First Financial Bancorp (NASDAQ:FFBC)
Q2 2013 Earnings Call
July 26, 2013 8:30 a.m. ET
Ken Lovik - Senior Vice President, IR
Claude Davis - President and CEO
Tony Stollings - EVP and CFO
Scott Siefers - Sandler O'Neill
Emlen Harmon - Jefferies
Chris McGratty - KBW
Bryce Rowe - Robert W. Baird
Jon Arfstrom – RBC Capital Markets
Good morning and welcome to the First Financial Bancorp Second Quarter 2013 Earnings Call and Webcast. All participants will be a listen-only mode. (Operator Instructions) Please note this event is being recorded.
And I would now like to turn the conference over to Ken Lovik, Senior Vice President, Investor Relations and Corporate Development. Please go ahead.
Thank you, Emily. Good morning everyone and thank you for joining us on today's conference call to discuss First Financial Bancorp’s second quarter 2013 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer, and Tony Stollings, 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 for the quarter 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 second quarter 2013 earnings release as well as our SEC filings for a full discussion of the company’s risk factors. The information we will provide today is accurate as of June 30, 2013, 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.
Thanks Ken and thanks everyone for joining the call today. We are pleased to report second-quarter net income of $15.8 million or $0.27 per diluted share, representing an increase of $2 million or 14.5% compared to the linked quarter. Return on assets was 1.01% and return on tangible common equity was 10.54% for the quarter. Our results for the quarter were impacted by several non-operating items that in total reduced net income by $1.1 million or $0.02 per share. Excluding these items, return on assets was 1.08% and return on tangible common equity was 11.3%.
Loan growth continues to be solid as we achieved our fifth consecutive quarter of growth in our uncovered portfolio, which increased $133.3 million or 16.5% on an annualized basis compared to the prior quarter. The growth was driven through multiple channels led by strong performance in our specialty finance, C&I and commercial real estate units. And for the third consecutive quarter uncovered loan growth exceeded the decline in our covered loan portfolio as total balances grew $67.8 million. This translates into 6.9% growth on an annualized basis which represents a solid growth rate in its own right compared to overall industry performance.
Our pipeline of new business opportunities remained strong. While the market remains competitive and economic growth in our local markets remain slow yet stable, through our strong sales efforts we are capitalizing on opportunities and remain optimistic that business confidence will continue to improve. While average deposit balances remain relatively flat quarter over quarter, now almost 80% of deposits consist of non-time accounts contributing to a stronger, more core funded balance sheet.
Over the long-term though, asset growth will be dependent on our ability to increase core deposits and our consumer and commercial banking teams are focused on strategies to drive this growth. We were pleased with a $2.1 million increase in non-interest income during the quarter after adjusting for covered loan and nonrecurring items. As part of our strategy to create long-term diversity and sustainable revenue sources, our goal is to further enhance fee income through deposit related fees, mortgage and wealth management as well as through improved fee income in our commercial line of business.
Asset quality continues to improve as nonperforming loans declined $2.3 million during the quarter and the ratio of nonperforming loans to total loans declined to 2.22% from 2.38% for the linked quarter. We feel optimistic on continued improvement as we have several large nonperformers that are currently in the later stages of resolution. We continue to make progress on the efficiency plan during the quarter as operating expenses on an adjusted basis declined over $900,000 during the quarter. Based on current results we estimate that we have achieved $15 million of annualized savings to date, which is in line with our internal estimates of realizing 85% of the announced 17.1 million in annual savings in 2013.
As part of our goal to build a high-performing financial institution, we realized that the current initiative will not be sufficient to drive long-term earnings growth. We are currently working in the next phase of identifying initiatives and we will share those during the third-quarter earnings call.
In conjunction with the earnings release, we announced our quarterly dividend of $0.27 per share to be paid October 1. This includes a $0.12 variable dividend which will be the last variable dividend under the 100% payout ratio we’ve had in place since the October 1, 2011 dividend. Going forward quarterly dividends will consist solely of the regular dividend which at $0.15 per share equates to a 3.7% yield based on yesterday’s closing price and it's still on the upper end compared to peer institutions.
During the second quarter we continued to buy back shares in connection with our share repurchase plan. We repurchased 291,400 shares during the quarter at an average price of $15.47 per share. When combined with dividends paid, we returned over 130% of quarterly net income to shareholders during the quarter. With the second-quarter repurchase activity we achieved our annual total repurchase target of 1 million shares since we announced the plan as part of the third quarter 2012 earnings release. As such, we will be out of the market during the third quarter and expect to resume purchases in the fourth quarter following the release of third-quarter earnings.
Capital levels continue to remain strong despite the high return of capital to shareholders. In connection with the final capital rules related to Basel III, we’ve performed an analysis of the estimated impact on the company capital ratios and determined as expected that pro-forma ratios are well in excess of Basel III minimums plus the capital conservation buffer. As a result of the new rules and our analysis, we have adopted new long-term capital targets for the company consisting of a tier 1 leverage ratio of 8.5%, a common equity tier 1 capital ratio of 9%, a tier 1 capital ratio of 10.5% and a total capital ratio of 12.5%.
From a capital return perspective going forward, we expect to return 60% to 80% of earnings to shareholders through the regular dividend and share repurchases. Our long-term goal is to deploy the remaining capital above these target capital ratios through growth initiatives, including organic asset growth and acquisitions.
With regard to M&A, we remain interested in acquiring banks within our three-state footprint as well as contiguous market with growth opportunities and characteristics similar to our existing franchise. We also remain interested in looking at non-bank financial services providers which is asset generators or fee revenue providers that fits strategically with our commercial consumer and wealth management lines of business.
In summary, our overall performance is solid and we feel optimistic in our outlook for the rest of the year, as we continue to capitalize on loan growth opportunities. However our goal is to produce long-term consistent earnings growth and our strategies remain focused on producing greater core deposit and fee revenue growth combined with active balance sheet and credit management. Additionally, we need to remain dedicated to achieving our efficiency plan objectives both current and future in order to produce top of class earnings growth and profitability.
With that, I will now turn it over to Tony for further discussion on our financial performance.
Thank you, Claude. Our second-quarter adjusted pretax pre-provision earnings of $26.4 million, which excludes certain items related to covered loan activity as well as other significant items, increased approximately 5% quarter over quarter. As shown on slides three and four of the supplement, this is 1.68% of average assets on an annualized basis.
Total interest income declined 1.2 million or 2% compared to the linked quarter due to lower interest income earned on loans, a small decline in interest income earned on investment securities and modestly higher amortization of the indemnification assets during the period. The decline in interest income on loans was primarily the result of a 9.8% decrease in the average balance of covered loans and a 42 basis point decline in the yield on covered loans compared to the linked quarter. This impact from covered loan activity was partially offset by a $109 million or 3.4% increase in average uncovered loan balances, as well as modestly higher loan fees.
However we continued to see a significant difference in the yields on new loan originations compared to loans that pay off as the yields earned on uncovered loans declined 4 basis points during the quarter. Lower second quarter interest income from investment securities resulted from a $134 million or 7.3% decline in average balances compared to the linked quarter, partially offset by a 10 basis point increase in the portfolio yield, largely driven by stabilization in the premium amortization during the period. The decline in securities balances during the quarter was intentional as we began to slow our pace of reinvestment late in the first quarter in order to balance loan demand and deposit outflows. This strategy continued throughout the second quarter as a result of sustained loan demand and as part of the company’s strategies to maintain the potential impact of rising long-term interest rates on balance sheet sensitivity and capital. These are risks that we routinely monitor and the decline in the size of the securities portfolio could accelerate in future periods.
Total interest expense continued to benefit from the impact of the company’s deposit cost management strategies, declining approximately $600,000 compared to the prior quarter. The cost of funds related to interest bearing deposits declined 6 basis points to 35 basis points during the quarter. Including non-interest bearing deposits, our total cost of deposit funding declined 5 basis points to 27 basis points for the quarter.
In addition to reducing the balance of higher cost non-core relationship deposits, we have significantly improved the quality of the deposit base as total non-time deposits now comprise almost 80% of total deposits compared to approximately 74% a year ago. While there may be some limited improvement remaining in our cost of funds, we are certainly focused on deposit growth initiatives both retail and commercial and creating long-term franchise value through our core deposit base remains a strategic objective.
Net interest income on a GAAP basis declined $600,000 or 1% to $58.1 million from $58.7 million for the linked quarter. Net interest margin on a GAAP basis declined 2 basis points to 4.02% from 4.04% for the linked quarter, holding better than anticipated due to continued strong loan demand, higher investment yields and a declining cost of funds.
Looking ahead, we anticipate continued margin pressure for the balance of the year, the magnitude being very dependent on continued loan growth and related fee income as well as covered loan activity. Our expectation is that margin could be 10 to 15 basis points lower by the end of the year but given the many variables it’s difficult to be more precise on the timing of the change.
Moving now to non-interest income, excluding the gain on sales of securities, reimbursements due from the FDIC and other covered loan activity and other items as noted in table one of the earnings release, first quarter non-interest income increased approximately $2.1 million from the linked quarter to $16.4 million. The increase was primarily driven by higher service charges on deposits, bank card income, net gains from sales of residential mortgages, client derivative fees and portfolio valuations related to client derivative, partially offset by lower trust and wealth management fees during the period.
The increases in service charges on deposits during the quarter was due to seasonality as well as updated commercial deposit service fee plans implemented during the quarter. While higher net gains on the sales of residential mortgages were largely timing related as the number of sales were pending at the end of the first quarter. The increase in client derivative fees and fluctuations in derivative portfolio valuations were closely related to interest rate movements we saw during the quarter while the decline in trust and wealth management fees is largely due to lower client tax service fees which primarily occur in the first quarter.
Non-interest expenses, excluding certain FDIC and covered asset expenses, expenses associated with the implementation of our efficiency plan and other items as noted in table 2 of the earnings release were $48.1 million as compared to $47.7 million in the first quarter. The modest increase in noninterest expenses compared to the linked quarter was primarily driven by higher marketing and other miscellaneous timing-related expenses, partially offset by lower salaries and employee benefits, uncovered ORE and equipment expenses. \
During the second quarter, the company incurred a $4.3 million of pension settlement charges driven by the year-to-date level of lump sum distributions from the plan. When these distributions exceed the annual threshold permitted by pension accounting rule, an acceleration of pension expense is required. We have incurred pension settlement charges before. They are a result of staff retirements as well as our efficiency initiatives. We will continue to experience a charge for lump-sum distributions that occur over the remainder of 2013 but not at the magnitude as the second quarter. The accounting threshold for lump sum distributions will reset at the beginning of 2014.
Overall we continue to be pleased with our performance with respect to expense management and feel we are tracking well on our initiatives. Efforts are ongoing to further evaluate our operating platform for additional savings opportunities.
Income tax expense for the second quarter was $6.5 million resulting in an effective tax rate of 29% compared with income tax expense of $6.4 million and an effective tax rate of 31.5% in the first quarter. The decline in our effective tax rate during the second quarter was primarily the result of a favorable reversal related to an intercompany tax obligations associated with a non-consolidated former Irwin subsidiary as well as other items not expected to recur associated with favorable state tax changes. To a lesser degree, this quarter also reflects the impact from the implementation of recent tax planning strategies. The company anticipates that this will be the last meaningful adjustment related to the resolution of the former Irwin subsidiary and that a normalized effective tax rate is estimated to be 34.5%.
Turning briefly to covered assets, the company recognized $1.8 million of income in the second quarter associated with net credit costs on covered assets. As highlighted on page 9 of the supplement, which shows the individual components of credit and FDIC related items associated with those assets. Credit costs on covered assets can be somewhat volatile from quarter to quarter and are affected by actual charge-offs, changes in estimates for both the timing and the amount of expected cash flows and continued mix shift as the covered loan portfolio matures.
However credit costs this quarter were also impacted by enhancements we made to our valuation methodology and the quarterly estimation of impairment, placing greater emphasis on changes in total expected cash flows and less emphasis on changes in the net present value of expected cash flows. As a result of these enhancements, the company’s allowance for loan losses related to covered loans and the related covered loan provision expense were reduced by $7.8 million this quarter with the corresponding 80% offset reported as a reduction to the FDIC indemnification assets and FDIC loss sharing income.
Including the impact from these enhancements, the company’s FDIC indemnification asset balance declined from 112.4 million or 16% of covered loans at March 31st, to 89 million or 14% of covered loans at June 30. While we expect an impairment in the related cover loan provision expense would be lower in future periods than in the past as a result of these estimation enhancements, we do not expect it to be of similar magnitude to that observed this quarter. Future impairment is difficult to estimate as they can also be impacted by the level of loan resolutions. But we believe on a normalized basis it should be lower than what we have experienced in prior periods.
Finally, I will briefly comment on interest rate sensitivity and capital. Due to our initiative in late 2012 to pre-fund the investment portfolio with wholesale borrowings based on the portfolio’s expected cash flows over a 12-month horizon, we were in a modest liability sensitive position at March 31, 2013. As I mentioned earlier, late in the first quarter we began implementing the strategies to allow the prefunding initiative to unwind. The strategy continued through the second quarter as a result of strong loan demand and the upward movement in long-term interest rates as evidenced by the declines in the average balances for both the investment portfolio and short-term borrowings.
As of June 30, we expect to be approximately neutral on our asset and liability sensitivity position under a plus 100 basis points parallel rate shift and asset sensitive under plus 200 basis point rate shift. We continue to evaluate a number of strategies and we remain prudent in managing our balance sheet given the strong loan demand and our rational deposit pricing.
I will now turn the call back over to Claude.
Thanks Tony, and we would be happy to open the call for questions now.
(Operator Instructions) Our first question comes from Scott Siefers with Sandler O'Neill.
Scott Siefers - Sandler O'Neill
Tony, I guess the first question is probably most appropriate for you. I was wondering if you could add a little more color on the unwinding of the prefunding initiative and just give us sort of a sense for how far through that process you are? And I know in your prepared remarks you’d suggested that the securities portfolio decline could accelerate in coming quarters but just sort of curious as to – order of magnitude how much more could that come down, what’s the final goal or resolution?
Well, if you recall back when we put the initiative in place, we purposely set it up to where we could unwind it over a 12 month period and at that time we were optimistic about loan demand and that's certainly come into play. I don't think anyone anticipated the move in rates that occurred starting in May but given both of those we thought it was prudent to begin to unwind. We have two portfolios, we have the held to maturity which kind of sits and does what it does, and then we have available-for-sale which we have a lot more flexibility on. So we are content right now given all the other balance sheet dynamics and where the market is to just let it be a more organic or natural unwind. But should the market provide us the opportunity we might accelerate that up, particularly if loan demand stays strong.
And Tony – we will do it also, Scott, in the context of just what the overall asset sensitivity is and what the loan growth is. So we've not put in place a specific target or a dollar amount, if you will, but really it’s more tied to managing the overall balance sheet rate sensitivity.
Scott Siefers - Sandler O'Neill
And then just a couple additional questions just on fees and expenses, obviously the fee number jumped pretty substantially from the first quarter, and you offered the color on why but just curious that kind of 16.5 million sort of core run rate, do you think that's a level you guys can sustain here as we look forward? And then the final question is on probably best for you Claude on the efficiency, you mentioned that you’re going to be discussing some additional initiative in the third quarter. How are you thinking about that in terms of scope, are they just kind of smaller add-ons relative to the heavy lifting you’ve already done or would this be another relatively large new program, how are you thinking about that kind of dynamic?
Sure. Yeah, the first thing I would say is, Scott, on the fees, first quarter is traditionally a low quarter for us as it relates to fees. There was nothing in that second quarter items whether that unusual or significant that we wouldn’t expect to recur but Tony, now you want to add if there is any –
Yeah, I think it’s pretty much what you see there, except there is some impact from rising rates and around our derivative portfolio and that I think as everyone knows that’s subject to some volatility. So – but outside of that I think the fee income that you see there is largely what we would expect.
Our mortgage banking piece is not a big part, I mean it’s a nice and growing part and it’s one where we’re continuing to invest in, Scott, I think it was over a million in the second quarter. We are seeing nice purchase applications, we know refinances will decline some but fortunately at this point in this development we don’t have the same exposure that maybe others do in that category.
On the expense initiative side, yeah I don’t mean in any way to signal that it would be anything a significant as the 17 million we announced. I would say it’s – the things we are working on, I would call them more incremental than the 17 but still important and significant to us in achieving our earnings goals and objectives long-term. And it won’t just stop at the third quarter, we feel like ongoing efficiency work is critical. And we do that through process reviews through evaluations of all the business lines and the profitability, everything that we’re doing we’re evaluating, as well as, as the loss share portfolio continues to decline we would expect the expenses associated with managing that to decline as well.
Our next question is from Emlen Harmon of Jefferies.
Emlen Harmon - Jefferies
A quick follow up on the last question on expenses, and you guys are tracking pretty well versus that $17 million number that you had I think initially hoped to hit by year end of this year. I was just curious how much of that is just kind of timing, you’re getting it faster versus maybe finding a little bit more, than you thought was there originally just kind of with what you had identified?
Yes, on the 17, most of that is timing, although I mentioned in the Scott question, we know that’s not sufficient to meet our efficiency objective. And so we are continuing to look for additional opportunities and as I mentioned and I’ll just keep emphasizing it, is we also have a fair amount of loss share expenses that we should see continue to decline as we get into later stage of next year when you look at total cost and total expenses.
Emlen Harmon - Jefferies
And then just a couple of questions on capital, I guess, when you think about a 60% to 80% payout ratio, would imply that there is some capital built underlying, how do you think about just kind of a trajectory – to think about the trajectory of capital ratios with organic growth coming into the mix as well? And then also just if you could give us an update on what you think Basel III impact is now that we have a better sense of what the final rules are?
Sure and I will make a couple of comments and Tony can fill in as well. You are right, 60%, 80% we reason we pick that is based on what we believe are good organic asset growth rates that the capital retention over time would support the organic asset growth. But if you look at our current capital ratios compared to our – the new targets we announced in my comments, there is still a [nice excess] [ph] above that and that was related to my point on M&A that we continue to look for opportunities for growth initiatives and that hopefully our earnings retention will support organic asset growth and, that that additional capital is available for us to deploy with M&A opportunities that we hope we can identify and execute. Certainly if we don't succeed on either one of those then we are going to have to come back and look at our capital plans, which we’ve always done as we think about being shareholder friendly.
Yeah, the capital planning process is continuous. Our early look at Basel, it’s impactful but we are estimating it’s probably a 60 to 70 basis point impact to us and much of that impact we believe that we could manage away by the time actual implementation comes in. So it’s just that balance of having the right amount of capital and not too much capital. We don’t worry about having too little, it’s too much and we balance that against the opportunities that come our way. So it’s a continuous process and every component of it is under review.
Also as part of our planning process now, we're also looking at the composition of our capital structure. We’re very almost totally calm and happy and we think we have some opportunity to not only enhance and strengthen our ratios but also have a more efficient structure. So all those things are in the planning process.
Emlen Harmon - Jefferies
So would it be fair to say that like you kind of – as far as the ratios are concerned you’re kind of thinking about – with the organic growth kind of keeping those steady here over the near term?
Yeah, I would say on a ratio basis – the one thing that’s changing for us is – as you look forward to loss share and the end of loss share at the end of next year our risk weighted assets will increase just as a result of the determination of that and -- if you take a look at the loss share assets today they would have a 20% risk weighting because of the loss share agreement, if – when those convert to a 100% that as an example would be about a 100 plus – 100 basis point plus impact, that balance will be smaller at that point in time but we also expect to have loan growth during the period. So the point being is our risk weighted asset growth will be higher than many over the next 12 to 24 months because of the expiration of the loss share agreement. But with our capital ratio position we feel very good about having some dry power if you will to pursue M&A opportunities.
And we have factored that risk weighted asset conversion into our planning.
Emlen Harmon - Jefferies
And you just hit on M&A opportunities, I guess what’s the environment like out there today, I guess we started to see few more deals kind of – few more deals starting in the surface and just kind of – increase the stock prices at least it feels like that’s kind of making some sellers a little bit – bring more sellers I guess to the table. But could you give us an update just on kind of volume of conversations and just kind of at the level volume of share you are gaining from potential targets?
Well, I would say obviously we all see the same thing in terms of the announced deals and it feels like things are beginning to improve as it relates to the opportunities. And it’s an area that we continue to be interested in and as I commented in my prepared comments both in a bank level but also in business line levels and that’s something that we are going to continue to actively – and I wouldn’t – I don’t know that I draw too much to comment on conversations but I guess we are hopeful that that would be an opportunity for us going forward. If it’s not, we feel good about our organic growth prospects, our organic profitability prospects and we will continue to pursue those as the primary strategy. But yeah, we’re hopeful as you are that the things will begin to heat up if you will in the M&A market.
Our next question is from Chris McGratty of KBW.
This is [Mike Fredo] stepping on for Chris. I guess first, quick questions on securities book, the yield was up 10 basis points, and I saw on the text in the release that it’s primarily premium amortization. But I guess what do you guys see on the yield side, are you guys still punched upon lower than what’s rolling off – is that gap closing?
First of all, we are not putting a lot on, we’ve done – I would describe them as very select opportunistic buys in the last few months. But most of these new purchases would be above the 2008, as I said they are opportunistic. Most of it has been just the stabilization of the premium amortization.
Do you guys have an expectation to that going forward, is that – should you think that’s a swing yields in the coming quarters at all or should –
I would love to see a significant change in the overall yield. Again it’s going to be largely dependent on where rates go as well. But –
And then just one quick one on M&A, what kind of – when you guys think about – what kind of is your target size you think you guys would like to add, so maybe any other color on what exactly you are looking for in the market to acquire?
We don’t necessarily think about it, Mike, in terms of target size. As you would expect there is extremes on both ends in terms of thing that are too small to dedicate resources to and things that are too large that may destroy the culture or it would be too high of operational rut. Our focus is more on the strategy piece and that is – is the deal strategic for us and our business and that could give both whole bank as well as product line driven. We have proven through the deals we did in ’09 and when we doubled the size of company that we can integrate – even acquisitions as large as I. So I think we’re confident in the operational integration capability no matter the size, it’s more a function of its –
Our next question is from Bryce Rowe of Robert W. Baird.
Bryce Rowe - Robert W. Baird
A few questions, first one, Tony, saw a nice decline in the cost of average interest-bearing deposits. Can you tell us what the average cost of CDs did in the quarter and what the expectation is going toward with coming on the CDs rolling off and where they are rolling off in terms cost?
Let me get this cost number for you here. But just from a general – just like our overall time deposits for the quarter were about 104 and that’s down about 16 basis points from the second quarter – from the first quarter. And our focus outside of just being rationally priced, we have talked in previous quarters about our single service CDs and trying to get those to the right price, or get them into other products. So that’s probably still the biggest opportunity that’s about – that category of CDs is about 27% of our balances, about $240 million. Now we have seen a particularly since first quarter because of some of our other deposit growth initiatives we've seen a higher retention rate on those than we had before, it was running about 60%. So there’s still some downward opportunity but probably not in the magnitude that we have seen in prior quarters.
Bryce Rowe - Robert W. Baird
On the leverage program, just trying to get a feel for what an organic unwind would look like in terms of securities portfolio and then what to expect on the flip side on the liability side to get FHLB ---
Again largely driven by what the longer-term rates do. The run-off of that portfolio is probably 20 to 25 a month, but that could swing, we are – those assets are largely mortgage related. So it’s impacted by the longer-term rates. So 20 to 25 is what we have been seeing.
Bryce Rowe - Robert W. Baird
Last question, Claude, you mentioned the potential resolution of large NPAs in your prepared remarks. Just wanted to get a better understanding of that and how large are those NPAs and what we might expect to see in terms of downward movement in non-accruals or NPAs –
I will give you some qualitative though, but I don’t want to into quantitative just because whenever you are dealing with nonperforming credits and resolution strategies, the timing of those can be pretty volatile to be honest. But as you know we are different than most banks is when you have a NPA bucket, there is always a few large ones and then a lot of smaller ones, and the reason for calling it out in my script is that few of the larger ones – obviously in our case it would be a few million dollars each, are ones that we feel like we are in a good position in nearing resolution -- near resolution on those future strategies, we have been working on for several quarters. So we are hopeful those will get done and accomplished this quarter. But I would say – I would just more focus – the trend will be down and obviously surprise is something moving into it but we expect the trend to be down and I just – at this point wouldn’t want to put a dollar figure on it until we have more certainty around the strategy resolution.
Bryce Rowe - Robert W. Baird
Are there specific reserves held against us –
Absolutely, yeah. It’s a part of our normal allowance process. Every classified credit and certainly non-performing credit is going to individual loan review to ensure that the appropriate reserve is on it.
Bryce Rowe - Robert W. Baird
Is it fair to expect a decline in the allowance (inaudible) loans this quarter, fair to expect that – if we get resolution of those larger NPAs?
I don’t think so. That’s – the outcome of the ebbs and flow is driven by our modeling -- anything that we wouldn’t -- that wouldn't have already occurred we didn’t have confidence in, would not be reflected in there yet. But most of the decline that you see in the ratio this quarter is driven by growth.
Our next question comes from Jon Arfstrom of RBC Capital Markets.
This is Andy [ph] for Jon. I was just curious loan growth numbers were really impacted this quarter and just wondering if you could comment if that’s you’re seeing in converting covered loans you want to retain through core relationship?
In terms of the covered portfolio that we've managed and we’ve in last few quarters gone deeper breaking it out which is what we call – prefer to retain and prefer to exit, in those that we preferred to retain, we have always managed those as core relationship just as we manage legacy loans, they just happen to have a loss share guarantee on them, but in those cases, it’s almost irrelevant because they are good loans, they are paying, we don't expect to ever request payment from the FDIC. So we are now close to four years into both loss share agreements and so in those loans that we’d likely to retain we’re going in fact retain them, and if they weren’t happy with us, they would have left long ago.
Now the balances need to come down because as you have a good loans that pay you back, so you continue to see that occur but as it relates to the relationship, we feel good about the relationships with those clients and we continue to pursue them for new loans, new deposit relationships etc. So obviously at this point I would call that a mature portfolio that there are clients we’ve retained them and hopefully we can do more business with those that we view as strategic core relationship.
I guess what I was trying to get at is of the 132 million loan growth this quarter, was any of that due to some of the covered loans –
No, those were all new relationships or expanded relationships with existing clients. That we don't include in that number any conversion of covered to uncovered.
And then on the loan pipeline you mentioned that still remains strong. Just wondering has there any change in the composition of that and where you are seeing the vast risk adjusted spreads?
It’s been interesting, one of the things we did in 2011 was to begin to expand our product offerings. We added the asset based funding, equipment finance groups. We expanded our mortgage operations. And what we are seeing that is that, different quarters, different groups are having higher performance and it was a part of our original plan was to have a broader asset diversity, and that’s bearing now. And I think that’s a part of what’s translating into continued good loan growth for us is the investments we made to build out our asset diversity and our sales force in that asset diversity. And we actually included a slide this time in the supplement on the profile of the loan portfolio and that’s one that I particularly feel good about from the standpoint, if you look at the diversity now of our loan portfolio and how it’s growing, we are seeing different contributions from different areas at different times and that’s been a real positive for us.
So it really moves from quarter to quarter. As I mentioned in my prepared remarks, this last quarter we particularly saw good performance in what we call our specialty finance group, which is asset based funding and equipment finance as well as continued good movement in CRE and core C&I business. So that’s the plan and it's fortunately thanks to the really good sales staff bearing now.
We have no further questions. This concludes our question and answer session. I would like to turn the conference back over to Mr. Davis for any closing remarks.
Great, thank you very much and again thank you all for your interest in First Financial.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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