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First Financial Holdings (NASDAQ:FFCH)

Q4 2010 Earnings Call

October 27, 2010 2:00 pm ET

Executives

Dorothy B. Wright - SVP-IR and Corporate Secretary

Wayne Hall - President and CEO

Joseph W. Amy - EVP and Chief Credit Officer

Blaise B. Bettendorf - EVP and CFO

Analysts

Adam Barkstrom - Sterne, Agee & Leach

Christopher Marinac - FIG Partners

Jeff Harralson - Keefe, Bruyette & Woods

David Grayson - Suntrust Robinson Humphrey

Rupesh Sahu - Titan Capital

Operator

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

And I would now like to turn the conference over to D. B. Wright, Vice President and Corporate Secretary with First Financial Holdings. . Please go ahead.

Dorothy B. Wright

Good afternoon and thank you Andrei and we appreciate your participation in the fourth quarter 2010 earnings conference call. Before we begin, I have several brief administrative items to address. You should have received our fourth quarter and fiscal year-end 2010 earnings release along with supplemental information earlier today. For those who did not, those are available on our website at www.firstfinancialholdings.com. In addition to this teleconference call, we have a listen-only live web cast. This webcast will be available for the next 90 days. Those are live in archive webcast may be accessed via a link on the homepage of our website. On our call today, Our President and Chief Executive Officer, Wayne Hall, Blaise Bettendorf, our Chief Financial officer and Joe Amy our Chief Credit Officer will be presenting and all will take questions at the end.

Before we begin, I need to remind you that during the course of this call, the company may make forward-looking statements about future events and future financial performance, management plans, objectives or goals for future operations, products or services, forecasts on financial and other performance measures and statement about the company’s general outlook for economic and business condition. You should not undue reliance on any forward-looking statement which speaks only as of the date made. These statements are subject to numerous finance 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 on our fourth quarter and fiscal year-end 2010 earnings release.

I will now turn the call over to Wayne.

R. Wayne Hall

Thanks D.B. Good afternoon everyone and thank you for joining us on the call today and for your interest on First Financial. I encourage you to review our fourth quarter and fiscal year-end earnings release if you have not done so already. As D.B. mentioned, it is available on our website and we will be taking questions at the end of the call. We have completed one most difficult and challenging years for our company and the country. The financial sector as a whole has been dramatically affected by economic downturn over the last 24 months. While we recorded a loss for the year, gain levels are encouraging, our capital remains strong and we believe that we are well-positioned for when the economy turns to a more positive growth direction. We have made considerable investments in human capital over the last year. Our talented and skilled management team is leading the company to fundamental stability, improve deficiencies, and we are executing on a strategic initiatives. We are pleased with the results of this quarter and the quarterly improvements that we have posted. I will like to review some highlights with you.

First, despite our credit challenges and disappointing level of creditworthy loan demand, we still maintain a solid performance in our core business. Our free tax, free provision profit remained solid at $15.2 million for the quarter and $64 million for the year. This is compared to $66.7 million from the prior year and is better than anticipated considering the reductions on our loan balances which are down $ 26.5 million for the last quarter and that is down to $4 million from the prior year-end. We are pleased with our free tax, free provision results as it reflects the work we’ve done to remain focus on generating revenue and operating as efficiently as possible for this cycle. Today, we reported a net loss for the quarter of $1.2 million. This is a marked improvement from the net loss of $12 million from the June 30 quarter and as compared to net loss of $1.3 million from the same period last year. Non-interest income was $19.1 million up from the last quarter’s total of $18.7 million and up from $17.2 million for the same quarter last year.

Our net interest margin remains strong at 3.91% on a fully-taxed equivalent basis for the quarter. As compared to the June 30 quarter, we reported inquiries and mortgage and other loan income on a lower OTTI charge on investment securities. While other income was down as a result of the final settlement from the FTLC related to our acquisition of Cape Fear Bank. This settlement totals $1.5 million and was stated last quarter. Increases on non-interest expense are related to higher real estate owned which Blaise will discuss. The loss for the quarter was driven by long lost provision related to the continuous stretched on our loan portfolio. However, the provision was down from the linked-quarter and lower than the same quarter of the prior year. Joe will address our credit metrics in more detail. Now, I will turn the call over to Blaise Bettendorf and she will walk us through the details of our results. Blaise?

Blaise B. Bettendorf

Thanks, Wayne. From our balance sheet perspective, compared to last quarter, total average earning assets were down $47.4 million primarily due to decreases in both the loan and the mortgage-backed security portfolios. Forward to September 30th quarter, average loans declined $15.5 million from the prior quarter while mortgage backs were down $34.5 million during the period.

This movement was the primary driver in reducing interest income compared the linked quarter. Interest expense was also due in part to the reductions of timed deposit balances and the continued re-pricing of deposits in the fourth quarter. We are seeing rate movements from our competitors which is allowing us to lower rate while maintaining our market share. Our core deposits which we define us interest and non-interest bearing checking account, savings and money market account our up $6.6 million over last quarter end and up $83.1 million from the entire year end. The increase being primarily in the commercial checking accounts. The other factor that primarily affected the interest expense was the lower average balance of borrowing and lower rate on borrowing during the most recent quarter as compared to the June quarter related to the change in our funding needs. We have been able to maintain our margin during the year, even though our loans and investments have been re-priced into a lower rate. The increased level of nonaccrual loans has also negatively impacted our margins. Our margin on a tax equivalent basis was 3.91 for the fourth quarter compared to 3.94% for the June quarter.

Today, our net interest margin is 3.94 compared to 3.81 for the prior year. While we are managing our balance sheet, maintain a margin in the mid to high 300s, we do anticipate some compression with a related negative impact on net interest income going forward. The margin has been higher than our historical normal level related in part to the impact of Cape Fear acquisition and related discount accretion as well as taking advantage of steep yield curve this year.

In the current low-rate environment, which we believe will continue throughout our fiscal year 2011, we anticipate that earning assets will re-price and be replaced with lower yielding assets. Given the slow loan demand, we are actively working to invest cash flow over the next several quarters and to select high quality investment securities. We were able to execute this on September and settled $39 million mortgage-backed security during that month. However, we do remain cautious due to extremely low yields on short and mid-term securities. We are taking advantage of opportunities to strategically lock in low, longer-term funding as we deem appropriate. However, the majority of our CDs were already re-priced and we don’t see future re-pricing as being enough to offset the continued reductions on asset yield that we expect, thus the anticipated compression in our margins.

Turning now to review on non-interest income, our insurance agencies continue to provide solid contributions to earning which revenues totaling $6.3 million for both the current quarter and the linked quarter. Contributing to the increase and other income over the linked quarter is $1.9 million in additional mortgage and other loan revenues. This increase is related to the level of gains on sales of loans, resulting from higher volume of loan originations during the fourth quarter as well as improved margin on the loan sales driven by the low-interest rate environment. NSF and ODP fees, net of refund, were down $196 thousand related to the lower volume of transactions, due in part to this being the first full quarter of the Reg E amendment related to overdraft being in effect.

We continue our marketing efforts to increase the opt-ins from our customers. Non-interest expenses increased to $1.6 million from the prior quarter as the direct result of higher real estate owned costs. REO costs included $2.4 million in write-downs related to fair value declined on more properties on the fourth quarter than we experienced in the third quarter. Given the timing of foreclosure moratoriums in 2009, which were initially self-imposed by the bank, and then imposed throughout our industry by state of South Carolina, we anticipate the potential increase level of real estate foreclosure activity during fiscal 2011 as the backlog of legal processing flowed through the court.

Other operating expenses, exclusive of OREO cost, are down slightly from the linked quarter and are up only $238 thousand from the same quarter last year. As we continue to maintain more operating expense level to offset the elevated level of real estate cost we are experiencing.

Finally, I would like to update you on our capital position. As of September 30, 2010, we are reporting consolidated tangible common equity of 6.55% compared to 6.71% for the third quarter and 7.16% at September 30, 2009. In addition, First Federal continues to be considered well-capitalized based on regulatory definition. Tier one capital with 11.27% and total real estate capital was 12.55% at our fiscal year-end. In addition, we currently hold $25 million of liquid assets at the holding company approximately two and a half years of operating needs for First Financial. We currently intend to retain these funds at the holding company level. Joe Amy will now address our current credit quality position.

Joseph W. Amy

Thank you, Blaise. As compared to the prior quarter end, the total commercial loans including commercial construction CRE and CNI were down by $47.5 million while total consumer loans were down by $6.2 million. We reported an increase in residential loans of $27.3 million primarily in the 1 to 4 loan category. We are challenged by the low level of quality loan demands. We continue to focus our efforts on managing our level of non-performing assets and reducing the risk profile of our portfolio. While we did not see improvement in all our credit metrics, there is a stabilization noted in many of the risk measurements. The provision for loan losses decrease 52% from $36.4 million for the prior quarter to $17.6 million for the September quarter to $17.6 million for the September quarter.

The allowance for loan losses is $86.9 million or 3.39% of total loans outstanding. Fairly stable compared to the prior quarter and up to 2.57% for the same period last year. Delinquent loans past due to 30 to 89 days increased to $30.3 million or 1.2% of the portfolios from 0.99% at June 30th 2010. Primarily, the majority of the increase was in the commercial loan category related to one CRE loan, one commercial construction loan and several land loans from our Cape Fear Bank acquisition. Now, the largest one which is over a million dollars. Total non-performing assets were up 5.8% to total $153.1 million.

The increase in commercial nonaccrual category of $9.4 million from the prior quarter is primarily related to three commercial real estate properties. There were declines on both residential and consumer non-performing loans during the quarter. Charge-offs were down from $32.2 million for the third quarter to $17.7 million for the current quarter. The lowest quarterly level this fiscal year. The largest decline is in the commercial land category as there were fewer credits requiring write-down adjustments this quarter. We also noticed improvements in the level of home equity charge-offs this quarter. 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.

And now, I will turn it back to Wayne.

R. Wayne Hall

Thanks Joe. As you were all aware this past summer, the president signed into law Dodd-Frank Act. This legislation will restructure the regulation of the financial services industry. In addition to eliminating the Office of Thrift Supervision, the Act changes the way institutions are assessed for the private insurance, creates capital requirements for savings and loan holding companies, reduces the pre-emption of state law requirements that federal savings associations have enjoyed. It contains a number of reformed related to mortgage originations. These are just a few or the substitute changes that are on the horizon. Most of the provisions of the Dodd-Frank Act require the issuance of regulations before management can fully assess the impact the new law will have on our operations. However, there is likelihood that the Act will result in increased regulatory burden and compliance cost for us. We believe that current expansion plans and economic development in Charleston and the surrounding markets will help with our recovery as we continue to work through the current economic challenges. However, we believe that the mortgage we serve will be delayed in recovery until our employment lessons and businesses are ready to start investing and expansion again and in doing so incurring a reasonable level of debt.

We anticipate continuing challenges during our Fiscal 2011 to include stress on our credit portfolio, compression of our entries margins and slow asset growth. During the upcoming fiscal year, we plan to focus on several strategic themes intended to provide a strong foundation for the bank; this include executing on growth and expansion opportunities that may be presented to us, maintain strong capital and adequate liquidity, reducing the level of the non-performing assets and controlling expenses while gaining efficiencies. We are optimistic about of First Financial’s future as we believe the strength of our management team and staff will allow us to emerge from the current challenges as a stronger company.

Operator we are now ready to open line for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen if you would like to register a question (Operator instruction). Our first question comes in line of Adam Barkstrom with Sterne, Agee & Leach. Please proceed with your question.

Adam Barkstrom - Sterne, Agee & Leach

Hey guys. Good afternoon. Maybe a question for Joe just wanted some clarifications. I know you talk a little it in your opening comments. The nonaccruals, the CRE nonaccruals were up $13.4 million. You know these are 3 commercial real estate credits. Are these all from Cape Fear and are they all covered?

Joseph W. Amy

These are legacy loans they were very familiar with. Again, I pointed out it was three that we have been monitoring very closely and we understand where we are headed with those.

Adam Barkstrom - Sterne, Agee & Leach

Any more color you could give them?

Joseph W. Amy

Well, I really prefer not to. I mean I was trying to give you an indication that it is a known and confined amount than the three loans. Also, I should point out that by just seeing the three loans, they have been properly reserved and I assure you of that.

Adam Barkstrom - Sterne, Agee & Leach

Can you give us any sense of where you have these reserved or how you see the process going from here on the history?

Joseph W. Amy

I hesitate to give you anymore on that in terms of further details.

This loans as all loans goes to our thorough review in our loan loss process. We can assure you based on the information that we have today that we believe they are fully reserved for.

Adam Barkstrom - Sterne, Agee & Leach

In terms of the management can you give a little bit color on that?

Joseph W. Amy

They have been reviewed as I’ve said before they review it monthly and so we expect that a good and place to try and try to resolves the issues.

Joseph W. Amy

(Inaudible) on the 30-89 bucket and I know this are (inaudible) jumps around a lot but I’m just curious if you can give a little color on there’s a bit of a jump in the SRE in the commercial land.

Adam Barkstrom - Sterne, Agee & Leach

Yeah, ill be happy (inaudible) they do jump around but if we do look at and focus on the CRE loans specifically, there’s a 5.5 ripley million dollars increase which 2.2 were from (inaudible) loans so as your covered assets. As 40% of the increased was from (inaudible) to your bank and covered and the other (inaudible) portion related to own and here again were working at the borrowers to resolved those issues.

Joseph W. Amy

Maybe, just curious for a second question for Blaise where do you guys stands as the deffered tax asset issues that weve been a hot button issue here to last several quarters from many in, just curious if you can give us some call on that maybe share the balance of the DTA and where do you think you stand in that process.

Blaise Bettendorf

Sure, I’m happy that (inaudible) we are obviously currently going through our year end review and finalized our documentation of the per tax calculation we are.(inaudible) which is a certainly evidence with regards to that per tax asset but were going through all of the appropriate analysis on that and looking as the (inaudible) is obviously one of the first thing that we go to this. See what we can use and that we can use most of our as the deferred tax asset (inaudible) that will be reverse in (inaudible) 24 months.

We are also going to drill down and see what would be less than to recover going forward in schedule office, temporary differences. We don’t anticipate right now based on the initial analysis and work on our tax account have done and in need for evaluation. The amount is very small as the total to be disclosed in 10K when we put that out but the net per tax asset is immaterial to our total balance sheet. So, its not a significant exposure in any case that right now the indication is that our support will substantiate the need for no evaluation and will have a lot more detail tat obviously (inaudible).

Joseph W. Amy

(inaudible) I would underline word rough calculation (inaudible) $27 million which is immaterial to the size of your balance for $27 range for the DTA and am I even close.

Blaise Bettendorf

For the DTA but our net per tax asset is considerably smaller because we have a deferred tax liability which is driven by the (inaudible) deferred gain so the net amount is considerably smaller that what is your estimating as our gross DTA and you are in line with that .

Joseph W. Amy

Ok. Thank you. (Inaudible) jump in.

Operator

Our next question comes from the line of Christopher Marinac - FIG Partners

Christopher Marinac - FIG Partners, LLC

Thanks, good afternoon. Blaise, just to continue on the DTA for a second, does your expectation of profitability in general the next year also drives some of that?

Blaise Bettendorf

Absolutely correct.

Christopher Marinac - FIG Partners, LLC

Okay. So we can certainly read whatever we want into that, but a lack of problem is also the spoils of that.

Blaise Bettendorf

We certainly part of the evidentiary matter that we put forward and (inaudible) just ..

Christopher Marinac - FIG Partners, LLC

Okay. Great. And then a general question for Joe or Wayne, just about, from the credit perspective, are there any loans, particularly on the CRE side, that you initially reviewed a couple of quarters ago when you started that process that may have had additional impairments or valuations that surprised you? Or has the actual experience that you've now seen through September justified your original evaluations of those loans?

Joe Amy

In terms of the evaluation of the unscheduled questions correctly. The process in terms for review we have still look all the major credits and in that review process that got any issues on the radar and we are able to begin to generally deal with all cases.

There is some volatility that occurs there by I think I can in all fairness they haven’t any overly surprises and very comfortable that we’ve correctly and incompetently reserve any (inaudible) losses. I hope that fully answers your question.

Christopher Marinac - FIG Partners, LLC

That's helpful. Part of my question was did you see any surprises on how you've actually seen actual loans get written off compared to what you thought they were, particularly on the CRE, given that there was a lot of intense time that you made earlier this year?

Joe Amy

I think this is gone pretty much the course (inaudible) has its own story and has had on (inaudible) are taken.

Wayne Hall

I would say that were pleased with the analysis that Joe and his team has done and what we have stating (inaudible) probably closer to his initial analysis.

Christopher Marinac - FIG Partners, LLC

Okay. Great. And then could either of you tackle the issue of foreclosures and mortgage recisions? Have any of those affected you? Is there anything of note that you've seen in either this last quarter or over the course of the last fiscal year?

Joe Amy

Joe, as most bank have gone back and offer a closely into foreclosure to make sure were in full complaints and certainly our initial review concluded that other internal reviews still be done to confirm that to be comfortable with the direction and the process just in place currently.

Christopher Marinac - FIG Partners, LLC

Okay. So recisions have not been an issue in terms of anything even at this small absolute number?

Joe Amy

We have an editing issues.

Christopher Marinac - FIG Partners, LLC

Okay. Great. Thanks very much.

Operator

Our next question comes from the line of Jeff Harralson - Keefe, Bruyette & Woods. Please with your question.

Jeff Harralson - Keefe, Bruyette & Woods

Thanks, good afternoon. Just wanted to ask you guys about, for 2011, what we can reasonably expect, or at the very least how you think about how we should come to what we expect for losses, reserve building, reserve lease, timing to breakeven, coming off a tough year obviously. We've done the big reviews, and I'm sure the regulators have been in there and out. How should we think about it when we're all building our models next year for credit, what should we take into account?

Wayne Hall

Jeff, we don’t give guidance. We have never given guidance. I think we are encourage before were saying the (inaudible) were still shoulder with loan demands to ensure that is as replacing assets are running off some appropriate yielding assets and what was saying here at (inaudible) is that business are just reluctant still to go out and expand. We are working with many of them, helping the to understand their business models, helping them to understand where they have opportunities and hoping that it will lead to increase loan demand but right now it’s pretty light.

Jeff Harralson - Keefe, Bruyette & Woods

All right. And then maybe we'll just talk about generally, if possible, then, on the reserve. Do you think that, with all of the studies and reviews we've done this year, do you think you most likely need to continue building this reserve, or do you think that from here that we're going to mask charge-offs and provisions, or is it just something you don't really want to comment on?

Wayne Hall

I don’t want to comment any further than to say that each quarter we applied the same methodology and I believe it was seen and reported. It’s adequate in certainly using that consistent methodology that we viewed here.

Blaise Bettendorf

Jefferson, I’ll add that with regard to the level of those reserves it certainly going to be driven by what happen to that (inaudible) portfolio as you know that portfolio help grows on putting general reserves if we an increase and detoriation whether it be from risk ratings or from historical loss factors, or to the flip side as we starting to see improvement in those risk metrics. All of that was through our calculation of the allowance to our models that Joe mentioned and will determined what levels of the reserves makes based on that each quarter end.

Jeff Harralson - Keefe, Bruyette & Woods

Okay, thanks guys.

Operator

(Operator instructions). Our next question comes from the line of Mac Hodgson with SunTrust Robinson and Humphrey. Please proceed with the question.

David Grayson - SunTrust Robinson Humphrey

Good afternoon, everyone. This is David Grayson filling in for Mac. Just a couple of housekeeping questions to start with. With the OTS winding down you're looking at OCC examinations. Do you have available your consolidated holding company regulatory capital ratios?

Blaise Bettendorf

David as you know, we’re not required to cash out a (inaudible) holding company rebate capital or other capital ratio with that point when those regulation will be become (inaudible) regulations will absolutely start calculating a report appropriately.

David Grayson - SunTrust Robinson Humphrey

Okay. I understand, but you don't have the numbers maybe as if it were just a what if, a dry run or anything?

Blaise Bettendorf

(Inaudible)

David Grayson - SunTrust Robinson Humphrey

Okay. Fair enough. Next question. As I look at the detailed breakout of the NPA portfolio in your release, it's really a good level of detail by the way. Of the nonperforming assets reported this quarter, the release mentions that 14.7% or roughly 10% are covered under the purchase and assumption agreements post Cape Fear. Are those newer NPAs, because it seems like the level of nonperforming assets under book would be higher, or the Cape Fear NPAs would be much higher. So I was just maybe looking for some guidance on how to think about that number.

Blaise Bettendorf

Again, do you remember what date was that when we did the purchased accounting (inaudible) we bifurcated the portfolio and for 40 months they wont (inaudible) as non-determinant account towards the old standard I refer to SCLPO3. So, (inaudible) don’t flow through into our presentation and the closure on non performing well now.

What you’re seeing there from the (inaudible) disclosure is (inaudible) which were initially said out as performing well and (inaudible) deteriorated and gone to no accrued status.

David Grayson - SunTrust Robinson Humphrey

Okay. Thank you.

Blaise Bettendorf

Thanks. Sure.

David Grayson - SunTrust Robinson Humphrey

And I guess one further question. Mortgage revenue looked real good this quarter. Maybe some additional comments on the pipeline and what you're seeing and how we should think about that line item?

Blaise Bettendorf

Well, we we’re very pleased about (inaudible) as a result of this quarter. I think that the volume of (inaudible) organizations increase considerably in (inaudible) low grade environment. We’re also based on (inaudible) of the some of the sales movements and rates into the marketplace able to take up spread on the Q4 over the Q3 on sales that we settled. So, we were very happy with that.

I think before I look forward, obviously we think the low interest rate is going to continue for some time and that is going to be conducive for continued strong level (inaudible) with the opportunity for sales. We’re stopping of as we see the volume supporting that need for staffing so that we can continue to make (inaudible).

Obviously I don’t have a crystal ball to anticipate how long that stand and go but we will have the support available to make the needs as we see them continue because it is obviously a very important line of business for us.

David Grayson - SunTrust Robinson Humphrey

Thank you.

Operator

Our next question is a follow up question from the line of Christopher Marinac from FIG Partners. Please go ahead sir.

Christopher Marinac - FIG Partners

Thanks. Blaise, now that it's been over a year since the Cape Fear transaction, what is the portfolio yielding in terms of what you have residually there? Is that something that's going to evolve any differently over the next couple of quarters?

Blaise Bettendorf

Physically, what we integrated that portfolio last year (inaudible) our financial record. We don’t really tract or yield in what have you on that separately. We do have when we set up the original purchased of accounting had just over a 3 year amortizations schedule on some of those operation that we’re about 18 months into it. So, we’ve got another almost 2 years left with some of that operation that’s trying to support in some of that but I don’t have separate yields on that portfolio.

Wayne Hall

(Inaudible) while will add is that we’ll expect the Morgan’s to have remained fairly steady (inaudible) portfolio was getting smaller. So, we have a lot of impact.

Christopher Marinac - FIG Partners

Okay. But the indemnification asset has grown in the past couple of quarters. Will that it itself reverse over time just as you collect the rest of the portfolio?

Blaise Bettendorf

Absolutely, what happened in the majority of the increased in that course is related to the operation of the account that we are recently set up on that over the life (inudible) that the asset is also has been some additions for losses that has been occurred but weren’t initially set up in the Indian assets.

We have not reach our first loss (inaudible) quiet well. (inaudible) 30 of certificate reporting had not reached our first loss trench so though we have been submitting claims to the SCIC has not had any break that threshold for reimbursement.

So, once we get to that threshold we will start seeing that asset coming down as we are getting reimbursement for that claims.

Christopher Marinac - FIG Partners

Okay. Very well. Thanks, Blaise.

Operator

Our next question comes from the line of Rupesh Sahu with Titan Capital. Please proceed with the question.

Rupesh Sahu - Titan Capital

Thanks for taking my question. I may have missed it. What was the capital at the holding company at the end of the quarter, and then, what's the ability to maybe push that down to the bank?

Blaise Bettendorf

I refresh, this is Blaise. We have about $25 million in liquidity of capital available at the holding company level as the quarter ends-year end. We’re planning on retaining that as we like to keep about 2 1/2 to 3 years level of operating expenses to holding company level and as we were at right now. So, I don’t anticipate down to training at this point in time and its the bank.

Rupesh Sahu - Titan Capital

Okay. My other question is about the efficiency ratio, and I know REO expenses are definitely elevated in the quarter, and I wanted to ask you what is the opportunity to bring down REO expenses and improve the efficiency ratio over the next cycle?

Blaise Bettendorf

I think that clearly there is opportunity to bring it down. Were actually looking for ways to manage our overhead cost, off setting some of the increases that weve seen and (inaudible) cost but we do anticipate the real state on cost in continuing that were working through the anticipated level foreclosures. So, there’s obviously always opportunity for that and we try to manage it (inaudible) as we can. I really don’t a projection for you on that.

Rupesh Sahu - Titan Capital

Thank you.

Operator

(Operator instructions). Our next question is a follow up question from the line of Adam Barkstrom from Sterne, Agee & Leach. Please proceed with your question.

Adam Barkstrom - Sterne, Agee & Leach

(Inaudible) any changes in your thoughts on (inaudible) and what else we need you to talk about in the past looking our further potential eminent opportunities. What our thoughts on that now.

Wayne Hall

(Inaudible) I think we had our approach that has not changed. We will continue to evaluate the (inaudible) capital that we have and what time should we pay back was still as we talked before we still look at as a charge policy and as long as the economy is still sluggish, I think its our intent to keep it (inaudible) standards at 5% . And as we talked before, its starting our expectation of pay that back before it goes to the bank.

Adam Barkstrom - Sterne, Agee & Leach

(Inaudible) we continue to be an arrested (inaudible) although I think they become at the certain level of competitive and with a change in the bidding process and a long share way but I was headed to come (inaudible) for manage as well

Wayne Hall

And as we believe that we’ve said it earlier meeting is that we have an interest to the (inaudible), still we continue to evaluate targeted banks that we believe can either expand an existing mortgage or allow us to expand its new marks.

Adam Barkstrom - Sterne, Agee & Leach

Thank you.

Operator

There been no further questions at this time.

Wayne Hall

Thank you for the interviews today with taking your time with busy schedules. We appreciate your interest on first financial and we hope each and everyone have a nice day.

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