Oct 30, 2008
Executives
Claude Davis - President and Chief Executive Officer Frank Hall - Executive Vice President and Chief Financial Officer Patti Forsythe - Vice President, Investor Relations
Analysts
Scott Siefers - Sandler O’Neill Steve Covington - Stevens Capital Daniel Cardenas - Howe Barnes Christopher McGratty - KBW Ross Demmerle - Hilliard Lyons
Operator
Hello and welcome to the First Financial Bancorp. third quarter 2008 earnings conference call.
(Operator Instructions) Please note this conference is being recorded. Now I would like to turn the conference over Ms.
Patti Forsythe, Vice President Investor Relations. Ms.
Forsythe, you may begin.
Patty Forsythe
Thank you, Camille. I would also like to thank everyone for joining us on today’s call to discuss First Financial Bancorp’s third quarter and year-to-date 2008 results.
Joining me on today’s call are Claude Davis, First Financial’s President and Chief Executive Officer and Frank Hall, First Financial’s Executive Vice President and Chief Financial Officer. I would like to remind everyone that our discussion today may involve certain forward-looking statements, which are not statements of historical fact.
Our third quarter and year-to-date 2008 earnings result should be read in conjunction with the consolidated financial statements, notes, and tables attached and in the First Financial Bancorp Annual Report on Form 10-K for the year ended December 31, 2007. Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.
However, such performance involves risks and uncertainties that may cause actual results to differ materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, management's ability to effectively execute its business plan; the risk that the strength of the U.S.
economy in general and the strength of the local economy in which First Financial conducts operations may be different than expected; 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 the 2007 Form 10-K and other public documents filed with the Securities and Exchange Commission.
These documents are available at the Investor Relations section of our Web site at bankatfirst.com, and on the SEC'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, October 30, 2008.
Now, I will turn the call over to Claude Davis. Claude?
Claude Davis
Thank you, Patti. Good morning and thank you for joining us.
We reported solid third quarter and year-to-date 2008 results in a volatile and challenging economic environment. Our earnings for the third quarter and year-to-date 2008 reflected our prudent approach to credit combined with long-term balance sheet management and strong liquidity capital positions.
Our third quarter and year-to-date 2008 earnings were impacted by a $2.2 million after-tax loss related to the company’s investment Freddie Mac preferred stock. Excluding this loss, our diluted earnings per share were $0.21 and we added three basis points to our loan loss reserve during the quarter.
Frank will further address our results later in the call. As mentioned in the news release we issued yesterday, our credit quality performance in the third quarter was consistent with our expectations and reflects our discipline of strong underwriting policies, proactive portfolio management, and aggressive resolution strategies for problem credits.
We saw improvement in a number of our key credit quality metrics during the third quarter of 2008 as compared with the second quarter of 2008. Annualized net share charge-offs as a percent of average loans declined 4 basis points from 40 to 36 basis points.
Non-performing loans as a percent of total loans declined 4 basis points from 57 to 53 basis points. Non-performing assets as a percent of total assets declined 2 basis points from 55 to 53 basis points and our loan loss reserve coverage of non-performing loans increased from approximately 200% to 220%.
Despite the difficult and uncertain economic conditions we’ve been operating under for the past year, we have been able to remain an active lender in our communities even as we maintain our strong underwriting policies. On a year-to-date comparative basis, average total loans increased approximately 119 million or 5% with average commercial, commercial real estate and construction loans increasing approximately $224 million or 15%.
While our credit trends have remained relatively consistent over the past several quarters, the impact from the economic recession including a severe housing down turn and higher unemployment remains unknown and a possibility exist that we could experience higher credit cost over the next several quarters. Frank will provide an overview on our current expectations for the remainder of 2008.
We continue in our efforts to grow our business, reach new clients and expand our market share. During the third quarter, we established a commercial banking office in the Indianapolis, a new market not previously served by First Financial and we continue to grow in our existing markets.
We recently opened a new regional hub and retail banking center in Dayton, Ohio which is an existing market where we have successfully continued to expand with our retail banking and commercial banking presence over the past three years. In addition, construction is underway for two new retail branch locations; one in Crown Point, Indiana and the other in Madeira, a Cincinnati suburb.
Crown Point serves a market where we had a presence since December 2003 and the Madeira location is part of our overall plan to expand in the Greater Cincinnati and Northern Kentucky metropolitan area. Our capital continues to exceed regulatory well-capitalized requirements and our liquidity position remains strong.
However, we continue to evaluate various balance sheet strategies in an effort to further improve our regulatory capital ratios as well as to manage the risk profile of our balance sheet. The U.S.
Treasury Department working with the Federal Reserve Board recently announced the Troubled Asset Relief Program or TARP including the Capital Purchase Program, both intended to stabilize the financial services industry. First Financial is currently analyzing the potential advantages of participating in these programs.
We do plan, however, to participate in the recently enacted FDIC temporary liquidity guarantee programs covering newly-issued debt and non-interest bearing deposits. As I’ve stated in the past several quarters on our conference calls, these are challenging and uncertain times.
We will continue to manage the company with a long-term view by maintaining a strong emphasis on credit and risk management while pursuing opportunities for growth that are consistent with our risk profile. I will now hand the call over to Frank to review the highlights the third quarter.
Frank?
Frank Hall
Thank you, Claude. There are a number of specifics I would like to highlight in our third quarter results of $0.15 per share but first so, I want to highlight an item that we consider to be nonrecurring in nature specifically the approximate $0.06 per share effect of the loss associated with our exposure to the Freddie Mac preferred stock that we purchased in early 2007.
Excluding this item, out third quarter earnings per share was approximately $0.21 per share. The net interest margin for the third quarter of 3.68% on a nontax-equivalent basis decreased from the second quarter 2008 by 4 basis points.
Approximately 3 basis points of the decline is due to the increase in our earning assets through both securities purchases and increased loan balances. The remaining change is due to the lingering effects of the Fed rate cuts on our asset sensitive balance sheet.
We continue to estimate our full year net interest margin to be in between 3.67% and 3.75% on a nontax-equivalent basis. Recent rate cuts have provided a new headwinds for our margin in net interest income though new loans spreads are beginning to wipe.
The net result of these factors is stable net interest income and margin for the remainder of the year. Our investment portfolio grew in the quarter by approximately $68 million.
Investment securities purchased during the quarter of approximately $90 million had a weighted average yield of 4.94% with a duration of just over 3 years. These purchases are the final part of the previously announced leverage strategy.
Securities purchased are primarily agency mortgage backed security. To date, the strategy has added approximately $130 million in investment securities and is currently funded with a mix of short-term and long-term funding.
The long-term funding obtained in the third quarter was approximately $115 million with a weighted average rate of 3.63%. Also included in the quarterly investment purchases was an additional $58.5 million due to the securitization of a portion of First Financial originated residential mortgage loans, not considered part of the leverage strategy.
Strong loan growth continues in the commercial and commercial real estate portfolios. This is a consistent point of emphasis as we shift our asset mix from a consumer heavyweight into one of commercial.
First financial allowance for loan and least loss increased over the second quarter by just under $1 million to $30.4 million at the end of the third quarter. The percentage allowance to loans increased by 3 basis points on a linked-quarter basis and our overall coverage ratios remained strong at 2.2 times our non-accrual loans.
The allowance for loan and lease losses to period end loans ratio was based on our estimate of potential losses inherent in the loan portfolio in today’s economic environment. Total deposits on both the linked-quarter and year-over-year basis have declined primarily due to runoff in time deposits driven by our disciplined pricing decisions.
We continue to see positive results from our sales efforts and on a linked-quarter and year-over basis, non-interest-bearing deposit balances and transactional deposits experienced growth. Non-interest income on a linked-quarter excluding the effect of the loss associated with the Freddie Mac preferred stock were relatively flat due to the offsetting effects of higher service charges on deposit accounts and lower wealth management fees.
Our wealth management fees are based on assets under management that have decreased due to significant market value declines. Approximately half of our assets under management are in equity securities and their values are closely correlated to the major equity indices.
Our overall full-year outlook for non-interest income therefore has been modified to flat down from our previous expectations of modest growth. Non-interest expense for the linked-quarter excluding the effects of the 1.3 million second quarter retiree medical benefit liability reduction was down approximately 1 million.
Our overall staffing and salary levels remained disciplined with some opportunity for improvement. Expense control remains one of our areas of emphasis and we maintain our outlook of flat expenses for the year.
Our capital remained strong relative to minimum regulatory requirements. As previously mentioned during the third quarter First Financial securitized $58.5 million of its fixed rate, residential real estate loans, and the agency guaranteed mortgage-backed securities which are now held in the investment portfolio.
This strategy reduced our credit risk and improved the overall risk profile of our balance sheet and improved our total capital ratio by 9 basis points. As Claude mentioned, we are also evaluating the merits of the TARP capital purchase program.
We appreciate your interest in First Financial and this concludes the prepared comments section of the call. We will now open up the call for questions.
Camille?
Operator
Thank you. (Operations Instructions) Our first question will come from Scott.
Is it Siefers? From Sandler O’ Neill.
Please go ahead.
Scott Siefers - Sandler O’Neill
Good morning, guys.
Claude Davis
Hi, Scott.
Frank Hall
Good morning Scott.
Scott Siefers - Sandler O’Neill
Frank, this question is probably best for you. You talked about improving pricing on some loans.
I’d be curious to hear what types of loans you're getting the best pricing power on?
Frank Hall
Actually, we’re seeing that mostly in the commercial categories.
Scott Siefers - Sandler O’Neill
Okay. And then just I know you guys are still evaluating the TARP, but Claude as you think about sort of the major strategic pros and cons of taking treasury money.
Just looking at the pace of it you guys don’t need the capital but we presumably gave you some flexibility to do deals, maybe ramp up the pace of balance sheet growth, et cetera. What are sort of the major issues that you guys are hashing as you think about whether or not to take the money?
Claude Davis
Well, certainly the ones that you mentioned are ones I think every financial institution is evaluating. In addition to evaluating, the question of competitive advantage versus others weighed against the restrictions, So it is looking at the strategic impact and making sure that you can take advantage of opportunities, that you are not at competitive disadvantage weighed against the restrictions that are placed so that’s the process we’re going through.
And we will certainly we would decide to participate, we will make an announcement at that point.
Scott Siefers - Sandler O’Neill
Yup. Okay.
And then, finally, your guys' loan growth rate is certainly better than the growth rate of the region as a whole. From whom do you guys think you're in the best job of taking market share, is it the larger names that are perhaps seeing some weakness right now?
Other smaller names? Just be curious to hear your thoughts on that.
Claude Davis
Sure. Just because of the market share of the larger names, Scott, that would be the predominant source of our market share gain, but you know we’re seeing it from several.
But it's most acute as you would expect at this point from those that we know our capital constrained or have serious credit problems and you aren't as active in the lending side as they may have been a year or two years ago.
Scott Siefers - Sandler O’Neill
Okay. Then, the final question, you guys will have in presumably at least some impact from the P&E transaction and what kind of opportunities you see both on the customer side and potentially from picking up some employees that might be impacted by that deal?
Claude Davis
We’ve been talking a lot about the potential of what’s going to happen in respect to consolidation, Scott. And I think we would be looking at both of those that you mentioned which would be client and at this location as well as people.
And we’ve always said that we have strategy of pursuing and recruiting good talent and any time there’s consolidation that creates a good opportunity for a company like ours that is a bit more stable right now. So we’ll be pursuing both.
Scott Siefers - Sandler O’Neill
Okay, perfect. Thank you very much.
Claude Davis
Alright. Thanks Scott
Operator
Our next question will come from Joseph Steven from Stevens Capital. Please go ahead.
Steve Covington - Stevens Capital
.
Claude Davis
Scott, it's a good question and we have not seen that yet particularly on the CD side. I would say those large bank that we know may be more strapped for liquidity continue to offer rates, you know, that we wonder about their ability to reinvest the deposit spread.
And that creates the challenge on the time deposit side that we up until now chosen not to compete with, although I would tell you in the last 30 days we've become more competitive on the CD side just to protect the client relationships. And so we're seeing some of that stabilize but it's still a very competitive environment on the CD side.
Obviously, the most recent rate cut of yesterday we've not seen how that may impact market pricing. But CD pricing is competitive still.
Some of the transaction account pricing has become more rational so we'll see what the next month or so brings them CD side.
Steve Covington – Steven Capital
Okay, thanks.
Claude Davis
You bet.
Operator
Our next question will come from Daniel Cardenas from Howe Barnes. Please go ahead.
Daniel Cardenas – Howe Barnes
Good morning guys.
Claude Davis
Hi, Dan.
Daniel Cardenas – Howe Barnes
Most of my questions have been asked. Just a couple of clean-up questions.
On your assets under management and the wealth management division dropped $100 million. How much of that was market related?
How much of that was related to customers pulling money out?
Frank Hall
The bulk of that, Dan, and I don't have the exact breakdown, but typically what we've seen there most of that is due to market value declines. There's always some level of what I'll call a negative cash flow just as part of operating any trust department.
But the bulk of that decline would be attributed to market value declines.
Daniel Cardenas – Howe Barnes
Then on your home equity portfolio, how are the loan to values holding up and what's the average FICO score?
Frank Hall
Yes. We have not disclosed what the average FICO score is, but I would tell you in general the home equity portfolio is underwritten with some very strict guidelines.
So the growth that you're going to be seeing in that portfolio again is going to be underwritten with strict underwriting guidelines, and also, again, to the extent you see growth there. The values are going to be based on values on today's appraisals.
Daniel Cardenas – Howe Barnes
Great. Thank you.
Frank Hall
Thanks, Daniel.
Operator
(Operator Instructions) We have a question from Christopher McGratty from KBW. Please go ahead.
Christopher McGratty - KBW
Good morning.
Frank Hall
Good morning Chris.
Christopher McGratty - KBW
I think in your prepared remarks, you alluded to expectations for a relatively flat margin in the fourth quarter. Obviously, you guys are asset sensitive short term.
So I'm wondering if you just discuss your dynamics in light of the recent 100 basis point cut since quarter end.
Frank Hall
Sure. There's certainly a headwind there as I discussed.
But again, we are optimistic that there should be a sufficient offset for both loan pricing, and again just on the net interest income of full-quarter's effect on investments, security purchases, et cetera. So, that's really what's behind that.
Christopher McGratty - KBW
And then in terms of growth expectations for earning asset, it sounds like the leverage strategy is complete. So how should I think of, I guess, consolidated loan growth or in the realm of total earning asset growth going forward?
Frank Hall
Yes. I think we've guided that in the high single digits, mid to high single digits, as far as earning asset growth.
Christopher McGratty - KBW
For the fourth quarter?
Frank Hall
That's right.
Christopher McGratty - KBW
Okay, thanks.
Operator
(Operator Instructions) We do have a question from Ross Demmerle from Hilliard Lyons. Please go ahead.
Ross Demmerle - Hilliard Lyons
Hey, good morning.
Frank Hall
Good morning Ross.
Ross Demmerle - Hilliard Lyons
In your press release you talked about the possibility of a sale lease back and I'm wondering with your preliminary discussions, what kind of values you're refining right now for real estate? Because I would've thought that commercial real estate in general might be under pressure right now.
Frank Hall
Sure Ross. We're actually not to that part of the process just yet.
We're in what I'll call the early stages of evaluation but I think your observation's right of the landscape. But we wanted to at least get that point out there that it is something that we're evaluating.
Obviously, it needs to make sense for us and for our shareholders, but we're early in the process now.
Ross Demmerle - Hilliard Lyons
Okay. Thanks.
Operator
We show no further questions at this time. I would like to turn the conference back over to Mr.
Davis for any closing remarks.
Claude Davis
Hey, Camille, thank you and I appreciate everyone's interest, and we look forward to the next quarter. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.