First Financial Bancorp's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Apr.27.12 | About: First Financial (FFBC)

First Financial Bancorp (NASDAQ:FFBC)

Q1 2012 Earnings Call

April 26, 2012 9:00 am ET

Executives

Kenneth J. Lovik – Vice President, Investor Relations and Corporate Development

Claude E. Davis – President and Chief Executive Officer

J. Franklin Hall – Executive Vice President, Chief Operating Officer and Chief Financial Officer

Analysts

Scott Siefers – Sandler O'Neill & Partners

Jon Arfstrom – RBC Capital Markets Equity Research

John Barber – Keefe, Bruyette & Woods, Inc.

David Long – Raymond James & Associates

Emlen Harmon – Jefferies & Co., Inc.

Operator

Good morning, and welcome to the First Financial Bancorp First Quarter 2012 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I’d now like to turn the conference over to Ken Lovik, Vice President, Investor Relations and Corporate Development. Please go ahead sir.

Kenneth J. Lovik

Thank you, Denise. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s first quarter 2012 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Frank Hall, Executive Vice President and Chief Financial Officer and Chief Operating 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 first quarter 2012 earnings release, as well as our SEC filings for a full discussion of the company’s risk factors. The information we provide today is accurate as of March 31, 2012, 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 Claude Davis. Dave?

Claude E. Davis

Thank you, Ken, and thank you to those joining the call today. We’re pleased to announce another quarter of strong performance, reporting net income of $17 million or $0.29 per diluted common share. Return on average assets was 1.05%, and return on average shareholders’ equity was 9.67% for the quarter. During the quarter, we incurred $1.8 million of expenses not expected to recur, which reduced earnings per share by $0.02.

Our adjusted pre-tax, pre-provision earnings were $31.2 million for the quarter or 1.94% of average asset. Adjusted pre-tax, pre-provision earnings were essentially flat as higher net interest income and fee revenue were offset by higher operating expenses, primarily compensation cost due to a full quarter’s impact of the associates joining us from Flagstar, as well as seasonal factors.

We were extremely pleased with our net interest margins for the quarter, which increased 19 basis points to 4.51%, driven primarily by performance in our investment portfolio. Frank will provide more details on these items later in the call.

We paid our third variable dividend during the quarter, representing a 100% dividend payout ratio based on our fourth quarter’s reported earnings per share of $0.31. We’re also pleased to announce that the Board of Directors has approved an increase in our regular dividend to $0.15 per share, an increase of 25%.

While economic conditions in our operating markets have yet to fully recover, the increase reflects our confidence in sustainability of our earnings power and our continued commitment to providing shareholders with a solid long-term return on their investment in First Financial.

The increase will not affect the variable dividend in the short-term, as we also announced that we intend to maintain this component for the next six quarters, unless capital deployment opportunities arise that cause our capital ratios to move towards our stated thresholds sooner than expected. The six-quarter timeframe represents actual dividend that will be paid to shareholders through 2013 based on our traditional dividend payment schedule.

Our next quarterly dividend will consist of the increased regular dividend of $0.15 per share and a variable dividend of $0.14 per share based on the first quarter earnings of $0.29. The announced variable dividend results in a current yield of 6.8% based on yesterday’s closing price of $17.10.

Our variable dividend has been very well received and recognized as an innovative way to return capital to shareholders in an uncertain regulatory environment. However, we also acknowledge that many of our shareholders place greater value on the predictability of future dividend payments.

Additionally, our capital retention needs will increase in future periods as loans covered under loss share agreements with the FDIC, which enjoy a 20% risk-weighting currently begin to migrate to our uncovered portfolio and drive an increase in our risk-weighted assets. Furthermore, we will also maintain capital for pursuing future growth opportunities. These three factors compelled us to establish a timeframe for expiration of the variable dividend.

As of March 31, our tangible common ratio was 9.66%; Tier 1 leverage was 9.94%; and total risk-based capital was 18.45%. Our ratios remain well in excess of our stated thresholds of a tangible equity ratio of 7%; Tier 1 leverage ratio of 8%; and total capital of 13%. Our strong capital ratios still have the ability to support significant growth under the most constraining of our thresholds – excuse me, have capacity to support approximately $1.5 billion in additional assets.

Total classified assets continue to improve, declining for the seventh consecutive quarter and are down $7.7 million or 4.7% compared to the linked quarter and are also down $31.1 million or 16.7% compared to March 31, 2011. Additionally, net charge-offs declined for the third straight quarter and were down over 10% compared to the fourth quarter of 2011.

Total non-performing loans to total loans increased to 2.79% as of March 31, from 2.57% as of December 31. The increase in total non-performing loans during the quarter was a result of higher accruing TDRs and total non-accrual loans. The increase in accruing TDRs of $5.5 million was primarily driven by new accounting guidance defining what constitutes a TDR and related to renewals and term extensions of performing loans with strong underlying collateral and guarantor support.

Total non-accrual loans including non-accrual TDRs increased slightly during the quarter as loans moved to non-accrual status exceeded credits that rolled off, including transfers to OREO and loans that were charged off as we continue to work through resolution strategies on problem credits. Additions to non-accrual loans included a $10.8 million commercial real estate credit involving a single-office property in the Cincinnati market. Excluding this larger credit and the increase in the balance of accruing TDRs, we would have experienced a significant decline in our level of non-performing loans to total loans.

Total loans, excluding the covered portfolio, remained essentially flat at $3 billion compared to balances as of December 31, 2011. New commercial and CRE originations and renewals were low early in the quarter and competition has heated up in some of our primary metropolitan markets as lenders content for a limited number of high-quality borrowers looking to access capital. We did have a few bright spots though during the quarter. There were some markets within our footprint where we were able to grow our C&I and CRE portfolios; and overall, our CRE portfolio increased $29.7 million or 2.4% compared to the prior quarter.

Furthermore, we’ve begun to gain some traction in specialty finance areas, which is equipment finance and asset-based lending. While dollar volumes are relatively small at this point, our teams have been out calling on clients new prospects with some success helping to round out our commercial product offering as we continue to build a premier small and middle market business lending platform.

Commercial and CRE originations and renewals began to rebound during the later part of the quarter. And looking forward, our pipeline of outstanding proposals and commitments as of March 31, was at its highest level in recent history.

While we’ve no crystal ball regarding the economy and cannot foresee the actions of competitors in trying to gain market share, we feel optimistic regarding our ability to capitalize on loan growth opportunities as we focus on execution on our client service-oriented community bank business model.

Maximizing the operating leverage of the franchise remains a significant priority. This was the first full quarter of operations for all of our newly acquired locations in the key strategic metropolitan areas of Dayton and Indianapolis. And we are pleased with the new business opportunities provided by our enhanced presence in these markets. Our investments in these markets are expected to drive balance sheet growth and increased revenue across all business lines.

On an ongoing basis, we review our banking center network for growth expansion and consolidation opportunities to ensure that our resources are appropriately focused on markets providing the greatest prospects for growth and profitability.

We continue to invest in organic growth opportunities, and recently opened a new banking center in Columbus, Indiana, as well as one in the Cincinnati area, with two additional Cincinnati offices scheduled to open later this year. All of the new Cincinnati banking centers will enhance our presence in highly populated and demographically desirable areas of the market.

Inversely and in connection with the objective of managing our banking center network in the most efficient manner possible, we announced during the quarter that we will be consolidating nine branch locations throughout our footprint, and exiting one Indiana market.

Customer relationships in the nine consolidated locations will be transferred to the nearest First Financial location and we expect retention to be reasonably high. Annual pre-tax operating costs associated with these ten locations are approximately $2.3 million, net of the expected revenue loss related to deposit attrition.

In closing, we were very pleased with our results for the quarter. We were especially happy with the significant increase in net interest margin, our sustained profitability. And consistent pre-tax pre-provision income were all very positive aspects of the quarter. The 25% increase in our rate of dividend is evidence of the confidence we have in our business model and future earnings power. While the uncovered loan portfolio was flat quarter-over-quarter, key indicators appear to be pointing in the right direction and we’re optimistic that we will capitalize on growth opportunities throughout the remainder of 2012.

I’ll now turn the call over to Frank for further discussion on our financial performance.

J. Franklin Hall

Thank you, Claude. We have provided supplemental information furnished separately that is available on our website bankatfirst.com in the Investor Relations section or in the 8-K we filed last night. As in previous quarters, this supplement is crucial to establishing and maintaining a clear understanding of our reported results, as well as the concepts that have a material effect on our current and future performance. Unique accounting and reporting requirements and the strategic distinctions we’ve made related to our 2009 acquisitions materially impact our operating results. So to aid in the clear understanding of our strategic activities, I will focus primarily on the ongoing or strategic aspects of our business.

Our first quarter 2012 GAAP earnings per diluted share were $0.29. And I will speak briefly to the major components of our performance in the quarter. Total interest income was relatively flat compared to the linked quarter, as higher interest income earned on investments was offset by a decline in the interest earned on loans and amortization of the FDIC indemnification asset. The higher income earned on the investment portfolio during the first quarter was driven by an approximately $407 million increase in the average balance of the investment portfolio reflecting both purchases during the quarter, as well as a full quarter’s impact of approximately $229 million of purchases that set in late in the fourth quarter 2011.

The combined impact of these purchases was a 32 basis point increase in the yield on the investment portfolio compared to the linked quarter. In a continued effort to full deploy cash received from the 2011 branch transactions and increased yield, we purchased approximately $292 million of securities during the first quarter, primarily agency mortgage-backed securities and to a lesser extent, investment grade single issuer trust preferred securities and further extended the overall duration of the portfolio to 2.6 years.

Mindful of the increase in duration of the investment portfolio and the potential impact on shareholders’ equity, we also reclassified securities with a total book value of approximately $916 million from available-for-sale to held-to-maturity during the first quarter in order to mitigate the effect of future price volatility on capital through other comprehensive income.

There is no expected income statement impact on current or future periods from this change and accounting designation. While total interest income was essentially flat, net interest income on the linked quarter GAAP basis increased moderately driven by our strategic initiatives related to deposits that resulted in both a lower average balance of interest bearing deposits during the quarter, as well as a 7 basis point decline in the cost of these deposits. The combination of the performance of the investment portfolio and our ongoing deposit rationalization efforts, as well as a lower earning asset base and higher loan fees from loan prepayments resulted in a 19 basis point increase in net interest margins to 4.51% during the quarter.

As Claude mentioned, we continue to see improvement in credit trends during the quarter, resulting in a $1.9 million decline in the provision for uncovered loan losses compared to the prior quarter. This decrease is consistent with the linked quarter declines experienced in classified assets and net charge-offs during the period.

Excluding gains on sales of securities, reimbursements due from the FDIC and other covered loan activity, non-interest income earned in the first quarter 2012 was $15.3 million as compared to $15.1 million in the fourth quarter 2011, and $14.9 million in the first quarter 2011.

The increase compared to the linked quarter was primarily driven by modest increases in trust fee income and other non-interest income, partially offset by a decline in gain on sales of loans. Excluding the effect of acquired non-strategic operations and other acquisition and transition-related items, and as noted in the Table II of the earnings release, non-interest expenses in the first quarter 2012 was $48.7 million as compared to $47.2 million in the fourth quarter of 2011 and $45.7 million in the first quarter of 2011.

The increase in non-interest expense of $1.5 million or 3.2% compared to the linked quarter was primarily driven by seasonally higher salaries and benefits expense, data processing cost, and state intangible expense, partially offset by lower occupancy costs, marketing expenses and other non-interest expense.

Finally, I will briefly comment on the performance of our covered assets during the first quarter. Page 10 of the supplement discloses the components of credit losses, which totaled $3.2 million for the quarter compared to $2 million recognized in the fourth quarter.

The increased credit costs, as well as income from the accelerated discount on covered loans were prepay during the quarter are reflective of changes in both the timing and amount of cash flows, as well as the continued mix shift as the covered loan portfolio matures.

Overall, the performance of the covered portfolios continues to exceed our initial estimates. I will not turn call back over to Claude.

Claude E. Davis

Great. Thanks, Frank. And we’ll be happy to open the call for questions now.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question and answer session. (Operator Instructions) And our first question this morning will come from Scott Siefers of Sandler O’Neill. Please go ahead sir.

Scott Siefers – Sandler O'Neill & Partners

Good morning, guys.

Claude E. Davis

Hi, Scott.

Scott Siefers – Sandler O'Neill & Partners

Just wanted to ask a couple of quick questions on the, decision on the variable dividend to start. So, I guess as I look at things, even though you’re still going to be paying out pretty much everything you make through the end of next year, at least on like a TCE basis, you’re still going to be building capital, I’d imagine, given the run off of the recovered portfolio. So I guess, going forward, how will you guys be managing the capital priorities? And then, Frank, a kind of nitpicky question, but you guys alluded to the migration of the covered portfolio into non-covered portfolio. Even if your TCE is going to be building over that timeframe, will your regulatory capital ratios still be building as well? I guess it’s just been a little difficult with all the kind of puts and takes from the deals you’ve done, the securities purchases, et cetera, to get a sort of a clear line of what’s happening internally. Maybe if you guys can speak to those couple of dynamics, please?

Claude E. Davis

Sure, Scott. This is Claude. I’ll take the first one, then Frank can talk to the kind of migration of the ratios. First, as it relates to just kind of dividend strategy, as we’ve always talked about, we evaluate it quarterly. The intent of talking about six-quarter period for the variable was to deal with what we heard from shareholders, which is an interest and it really are having some predictability to it.

And with this allowing us to continue it through 2013, assuming no major changes related to acquisitions or other issues that would impact capital, we wanted to kind of deal with what the term or expiration might be, or would be. Certainly, I think our history shows as the board that – we tend to be shareholder friendly and when we get to that point, evaluate where the ratios are, what our growth opportunities are, what the growth, or what the earnings prospects are, and evaluate the right capital strategy at that point.

J. Franklin Hall

Scott, this is Frank. And, I’ll speak to the migration of the risk-weighting of the covered portfolio. Certainly, as that occurs over time, and I won’t describe it as a cliff event but there is a more abrupt end to it as the loss share expires at a date certainly in the future. There is certainly an impact immediately to risk base capital, the regulatory capital ratios. And given our expectations for what long-term growth prospects look like, there will continue to be, I’d call it, a very modest step-down in the regulatory capital ratios until we start to see the capital build through earnings retentions.

So, it’s a little bit of both, but certainly the more significant events for the risk-based capital is the expiration of the loss share.

Scott Siefers – Sandler O’Neill & Partners

Okay, that’s helpful. I appreciate the color. And then, Frank, I was hoping to ask you just an unrelated question, just the size of the securities portfolio going forward. With the run-off of the covered portfolio and the money you guys are making, I guess, you’ve to put that money somewhere. I’m just curious to hear how you will handle that going forward given the bigger relative size of the securities portfolio now versus say a year ago, for example?

J. Franklin Hall

Sure, Scott. So, if you’re asking about what the future expected size of the investment portfolio is likely to be I would say it’s probably around the size – there may be some volatility in size depending on what the deposit composition looks like over time. But we expected to say about the size. I will just point out though, related to any margin questions and the contribution from the investment portfolio, because of the size and because of that – looking at the investment portfolio in the context of our liquidity planning, we do feel more comfortable managing it to a longer duration than we have done historically.

Scott Siefers – Sandler O’Neill & Partners

Okay. That’s perfect, I appreciate the help.

Claude E. Davis

Yes. Thanks, Scott.

Operator

And our next question will come from Jon Arfstrom of RBC Capital Markets. Please go ahead, sir.

Jon Arfstrom – RBC Capital Markets Equity Research

Thank you. Good morning guys.

Claude E. Davis

Hi, Jon.

J. Franklin Hall

Good morning, Jon.

Jon Arfstrom – RBC Capital Markets Equity Research

Maybe a question for you, Claude, any story on decline in commercial balances, was there anything in there like large payoff or anything that was unusual, or is it just kind of the weakness early in the quarter that you alluded to that seems to have rebuilt?

Claude E. Davis

I don’t think anything unusual. We did see just some payoffs, nothing of note or significance. We view it more as normal activity. I would say the build in that portfolio was not as greater – it’s not that we had hope it would be going into the quarter. We’re still hopeful that pipeline is continuing to build and will yield some growth as we go throughout 2012.

And it’s a competitive time, and I think especially for the C&I credits, they’re high-quality, which is what we’re all looking for. We’re just seeing enhanced or increased competition in that area.

Jon Arfstrom – RBC Capital Markets Equity Research

Okay. And then can you talk a little bit more about the long-term plan for leasing in the asset-based lending businesses. You alluded to in your prepared comments, and I was just curious what your plans are in particular there? What kind of organic opportunities do you see, and then if – is it possible for any potential acquisitions in that business?

Claude E. Davis

Sure. What we’re really trying to do is to build out our commercial product platform, hence, we, if you will – and equipment finance, so we do both whole loan and leasing in that part of the business, as well the asset-based lending component were both holes in our product suite. So we hired some individuals who were very experienced in that area and we’ve just seen some really good traction over the last couple of quarters in client interest, both within our portfolio and external to our current portfolio.

So we do see it as a real growth opportunity, and to the extent that there might be an acquisition opportunity likely we’d look at in all of our product areas, we would certainly take a look at it. We like both of those products. And we think we have the infrastructure to manage it effectively. And so, yes, if the right opportunity presented itself, we’d certainly take a look at it.

Jon Arfstrom – RBC Capital Markets Equity Research

It sounds like you’re primarily in footprint though is your interest at this point?

Claude E. Davis

We are, yes.

Jon Arfstrom – RBC Capital Markets Equity Research

And then any update on bank, M&A? I don’t know if you’re sending a message with the dividend statement or not but is the flow changing at all in the quality of what you’re seeing changing at all?

Claude E. Davis

We obviously, as we’ve talked about before we don’t kind of speak to specifics, but it is one where we continue that if the right fit were there strategically, both in our current markets as well as nearby metropolitan markets, we would certainly have an interest. We integrated the acquisitions in ’11, and that we did in 2011; and we feel like that we have certainly the capacity and the ability to integrate more, if the right opportunity presented itself.

As it relates to environment, I don’t' know that I would be in the – by the best position to sense a change in tone. But it’s one where we view this as a long-term event that we’re going to continue to look for a good strategic, both organic as well as acquisitive growth opportunities.

Jon Arfstrom – RBC Capital Markets Equity Research

Okay. All right, thank you.

Claude E. Davis

You bet.

Operator

And our next question will come from Christopher McGratty of KBW. Please go ahead, sir.

John Barber – Keefe, Bruyette & Woods, Inc.

Good morning. It’s John Barber filling in for Chris.

Claude E. Davis

Sure, John.

John Barber – Keefe, Bruyette & Woods, Inc.

Claude, you’ve mentioned that you’ve seen an increase in competition in loan processing in your metro markets. I guess who are you seeing that from and how is that impacting your loan pricing?

John Barber – Keefe, Bruyette & Woods, Inc.

Yeah, we’ve really seen it across the board. I wouldn’t kind of single out any one institution because I think what we’ve seen and certainly what all of you see throughout the industry is the industry is now much healthier. Most of the banks have or are dealing with their problem credit issues. And certainly asset growth on the loan side is an interest of all of us. So when you see good companies, if they’re going out for request for proposals, it’s pretty heated competition. And I would say it’s across-the-board, both the large regionals as well as some of the smaller community banks. And you’re talking about smaller credits. There is pretty intense competition. We’re winning our share and we feel good about that and we’re still doing it at a pricing that meets our target rates of return. So I don’t want to oversell that point because we’re getting lots of good deals. But the competition is certainly stepped up from where it was a year ago and certainly two years ago.

John Barber – Keefe, Bruyette & Woods, Inc.

Okay. And any seasonality in deposits this quarter and also where are you offering now one-year CD rates and kind of how does that compare to your CD costs right now?

Claude E. Davis

Competition, I don’t know. Frank, if you’d have a sense...

J. Franklin Hall

Yeah, sure. As to seasonality on the deposits, I’d say there is some slight seasonality certainly in public funds. But on deposit pricing where we try to be is in the median of the competitive environment. And so I think, just on a one-year type CD product that might translate to a 10 basis points to 20 basis points type pricing, but again 25th to 50th percentile in a relative sense to the competition is where we try to be.

John Barber – Keefe, Bruyette & Woods, Inc.

All right. Thanks. And last one I had related to the comments on the variable dividends. Should we think of the six quarters as a maximum, meaning, you won’t go beyond that or is there something you will evaluate at that time?

Claude E. Davis

Yeah. The way I would think about it is that, first, is our confidence in our earnings stream or the increase in the core dividend of 25%. The variable dividend, again, because of the three factors we mentioned, which again I would just kind of reiterate. I think that what we’ve heard from shareholders, which is an interest in knowing. And what that certainty is or predictability of it is, we wanted to give people some sense of time which was the intent of the six quarters. Second was the fact that, in 2014, our FDIC loss share coverage expires, which puts a little more pressure on the regulatory ratios.

And then third was the interest in certainly retaining some capital for growth opportunities. As it relates to kind of how you should read that, I think you should read it as we intended to continue the variable dividend for six quarters. And as we’ve always done as a board, not only at the end of that period, but from now until that period and beyond, we always look at our capital position, how best should we deploy that capital in the most shareholder-friendly way. And I think, like I said, I would just point to our last few years of history, I just think our board has done a terrific job of not following the pack and doing a good job of returning capital to shareholders when it was appropriate and deploying that capital when it was appropriate. And we will follow the same process.

John Barber – Keefe, Bruyette & Woods, Inc.

Thanks for taking my questions.

Claude E. Davis

You bet.

Operator

(Operator Instructions) Our next question this morning will come from David Long of Raymond James. Please go ahead, sir.

David Long – Raymond James & Associates

Thanks, good morning guys.

Claude E. Davis

Hi, Dave.

J. Franklin Hall

Good morning, Dave.

David Long – Raymond James & Associates

Looking at the C&I loans across the industry and looking at some of our peers, we still have seen some pretty good growth there. You guys were down in the quarter. Just want to get some more color from you guys and what you’re seeing in the C&I side, what does your pipeline look like and how have your spreads changed there – yeah, how spreads change there in the first quarter versus the fourth quarter maybe, a year ago?

Claude E. Davis

Sure. David, as I mentioned earlier, our pipeline has been strong. We’ve seen good activity really from the third quarter last year fourth quarter, where we saw some growth. We did see some payoff in this quarter. We also saw some – and not necessarily payoff to people going to another – to other banks, but line pay-downs, etcetera. So we did see some of that impact. Competitively, again, just as I referenced on the other question, I think pricing is where it’s the most competitive. We try to stay disciplined, but it is competitive. I would guess that origination yields are down in commercial, probably 100 basis points year-over-year. Obviously, deposit costs are down as well. But from what we were seeing a year ago to now, certainly we have seen a compression in what rates you can get on good quality clients.

David Long – Raymond James & Associates

Okay. It sounds like it’d be safe to assume that your utilization rate has come down.

Claude E. Davis

The utilization rate on lines has continued to be lower than historically where they have been. I don’t have the number of where they were last year versus this year, but they’re at historically low levels still.

David Long – Raymond James & Associates

Okay and then one question on the securities portfolio. Of that $292 million that was purchased in the quarter, was that done throughout the quarter or were there any lump purchases in their? Just trying to get a sense of the timing in the quarter.

J. Franklin Hall

Yes, this is Frank. Most of the purchases were done throughout the quarter.

David Long – Raymond James & Associates

Great, thanks guys.

Claude E. Davis

Thanks, Dave.

Operator

And our next question will come from Emlen Harmon of Jefferies. Please go ahead.

Emlen Harmon – Jefferies & Co., Inc.

Hi, good morning.

Claude E. Davis

Good morning, Emlen.

Emlen Harmon – Jefferies & Co., Inc.

Frank, maybe a question for you. I heard a lot of commentary so far just on the competitive environment for loan pricing. But, you guys have actually been able to maintain kind of like the legacy and originated loan portfolio yields, pretty pre-consistent kind of quarter-over-quarter, the last few quarters. Is that a mix effect and is that sustainable going forward?

J. Franklin Hall

That’s a great question. I would say that’s probably our greatest area of risk or a headwind on margin is how our loan portfolio has a duration of about three years. And about 60% of that is variable priced. So as those loans renew, re-price, and as we’re competing for new loans, as Claude mentioned, we were certainly repricing those in a new environment. So that will be a challenge that we have going forward. So I think you’ve identified the risk there. But as Claude said, we can certainly try to remain disciplined in our pricing. But the competitive landscape could create some headwind and some pressure there.

Emlen Harmon – Jefferies & Co., Inc.

Okay, thanks, and then just a quick follow-up on expense progression. And as we start to look forward, should we expect that you guys are able to pull some additional expenses kind of out of acquired franchises? And just how should we thinking about the trajectory of the expense run-rate?

J. Franklin Hall

Yeah, sure. This is Frank. Again, I think that we’re continually looking for opportunities to reduce the cost base of the franchise. But I would say that the run-rate that we’ve been operating on and where we are for the quarter is materially indicative of what it will look like. Certainly, there’re going to be some cost saves on the margin that we’ll experience. But all in all, those should be relatively small. After we go through the full disposition and closure of the offices that Claude mentioned, certainly we’ll see the full impact of that in the second quarter.

Emlen Harmon – Jefferies & Co., Inc.

Hey, great thanks. Thanks for taking my questions.

Claude E. Davis

You bet. Thanks

J. Franklin Hall

Thank you.

Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Claude Davis, President and CEO, for any closing remarks.

Claude E. Davis

Great. Thank you and I would just offer – again, we feel good about the quarter and we appreciate everyone’s interest in First Financial. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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