First Financial Holdings, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: First Financial (FFCH)
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First Financial Holdings, Inc. (NASDAQ:FFCH) F3Q08 Earnings Call July 17, 2008 2:00 PM ET


A. Thomas Hood – President and Chief Executive Officer

R. Wayne Hall – Chief Financial Officer

Dorothy B. Wright – Vice President-Investor Relations, Corporate Secretary


Mac Hodges - SunTrust Robinson Humphrey

Nicole Peterson - Scott & Stringfellow


Welcome to the First Financial Holdings quarterly earnings conference call. (Operator Instructions) Now, I would like to turn the conference over to Dee Bee Wright, the Vice President and Corporate Secretary.

Dee Bee Wright

Thank you for participating in our third quarter 2008 earnings conference call. Before we begin, I have several brief administrative items to address.

You should have received our third quarter fiscal 2008 earnings release along with our supplemental information earlier today. For those who did not, they are both available on our website and that address is

In addition to this telecast, we have a listen-only live webcast available. The webcast will be available for the next 90 days. Both the live and the archived webcasts may be accessed via a link at the bottom of our home page and again that address is

Our President and Chief Executive Officer, A. Thomas Hood will make opening remarks on our call today. Wayne Hall, Executive Vice President and Chief Financial Officer will follow and both will take questions at the end.

Our presentation today discusses the company’s business outlook and will include forward-looking statements. Those statements include descriptions of management plans, objectives or goals of future operations, products or services, forecasts of financial or other performance measures and statements about the company’s general outlook for economic and business conditions. We also may make forward-looking statements during the question and answer period following management’s presentation.

These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today. Information on the risk factors that can cause actual results to differ is available from the earnings release that was distributed earlier today and also from the Form 10-K for the year ended September 30, 2007. Forward-looking statements are effective only as of the date they are made and the company assumes no obligation to update this information.

I will now turn the call over to Tom.

A. Thomas Hood

We’re very appreciative of your interest in First Financial. I hope you’ve had a chance to review the third quarter earnings release that we issued this morning. If not, please review it at our website, as Dee Bee referenced.

I’ll provide you with some key details as we discuss operations for the quarter as well as the nine months ended June 30, 2008. After commenting on highlights in the quarter and the nine months, I will comment on some continuing strategic initiatives and report on some other results.

Just a brief snapshot of third quarter, net income was $5.9 million for the June quarter compared to $6.5 million in June ’07, compared to $7.5 million for a length quarter, the March quarter of ’08. Earnings per share diluted at $0.51 for the June ’08 quarter, $0.54 for the comparative quarter of ’07 and $0.64 for the March 31, 2008 quarter.

Return on equity for the June quarter was 12.6%, compared to 13.75% for the June ’07 quarter, and 16.11% in the March of ’08 quarter.

Earnings decreased 22% over the length quarter. As we commented in the past, the March quarter is typically a very strong quarter for insurance revenues. On a comparative quarter basis, the earnings were down about 9% from the June quarter in fiscal 2000.

Earnings compared to our March ’08 quarter were favorably impacted by higher net interest income, a higher margin, and also strong loan growth. They were also favorably impacted by higher insurance revenues.

The June quarter compared to our length quarter, the March ’08 quarter, and earnings were negatively impacted by higher loan loss provision, in response to a continued higher level of charge-offs a higher level of problem loans. We increased our loan loss reserve to $21 million. We’re at 92 basis points of total loans. We also had lower mortgage banking income for the June quarter.

Our operating expenses were higher due to the addition of Somers-Pardue. The completion of that acquisition occurred in that quarter. I want to add that we’re very, very pleased with the early results from the acquisition of Somers-Pardue.

When we compare our June ’08 quarter to the June ’07 quarter, the earnings were positively impacted by again a higher interest income, increased profitability of our mortgage banking operations and again, higher insurance revenues.

Our earnings for the June ’08 quarter compared to ’07 were negatively impacted by again, a higher loan loss provision and a higher operating expense, again primarily due to the acquisition of Somers-Pardue.

For the comparative nine-month period ending June 30, net income was $16.3 million for June ’08 compared to $19.9 million for June ’07. Earnings per share diluted for that nine-month period in the current year was $1.40 compared to $1.63 for the first nine months of fiscal ’07.

Net income was down $3.6 million, or 18%. Earnings per share were down $0.23 or 14%.

I want to remind everybody that we did have a large charge in the first quarter related to our early retirement plan.

In the current nine-month period, earnings were positively impacted by again, a higher net interest income, strong loan growth, higher earnings from our mortgage banking operation and higher insurance revenues. They were negatively impacted by again, a higher loan loss provision and higher operating expenses. Next, I’ll comment on some specific areas that we had positive results in for the quarter.

Nets and net interest margin, we are obviously very, very pleased with the improvement in our net interest margin. On a length quarter basis, the net interest margin was 3.56% compared to 3.35% for the March ’08 quarter. That’s a 21 basis point improvement. Considering the interest rate environment which we’re in, we couldn’t be more pleased with that outcome.

We have continued to enjoy reduction in our funding costs over the last nine months. Both deposit pricing and wholesale funding make contributions to that. We continue to focus on increased core deposits, making sound decisions on lower origination and pricing.

We’re ahead of our expectations and we continue to face competitive pricing issues. Some very large financial institutions have increased deposit rates well above normal rates in the market. These are very extraordinary times, obviously. It’s unlikely that strong growth and our margin will continue in coming quarters.

The next area I’ll comment on is credit [s/l Pawley]. We continue to see increase levels at charge-outs and nonaccrual loans. At the end of the June quarter, we experienced an increase in delinquencies in several categories. Net charge-offs for the quarter were 32 basis points compared to 43 basis points for the length quarter.

We have been providing data to the market on a quarterly basis on our charge-offs. Excluding charge-offs on our manufactured housing portfolio, as we pointed out in the past, manufactured housing loans have much higher charge-offs and delinquencies, and obviously we’re compensated by higher yields. The net charge-offs were 26 basis points annualized for the third quarter fiscal 2008 after excluding manufactured housing charge-offs. The manufactured housing charge-off rate, I mentioned was 86 basis points for the quarter. Annualized, which we think is a pretty good charge-off rate for the mobile home portfolio.

In comparison, charge-offs in the March ’08 quarter were 96 basis points so there was actually a 10 basis point decline in the charge-offs of the mobile home portfolio. Reserve reached by problem loans was 126% versus 139% at March ’08 in the length quarter and 259% in the comparative June 30, 2007 quarter.

The quarter ended with higher non-accrual loans and a higher level of real estate owned at the length quarter. Approximately 37% of non-accrual loans are either single-family or home equity loans.

I thought we’d take you through a portfolio-by-portfolio example of delinquencies and how they’ve changed from the March quarter to the June quarter. In the real estate 1 to 4 area, our 30 or more delinquent categories, there’s been an increase to $8.4 million from a March level of $3.4 million. Again, that’s 30 days or more delinquent in the real estate 1 to 4 category.

In the home equity area, we actually had a decline in June 30 home equity loans 30 days or more delinquent totaled $2.3 million compared to $3.4 million in the March quarter.

Manufactured housing also had a slight increase. It was up to $4.2 million compared to $2.5 million in the March quarter. Marine lending was just about the same for both quarters at $0.4 million. Commercial real estate actually had a slight decline in the June quarter.

Delinquencies are $7.1 million compared to $7.2 million. Land had a slight increase in delinquencies, $2.3 million compared to $1.4 million in the March quarter.

Real estate construction had a significant increase from $2.6 million in the March quarter to $6 million in the June quarter. Commercial construction had an increase from a level that was diminished to $2 million in the June quarter.

I think Wayne has put together another illustration of non-performing assets and we’ll go through that scenario.

R. Wayne Hall

To continue what Tom was just talking about, we look at non-performing assets which are primarily from nonaccrual loans at 90 days or more delinquent. At the length quarter March 31, single-family was at $2.4 million increased to $4.5 million. Construction loans were a little under $600,000 at March 31, increasing to $2.4 million at June 30.

Commercial real estate was pretty flat from quarter to quarter. Commercial business was up slightly from $2.8 million to $3.2 million. Land was actually down just a little bit from $1.4 million to $1.3 million. Mobile home portfolio was up slightly from $1.3 million to $1.5 million.

Home equity lines decreased from $2.1 million to $1.6 million so total non-accrual loans went from $12.8 million at 3-31 to $16.6 million at 6-30-08. A little bit of information on charge-offs. Real estate charge-offs were for the most part down across the board. Total net charge-offs for our second quarter which is March 31 was $2.4 million, down to $1.8 million for our third quarter.

Those categories, real estate went from $522,000 to $458,000. Commercial real estate went from $243,000 to $0 for our June quarter. Commercial business was $188,000 down to $121,000 and consumer went from $1.4 million to $1.2 million.

A. Thomas Hood

That’s quite an illustration, I think; that we are continuing to pay a lot of attention to all the categories of loans that we have in our portfolio. I think using pretty aggressive efforts to try to make sure that we stem the tide of increasing loan delinquencies and also deal with other non-performing assets.

We did have a slight increase in other real estate owned from $4.3 million in the second quarter to the level of $5.4 million in the June quarter. We do anticipate some sales of those properties that are still on the books in coming weeks.

Total consumer delinquency rates have increased, again, we’ve already discussed, only slightly. They came from 1.16% to 1.12% at the March 31, 2008 quarter. There were some changes to two categories in the consumer area. Manufactured housing increased to 1.93% from 1.19%. The ABA does a quarterly consumer delinquency bulletin for folks. At March 31, 2008, they noted that manufactured housing delinquencies were about 3.22%. I would contrast that to our current delinquency rate of 1.93%. That is a significant variance, a positive variance in our portfolio.

While home equity loans declined from 1.27% to 0.81%, that same ABA bulletin noted that the March delinquencies for home equity delinquencies were about 2.34%, again contrasting the national rate of 2.34% to our rate of 0.81% for home equity loans.

We have been experiencing a decrease in delinquencies of home equity loans for the past several quarters. The breakdown of the sector indicates that we are in the first mortgage position or second lien position of our own first lien position in 67% of these loans. Overall, the line draws to the full line remaining at about 52% of the total line.

We believe our underwriting continues to be very strong. The average line amount is about $73,000. The average home value is about $280,000. In a difficult economy, we would expect an increase or we would experience increases in both charge-outs or delinquencies in our mortgage housing portfolio or manufactured housing portfolio. Again, excluding manufactured housing delinquencies, total consumer delinquencies were only $3.2 million. That is only 82 basis points at June 30 compared to $5 million or 108 basis points at March 31.

I would add that on the basis of the number of loans, our consumer portfolio, the delinquent loans represent 0.74% of the number of consumer loans that are in the portfolio. I want to emphasize again, we do not categorize any portion of our residential real estate loans that we hold in portfolio as subprime.

We expect foreclosures to increase. We’ve experienced a slight increase in foreclosures through June 30, 2008. For the first nine months of the fiscal year 2008, we completed only 14 foreclosures for approximately $5 million, one of which was a large commercial real estate land loan for $1.8 million. We did recognize a significant charge-off on that, about $450,000 in the first quarter of the year. We believe that this charge-off was particularly unique to that loan and we wouldn’t expect that the charge-offs would be that significant relative to the original value of the loan.

We believe that for the remaining 13 foreclosures, we have recognized approximately $240,000 in losses or approximately $18,000 per foreclosure. Those are typically in the 1 to 4 area. We have always considered any number of alternatives to resolve significantly delinquent loans to avoid foreclosure and we continue to do so. This should also be an indication, I think; of the quality of our 1 to 4 residential loans while delinquencies may be higher, foreclosures are very manageable. Later in the call, we’ll focus on some other parts of our loan portfolio and give you additional information.

Reporting on other operations, mortgage banking operations had another successful quarter despite the extended slowdown of real estate sales in many of the markets that we serve. Total revenues for the third fiscal quarter were $1.8 million which compares to $3.0 million in the length quarter and $1.3 million for the same quarter, the June quarter of 2007. Following my comments, Wayne plans on discussing some additional detailed elements that make up the revenue from mortgage banking.

The vast majority of our residential borrowers continue to choose to finance their purchases with fixed-rate mortgages rather than variable rate mortgages. We have continued our practice of selling most of our fixed rate mortgages into the secondary market. We haven’t had any problems moving into the secondary market with loans for sale. I think both of the key providers in the secondary market, Fannie and Freddie recognize the very high quality of the loans that we produce. So we expect that the real estate market, however, will be sluggish for the foreseeable future and indeed, we have noticed a decline in single-family applications in recent weeks.

As for service charges and fees on deposit accounts, we expect our strong focus on growth and core checking products to continue and to benefit deposit fees and card-related revenues. Deposit fees were $5.9 million for the quarter and increases were principally due to the growth and demand account relations which increased approximately 4,900 accounts or 4.8% during the first six months of the fiscal year.

As to our insurance operations, insurance operations showed a significant improvement from the same quarter in 2007, mainly related again to the Somers-Pardue acquisition. It was effective on April 1, 2008. This acquisition added about $1.8 million in insurance revenues during the third quarter. It’s important to note that some of our major carriers have changed their contention commission structure and some of these contention commissions will now be paid over the year rather than during the second fiscal quarter which ends in March.

It’s always been a departure and a somewhat difficult concept to grasp, I think for folks following the company, this surge in revenues and insurance in the large quarter. Some of that will change over time. In addition, many carriers have changed the structure of contention commission programs and we expect the levels of contention commissions will decline as a percentage of total commissions. We continue to be very, very pleased with the performance of all of our insurance operations.

Now I ask Wayne to comment on some other highlights of operations for the quarter and also to focus on some balance sheet changes and I’ll add some commentary on market expansion followed by your questions.

R. Wayne Hall

We believe the bank demonstrated strong fundamentals in most all areas of operations. Amidst strong deposit and loan competition, we continue to make progress in growing our customer base. Our credit standards remain steady and the insurance operations continue to add significant revenues.

What we’ll do first, is discuss the define impact of the balance sheet dynamics over the length quarter for our net interest income. We are pleased with the growth in our margins over the last two quarters. Our margin for the current quarter was 3.56% compared to 3.35% the last quarter and 3.23% for our first quarter. Our average loans increased by $39 million while our average deposits grew $43 million from the length quarter.

In addition, our average cash deposits declined 41 basis points along with a significant decline in costs and borrowings of approximately 50 basis points which more than offset the decline in yield and earning assets of 21 basis points.

Our product managers continue to work very hard with campaigns to keep and attract CD, money market and checking account customers.

We experienced growth in most loan categories. Compared to the length quarter, on an annualized basis, manufactured housing loans increased 11.8%. Home equity loans rose 22.4%. Commercial real estate loans were up 15.3%. Commercial business loans were up 19.8%. Land loans were up 11.4%. All other consumer loans were up 7.2%.

Construction loans declined 13.8% and 1 to 4 family declined 3.1%. Overall, loans grew at an annualized basis of 6.7% from March 31, 2008. The market value of the available for sale investment portfolio at June 30 was below book value by approximately $11.7 million. There have been no downgrades in the investment portfolio except for three munis with total balances of $2.5 million, all of these have stand-alone “A” ratings.

We do our own collateralized debt obligations made up of 100% bank trust preferred securities totaling $5 million that have been placed on watch. We also have one re-preferred whose parent bank has been placed on credit watch which is $1.4 million. We consider the compliant value to be temporary.

As Tom mentioned earlier, we have experienced a higher level of charge-offs, though they’re down from March 1, 2008. Charge-offs for the June ’08 quarter were $1.8 million or 32 basis points compared to $2.4 million or 43 basis points from the length quarter.

We are committed to strong underwriting standards and believe the higher than normal charge-offs are a result of economic conditions rather than poor underwriting. We continue to place increased emphasis on monitoring problem assets, in addition to aggressive collection and disposition of these assets.

The absolute level of the allowance for loan losses has increased 17% or $3.1 million and allowance as a percentage of loans ended at the quarter at 92 basis points, up from 80 basis points at 3-31-08.

Non-accrual loans increased to $16.6 million, up from $12.8 million at 3-31-08. This increase in non-accruals is concentrated in construction with an increase of $1.8 million and single-family with an increase of $2.1 million.

We continue to expect a higher level of charge-offs in the foreseeable future and are paying particular attention to our spec residential construction loans. Although we have not experienced any significant increase in charge-offs, we do believe there’s a greater risk of loss in this loan category.

We are working very closely with builders to understand the potential for sales as well as working with them to help us facilitate sales. Our total exposure to spec residential construction loans at June 30, 2008 is approximately $75 million.

Let’s talk briefly about non-interest income and non-interest expense. We made good progress of continuing our goal of diversifying revenues and reducing reliance on net interest income. Total non-interest income for the quarter was $16.4 million. This represents a $2.9 million or 21.4% increase from the same quarter last year. Non-interest income represents greater than 40% of total revenues.

Our mortgage banking operation performed well during our third quarter, although down from the length quarter, contributing $1.8 million compared to $3.0 million for the length quarter. A large part of this change could be contributed to the Heddon program as we reported last quarter.

During our second quarter, the spread between 10-year treasury yields and 30-year mortgage rates increased significantly. This served to create a Heddon gain as treasury based instruments are used to hedge a change in the value of the mortgage servicing rates. The Heddon program performed as designed during our third quarter.

We also benefitted from increased late charges during the third quarter, as these fees were approximately $240,000 higher than the length quarter. Additionally, mortgage banking revenues during our second quarter conclude $440,000 related to the adoption of staff accountables of 109 which was affected January 1, 2008.

Insurance revenues increased $2 million from the same quarter last year. The Somers-Pardue acquisition added $1.8 million to revenues during the current quarter. Adjusting for annual tender commissions received during our second quarter as well as the Somers-Pardue acquisition, insurance revenues for the current quarter were up approximately $1 million from the length quarter.

Service charges and fees on deposit accounts were up slightly from the length and prior year quarter. Card-related fees were up approximately $130,000 while NSF and overdraft fees were up approximately $95,000 from the length quarter.

Let’s now turn to operating expenses which were reported at $25.7 million up $1.7 million from the length quarter. The acquisition of the Somers-Pardue added $1.5 million of operating expenses during our third quarter. Excluding this acquisition, operating expenses were up less than 1% from the length quarter. Salaries and employee benefits adjusted for the acquisition were down approximately $400,000 for the quarter.

Margin increased $115,000 associated with timing of advertising campaigns. Furniture and equipment increased slightly about $71,000 and occupancy expenses remained flat from the length quarter.

We are working very hard to control operating expenses. Adjusted for the acquisition of Somers-Pardue, our efficiency ratio would have been approximately 62.5%, down from the 65.9% for the same quarter last year.

I’ll now turn the floor back over to Tom.

A. Thomas Hood

We have always considered our distribution system as a great strength of our company. We continue to have great results in our in-store locations and in-store expansion and diversification has continued this year. We added three additional in-store centers at Lowes Food stores along with two additional Wal-Mart in-store sale centers are expected to open in late fiscal 2008 and in fiscal 2009.

As we reported many times, that our in-store operations produced very significant amounts of our new demand deposit account relationships. During the first nine months of fiscal 2008, 59% of new retail demand deposit accounts were opened on in-store platforms. Our overall checking account growth rate during fiscal 2008 is 6.4% whole in-store locations have a growth rate on demand accounts of 22%. Our in-store locations now represent 25% of our total sales offices.

Technology initiatives included merchant capture systems which are now being offered and made available to our commercial demand customers. We have made significant progress on our company-wide document imaging system. We believe as we go through this next phase of roll-out of that system that we’ll have some pretty favorable impacts on operating costs.

New enhancements to our customer experience in our retail sales offices will include some teller-assisted and self-service systems. We just approved the acquisition of about five of those systems for placement in branches in this region, the Charleston region. We’ll be rolling those out very, very soon.

Many of these initiatives once fully implemented, should also produce additional operational efficiency improvements and we believe improvements in customer service.

As to our outlook for the remainder of fiscal 2008, we believe interest spread should hold or only slightly decline. We are projecting our net interest margin to be in the range of $340-$345 million for the fiscal year. The credit quality will continue to be under increased pressure. We believe our historically and continued strong underwriting standards will lessen the impact. We’re working closely as Wayne indicated with our home builders and other borrowers to help facilitate home sales lessen the impact on them as we lessen the impact on us.

As always, we’re not reaching for loan goals that would compromise the quality of our existing portfolio. As to loan growth, it’s very difficult to predict, although we are very pleased with the first nine months of our growth. Present slow conditions in residential real estate lending may prevail through 2008, possibly well into 2009 and there is the possibility that it could spill into other sectors of loans. We’re well staffed and intend to take advantage of any disruption in the mortgage brokerage or banking community.

We also remain focused on a number of retention strategies for our existing portfolio. It enjoyed some success in the execution of those strategies. We believe great opportunities continue to exist in our markets in North and South Carolina and other nearby markets including opportunities to gain market share from financial institutions that may not be as strong as First Financial. Our markets in North and South Carolina continue to have very stable unemployment rates. Our primary market, the Charleston market has an unemployment rate of 4.9%. It also has increasing per capita income levels and job growth in these markets, for instance, for the twelve months ending February 2008, Charleston was ranked #6 in the nation in job growth at 2.19%.

We believe the quality of life, growing workforce, particularly in the technology sector and increasing foreign investment will serve us very well as we continue to work through the economic downturn. We continue to expand our market presence in 2008. We’re also examining opportunities to refine and make our branch distribution system more effective, more efficient, including branch relocation and consolidation of some offices. We know that improving productivity will translate into lower efficiency ratio and obviously to improving our return to investors.

You should also consider the experience of our management team. Most of the people around our management team table have experienced several previous credit downturns in the 1980’s, 1990’s, and the addition of a very devastating hurricane in 1989. This is a team with great experience and determination; a team that you can count on to produce better results.

That ends our formal remarks. We’d be happy to entertain any kinds of questions you might have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mac Hodges - SunTrust Robinson Humphrey.

Mac Hodges - SunTrust Robinson Humphrey

First on the margin, I believe that you said the guidance for the full fiscal year was $340-$345 million. I was curious, imagine that you decided not to do anything this quarter, and you just see some pressure this final quarter, and I was curious what your assumptions were, as we get further into this year and into ’09.

A. Thomas Hood

I think one thing I’d point out very quickly is that some of the larger institution markets that we serve have pushed deposit rate levels much higher than we would have anticipated they would. They obviously have some limitations on building liquidity in their organization and they focus on deposits and gathering deposits, mostly high-priced CDs in the marketplace. That could have an impact from a competitive standpoint on our margin.

We are also pretty close to the end of most of the deposit pricing to lower rates in our existing portfolio of deposits. So we see that as a limiting factor, both of those issues as limiting factors on further expansion of an anachrous margin.

However, we think that we’ve had pretty good loan growth, very high quality loan growth, and I think we’ve priced effectively there. So while we could be subject to a decline from that perspective, lower yields on assets, we think we’ve done a pretty good job of holding a line there.

Mac Hodges - SunTrust Robinson Humphrey

Maybe on credit quality, I appreciate the detail you gave on the different kinds of loan categories and delinquency buckets. Given the weakening consumer and real estate markets, I know you built reserves very considerably this quarter, is it reasonable to assume that you continue to build reserves here or do you feel like the level is going to stay close to where it was this quarter?

A. Thomas Hood

We go through a very, very comprehensive analysis of reserves today. It’s a mixture of assumptions but a lot of scientific process. There are lots of people around the table, probably twice the number of people around the table than in the past. I think that it’s altogether likely that there could be some additional reserve building in the future. I know that the marketplace has had some concerns about the absolute level of basis points in reserves against our loans that we had. Certainly, we’re listening to the marketplace and also following what is a very well-defined process in coming up with a legitimate add to loan-loss reserves.

We think that we’ve done a good job of building a credibility for the company and certainly loan quality is an area today where we need to be brutally honest with the marketplace. It is the headwind of all headwinds, so I think we’re trying to provide as much information to the marketplace as we possibly can. We don’t know the depth of this real estate issue as yet. We don’t know how long or prolonged this credit event is going to be so I certainly would consider that some point in the future, we may again be building additional reserves.

Mac Hodges - SunTrust Robinson Humphrey

Outside of the spec resident construction book of $75 million was mentioned. Where is the next portfolio of concern, if there is one?

A. Thomas Hood

We have not seen any indication that there’s deterioration in any of the commercial categories. If this credit issue lengthens, if economic conditions were to decline for several quarters, to the point where all of these parts of our portfolio would have more significant delinquencies or significant write-offs, then there’s altogether the possibility of some point in time that this credit event will have a greater impact on the commercial side of the business.

Again, we have not seen any indication, as a matter of fact, our chief lending officer went through each portion of our portfolio, indicated he had a great deal of confidence in all of the commercial categories and we’ve had some good experience in the commercial categories thus far. I think there’s a body of opinion growing out there, maybe much of it on the part of the regulators, but they have reason, opinions, and observations about all this also. We haven’t seen anything of yet.

Mac Hodges - SunTrust Robinson Humphrey

Wayne, I’m curious on account of the capital front. I know with the insurance acquisition this quarter, you had some intangibles; the tangibility ratio went down a little bit. I’m trying to find my notes. I think I had it at 5.12% or so. I was curious, the comfort level on capital, if you were considering anything, given some of Tom’s comments about seeing opportunities, you don’t know when to pull back to bolster the balance sheet for future growth.

R. Wayne Hall

I think we’re comfortable right now with our levels. I think if an acquisition opportunity arises, I think we are certainly in a position that we would be able to raise the capital; adequate enough capital to acquire what we thought would be an appropriate acquisition.


Your next question comes from Nicole Peterson - Scott & Stringfellow.

Nicole Peterson - Scott & Stringfellow

My question is related to end-of-year. I know you mentioned that you see them increasing in the near term and they’ve been in the range of 8-12 basis points. I was wondering if you have a range going forward.

A. Thomas Hood

I don’t know if we have a specific range going forward. I would share this that we become very impatient with the process. Most of the collateral for these non-performing loans is real estate. It does take some time to actually get the keys. For instance, we had a very large single-family property that first went through the delinquency process, and then went through the bankruptcy process. We’ve been trying to get our hands on that property for probably close to a year. We have finally been able to get the keys and probably within about 45 days, that property will be sold, with I think a very minor loss compared to its value. I think that’s the sense of frustration that we have is that if we could simply go out and grab the property, get it sold and get a non-performing loan off the books, that would be a great process. Unfortunately, foreclosure and bankruptcy can extend the time to get that property and get it sold.

We probably have several pieces of real estate that we think we can very quickly dispose of but it’s going to take some time to do that from a foreclosure perspective. It’s not a problem for investors but all of those foreclosed properties have to be valued at their market value and typically that would include all of the costs associated with the sale of that property and generally some estimate of a decline in value based on a very quick sale of the property. So they’re properly valued on our balance sheet at market value or even below market value considering a quicker sale than normal.


There would appear to be no further questions at this time.

A. Thomas Hood

We want to thank you very much for being here on the call with us today. Again, we greatly appreciate your interest in First Financial. There is lots of information available on the web about operations and we would encourage you to review the third quarter information that is available. We have an analyst’s booklet that goes out to many of you already and certainly get in touch with Dee Bee if you’d like to have that.

I mentioned the quality of this marketplace, our primary marketplace in Charleston. We recently got another expansion opportunity. There’s a large company that’s going to build an adjoining facility for about $11 million, add another 100 jobs in this marketplace. They are going to be high quality jobs. We are optimistic about the future although we have lots of other things to attend to; today we think these markets are going to be great places to be for a long period of time. Thank you again for being on the call with us.

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