First Financial Bancorp's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.26.12 | About: First Financial (FFBC)

First Financial Bancorp. (NASDAQ:FFBC)

Q3 2012 Earnings Call

October 26, 2012, 09:00 am ET

Executives

Ken Lubbock - VP, IR & Corporate Development

Claude Davis - President & CEO

Frank Hall - EVP, CFO & COO

Analysts

Scott Siefers - Sandler O’Neill

Matthew Keating - Barclays

Bryce Rowe - Robert W. Baird

John Barber - KBW

Kenneth James - Sterne Agee

Emlen Harmon - Jefferies

Operator

Good morning and welcome to the First Financial Bancorp Third 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 would now like to turn the conference over to Ken Lubbock. Please go ahead.

Ken Lubbock

Thank you, Jess. Good morning everyone and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s third 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, 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 statements disclosure contained in the third 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 September 30, 2012, and we will not be updating any forward-looking statements to reflect facts or circumstances after the call.

I will now turn the call over to Claude Davis.

Claude Davis

Thanks Ken, and thanks for those joining the call today. We are pleased to report third quarter net income of $16.2 million or $0.28 per diluted common share. Return on average assets was 1.05% and return on equity was 9.01% for the quarter. Included in the results for the quarter were $2.6 million of pretax gains on the sale of investment securities as well as $400,000 of pretax employee benefit expenses related to the execution of our efficiency plan.

Our results for the quarter were impacted by both declines in net interest income and margin due to activity in our covered loan portfolio as well as the impact of elevated prepayments in our investment securities portfolio. Frank will provide more detail on these items in his prepared remarks.

We are pleased with our current results for the quarter as we demonstrated improvement in almost all credit related performance ratios. Total classified assets continue to improve declining for the eighth consecutive quarter and are down $12 million or 8.4% compared to the linked quarter and down $39.2 million or 22.7% compared to September 30, 2011.

Total non-performing assets also declined $10.9 million or 11.1% compared to the linked quarter and are at their lowest levels since the fourth quarter of 2009. As a result, the ratio of non-performing assets to total assets declined to 1.41% from 1.57%.

On October 1st, we paid our fifth variable dividend based on the second quarter’s reported earnings per share of $0.30. Our next quarterly dividend will consist of regular dividend of $0.15 per share and a variable dividend of $0.13 per share based on third quarter earnings of $0.28. The announced variable dividend results in a current yield of 6.8% based on yesterday’s closing price of $16.44.

With regard to capital management; we are pleased to announce that the Board of Directors has approved a share repurchase plan of up to 5 million shares. Under the plan, we expect to repurchase about 1 million shares annually and we will begin buying back stock during the fourth quarter.

I would like to highlight though that the timing of repurchases will be subject to market conditions as well as balance sheet growth and asset composition. The Board will evaluate the plan on ongoing basis and we expect to provide a summary of the total share repurchase quarterly in future periods.

Implementation of the buyback plan will not affect the variable dividend which we intend to continue paying through 2013 as previously stated. Therefore, we will be returning in excess of 100% of our earnings to shareholders through that timeframe. Subsequent to 2013, our intent is to return 60% to 80% of the capital we generate to shareholders in the form of dividends and share repurchases.

Based on our internal forecast, we expect to maintain capital ratios in excess or stated target thresholds, current regulatory requirements and proposed capital requirements under Basel III, while still preserving a sufficient level of excess capital to support the growth initiatives. Of course, this capital management plan, including both the variable dividend and the targets on the share repurchase plan will be subject to change if our capital position changes materially or capital deployment opportunities arise that result in capital ratios moving towards our stated thresholds sooner than expected.

During the last quarter’s call, I mentioned that we will be undertaking a full review of our cost structure in the third quarter. Thus far, this review has identified approximately $17.1 million of annual cost savings across all business lines and support functions, which includes the estimated $3 million of net operating cost we disclosed last quarter related to 2012 banking center consolidations and closures.

In addition to these closures, we actually began a preliminary work on this study earlier in the year and started implementing certain initiatives during the second quarter and end of the third quarter. We anticipate all identified cost reduction plans to be in place by the end of the second quarter of 2013. Of this annual total savings estimate, we expect our 2013 financial results to reflect approximately 85% of the savings with 100% being realized in 2014 and beyond.

As I mentioned during our Investor Day held this past August, remaining focused on driving greater efficiency is a key strategic imitative for us which was the theme that was repeated throughout the business line presentations. And while we feel we made great progress with the current imitative, we will continue to employ many of the same practices on an ongoing basis in order to identify further efficiencies.

During the quarter, we also had solid loan growth as total uncovered loans increased $53.4 million or 7.1% on annualized basis during the third quarter driven by the commercial, commercial real estate, specialty finance and residential mortgage portfolios. Originations and renewals remained strong in our commercial and retail lines of business, but unfortunately we experienced a high level of early chaos as this segment of our client base continues to deleverage in the face of an uncertain economy. Additionally, given the level of increased competition in our metropolitan markets, we have seen at times situations where rates and structures have become extremely aggressive.

We understand that bank investors are focused on the dynamics of the current environment and its related challenges, specifically related to net interest margin and we are focused on doing all we can to mitigate these challenges. However, we continue to believe that our standing in our markets leaves us well positioned for future growth.

As we discussed during Investor Day, we occupy a unique space in our key metropolitan markets and that we have a product set and financial resources surpassing those of our smaller competitors while delivering the local decision making to experienced bankers in a more responsive and efficient manner compared to large regional competitors.

Specifically, we are focused on and excited about many operating areas that there are opportunity for us and where we continue to execute consistent with our strategic plan of building long-term franchisee value. Some of those are the growth and development of our commercial businesses in our specialized leading areas of core C&I, investment commercial real estate, asset based lending, equipment finance, and franchise finance.

Our expertise and products array in these areas allow us to compete with any competitor for our target clients. We will continue to evaluate with our additional specialty areas on opportunity and fit for our risk profile. Focus deposit growth in our transaction accounts and our retail channel as well as our treasury management channel, which droves 12.7% annualized growth during the quarter in core commercial deposit balances.

Both of these areas are supported not only by an expanded sales force, but an expanded branch network in the last two years and also by a new state-of-the-art electronic banking and payment system platform that we introduced in the third quarter and fourth quarters for our consumer clients and will be rolled out in the first quarter of 2013 for our commercial clients.

We continue to build out of our mortgage business after exiting it prior to the financial crisis. Our expansion in this area over the last 18 months has produced year-over-year origination increases in the third quarter greater than 100%. A renewed focus of growth and investment in our wealth business is well, where we’re managing excess of $2.4 billion of client assets.

Also in conjunction with our plans for continued growth we continue to be focused on improving our core efficiency and looking for improvements in our processes and operating models throughout all of our businesses. This will be an ongoing and consistent process. And as we have always done, we will manage our capital in a safe and shareholders friendly manner, which we believe are consistent over the long term. This means that we will maintain a strong capital level to absorb unexpected shocks, provide for both planned and opportunistic growth opportunities and to allow for distributions that provide a reasonable return to shareholders.

Finally while we understand the pressure on short-term profit growth, we will stay focused on the risks that we understand and can manage and that will allow us to be well positioned to pursue our strategy and future opportunities. Resisting pressures, taking appropriate risk leading up to 2008 allowed us to be in a position to take advantage of opportunities throughout the crisis. This is a part of our culture and management philosophy that has produced 88 consecutive quarters of profitability.

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

Frank Hall

Thank you, Claude. Our third quarter 2012 GAAP earnings per diluted share were $0.28. As Claude mentioned the most significant non-recurring items included in the results for the quarter were $2.6 million and pre-tax gains related to sales of investment securities and approximately $400,000 of employee benefit expenses related to implementation of the efficiency plans. So I will speak briefly on the major components of our operating performance in the quarter.

Our adjusted pre-tax pre-provisioned earnings as shown on slide 3 and 4 of the supplement were 24.4 million for the quarter or 1.57% of average assets. Adjusted pre-tax pre-provisioned earnings which excludes certain items related to covered loan activity as well as significant non-recurring items were down quarter-over-quarter due almost exclusively to a decline in net interest income. Total interest income declined $5.6 million compared to the linked quarter due primarily to lower interest income earned on loans and investment securities during the period. The decline in interest income on loans resulted from an 8.8% decrease in the average balance of covered loans outstanding and to a lesser extent a 59 basis points decline in the yields earned on covered loans.

While we have observed a relatively consistent decline in covered loan balances in recent quarters, the decline in the yield on covered loans was partially driven by the prior quarter impact of full accretion of discounts associated with a small population of loans as well as a payoff on the large credit that had previously been classified as non-accrual during the second quarter. As a result, the decline in interest income due to lower average covered loan balances was consistent with recent quarters; however the decline in yield resulted in an additional $1.1 million decrease in interest income compared to the prior quarter.

Changes in covered loan yields are not expected to be as impactful for future periods as in this quarter. Average uncovered loan balances increased 4.8% during the third quarter on an annualized basis. However, the impact to interest income was negligible as payoff activity was elevated and loan originations during the quarter were recorded at an average yield of 3.87% or approximately 94 basis points lower than the average yield on loans that paid off during the period.

Lower interest income from investment securities resulted from a 37 basis points decline in the yield earned on the portfolio and a 6.3% decline in the average balance, both of which were impacted by elevated pre-payment activity on higher yielding mortgage back securities during the quarter. The elevated pre-payment activity on mortgage-backed securities also resulted in accelerated premium amortization during the quarter. Additionally, a significant portion of the company’s higher yielding trust preferred securities were redeemed by the issuers early in the quarter.

The impact of accelerated premium amortization and the early redemption of trust preferred securities during the quarter resulted in an approximately $1 million in interest income as compared to linked quarter. As a result, we begin repositioning our investment portfolio during the third quarter to reduce the future risk of pre-payment by selling approximately $84 million of agency mortgage-backed securities and recognizing a pre-tax gain of $2.6 million.

Additionally, we purchased over $390 million of securities late in the third quarter and thus far in the fourth quarter with a weighted average yield of 1.53% and with characteristics that we expect will help mitigate pre-payment and premium risks. The company’s current investment strategy consist of a bar-belled approach under which both short and long duration securities are targeted to provide a weighted average duration and yield profile approximating in the intermediate duration security.

This strategy will provide trend income from the longer duration securities which benefit from the steepness of the yield curve, while also mitigating interest rate risk with shorter duration, variable rate securities which will reset when interest rates begin to rise. Total interest expense continue to benefit from the impact of the banks’ deposit pricing and rationalization strategies, declining $600,000 compared to prior quarter.

The cost of funds related to interest bearing deposits declined 4 basis points to 57 basis points which helped to offset the impact of the covered loan and investment activity. Several time deposits continue to decline, decreasing $132.5 million or 9.9% during the third quarter. Compared to one year ago time deposits have declined 458.7 million or 27.7%. A majority of these amounts of consisted of single service CDs and other time deposits representing non-core relationships.

As of September 30, our total balance of time deposits was $1.2 billion with a cost of funds of 1.53%. As I mentioned last quarter, we have likely lowered our pricing on non-time deposit products as far as we can, however there is still room for continued improvement related to CD balances as about 30% of the total time deposit balance represents single service relationships with a weighted average rate of 1.78%.

During the fourth quarter maturities of these deposits are expected to be approximately $75 million with an associated cost of 1.64%. Since the fourth quarter of 2011, our experience with maturing single service CD products has resulted in approximately 58% of the balances rolling-off and 42% retention which is consistent with what we reported last quarter. CDs being renewed are done so at weighted rates no higher than 35 basis points, so even if our retention rates were to increase, the cost of funds differential is great enough to have a significant impact on the all-in-cost of deposit funding.

There is also the additional impact of repricing the existing CD book with core relationship clients, which again would be repriced at significantly lower rates for those balances that are renewed. When you include non-interest bearing deposits our total cost of deposit funding declined 4 basis points to 45 basis points for the quarter. As we continue to reduce the balance of higher cost, non-core relationships deposits, we have significantly improved the quality of our core deposit based and certain non-time deposits now comprised almost 76% of total core deposits, compared to 69% one year ago.

As a result, net interest income on a GAAP declined $5 million to $59.8 million from $64.8 million for the linked quarter. Similarly, net interest margin on a GAAP basis declined to 28 basis points to 4.21% from 4.49% for the linked quarter. In terms of future expectations for margin, we expect the net interest margin to remain under pressure as a result of the current lower rate environment. However, our expectation is the quarterly declines will be less severe in future periods.

Further margin pressure is expected to impact fourth quarter 2012, net interest margin by approximately 8 to 15 basis points. While changes in linked quarter pre-payment activity are expected to have a negligible impact on net interest margin; it could have as much as a 5 basis point impact in some accelerated scenarios.

Moving now to non-interest income, excluding non-recurring items, reimbursement due from the FDIC and other covered loan activity as noted in table one of the earnings release. Non-interest income earned in the third quarter decreased approximately $500,000 to $16 million from the linked quarter.

The decrease was primarily driven by decreases in client derivative fees and bank card income, partially offset by increased service charges on deposits and gain on sale of loans from mortgage originations. I will note too, that our wealth management group experienced annualized growth and assets under management of approximately 18% which should help this fee category grow over time. In the third quarter, non-interest expenses excluding non-recurring items certain FDIC and covered asset expenses and other non-strategic operations and transition related items as noted in table two of the earnings release were $50.3 million as compared to $49.2 million in the second quarter.

The increase in non-interest expenses compared to the linked quarter was primarily driven by higher uncovered [ORE] expenses, marketing and data processing costs, partially offset by lower salaries and employee benefits and professional service expenses.

Finally, I will briefly comment on the credit performance of our covered assets during the third quarter. Net credit losses on covered assets for the quarter were $1.7 million as highlighted on page 10 of the supplement which discloses the individual components of credit and FDIC related items associated with covered assets. As can be seen on the graph of page 10 which shows the prior fourth quarter trend actual credit losses can be somewhat volatile from quarter-to-quarter and are affected by actual charge-offs.

Changes in both the timing and amount of cash flows and continue to mix shift as the covered loan portfolio matures. Overall, the covered portfolios continue to perform well.

I will now turn the call back over to Claude.

Claude Davis

Thanks Frank and we will be happy to open the call for questions.

Question-And-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Scott Siefers with Sandler O’Neill.

Scott Siefers - Sandler O’Neill

I guess the first question is just on the margin I guess. Frank as you look, as I appreciate all definitely a lot of details which I appreciate in the fourth quarter thoughts as well, as we look I guess beyond the fourth quarter is that similar kind of compression sort of the 15 basis points range, I mean is that something that you feel like is realistic just based on what you see your experience with the covered loan portfolio, the way you think you repositioned the securities portfolio etcetera. And then I guess just kind of from your guy’s perspective, again given that you gave a lot of information or detail on the margin what was it that surprised you most in the quarter caused a pretty significant sequential reduction?

Frank Hall

Sure. Well, let me take those questions one at a time. I think for the fourth quarter, we certainly wanted to make it clear what the change would be relative to what we just experienced in the linked quarter. And really just want to convey the thought that it will be less severe. So I think one of the things to keep in mind Scott is that as we continue to reprice our earning asset portfolios in a low rate environment, you’ll continue to see declines but they will be gradually lessen quarter-to-quarter and that's just because as the portfolio yields continue to come down as you add new assets, you are starting from a lower base each successive quarter. So this quarter by far was the most significant and highest impact quarter. We would expect any future linked quarter adjustments to be less severe.

Claude Davis

And Frank, if I could just add there for you continue. Scott, the other thing I would say, I think as you look at companies that start from in our case, a 440 margin to a 420 margin, just where assets are being priced in the market, whether that be loan or investment security assets, those with higher margins are going to see a higher earlier compression than those that started at 350 margin that are more [account] to current asset prices. Did that make sense?

Scott Siefers - Sandler O’Neill

Yeah.

Frank Hall

And Scott, I would add to that as well. What you see early on in a repricing environment or a refinancing environment is that your higher rate assets come off faster and so there is a magnified impact. So that’s what we're experiencing now. Your question about what surprises; I wouldn't necessarily say that anything surprised us but I would say probably the largest contributor is on the acquired loan portfolio and some of that is as you know, having followed us for years. Some of those components can be somewhat volatile.

Scott Siefers - Sandler O’Neill

And then I guess just a separate question. it sounds like I mean you guys are doing quite a bit, try to outside the margin between the share repurchase and the cost cutting initiatives, seems to me like you are doing just about everything you can to try to kind of stay off, the pressure is on the earning side. I guess I am just curious. What kind of flexibility do you guys see both on the repurchase and then on the cost cutting side to perhaps accelerate both of those programs, maybe on the cost side, bring the benefits into earnings a little sooner and then if you got an opportunity to do something a bit more aggressive earlier on the share repurchase and kind of a straight line repurchase over several years.

Claude Davis

Sure, first on the cost piece, two things that incur important there one is timing and one level as it relates to timing we are doing them as quickly as we think is prudent for the long-term health of the business. So certainly if we see a cost opportunity, we are going to do that when it makes sense and as soon as possible. But we also want to be careful because our ultimate objective is to grow because the other way to mitigate margin pressure is to see good growth both in loans and deposits. So we are very sensitive to that as well as we are really trying to focus and grow the fee based businesses to also kind of deal with the margin compression that we know as a part of all are or like these days. So I would say that’s first on the cost side as it relates to timing.

Second, in terms of level; we have identified 17.1 million. We continue to evaluate every part of the company and we won’t be stopping. It’s a 17 million, we think we have additional opportunities that could be material, opportunities to increase that number obviously we won’t announce it until we have identified it, we think it’s real but it’s we see additional opportunities that we think make sense and don’t destroy the long-term growth opportunities for the franchise.

As it relates to the repurchase, I will just give my quick comment and then Frank can add his thoughts. We really want to, we wanted to move and the announcement this quarter was not just about the margin compression and earnings impact, but was to really let investors know what the long-term capital plan is for the organization and that is to have a consistent 60% to 80% return of capital fully based on current conditions and that certainly in the near-term would be 100% variable dividend. We want to be prudent and not be too extreme and that's what we thought the million shares roughly and that may very to be little bit higher to be a little bit lower depending on conditions with the right approach.

Now it relates to timing of the million shares annually obviously that will depend on markets conditions. So and we said we’ll kind of let you know that as each quarter progresses. Frank is there anything you would add?

Frank Hall

No, just the mechanics of the share repurchases as Claude alluded to we will begin that in the fourth quarter and the number of shares repurchased each quarter will vary obviously based on market conditions.

Operator

The next question comes from Matthew Keating with Barclays.

Matthew Keating - Barclays

I was hoping if you clarify your commentary on the share buybacks first. Its obviously, you mentioned you planned it again in the fourth quarter of 2012, but that million share, is that pro rata for the year then like your million share of target annually would that be a pro rata for 2012 at least, for just one quarter?

Frank Hall

No, that is expected to be a $1 million shares over a one-year time horizon.

Matthew Keating - Barclays

And then just more generally perhaps, can you comment why you view now as the appropriate time to institute the share buyback program, does that say anything about the M&A environment in your footprint at this point?

Frank Hall

The share repurchase program we feel as and the board feels is an appropriate message to return capital to shareholders, and as Claude mentioned targeting that 60% to 80% total return of capital to shareholders. We wanted to introduce it, because some of our shareholders have expressed a desire to see that type of return of capital in addition to dividends. I would not read into it any commentary or any view on the M&A environment. And as Claude mentioned it’s a program that will be reevaluated by our Board each quarter and it will be reviewed in the context of asset growth opportunities.

Matthew Keating - Barclays

Switching gears to expenses, I appreciate the color on the timing of the $17 million in identified expense opportunities, can you clarify on whether or not these identified opportunities will all fall to the bottom line or will there be natural sort of expense inflation in the overall organization, so that you don't necessarily see sort of that overall expense impacts. So different banks have sort of different outlooks when they identify these cost saving opportunities and I appreciate your color on sort of how you view these savings?

Claude Davis

Sure, when we talk about the $17 million just from the current run rate, we are not trying to forecast kind of future increases or decreases and there will be both, because of different dynamics in the business. But certainly, I will tell you as the general theme of what we are trying to accomplish, both identifying the $17 million that we have identified and know what they are to the additional review and look for additional opportunities, the intent is to try to continue to improve the efficiency ratio or improve our operating leverage. But to that point, we are not providing really the expense guidance, any form of expense guidance.

Operator

The next question comes from Bryce Rowe with Robert W. Baird.

Bryce Rowe - Robert W. Baird

I think my question was just to ask, I'll try a bit differently here. You've got $17 million of projected expense savings roughly with $4.25 million per quarter. What kind of operating expense base are we to assume that's going to come off of, so are we assuming the expense base that includes some of these transition related and non-strategic expenses or to be worked off of the core expense space that you guys have shown in various tables?

Frank Hall

Yeah this is Frank; it’s also the adjusted number, so when we are talking about expense saves, we’re talking about expenses that we consider to be core expenses. We will continue to differentiate what the transitional and FDIC related costs are quarterly in the tables.

Operator

The next question comes from Christopher McGratty with KBW.

John Barber - KBW

Good morning it’s John Barber filling in for Chris. First question, I was just wondering did the OCC’s guidance have any impact on your results this quarter?

Claude Davis

Specifically on….?

Frank Hall

On equity or…?

John Barber - KBW

The Chapter 7 guidance from the OCC?

Claude Davis

Yeah, it did not, its something that we continue to evaluate, but don't expect it to have a meaningful impact.

John Barber - KBW

And what's the good tax rate to use going forward?

Claude Davis

I think the current tax rate that we have in this quarter is probably the best one to use going forward. In the previous quarter, we had some true-ups there that lowered it, but this quarter’s rate is probably the right one.

John Barber - KBW

Okay. And are you still comfortable with your 55 to 60 targeted efficiency ratio, and if you are, what's the timing that you expect to achieve that?

Claude Davis

Well, first thing I would say that’s still our long-term target. Obviously, we're in a period here that we're all under revenue and margin pressure because a low rate environment. So yes, it used to be a target. I wouldn’t want to put a timeline on it, principally because while we continue to look aggressively for cost reduction opportunities, I just keep emphasizing the point that we will not do that at the sake of our growth objectives. So we will do what's prudent and make sense and it will mean a slightly higher efficiency ratio near-term that may be something we have to work with. But we will continue to update you on the efficiency thing that we have identified and continue to make progress towards that long-term strategic efficiency goal.

John Barber - KBW

On the expected cost savings of 17.1 million, could you give as any color on the expected breakdown of that cost savings?

Claude Davis

It's across multiple income statement line items.

Frank Hall

Yes, the bulk of it's going to be in salaries and benefits and that is distributed across other categories, even less so. So call it roughly 70% salaries and benefits, occupancy is the next largest category, but distributed across all but weighted towards salaries and benefits.

John Barber - KBW

On the salary and benefits, have you identified what percent of people are client facing?

Frank Hall

Yeah we haven’t discussed nor will we at this time in any greater detail than what we have shared, obviously anything that impacts branch closures and things like that will be announced consistent with what the regulatory requirements are.

John Barber - KBW

Just last one I had, you guys [advice] on deep dive on the expense side, but have you taken a similar approach and looked at revenue enhancement opportunities.

Claude Davis

Yeah if you are talking about fees specifically, we are always looking at fee opportunities, but when we think carefully about just because of the client impact and the competitiveness impact, but yes we are always looking at those opportunities.

Operator

The next question is a follow up from Scott Siefers with Sandler O’Neill.

Scott Siefers - Sandler O’Neill

I wanted to ask another question on the cost savings. I think the 17 million is inclusive of some of the brand closures that you guys have already done, one is I could [recommend] two, if that’s the case are any of the 17 million already in the third quarter 2012 run rate or are we already sort of be gone on a portion of the cost savings?

Frank Hall

Sure, Scott you are correct the 17 does include the impact of the previously announced branch closures, and as it relates to what’s reflected in the current numbers it’s a very small amount that’s in there currently.

Operator

The next question comes from Kenneth James with Sterne Agee.

Kenneth James - Sterne Agee

I had a question here just kind of help me, my long range margin modeling and Frank forgive me, but it’s somewhat FDIC related. If I am looking at the income statement, I look at accelerated discount. When that occurs, when I am looking at your accruable discount in this quarter, did that came out of the same bucket that goes through your net interest income as well, or is that coming from somewhere else?

Frank Hall

Accelerate discount is in the income statement and non-interest income.

Kenneth James - Sterne Agee

No, I am saying does it come from the accruable discount, in the same manner with the net interest income does it reduce accruable discount going forward every time you are doing a guess?

Frank Hall

Yes, it does.

Kenneth James - Sterne Agee

Okay, that's what I want to make confirm that thank you.

Claude Davis

Thank you.

Operator

(Operator Instructions) Our next question comes from Matthew Keating with Barclays.

Matthew Keating - Barclays

I just had a follow up question in terms of your lending pipeline, you mentioned that it remains strong, so have been into 4Q. Perhaps if you could talk more specifically about you C&I lending pipelines, does it look like (inaudible) balances were up although a bit over the average balances, and we just appreciate any color on the pipeline. Also you mentioned about the 94 basis points on declining loan origination. Can you talk about, what particular categories might be experiencing the most notable yield pressures, thank you.

Claude Davis

Sure, that last question for us have been the most direct; that 94 basis point difference is on all loan categories compared to what loans were paid off during the quarter. So, as you can imagine with the declining rates over the last couple of years, all categories are seeing kind of declines in terms of what new origination rates are versus payoff rates and I don't know we've seen a particular area that has seen more of a compression other than perhaps our franchise finance business where we are seeing new entrants into that business that is starting to compress margin somewhat. I mean there are still rates that are higher than our core commercial but they compress from where they were say two years ago.

In terms of the pipelines, pipelines do continue to be good. Fourth quarter can sometimes be a little bit lumpy just because of year end activity. Also this year, I think we are seeing different views on when did you credit based on the election and what might happen with fiscal cliff issues. So it is strong and we feel good about it. I think C&I is a particular focus of ours both in what I would call small little markets for C&I which we define as $1 million to $15 million in outstandings to our asset based lending product to our business banking products and all have seen increased originations.

So we are really encouraged by the efforts of our sales staff and how good a job they are doing. What's muted to that has been as we mentioned in my script has been some of the early payoffs, some of which is due to the companies choosing to deleverage, others have been companies choosing to sell and then just some competitive activity. So we've not seen the growth, we would have otherwise experienced in past periods based on our originations but its still, we still feel good about our sales activity.

Operator

Next question comes from Emlen Harmon with Jefferies.

Emlen Harmon - Jefferies

I apologize, how about a little bit late, so I apologize if this has been addressed already but our premium amortization on the [MBS] book, could you give us just a sense of I guess how much premium has kind of lessened that book overall and then what your assumptions are on kind of prepay speeds and where those levels fall out, the amortization levels fall out going forward?

Frank Hall

Sure we have roughly about two points of premium left in the portfolio and I am sorry your other question.

Emlen Harmon - Jefferies

Just kind of what are your assumptions on prepay speeds going forward and just the level of amortization that premium it drives, kind of what's in your expectations for kind of next quarter and that kind of the decline you laid out, the margin decline you laid out?

Frank Hall

Sure I would describe the expectations, I mean certainly what we experienced in this last quarter was elevated. Our expectations I would say are around a similar level but not really seeing anything it would indicate any [direction].

Operator

(Operator Instructions) With no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Claude Davis for any closing remarks.

Claude Davis

Great, thank you and thanks to all of you for participating in the call today. I appreciate it.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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