in the prepared comments you talked about demand for loans remained slow but you actually had, I think, a decent long-growth quarter, particularly in your two largest categories. I’m just curious where that demand is coming from and how you feel about the pipeline in your core business?

Claude Davis

Actually the Q4 was a more encouraging sign, Jon. You know the commercial business is one that we’ve continued to be very active in and had a sustained calling effort in. I think in the Q4 we began to see more just general activity from our clients, some new prospects that we’re able to convert over to First Financial. Especially later in the Q4 we were really pleased with some of the closing activity. I think it was a good first step as it relates to organic growth, you know. We feel good about it going into 2011, but it’s one of those where I’m still a bit cautious. I want to see two or three quarters of good, solid origination improvement before I can declare that we’re going to see that on an on-going basis. At least for one quarter I feel good about field activity and our clients’ optimism.

Jon Arfstrom – RBC Capital Markets

Okay, and then also in your prepared comments you talked about competition increasing. Is that something you’re seeing already or something that you’re expecting to happen?

Claude Davis

We’re seeing it already. Especially with the banks that have raised capital or are already well-capitalized and I think what all of you see is analysts, I think the fact that we’ve had either declining loan balances or anemic growth, I think everybody’s interested now in really pursuing, especially, those really good clients. So that has increased competition and we would expect it only to get more intense as we move forward.

Jon Arfstrom – RBC Capital Markets

And then just two more things. Frank, we’ve all talked to you about the complexity of the numbers here, and I just want to try to simplify what you said, the credit assumptions that you’re making on your covered assets. Generally you’re saying that the credit assumptions are coming in better than your original expectations; is that a simplified way of saying it?

Frank Hall

That’s correct. Overall, the covered portfolio is having performance better than original expectations and past expectations as we continue to re-value it on a periodic basis.

Jon Arfstrom – RBC Capital Markets

Okay, okay.

Claude Davis

Jon, the one other point I want to keep emphasizing as well, and Frank spoke to it in his prepared remark, is that we continue to remind people that as you do a loan pool by pool evaluation, impairments are recognized immediately, improvements are over time.

Jon Arfstrom

Right, okay.

Claude Davis

That, Jon, is actually a topic that we’ll cover in that technical call in greater detail, as well.

Jon Arfstrom – RBC Capital Markets

I understand, and I understand the timing is obviously something that isn’t always in your control. The last thing is that you’ve touched on regulatory reform, Claude, is there one or two things that we should be aware of that you think are the largest headwind that we need to think about in a little more detail specific to your company?

Claude Davis

I don’t think there’s anything specific to our company, Jon, my concern is really just what I would call the attack on consumer fees, both legislatively and from the regulatory perspective. So that, if there’s an area that we remain cautious about, it’s in that area, whether that further changes to over-draft programs and expectation even though we think ours is conservative and complies, that seems to be an on-going focus of the agencies. As well as while we’re under $10 billion, and technically the Durbin Amendment doesn’t apply to us, we’re as concerned as any bank out there that competitively it may end up impacting us. Those are the two biggest areas that are known today but I think the environment is one that we’re cautious about what other impacts are made that may be a result of the Dodd-Frank legislature.

Jon Arfstrom – RBC Capital Markets

Okay. Alright, thank you.

Operator

The next question is from Justin Maurer of Lord Abbett. Please go ahead.

Justin Maurer – Lord Abbett

Good morning, guys. Frank, I appreciate the clarity, and attempt, as best as you can to segregate this confusing issue into another call. Just one quick question on that though. The NIM relative to the expectations, you had the two buckets that will flow through NIM and the third bucket being the indemnification asset which flips to a negative; that’s in Other Income or Expense, is that right?

Frank Hall

No, that is also in that Interest margin.

Justin Maurer – Lord Abbett

Okay, so prospectively all three of those items, so 901 on page three, 9.01% dropped to 884, that all flows through NIM?

Frank Hall

That’s correct.

Justin Maurer – Lord Abbett

Okay. Secondly, just thoughts on kind of the provision, you know, Claude I appreciate the color and you guys have certainly been cautious all along relative to your borrowers and the migration this quarter. We’ve certainly seen most banks, if not all, start to under-provide relative to charge-offs, and one even—I’m sure you saw—did a negative provision which raised some eyebrows. But if your classified, you guys mentioned in the press release, I believe, classifieds are down, obviously MPA’s are down. I suspect as a result you’re kind of general reserve against those loan pools would be down, or would have the potential of being down, so what—give us some kind of color on thoughts of bumping the provision up a bit late in quarter.

Claude Davis

Sure, fair question. Obviously, we had the model we follow that kind of guides out provisioning and allowance. I would say from a qualitative management perspective, we’ve seen our MTA’s stabilize throughout most of 10 and then in the Q4, as you pointed out and I pointed out in my prepared remarks, it did decline. I’d say that it’s similar to my comments on the organic sales growth that we’re pleased to see that improvement and we’re just a bit cautious because it’s one quarter of decline. You know, with unemployment continuing to remain, I’d say, stubbornly high, and commercial real estate being so choppy, it’s one that we think our approach this quarter was prudent. Now as we get into 2011 we’ll see how the model plays out in terms of what it suggest but from a management perspective that’s our view right now.

Justin Maurer – Lord Abbett

Okay. Was there any move at all more into CRE even though the overall blended number is down, was there some shifts kind of to some more severity types of buckets that, that’s what causes it? Or just more again, general cautiousness?

Claude Davis

No kind of specific severity issues. We obviously don’t disclose the details of the allowance model, but I don’t know, Frank, if you’d like to add any additional color?

Frank Hall

Yes, Justin, I would just say that our review of each of the different asset classes is reflected in the model but it caused no dramatic changes in our view.

Justin Maurer – Lord Abbett

Okay. You mentioned the regulatory issues and so on and Durbin and that you guys don’t apply, and so the reggy issue would have been kind of fully baked, right, for the Q4 kind of run rate. So are there other things you guys are thinking about, kind of actively, that are potential depressants to fees or is it just the overall risk like you said, the industry kind of under attack that leaves the door open for potential?

Frank Hall

It’s just the overall environment. It’s, you know, related, even Jon’s comment. It’s really just more the environment and I think the sensitivity in the legislative and regulatory area is around consumer fees, specifically, and certain types of fees that we just want to point that out as an area of caution for investors. I can assure you that we continue to look, as many other banks have announced this quarter, that if certain fees get reduced we’re looking at other opportunities for revenue improvement, or cost reduction in that business to try to offset it but I feel like we’d be not completely transparent if we didn’t disclose the fact that just the environment itself concerns us.

Justin Maurer – Lord Abbett

Okay, fair enough. Thanks a lot, guys.

Operator

The next question is from Eileen Rooney of KBW. Please go ahead.

Eileen Rooney -- KBW

Good morning, everyone. Most of my questions were already answered. I’m sorry, Frank, if I missed this in your comments, the charge-off that you took this quarter, that one credit, was that already non-performing and could you just give us a little bit of color on what that charge-off was?

Frank Hall

Sure. It was on non-performing and as far as the industry, Richard Barbercheck, our Chief Credit Officer, is here and he can speak to general description.

Richard Barbercheck

That was a credit into a marketing and servicing firm that we’d had for a number of years. It had gone through several different strategies of working on it and we finally found a resolution to that. Claude’s point, in his comments, that brought back actually cash recovery into the transaction, although we obviously had a charge-off in conjunction with that.

Frank Hall

It would have been classified in the C&I category, Eileen.

Richard Barbercheck

It was a non-performing, previously.

Eileen Rooney -- KBW

Okay, thanks. Then, I know we’ve kind of covered this a little bit but I’m just thinking about your loan yield going forward. You had a nice increase this quarter but it sounds like credit spreads are probably going to come under some pressure, just how you’ve been talking about the competition and the market. Should we expect that you might have some trouble holding that where it is now?

Claude Davis

I think, Eileen, as you look at the headwinds on loan yields it is certain the competitive environment could impact it and as you look at the yield on the covered loans, as that begins to diminish, I would say those are two headwinds there, certainly. Margin will certainly enjoy the benefit of that and also lower funding costs.

Eileen Rooney -- KBW

Okay, that’s helpful. Alright, thank you guys.

Frank Hall

Thank you.

Operator

The next question comes from Matthew Keating of Barclay’s Capital. Please go ahead.

Matthew Keating – Barclay’s Capital

Yes, thank you, good morning. I wanted to follow up on the Michigan and Louisville exits. Are those still on track for March 31st?

Claude Davis

Yes.

Matthew Keating – Barclay’s Capital

They are. Okay, and the expense savings associated with those is about $5.3 million, thereabouts. I guess there was also seven branch consolidations. Could you size sort of the expense savings associated with those seven branch consolidations in Ohio and Indiana, please?

Claude Davis

We have not disclosed that specific number.

Matthew Keating – Barclay’s Capital

Okay, then I guess just broader strategy speaking; I was somewhat surprised on the Louisville exit. Could you talk to your broader strategy in Kentucky, and why exiting that metro market made sense to you at this time?

Claude Davis

Sure, if you recall that was a location that was acquired as part of the Irwin transaction, it was one location that was relatively small in scale. It had not been originating new loan volume for the past two to three years, roughly, and the conclusion on our end was that while Louisville is an attractive market, in our view, certainly fits within our franchise footprint, having one location there without sufficient scale just did not make sense to us. So Louisville would be one of those markets in context of an acquisition opportunity or other opportunities to rescale that we would consider.

We didn’t find that our current operation there would be helpful to us in the event that an acquisition opportunity presented itself. So that was the reason for that decision. It’s not a statement about Louisville per se, but as we look at our organic growth investments, in other words, those areas where we would be investing in new banking center or branch growth, that will be focused at least for now in our current metro markets; Cincinnati, Dayton, Indianapolis, and our other market areas where we need additional in fill, so we didn’t see the opportunity to allocate additional capital to Louisville to get to the scale we thought we needed there long term.

Matthew Keating – Barclay’s Capital

Great, thanks for the color.

Claude Davis

You bet.

Operator

Our next question is from Bryce Rowe with Robert W. Baird. Please go ahead.

Bryce Rowe -- Robert W. Baird

Thanks, good morning. You guys touched on the competitive landscape intensifying a little bit here, and I don’t know if you guys talked about this, I might have missed this with Jon’s question, but are you seeing a higher level of competition for C&I credits versus CRE credits, and do you kind of see that as a potential opportunity?

Claude Davis

Yes, I would say the areas of greatest competition right now are in C&I and Small Business credit. CRE I would say is still a bit tough, but in terms of people’s interest in that, obviously we continue to look at commercial real estate opportunities, both owner occupied, and otherwise, but we’re cautious, as most banks are currently. So yes, I think the greatest competition is in C&I and the Small Business sector.

Bryce Rowe -- Robert W. Baird

Okay, and then I guess from an M&A perspective, obviously you get the dividend increase here today and you’re still sitting on plenty of excel capital. Can you speak to – I’m sure you’re having some level of conversations with potential targets. Can you speak to what thoughts are on pricing today, and how you approach some of the increased pricing for M&A transactions we’ve seen over the last couple of months?

Claude Davis

You know, Bryce, I’ll just give you our general strategy that we’ve articulated before on M&A; which we hold to, honestly regardless of what others are doing and what’s going on. In addition to the strategic fit and our ability to manage it operationally, we’ve always approached M&A, prior to our ’09 acquisitions when we had not done any but had looked at others in the past to those that we did in ’09 to any that we would pursue going forward, that we expect it to have an IRR, certainly well above our cost of capital and we price it based on that.

Certainly depending on what we think the franchise opportunities are for revenue growth as well as cost save obviously drives that number, as you well know, so that’s really our approach. If we can successfully do a deal on that basis, we’ll do it; but at the same time, as we’ve always done, we’re not going to put internal pressure on ourselves to do a deal at a price that we don’t think makes sense. So yes, we watch the pricing just as you do and we know it’s drifted up on a few deals, but that has not impacted our strategy.

Bryce Rowe -- Robert W. Baird

Okay, I appreciate it, and again, thanks for all the information on the acquisition accounting.

Claude Davis

Sure.

Operator

The next question is from John Rodis with Howe Barnes. Please go ahead.

John Rodis -- Howe Barnes

Good morning guys. Frank, maybe just back to the loan growth real quick. Was the growth in the C&I category, was it fairly granular? Or were there any one or two bigger credits that you put on in the quarter?

Frank Hall

It was granular.

John Rodis -- Howe Barnes

Okay, and then just kind of looking at the end of period balance sheet versus the average balance sheet, it looks like the commercial real estate balances may be trended down a little bit towards quarter end. Can you maybe just address that?

Frank Hall

You know, there’s no specific kind of issue there. Obviously we always see some paydowns and year end clean up that might occur, but nothing of significant note there. We continue to see our construction development portfolio decline, and we would expect it to continue to decline, as we’re not active right now in doing new originations there. So nothing specific. And the other point I would make to your other question too, just as a reminder, with our growth we still have an internal loan limit of $15 million, so that’s what allows our portfolio to stay relatively granular.

John Rodis -- Howe Barnes

Okay, fair enough. Thanks guys.

Frank Hall

You bet.

Operator

(Operator instructions) Our next question comes from Joe Steven of Steven Capital. Please go ahead.

Joe Steven – Steven Capital

Good morning Claude, good morning Frank. Actually most of my questions were answered, my last one was sort of on the M&A side, but I actually do appreciate you guys trying to open up the understanding of the accounting, because it is complex. I guess my final question was – you guys have talked about – I’m assuming the Michigan, getting out some of the Michigan stuff is sort of the same thing as Louisville. You still can find attractive markets in Michigan, but what you had there just wasn’t what you wanted. Is that sort of the correct answer?

Claude Davis

Joe, it is, and again I would mention that it was very similar to Louisville, that we had four offices in four different cities. All of those cities; Kalamazoo, Lansing, Grand Rapids, Travers City, are of a size that one office is not a sufficient scale for the retail banking business that we want to do and we did not think any of them would be necessarily helpful in the event of an acquisition in any of those communities. So yes, again it was not a statement about Michigan; or our interest in that market or any specific market, it was more about lack of scale.

Joe Steven – Steven Capital

And Claude, on a big picture, macro level on acquisitions right now, are Boards of these small companies, let’s say the half billion dollar companies, maybe a little bigger, are they starting to come around? Because if you look at a company like yours that has not only capacity, but it has the professional expertise to sort of excel, are these smaller companies coming around saying “Okay, I need to partner up, because the regulatory burden is now so high”, or are they still delirious?

Claude Davis

Well, you know, I wouldn’t want to make any general statements or try to lead the group on to think we have enough color to be able to make a broad statement, but I would just suggest that I think the headwinds that they’re facing are even more acute than what all of us in the industry are facing as relates to regulatory pressure on fees, regulatory compliance cost, their probably additional burden is access to capital for growth. You know, we think for the right markets and the right players we offer an alternative that can be good for their shareholders and good for our shareholders, and that’s our view of that sort of unassisted transaction that we talk about.

Joe Steven – Steven Capital

Okay, thank you guys.

Claude Davis

Thank you.

Operator

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

Claude Davis

Thank you Sue, and again, I just thank everyone for participating on the call, and just add a reminder that we do plan to hold the technical call next week and there will be further information provided in terms of the timing of that call. As Frank mentioned in his prepared remarks, if you should have any specific items you would like us to cover, please email those to Ken Lovik and again our objective on that call is not necessarily to introduce new information, but it’s to try to continue to clarify and be transparent as we think we have been on the impact of that accounting and value of it that we see to ourselves and to make sure that our investors understand it well. With that, thank you for joining us on the call today and we appreciate your interest in First Financial. Sue, that ends our call.

Operator

The conference is now concluded.

Executive

Thanks!

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