Nov. 5, 2009 (PR Newswire) -- CINCINNATI, Nov. 5 /PRNewswire-FirstCall/ --
-- Net income of $225.2 million or $4.38 per common share for the third
quarter of 2009
-- First Financial, through Federal Deposit Insurance Corporation (FDIC)
assisted acquisitions, made significant advancement in its strategic
operating markets with the addition of 36 banking centers and over $3.8
billion in assets from the acquisitions of the banking operations of
Peoples Community Bank, Irwin Union Bank and Trust Company and Irwin
Union Bank, F.S.B.
-- Purchase accounting contributed approximately $241.0 million of capital,
created through the recognition of a bargain purchase gain on
acquisition
-- Tangible book value per common share increased by 58.5%, without
dilution to shareholders, to $10.48 from $6.61 at June 30, 2009, with a
tangible common equity ratio of 7.48% and a total risk-based capital
ratio of 17.46%
-- Increased allowance for loan and lease losses to 1.94% from 1.34%,
excluding loans covered by FDIC loss share agreements
First Financial Bancorp (Nasdaq: FFBC) today reported third quarter and year-to-date results for the period ended September 30, 2009.
Claude Davis, First Financial Bancorp's president and chief executive officer, said, "We are very excited about the growth and expansion of the company, particularly the retail banking network in the greater Cincinnati market, the state of Indiana, Louisville, Kentucky and our re-entry into Michigan. The banking centers we acquired complement our existing locations and provide entry into markets where we did not have a presence.
"The financial and capital strength of the company has positioned us to be opportunistic in these difficult times, and we believe that our ability to execute these transactions is evidence of that strength. We expect the capital generated as a result of these acquisitions will support the acquired assets and also support future growth and expansion opportunities.
"First Financial associates, both existing and new, have worked relentlessly to ensure the efficient integration of these banking operations. We are grateful to all of our associates for their hard work and the professional manner in which they helped to execute these transactions. We welcome our new associates to First Financial and look forward to helping them further build their careers with a strong and growing company. We also welcome our new clients. We are very excited to forge long term relationships with them and the communities where they live and work.
"Our organic growth strategy also remains on track. Construction is nearly complete on banking centers in St. Marys, Ohio and Edgewood, Kentucky," added Mr. Davis. "Both locations are expected to open in the fourth quarter and are being built with the company's new prototype design, which we expect will further enhance access and service to our clients in those markets. First Financial clients now have the convenience of banking at 118 First Financial Bank locations and ATMs within the four state regions of Ohio, Indiana, Kentucky and Michigan."
Mr. Davis continued, "Our results this quarter were impacted by higher credit costs resulting from our expectation of loan portfolio stress, primarily within our commercial and commercial construction real estate portfolios. Credit quality and the resolution of problem loans are top priorities and we continue to work closely with clients on resolution strategies for problem credits. However, until we begin to see consistent economic growth over several quarters, including increased consumer spending and lower unemployment rates, we believe that certain credit metrics, including charge-offs and nonperforming assets, may remain at elevated levels."
EARNINGS & FINANCIAL RESULTS
Third quarter 2009 net income was $226.2 million, net income available to common shareholders was $225.2 million and earnings per diluted common share were $4.38. This compares with net income of $5.7 million and earnings per diluted common share of $0.15 for the third quarter of 2008, and net income of $1.5 million, net income available to common shareholders of $0.5 million and earnings per diluted common share of $0.01 for the second quarter of 2009.
Year-to-date 2009 net income was $233.4 million, net income available to common shareholders was $230.8 million, and earnings per diluted common share were $5.31. This compares with year-to-date 2008 net income of $20.9 million and earnings per diluted common share of $0.56.
Third quarter 2009 results, when compared with the third quarter of 2008, and the second quarter of 2009, were impacted by the following significant items:
-- Gain related to the accounting for a Federal Deposit Insurance
Corporation (FDIC) assisted transaction.
-- On September 18, 2009, the company assumed the banking operations of
Irwin Union Bank and Trust Company and Irwin Union Bank. F.S.B.
(collectively, "Irwin"), which included 27 banking centers. The
estimated fair value of assets acquired exceeded the estimated fair
value of liabilities assumed, resulting in the recognition of a
$241.0 million after-tax gain.
-- On July 31, 2009, the company assumed the banking operations of Peoples
Community Bank (Peoples), which included 19 banking centers. The
estimated fair value of liabilities assumed exceeded the estimated fair
value of assets acquired, resulting in the recognition of goodwill in
the amount of approximately $18.7 million.
-- On August 28, 2009, in a separate and unrelated transaction, the company
purchased 3 banking centers located in Indiana from Irwin. Associated
loans were acquired at par value and there was no premium paid on
assumed liabilities.
-- Each transaction is considered a business combination and accounted for
under Financial Accounting Standards Board ("FASB") Codification Topic
805: Business Combinations ("Topic 805"), FASB Codification Topic 820:
Fair Value Measurements and FASB Codification Topic 310-30: Loans and
Debt Securities Acquired with Deteriorated Credit Quality. All acquired
assets and liabilities were recorded at their estimated fair market
values as of the date of acquisition, and identifiable intangible assets
were recorded at their estimated fair value. These estimated fair market
values are considered preliminary, and are subject to change for up to
one year after the acquisition date as additional information relative
to closing date fair values becomes available.
-- Increased credit costs, including higher provision expense and elevated
net-charge-offs.
-- Increased the provision expense from the second quarter of 2009 by
$16.3 million to $26.7 million, or 280% of total net charge-offs,
further strengthening the allowance for loan and lease losses
(excludes covered assets) to 1.94%.
-- Included in total net charge-offs was a $2.2 million loss on the
sale of the entire $34.5 million shared national credit portfolio.
ACQUISITIONS
All references to acquired balances reflect the fair value unless stated otherwise.
During the third quarter of 2009, through FDIC-assisted transactions, First Financial acquired the banking operations of Peoples and Irwin. The company also acquired 3 Indiana banking centers from Irwin in a separate and unrelated transaction. The acquisitions of the Peoples and Irwin franchises significantly expands the First Financial footprint, opens new markets and strengthens the company through the generation of additional capital. Through these three transactions, the company added a total of 49 banking centers, including 39 banking centers within the company's primary markets.
In connection with the Peoples and Irwin FDIC-assisted transactions, First Financial entered into loss sharing agreements with the FDIC. Under the terms of these agreements the FDIC will reimburse First Financial for losses with respect to certain loans and other real estate owned (OREO) (collectively, "covered assets"), which now represent nearly half of First Financial's loans, beginning with the first dollar of loss. These agreements provide for loss protection on single-family, residential loans for a period of ten years and First Financial is required to share any recoveries of previously charged-off amounts for the same time period, on the same pro-rata basis with the FDIC. All other loans are provided loss protection for a period of five years and recoveries of previously charged-off loans must be shared with the FDIC for a period of eight years, again on the same pro-rata basis.
First Financial must follow specific servicing and resolution procedures, as outlined in the loss share agreements, in order to receive reimbursement from the FDIC for losses on covered assets. The company has established separate and dedicated teams of legal, finance, credit and technology staff to execute and monitor all activity related to each agreement, including the required periodic reporting to the FDIC. First Financial intends to service all covered assets with the same resolution practices and diligence as it does for the assets that are not subject to a loss share agreement.
An overview of the transactions and their respective loss share agreements are discussed below.
Peoples Community Bank
Including cash received from the FDIC, First Financial acquired $566.0 million in assets, including $336.1 million in loans and other real estate, and assumed $584.7 million in liabilities, including $520.8 million in deposits, recorded at their estimated fair market value.
Covered assets totaling $324.4 million in fair value are subject to a stated loss threshold of $190.0 million whereby the FDIC will reimburse First Financial for 80% of covered asset losses up to $190.0 million, and 95% of losses beyond $190.0 million.
First Financial holds a purchase option from the FDIC for each of Peoples bank properties and their associated contents. The company's review of the former Peoples locations is still in progress.
In late October, First Financial successfully completed the technology conversion and operational integration of Peoples. In conjunction with these efforts, two former Peoples banking centers were consolidated into First Financial locations and one First Financial banking center was consolidated into a former Peoples location. In addition, of the approximately 115 associates who were employed at Peoples on the acquisition date, 96 have accepted full-time positions at First Financial. The positions are primarily located within the banking center network.
Irwin
Including cash received from the FDIC, First Financial acquired $3.3 billion in assets, including $1.8 billion in loans, and assumed $2.9 billion in liabilities, including $2.5 billion in deposits, recorded at their estimated fair market value.
The loans were acquired under a modified transaction structure with the FDIC whereby certain non-performing loans, foreclosed real estate, acquisition, development and construction loans, and residential and commercial land loans were excluded from the acquired portfolio. The estimated fair value for loans acquired was based upon the FDIC's estimated data for excluded loans. The company anticipates the final determination of the excluded loans will be completed in the fourth quarter of 2009.
Covered assets acquired from Irwin Union Bank and Trust Company totaling $1.5 billion in fair value are subject to a stated loss threshold of $526.0 million whereby the FDIC will reimburse First Financial for 80% of covered asset losses up to $526.0 million, and 95% of losses beyond $526.0 million.
Covered assets acquired from Irwin Union Bank, F.S.B. totaling $259.4 million in fair value are subject to a stated loss threshold of $110.0 million whereby the FDIC will reimburse First Financial for 80% of covered asset losses up to $110.0 million, and 95% of losses beyond $110.0 million.
As the estimated fair value of assets acquired exceeded the estimated fair value of liabilities assumed, First Financial recognized an after-tax bargain purchase gain of $241.0 million, as required by FASB Codification Topic 805.
Integration planning is underway for the conversion of Irwin's technology and operational systems; however, a specific timeline has not yet been established for these conversions.
Irwin Banking Centers
In a separate and unrelated transaction, the company purchased 3 banking centers located in Indiana from Irwin, including $84.6 million in deposits and $41.1 million in performing loans. Assets acquired in this transaction are not subject to a loss share agreement. Loans were acquired at par value and there was no premium paid on assumed liabilities.
Strategic Decisions
Management has concluded that the markets previously operated by Irwin in the western United States do not align with the long-term strategic plans for the company. Though profitable, each of these markets will pursue an exit strategy whereby the market presidents will work with an institution of their choosing to refer existing client relationships. If a suitable financial institution is not identified, an exit date will be selected for each market and the office will close in compliance with the applicable regulatory requirements. The western offices combined had an estimated $730.1 million in loans and $494.9 million in deposits on the acquisition date, based on the seller's book value. First Financial will continue to service the loans in these markets in compliance with the terms of the FDIC Purchase and Assumption Agreements.
First Financial also acquired, as part of the Irwin transaction, a franchise finance business. This business is a specialty lender in the quick service and casual dining segments of the restaurant industry. It has been consistently profitable and is led by a seasoned management team with strong underwriting, credit management and loss mitigation experience. There are principal balances of approximately $656.9 million in franchise finance loans outstanding, all of which are covered under a loss share agreement with the FDIC.
This niche business offers First Financial the ability to diversify its earning assets and will be supported as part of the company's ongoing strategy. The overall portfolio size will be managed to a risk-appropriate level so as not to create an industry concentration.
For additional information on First Financial's comparable financial results, please refer to the discussions that follow detailing revenue and expense fluctuations.
DETAILS OF RESULTS
Unless otherwise noted, all amounts discussed in this earnings release are pre-tax except net income and per-share data which are presented after-tax. Percentage changes are not annualized unless specifically noted. In some instances, financial data may not add up due to rounding.
CREDIT QUALITY (excluding covered assets)
The following table presents First Financial's key credit quality metrics.
Table I
($ in thousands)
Three Months Ended
September June March December September
30, 30, 31, 31, 30,
2009 2009 2009 2008 2008
Total Nonperforming Loans $63,608 $37,790 $24,892 $18,185 $14,038
Total Nonperforming Assets $67,909 $42,956 $28,405 $22,213 $18,648
Nonperforming
assets as a % of:
Period-End
Loans, plus OREO 2.36% 1.48% 1.04% 0.83% 0.70%
Total Assets 0.94% 1.14% 0.75% 0.60% 0.53%
Nonperforming Loans
as a % of Total
Loans 2.21% 1.31% 0.91% 0.68% 0.53%
Provision for
Loan & Lease
Losses $26,655 $10,358 $4,259 $10,475 $3,219
Allowance for
Loan & Lease
Losses $55,770 $38,649 $36,437 $35,873 $30,353
Allowance for Loan
& Lease Losses as
a % of:
Period-End Loans 1.94% 1.34% 1.33% 1.34% 1.14%
Nonaccrual Loans 92.2% 102.8% 147.6% 199.5% 219.5%
Nonperforming Loans 87.7% 102.3% 146.4% 197.3% 216.2%
Total Net Charge-Offs $9,534 $8,146 $3,695 $4,955 $2,446
Annualized Net Charge-Offs
as a % of Average
Loans & Leases 1.31% 1.19% 0.55% 0.73% 0.36%
Year-to-Date
------------
September September
30, 2009 30, 2008
--------- ---------
Total Nonperforming Loans $63,608 $14,038
Total Nonperforming Assets $67,909 $18,648
Nonperforming Assets as a % of:
Period-End Loans, plus
OREO 2.36% 0.70%
Total Assets 0.94% 0.53%
Nonperforming Loans as a
% of Total Loans 2.21% 0.53%
Provision for Loan &
Lease Losses $41,272 $8,935
Allowance for Loan &
Lease Losses $55,770 $30,353
Allowance for Loan & Lease Losses as a % of:
Period-End Loans 1.94% 1.14%
Nonaccrual Loans 92.2% 219.5%
Nonperforming Loans 87.7% 216.2%
Total Net Charge-Offs $21,375 $7,639
Annualized Net Charge-Offs as a % of Average
Loans & Leases 1.03% 0.39%
The elevated net charge-offs and higher level of nonperforming assets reflects the continued adverse impact of the prolonged economic downturn and its effect on the loan portfolio. The elevated provision expense in the quarter is due largely to the company's expectation of the risk inherent in the commercial real estate portfolio. While not necessarily credit specific for First Financial, generally the outlook for this sector has continued to deteriorate and is not likely to recover over the next 12 months, according to most industry data. Therefore, the company has increased reserves for this category. Approximately $10.2 million of the $17.1 million net increase to the allowance is due to the company's estimate of sector risk in the commercial real estate portfolio. Although there have been some signs of economic stabilization and emerging optimism, unemployment rates remain at near-record levels, consumer spending is stagnant, and operating conditions continue to be challenging for many commercial borrowers.
Net Charge-offs
The commercial and commercial real estate construction lending portfolios continued to experience elevated levels of stress during the third quarter of 2009. The quarter's increase in total net charge-offs compared with last quarter and a year ago was driven primarily by deterioration within these segments. Late in 2008 and continuing into 2009, pressure from the prolonged recession began to adversely impact clients who up until that time, had not been severely affected.
Third quarter 2009 total net charge-offs were $9.5 million, or 131 basis points of average loans and leases, compared with $8.1 million or 119 basis points of average loans and leases in the second quarter of 2009, and $2.4 million or 36 basis points of average loans and leases in the third quarter of 2008. Year-to-date 2009, total net charge-offs were $21.4 million or 103 basis points of average loans and leases, compared with $7.6 million or 39 basis points of average loans and leases year-to-date 2008.
During the third quarter of 2009, primarily due to a rebound in market values and the desire to eliminate portfolio risk from the shared national credit segment, the entire $34.5 million portfolio of shared national credits was sold, resulting in a net charge-off of $2.2 million or 30 basis points of average loans and leases. Included in this loan sale was a $1.4 million relationship, in bankruptcy, which represented approximately 20% of the loss on the portfolio sale.
Nonperforming Assets
Third quarter 2009 nonperforming loans were $63.6 million compared with $37.8 million in the second quarter of 2009 and $14.0 million in the third quarter of 2008. Both the linked-quarter and year-over-year increases were primarily attributable to continued deterioration within the commercial lending portfolios, specifically, commercial real estate construction. During the quarter, the company placed a single relationship totaling $13.6 million of commercial land development loans on nonaccrual.
Similar to the past several quarters, the higher level of nonperforming loans, which are accounted for under FASB Codification Topic 310-10-35: Subsequent Measurement of Receivables, continues to adversely impact the company's nonperforming loan coverage ratios. The third quarter 2009 allowance for loan and lease losses as a percent of nonaccrual loans was 92.2% compared with 102.8% in the second quarter of 2009, and 219.5% in the third quarter of 2008, and the allowance for loan and lease losses as a percent of nonperforming loans was 87.7% compared with 102.3% in the second quarter of 2009, and 216.2% in the third quarter of 2008.
Restructured Loans
During the third quarter of 2009, the company restructured approximately $2.9 million of residential mortgage loans for borrowers. The terms of the modifications included a combination of temporary interest rate reductions, term extensions and re-amortizations. These actions did not have a significant financial impact on the company. There can be no assurance these actions will be successful in improving the long-term performance of the borrowers.
Delinquent Loans
Total loans 30 to 89 days past due at September 30, 2009 were $20.8 million, or 0.72% of period end loans, compared with $20.5 million, or 0.71% at June 30, 2009, and $22.3 million, or 0.84% at September 30, 2008. Management closely monitors these trends and ratios and considers the level of delinquent loans consistent with its expectation of the total loan portfolio's behavior.
Allowance for Loan & Lease Losses
At September 30, 2009, the allowance for loan and lease losses increased to $55.8 million from $38.6 million at June 30, 2009, and $30.4 million at September 30, 2008. The higher reserve reflects the company's expectation that certain credit metrics may remain volatile and at these historically higher levels over the next several quarters as a result of the current economic conditions, including the high unemployment rates, declining real estate values and expectations for a slow recovery.
Other Real Estate Owned
At September 30, 2009, OREO was $4.3 million, compared with $5.2 million at June 30, 2009, and $4.6 million at September 30, 2008.
For further details on the quarter-over-quarter and year-to-date changes in credit quality, excluding covered assets, please see the attached Credit Quality schedule.
CAPITAL MANAGEMENT
The Irwin FDIC-assisted transaction, which was accounted for as a business combination with a bargain purchase gain, generated approximately $241.0 million of additional capital. The acquired covered assets and the FDIC Indemnification Asset, which represents the fair value of estimated future payments by the FDIC to First Financial, are both risk-weighted at 20% for regulatory capital requirement purposes.
Associated with the sale of the company's perpetual preferred securities to the U.S. Treasury under its Capital Purchase Plan (CPP) in December of 2008, the U.S. Treasury received one warrant to purchase 930,233 shares of First Financial common stock at an exercise price of $12.90 per share. As a result of the common equity raised during the second quarter of 2009, the number of common shares eligible for purchase under the warrant agreement was reduced by 50% to 465,116 shares.
At September 30, 2009, total regulatory capital exceeded the "minimum" requirement by $380.5 million, on a consolidated basis.
The following table presents regulatory capital ratios at September 30, 2009.
Regulatory
Table II "well-
-capitalized"
FFBC minimum
------------------------------------------------------------------
Leverage Ratio 14.60% 5%
Tier 1 Capital Ratio 16.21% 6%
Total Risk-Based Capital Ratio 17.46% 10%
EOP Tangible Equity /
EOP Tangible Assets 8.57% N/A
EOP Tangible Common Equity / EOP
Tangible Assets 7.48% N/A
N/A = not applicable
NET INTEREST INCOME & NET INTEREST MARGIN
Table III
($ in thousands)
Quarter Year-to-Date
September 30, September 30,
3Q-09 2Q-09 3Q-08 2009 2008
Net Interest
Income $37,455 $31,209 $29,410 $99,592 $86,073
Net Interest
Margin 3.59% 3.60% 3.68% 3.59% 3.72%
Net Interest Margin
(fully tax
Equivalent) 3.61% 3.64% 3.73% 3.63% 3.79%
Third quarter 2009 net interest income increased $8.0 million from the third quarter of 2008 and $6.2 million from the second quarter of 2009. The third quarter 2009 net interest margin declined 9 basis points from the third quarter of 2008 and 1 basis point from the second quarter of 2009. Year-to-date 2009 net interest income increased $13.5 million from 2008's comparable period, and the net interest margin declined 13 basis points.
The year-over-year quarter, linked quarter and year-to-date increases in net interest income were due to higher average loan balances largely driven by the purchase of $145.1 million in performing loans from Irwin at the end of the second quarter of 2009 and the Peoples and Irwin FDIC-assisted transactions in the third quarter. This increase was partially offset by the sales of securities at the end of the second quarter and the cash flows from the investment portfolio that were not reinvested into securities.
The year-over-year quarter, linked quarter and year-to-date net interest margin declines were primarily related to the impact from the cash received from the FDIC-assisted transactions in the third quarter. These funds, held at the Federal Reserve, earn a federal funds rate and are being utilized to fund anticipated runoff from deposit repricing. This impacted the net interest margin by 11 basis points in the third quarter of 2009. The year-to-date net interest margin declines were also impacted by the lower overall market interest rate environment. The net interest margin, however, continues to benefit from the growth in average total loans and the continued mix shifts in the loan portfolio from consumer to commercial and in the deposit portfolio from time to transaction deposits.
For further details on the quarter-over-quarter and year-to-date changes in the net interest margin, please see the attached Net Interest Margin Rate / Volume Analysis.
NONINTEREST INCOME
The following table presents a summary of items impacting
noninterest income.
Table IV ($ in thousands)
Quarter Year-to-Date
September 30, September 30,
3Q-09 2Q-09 3Q-08 2009 2008
Gain (Loss) on
FHLMC shares $154 $112 $(3,400) $277 $(3,601)
Gain on
Acquisition 383,330 - - 383,330 -
Gain on Sale of
property & Casualty
Portion of
insurance Business - - - 574 -
Gain on Sales of
investment
Securities
(CPP 2Q-09;
VISA 1Q-08) - 3,349 - 3,349 1,585
Impact to
Noninterest
Income $383,484 $3,461 $(3,400) $387,530 $(2,016)
Third quarter 2009 noninterest income was $394.9 million, an increase of $384.4 million from the third quarter of 2008, and an increase of $380.8 million from the second quarter of 2009. Excluding the items disclosed in the table, third quarter 2009 noninterest income declined $2.5 million from the third quarter of 2008 and increased $0.8 million from the second quarter of 2009. The year-over-year decline was primarily a result of lower net gains from loan sales, trust and wealth management fees and other noninterest income. The decline in other noninterest income was related to lower revenue from bank-owned life insurance and the sale of the company's property and casualty liability portion of the insurance business that was sold in the first quarter of 2009. Market-based revenues such as bank-owned life insurance and trust fees are reflective of the overall market conditions from which these revenues are derived. The linked quarter benefited from increases in service charges on deposit accounts and trust and wealth management fees, but was also negatively impacted by lower net gains from loan sales.
Year-to-date 2009 noninterest income was $421.0 million, an increase of $381.9 million from $39.1 million in 2008's comparable period. Excluding the items disclosed in the table, year-to-date 2009 noninterest income declined $7.6 million from 2008's comparable period. This decline was primarily due to lower service charges on deposit accounts, decreases in bankcard income and lower trust and wealth management fees as well as declines in income from bank-owned life insurance and brokerage income.
Over the past year, most fee income components of noninterest income have been negatively impacted by the declining economic conditions and their impact on consumer spending, while trust and wealth management fees were negatively impacted by volatility in the investment and equity markets. In the second and third quarters of 2009, a number of deposit and consumer-based fee income categories began to show improvement over prior quarters. Third quarter 2009 total service charges on deposit accounts increased $1.1 million from the second quarter of 2009 reflecting higher fee income on the company's legacy deposit accounts as well as additional income resulting from acquired deposit accounts during the quarter. Bankcard income declined slightly from the second quarter of 2009 but showed improvement from the first quarter of 2009.
The following table presents overdraft/non-sufficient funds fees and trust and wealth management fees.
Table V ($ in thousands)
Quarter Year-to-Date
September 30, September 30,
3Q-09 2Q-09 3Q-08 2009 2008
Overdraft/Non-Sufficient
Fund Fees $3,735 $3,003 $3,789 $9,529 $10,757
Other 1,673 1,286 1,559 4,247 4,149
Total Service Charges on
Deposit Accounts $5,408 $4,289 $5,348 $13,776 $14,906
Trust Fees 3,132 2,944 3,811 9,022 11,691
Investment Advisory
Fees 207 309 579 859 1,975
Total Trust & Wealth
Management Fees $3,339 $3,253 $4,390 $9,881 $13,666
Between June 30, 2008 and March 31, 2009, assets under management by the company's wealth management division declined by over $470 million from $2.0 billion to $1.6 billion, primarily as a result of equity market declines. A rebound in the equity markets over the past several months have positively impacted market values, and assets under management increased by over $230 million to $1.8 billion at September 30, 2009 from $1.6 billon at March 31, 2009.
NONINTEREST EXPENSE
Core operating expenses were primarily unchanged although there were some higher expenses related to general growth, market expansion and incentive compensation. Acquisition-related costs were primarily comprised of legal, professional, technology and other integration costs. Staffing and occupancy expenses also increased as a result of the additional associates and banking centers that were added during the quarter.
INCOME TAXES
Income tax expense was $133.7 million and the effective tax rate was 37.1% for the third quarter of 2009, compared with income tax expense of $2.6 million and an effective tax rate of 31.2% for the third quarter of 2008, and income tax expense of $0.7 million and an effective tax rate of 32.6% for the second quarter of 2009. Year-to-date 2009 income tax expense was $137.4 million with an effective tax rate of 37.1% compared with income tax expense of $10.0 million and an effective tax rate of 32.5% for 2008's comparable period. The increase in the overall tax rate for both the third quarter and year-to-date 2009 was driven by the tax impact from the bargain purchase gain and other changes resulting from the Irwin acquisition.
LOANS (excluding covered loans)
Third Quarter 2009 versus Third Quarter 2008
-- Average total loans increased $179.1 million or 6.6%.
-- Average commercial, commercial real estate and construction loans
increased $311.7 million, or 17.2%.
Third Quarter 2009 versus Second Quarter 2009
-- Average total loans increased $148.5 million, or 21.7% on an annualized
basis.
-- Average commercial, commercial real estate and construction loans
increased $150.1 million, or 30.5% on an annualized basis.
Year-to-Date 2009 versus Year-to-Date 2008
-- Average total loans increased $130.6 million, or 4.9%.
-- Average commercial, commercial real estate and construction loans
increased $275.6 million, or 15.9%.
Loan balances include $41.1 million in loans purchased on August 28, 2009 from Irwin, but exclude covered loans acquired under loss share agreements.
INVESTMENTS
Securities available-for-sale at September 30, 2009, totaled $523.4 million, compared with $492.6 million at September 30, 2008, and $528.2 million at June 30, 2009. The total investment portfolio represented 8.7% and 15.2% of total assets at September 30, 2009 and 2008, respectively, and 14.8% of total assets at June 30, 2009.
At September 30, 2009, the company held 71.8% of its available-for-sale securities in residential mortgage-related investments, substantially all of which are held in highly-rated, agency-backed pass-through instruments, including collateralized mortgage obligations (CMOs). All CMOs held by the company are AAA rated by Standard & Poor's Corporation or similar rating agencies. First Financial does not own any interest-only, principal-only, or other high-risk securities.
The company has recorded, as a component of equity in accumulated other comprehensive income, an unrealized after-tax gain on the investment portfolio of approximately $12.5 million at September 30, 2009, compared with an unrealized after-tax gain of $0.5 million at September 30, 2008, and an unrealized after-tax gain of $7.5 million at June 30, 2009.
The following table presents a summary of the total investment portfolio at September 30, 2009.
Table VI
($ in thousands, excluding book price and market value)
% of Book Book Book
Total Value Yield Price
UST Notes & Agencies 8.7% $54,502 4.65 99.76
CMOs (Agency) 9.9% 62,342 4.62 100.47
CMOs (Private) 0.0% 68 1.12 100.00
MBSs (Agency) 61.8% 389,469 4.64 100.94
Agency Preferred 0.1% 338 - 1.69
Subtotal 80.5% $506,719 4.64 100.69
Municipal 4.1% $25,512 7.15 99.01
Other * 15.4% 97,083 3.70 101.50
Subtotal 19.5% $122,595 4.42 100.98
Total Investment
Portfolio 100.0% $629,314 4.60 100.75
September 30, 2009 Pre-Tax
Market Value Gain/(Loss)
UST Notes & Agencies 101.92 $1,160
CMOs (Agency) 104.30 2,294
CMOs (Private) 97.97 (1)
MBSs (Agency) 104.92 14,753
Agency Preferred 1.69 -
Subtotal 103.46 $18,206
Municipal 101.43 $616
Other * 101.91 388
Subtotal 101.81 $1,004
Total Investment
Portfolio 103.17 $19,210
Net Unrealized Gain/(Loss) $19,210
Aggregate Gains $19,488
Aggregate Losses $(278)
Net Unrealized Gain/(Loss) % of Book
Value 3.05%
*Other includes $88 million of regulatory stock
First Financial has not purchased any securities in the investment portfolio since the first quarter of 2009 due to higher pricing on bonds, which has persisted since the beginning of the year. The increase in portfolio balances during the third quarter of 2009 was the result of acquired securities from the Peoples and Irwin transactions.
