First Financial Holdings, Inc. F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

Jul.26.10 | About: First Financial (FFCH)

First Financial Holdings, Inc. (NASDAQ:FFCH)

F3Q10 (Qtr End 06/30/10) Earnings Call

July 26, 2010 2:00 pm ET


Dee Bee Wright – SVP and Corporate Secretary

Wayne Hall – President and CEO

Blaise Bettendorf – CFO

Joe Amy – Chief Credit Officer


Mac Hodgson – Suntrust Robinson Humphrey

Christopher Marinac – FIG Partner


Ladies and gentlemen, thank you for standing by. Welcome to the First Financial Holdings third quarter fiscal 2010 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded Monday, July 26, 2010. I’d like to turn the conference now over to Dee Bee Wright, Senior Vice President and Corporate Secretary. Please go ahead, ma'am.

Dee Bee Wright

Thank you, Sean. Good afternoon. And thank you for participating in our third quarter 2010 earnings conference call. Before we begin, I have several brief administrative items to address. You should have received our third quarter fiscal 2010 earnings release and supplemental information today. For those who did not, both are available on our website at

In addition to this teleconference call, we have a listen-only webcast available. This webcast will be available for the next 90 days, both the live and archived webcast maybe accessed via a link on our website and again, that address is

On our call today will be our President and Chief Executive Officer, Wayne Hall; Blaise Bettendorf, our Chief Financial Officer; and Joe Amy, our Chief Credit Officer. They will all be presenting and will take questions at the end.

Before we begin, I need to remind you that during the course of the call the company may make forward-looking statements about future events and future financial performance. Management's plans, objectives or goals for future operations, products or services, forecasts of financial and other performance measures and statements about the company's general outlook for economic and business conditions.

You should not put undue reliance on any forward-looking statements which may speak only as of the date made. These statements are subject to numerous factors that could cause actual results to differ materially from those anticipated or projected. For a list of some of these factors, please see the company's forward-looking statement disclosure in our fiscal 2010 third quarter earnings release.

I will now turn this call over to Wayne.

Wayne Hall

Thanks, Dee Bee. Good afternoon, everyone. And thank you for joining us on the call today and for your interest in First Financial. I encourage you to thoroughly review our third quarter earnings release, if you have not done so already. As Dee Bee mentioned, it is available on our website and we’ll be taking questions at the end of the call.

Today we reported a net loss for the quarter of $12 million or $0.73 per share. This is an improvement from the net loss of $19.1 million for the last quarter, as compared to net income before extraordinary items of $5.2 million for the same period last year.

We reported an increase of $2.3 million in pre-tax, pre-provision income as compared to the linked quarter, demonstrating the strength of our fundamentals, despite the current state of the economy.

Non-interest income exclusive of impairment on investment securities, gained on disposition of assets and a final settlement with the FDIC from our Cape Fear acquisition was $16 million, up from the linked quarter total of $15.7 million.

Our net interest margin is very strong at 3.92% for the quarter. We reported increases in mortgage banking income, brokerage fees and service charges on deposit accounts, and OTTI charge on investment securities was down.

The loss for the quarter was driven by higher loan loss provisions related to the continued stress on our loan portfolio. We have now completed our target reviews of the higher risk segments of the commercial portfolio and continue with our ongoing monitoring of our loans.

While charge-offs and provisions were higher than we would have liked, we have recognized all identified losses in the June quarter and believe that we have a thorough understanding of the current status of our portfolio.

I will now turn it over to Joe Amy, our Chief Credit Officer, to review the credit trends and second quarter activity.

Joe Amy

The provision for loan losses increased $9.5 million for the period -- from the prior quarter to $36.4 million. We also noted decreases in delinquency, total non-performing loans and charge-offs in the third quarter. I will review those results in a moment.

The level of the provision is relative to the ongoing stress of the loan portfolio, most notably in the land and commercial real estate sectors. This deterioration has led to the increase in our allowance for loan losses at June 30th, which is $86.9 million or 3.36% of total loans outstanding, up from 3.17% from the prior quarter and 2.05% from the same period of last year.

As we have previously reported to you during this fiscal year, we have increased the frequency of our regular loan reviews and performed target reviews in higher risk sectors of the portfolio, which we identified as commercial land and A&D loans, and commercial real estate and business loans in excess of $1 million. These targeted reviews were undertaken due to the prolonged nature of the recession and the deterioration of the markets in which we operate, as well as our borrower's financial condition.

While our ongoing loan review process continues, we have completed the targeted reviews, which resulted in approximately 62% coverage of the defined commercial portfolios. The remaining balance of the commercial portfolio consists of performing loans under $1 million, which are monitored on an ongoing basis as part of our regular loan review process.

Losses identified requiring specific reserves or charge-offs have been included in the results of operations for the fiscal year-to-date period. Our ongoing monitor of the loan -- monitoring of the loan portfolio includes monthly reviews of all commercial loans greater than $200,000 past due – and past due greater than 30 days, and all criticized and classified loans greater than $500,000.

Action plans to address the credit problems are presented, approved and monitored. This process requires that problem loans or potential problems are regularly -- reviewed regularly to ensure that values are current and to the extent possible available options to reduce our exposure are deployed prior to the deterioration of the asset.

As I mentioned, we have seen some improvement in the credit quality measurements we track and are encouraged by the progress we have made. Total delinquencies have declined for the second quarter in a row and were down to $14.8 million from the prior quarter, with reductions in commercial real estate and residential mortgages.

Our non-accrual loans decreased $3.6 million to $132 million. This decrease was after the addition of $18.5 million from one relationship for several coastal properties, including developed lots and rental houses.

Net charge-offs for the quarter were $32.2 million, down $4.6 million from the prior quarter. We have seen some stabilization in the real estate values in Charleston, our primary market, while other markets may take longer to determine some level of stability. Our other real estate and assets owned ended the quarter at $12.5 million versus the prior quarter total of $12 million. In addition, at June 30, 2010, 23% of our real estate owned was under contract.

Based on our current knowledge of the portfolio from both targeted reviews completed and our ongoing monitoring process, we believe, we have an understanding of the risks in the portfolio and have appropriately recognized the losses and valuation adjustments necessary. We will continue to monitor and be responsive to the developing credit landscape and of course, there can be no certainty that further deterioration of values in the future will not occur.

Blaise will now discuss the financial results for the quarter.

Blaise Bettendorf

Thanks, Joe. Let me start with a review of our net interest income. For the current quarter, our margin remains strong at 3.92%, which is consistent with the most recent quarter. This is compared to 4.16% for the same quarter last year, which had the positive impact of the Cape Fear acquisition. Year-to-date, our net interest margin is 393, compared to 381 for the prior year.

Net interest income was $31.2 million for the quarter, down $267,000 from the linked quarter. Average earning assets do continue to decline as a result of investment pre-payments, loan payments, additions to non-accrual loans and loan charge-offs. This quarter earning assets dropped $64.5 million and this trend may continue given the slow loan demand and the low rate investment alternatives.

While we are managing the balance sheet to maintain a strong margin in the high 300s, net interest income may decline if earning assets are not replaced with comparably priced assets. We are continually managing our exposure to interest rate risk and work to structure our balance sheet to minimize the risk to earnings.

We've extended some maturities on FHLB advances, locked in low cost funding and are considering appropriate hedges and swaps to offset the risk of rising rates, particularly from the floors in place on our home equity lines of credit. We are currently slightly liability sensitive, such that we may realize lower net interest income in a rising rate environment.

Wayne previously mentioned the contributions from our core business units. Our insurance agencies continue to provide solid contributions to earnings and have consistently accounted for over 40% of core non-interest income annually, totaling 13.4% of total revenues for the year-to-date period.

Our insurance revenues totaled $6.3 million for the quarter and were down from the linked quarter, which we anticipated due to the timing of the contingency commissions which are primarily received in the second fiscal quarter of each year. Year-to-date, insurance revenues are up $470,000, despite the weak economy and competitive pressures on premium pricing.

Offsetting decreases in quarterly insurance revenues are increases of $369,000 in mortgage banking income. This is primarily related to gains on sales of loans and the positive impact of hedges for the quarter. We also had $401,000 in higher deposit service charges and fees related primarily to volume increases.

We are monitoring the changes coming from recently passed legislations and the potential impact that those may have on our income. We've proactively communicated with our customers with higher usage to educate them about the new requirements on debit card overdrafts and have received favorable opt-in responses. There were also significant positive contributors from non-core sources during the quarter.

We recorded a lower credit-related OTTI charge, which totaled $311,000 as compared to $1.8 million for the linked quarter. During the same period, real estate owned costs were down $989,000, as we have seen some stabilization of real estate values.

Looking at our non-interest expenses, exclusive of isolated charges this quarter, we reported reductions of $339,000 in many of our core operating expenses, which were distributed primarily among salaries and benefits, occupancy and marketing expense. Overall, operating expenses did increase $735,000 from the prior quarter, due primarily to the premium deficiency reserve increases at our reinsurance subsidiary, totaling $577,000.

This was combined with one-time legal and professional fees incurred in connection with the bid we submitted on an FDIC marketed transaction for which we were not the selected bidder. Operating expenses compared to the prior year same quarter are up $3.5 million, primarily related to the Cape Fear and the American pensions acquisitions which occurred in April and July of 2009. We also had expansion in our wealth management and wholesale mortgage corporate mortgage department.

And now, I’ll turn it back to Wayne.

Wayne Hall

Thanks, Blaise. I would like to update you on our capital position. As of June 30th, 2010, we are reporting consolidated casual common equity of 6.63%. In addition, through our subsidiary first federal continues to be considered well capitalized based on regulatory definitions.

Core capital was 8.46% and total risk based capital was 12.46% in the third quarter end. In addition, we currently hold $27 million of liquid assets at the holding company, which is approximately three years of operating needs for First Financial. We currently intend to retain these funds at the holding company level.

While results continue to be impacted by the current recession, high unemployment and depressed real estate values, all leading to high levels of problem assets, we are encouraged by several factors. Low mortgage interest rates and affordable selection of properties continue to support healthy market activity in the Charleston MSA.

May sales volume is the highest the region has seen since September 2007, according to the Charleston Trident Association of Realtors. Low mortgage interest rates and affordable selection of properties should continue to support healthy market activity.

While the high sales volume is a critical component of the recovery, it is equally important that home prices are continuing to stabilize. The average sales price for the region in May at $186,497 was in line with the May 2009 median of $187,000.

The impact of the Boeing final assembly plant on the region tourism industry and future workforce is starting to materialize. Historically, approximately 70% of Boeing's revenue from its commercial airplanes division is from customers outside the U.S.

This means that many of their international clients will be coming to Charleston, providing a boost to the local hospitality industry. Boeing recently announced it will locate an interior fabrication facility in North Charleston. It will manufacture interior parts like stow bins, partitions, class dividers and video control stations.

SCRA, a global leader in applied research recently announced that Inversion Genetic Diagnostic Inc. is the fifth and latest tenant to move into the SCRA MUSC Innovation Center. This center attracts and supports start-up companies with wet lab and equipment space, primarily in concert with entrepreneurs commercializing MUSC research.

The South Carolina State Ports authority owns and operates public sea port facilities in Charleston and Georgetown, handling international commerce valued at more than $45 billion annually. April was Charleston's strongest month for container volume in nearly a year and-a-half.

In the year starting July 1st, the ports authority plans to invest $77 million in internal improvements, equipment upgrades and new information systems. These investments strengthen South Carolina’s ability to serve their clients' growth.

We believe that current expansion plans in Charleston and surrounding markets will help with our recovery as we continue to work through the current economic challenges. As to our outlook, we believe that our net interest margin will remain in the upper 300s. Although we are encouraged, we believe credit quality will continue to be stressed as we expect the current difficult economic environment to not begin improving until late 2010 or early 2011.

We continue to demonstrate strong financial performance from our core businesses. Our pre-tax, pre-provision earnings continue to increase each quarter and are indicative that our core earnings driven by strong net interest margins and significant contributions from non-spread revenues, particularly, insurance, mortgage, banking and wealth management, combined with cost control initiatives have all created a strong foundation to position us well once the credit crisis is behind us.

We continue to be interested in expanding markets which we have discussed in prior calls. We believe that the opportunities for the foreseeable future will be with FDIC assisted bank acquisitions, although we have concluded from recent activity that bids on these transactions have and will continue to be increasingly competitive.

We believe that loan growth will continue to be slow. The present interest rate environment for mortgage loans will continue to be positive for our mortgage banking operations. Commercial and other lending is uncertain and businesses are hesitant to expand in this uncertain economic environment and other borrowers impacted by unemployment and underemployment are not expanding their debt.

We are optimistic about First Financial's future as we believe the strength of our management team and staff will allow us to emerge as a much stronger company. We will evaluate opportunities to expand our distribution network.

We are also positioning ourselves appropriately by investing in technology and human capital. We are very thankful for our loyal shareholders and many supporters. Sean, we are now ready to open the lines for questions.

Question-and-Answer Session


(Operator Instructions) One moment, please, for our first question. And our first question comes from the line of Mac Hodgson from Suntrust Robinson and Humphrey. Please proceed with your question.

Mac Hodgson – Suntrust Robinson Humphrey

Hey, good afternoon.

Wayne Hall

Hey, Mac.

Blaise Bettendorf

Hey, Mac.

Mac Hodgson – Suntrust Robinson Humphrey

Joe, I wanted to see if you could give any more detail on that $18.5 million relationship. Any more color you could provide on the collateral there, the situation?

Joe Amy

Well, it's a coastal property as indicated and it involved, developed lots and rental houses and I really can't give you more than that. I was just trying to give you a characteristic of the type of property that it was, or properties.

Mac Hodgson – Suntrust Robinson Humphrey

Okay. And you've taken – Have you taken a charge-off on that or reserve?

Joe Amy

We have a specific reserve on it.

Blaise Bettendorf

Mac, this is Blaise. The reserve is about 47% of $8.8 million is what we've got specifically reserved on that relationship.

Mac Hodgson – Suntrust Robinson Humphrey

Okay. Great. And Joe, is there any way to quantify how much of the provision charge-offs, maybe non-accrual in-flows related to the review, the targeted review that was completed in the quarter?

Joe Amy

I haven't related it directly back to that. And it gets a little complicated because we have a number of different reviews on and what to specifically say goes with what. I can tell you that I am confident that the numbers that we provided are a reflection of all the review processes that we have taken place here and are our best work.

Mac Hodgson – Suntrust Robinson Humphrey

It doesn't look like there was much – If I just look at non-accruals and charge-offs, commercial real estate and charge-off came down considerably and there's a slight uptick in commercial real estate non-accruals and kind of same story for commercial business. Just looking at those numbers, it wouldn't appear as though the review uncovered much in the way of weakness there, but the weakness came in just a kind of legacy, other segments like the land and just residential mortgage and home equity. Is that fairly accurate?

Joe Amy

Yeah. I think that's a fair way to characterize it but you have a lot of movements taking place there. Again, we've gone through the portfolio. We've identified the key things, we need to focus on and we've properly valued them.

Mac Hodgson – Suntrust Robinson Humphrey

And do you think, looking specifically at residential mortgage and home equity, charge-offs in those segments continue to steadily increase. Do you feel like you're getting close to a peak in run rate losses there?

Joe Amy

Well, as far as where we are in terms of the curve, I can say we focused on the home equity product in a review that we're executing there, of using the tools that are available to really drill down, reaffirm the credit scores of the borrowers and the valuation, using some tools in the marketplace to fully understand that portfolio.

Mac Hodgson – Suntrust Robinson Humphrey

Okay. Great. Just one last one. Blaise or Wayne, on the financial reform, anyway you guys can quantify potential impact related to Reg E. Maybe how much of your service charges are related to Reg E type overdrafts?

Blaise Bettendorf

Well, Mac, this is something that we are continuing to look at and have been. About 58% of our total line item for deposit service charges and fees is related to overdraft charges. We are continuing to get opt-ins in. We've gotten a very favorable response on that. We targeted our high use. And our high use customers account for more than 80% of the overdraft charges from the point of sale, debit cards. We're targeting more sending out or more mailings to go out to those. We’ve already got and over 70% opts-ins from those high use customers.

So we do believe that there is going to be a decrease to some extent in our revenue initially that will be replaced either through additional opt-ins as the time passes or from other sources of revenue. But again, it's such a moving target, based on those opt-ins coming in, that we don't have a dollar amount that we're willing to share right now.

Mac Hodgson – Suntrust Robinson Humphrey

Okay. That's helpful. Thanks.


(Operator Instructions). Our next question comes from the line of Christopher Marinac with FIG Partners. Please proceed with your question.

Christopher Marinac – FIG Partner

Thanks. Good afternoon.

Wayne Hall

Hey, Chris.

Christopher Marinac – FIG Partner

Can you give us some color on OREO costs and write-downs within other expense and to what extent some of those were there?

Blaise Bettendorf

Sure, Chris. We did have a pretty big reduction in OREO at this time, as far as total OREO costs that are included in other income. It was down about $989,000, compared to the prior quarter. We are seeing a little bit less on the loss of sales. We still have expenses, but the expenses are trending down just based on the timing of when we've got to pay for freight, insurance or taxes or what have you. Those were down this quarter. But really, the additional write-downs were the biggest chunk of that. Some of it was just the number that we took in as well as – partially write-downs, we may have already taken on the loans prior to them being moved into OREO.

Christopher Marinac – FIG Partner

Okay. So the 980 was the change from March to June.

Blaise Bettendorf


Christopher Marinac – FIG Partner

All right. And then can you talk to us a little bit about the loan to deposit ratio and kind of how you would like that to evolve over time, if you're thinking about that at all in terms of big picture?

Wayne Hall

Chris, this is Wayne. We typically have run around 100% loans deposit. I think we're very comfortable with that level. I think one factor is we do have a heavy concentration in mortgage one to four. So I think that gives us more comfort in allowing that ratio to go up a little higher than maybe some other banks have. So I think we're comfortable where it is and I would expect us to maintain it along that same level

Christopher Marinac – FIG Partner

Okay. And there is one final question. Wayne, you made a statement in the past that you and the team were working on having yourself prepared on OCC exam. With the changes in the charges this quarter, are you there today that if they walked in that you're ready for such events.

Wayne Hall

Well, I think we're close. I mean, Joe continues to review the policy and procedures and make sure that loans are well documented. We continue to make progress toward that. I think we probably have another year to 18 months, before the OCC will do an examination based on what we know. So I think by the time they come in here, we will be prepared for that.

Christopher Marinac – FIG Partner

Okay. Great. Thanks very much.


(Operator Instructions). One moment, please, for our next question. It would appear there are no further questions at this time. I'll now turn the call back to you. Please continue with your presentation or closing remarks.

Wayne Hall

Thanks, Sean. And we want to thank each of you for joining us this afternoon. My thanks to each of you having taken time out from your busy schedules and we appreciate your interest. If you have any questions, as always, you certainly feel free to call either one of us and we'll be happy to do our best to help you. Again, thanks.


Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.

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