First Financial Bancorp (FFBC) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentleman, and welcome to the Irwin Financial conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

I will now turn the call over to Mr.

Will Miller.

Mr.

Miller, you may begin.

Thank you, John.

Good afternoon and thank you for joining us.

I am joined today by Greg Ehlinger, our CFO, and Jody Littrell, our Controller.

Before we start with our presentation I want to make you aware of important cautionary disclosures in connection with the forward-looking statements we will be making on this call.

The cautionary disclosures are in our written press release and in our recent SEC filings, including our report on Form 10-K which we filed yesterday.

This morning we made two announcements.

The first is that we filed our annual 10-K last night reporting a fourth-quarter loss of $104 million and a loss of $340 million for the year.

The 10-K filing also included a restatement of our third-quarter results to a loss of $107 million, reflecting the resolution of the accounting questions we had submitted to the SEC.

The second announcement was that we have completed the fifth step in our restructuring plan -- the removal of about $690 million of home equity loans from our balance sheet.

This is a significant achievement and very good news as it will raise our capital orders in the first quarter.

But we know it's not enough and that is why we are aggressively pushing or pursuing our plan to raise capital.

The two announcements are related; losses in 2008 were primarily attributable to the deterioration and credit reserve quality and write downs in our portfolios, a significant differed tax asset valuation, and other restructuring costs as we worked our way through the steps in our plan in the face of the worst economic conditions in several generations.

To remind you, about a year ago we announced a restructuring plan that we had already begun with our exit from the first mortgage banking business.

That was the first step.

Second was exiting the small ticket leasing business in the US and Canada.

Third was shutting down our national home-equity production.

Fourth was financing permanently the remaining home equity portfolio to remove any liquidity risk while it is in run off mode.

And fifth was getting a significant amount of home equity loans off our balance sheets, which we accomplished yesterday.

Each of these steps was intended to refocus the bank on community-based lending and our niche in financing franchise restaurants.

Now over the past year, including our transaction last night, we have made significant strides in this process.

In spite of a continuously deteriorating economic environment, yesterday we completed this fifth and next to last step in our restructuring.

We sold mortgage servicing rights and certain platform assets related to securitized home equity loans to Green Tree Servicing LLC removing $690 million of home equity loans from our balance sheet in the first quarter.

This sale leaves us with about $410 million of home equity loans on our balance sheet, and as I said, nearly all of which are permanently financed to eliminate liquidity risk.

This has been a long and costly process, which has certainly put stress on our institution.

Irwin Union Bank and Trust and Irwin Union Bank FSB at year-end were adequately capitalized.

We want them to be well-capitalized, which is why we continue to aggressively pursue our plan to enhance capital ratios through a proposed public-private partnership to recapitalize the Company.

We have submitted our proposal to the banking regulators and to Treasury.

The support of private investment commitments of $34 million for such a public-private partnership remain in place.

We have been regularly disclosing the challenges, our plans to address them, and the potential consequences of not being able to execute on our plans for several quarters as this process has unfolded.

Once a year our external auditors express their opinion on our financial statements with a professional requirement to do so.

So in connection with our audited financial statements, they noted what we have been saying for some time that failure to achieve our restructuring objectives could materially affect our financial position and operations.

We do face challenges if we aren't successful in overcoming them that raise doubt about our ability to continue as a going concern.

This has been true, however, at every step in our restructuring process.

There has been doubt about whether we could pull each step off.

We agree we need to complete our last step, getting our capital raise done, and we are determined to do it as we have been determined to do each of the previous steps.

It's important to note that notwithstanding these uncertainties our auditors gave us an unqualified opinion on our financial statements, which were, after all, prepared on a going concern basis, and on our internal controls over financial reporting.

We have also built up substantial liquidity and expect to maintain access to our most important funding sources, which is important in giving us time to complete the last step of our restructuring.

I believe that through our strategic restructuring we can return to profitability, although in this economy I cannot predict exactly when, by simplifying our business and returning to our core strategy that has driven the success for the past 137 years, serving small businesses and consumers in our branch communities.

Now I will turn the call over to Greg to discuss our results in greater detail.

Thank you, Will.

Good afternoon.

Our loss, due principally to credit costs and restructuring, totaled $104 million in the fourth quarter and $340 million for the year.

Net interest income was $206 million in 2008 they compared to $262 million in 2007.

Non-interest income decreased to $1 million for 2008 from $27 million in 2007, primarily related to a $23 million other-than-temporary impairment charge.

The consolidated net interest margin declined to 3.87% as compared to 4.50% year-over-year.

Much of that margin decline reflected our defensive liquidity position which we put up to address environmental conditions.

Reflecting our restructuring, our consolidated loan and lease portfolio declined year-over-year from $5.7 billion to $4.4 billion.

This will decline by about another $700 million as a result of last night's home equity transaction.

To address economic conditions and portfolio weakness we substantially increased our allowance for loan and lease losses during the fourth quarter.

The allowance totaled $137 million as of year-end, down from $145 million a year earlier due to the reclassification of home equity loans to held-for-sale classification.

We had $3.26 per share in common shareholders' equity at year-end and at year-end our Tier 1 leverage ratio and total risk-based capital ratios were 3.1% and 6.6%, respectively.

These capital levels reflect the cumulative impact of our restructuring over the past year, very significant credit costs, and the write off of $119 million in deferred tax assets.

I think it notable too that we have $78 million in allowance for loan and lease losses that is not accepted under current regulatory calculations of Tier 2 capital.

Our bank subsidiaries, Irwin Union Bank and Trust and Irwin Union FSB, are considered adequately capitalized.

Turning now to the segments.

Commercial Banking had a pretax loss of $27 million in the fourth quarter and a pretax loss of $67 million for the year, primarily due to higher loss provisions.

The Commercial Banking segment's loan balances declined during the quarter as credit demand slowed.

Net interest margin was 3.65% in 2008, down from 3.91% in 2009 reflecting competitive conditions and an increase in non-accrual loans.

30-day and plus delinquencies were 2.96% at year-end compared with 0.85% at the end of 2007.

In the Commercial Finance line of business, the franchise finance channel, the part of the commercial finance segment we are retaining after our restructurings of 2008, earned $15 million pretax for the year down from pretax earnings of $20 million in 2007.

The Franchise Finance loan portfolio totaled $657 million at year-end compared to $619 million a year earlier and the net interest margin for the segment was 3.93% in 2008 versus 4.34% in 2007.

The 30-day plus delinquencies for the franchise portfolio were 3.44% at year-end compared with 0.69% a year earlier.

The Home Equity segment had a pretax loss of $18 million in the fourth quarter and a pretax loss of $211 million for the year.

That compares with the 2007 pretax loss of $79 million.

These losses, of course, reflect the deteriorating housing credit conditions throughout the year.

30-day and greater delinquencies on the managed portfolio increased from 5.78% at December 31, 2007, to 10.41% at the end of 2008.

Te allowance for loan losses totaled $56 million or 19% of the portfolio at year-end.

We expect last night's sale to remove approximately $690 million of home equity loans from the balance sheet.

Finally, the other bank and non-bank consolidated entities lost $44 million in 2008 compared to a loss in 2007 of $13 million.

This increased loss includes the $23 million other-than-temporary impairment I mentioned earlier and it includes additional charges associated with our restructuring efforts.

In summary, as Will noted, we are five steps through our restructuring process.

First, about a year ago we announced the restructuring plan that we had already begun with the exit from the first mortgage banking business.

The next steps were to exit the small ticket leasing business in the United States and Canada.

The third was to shut down our national home equity production.

The fourth was to permanently finance the remaining home equity portfolio to remove any liquidity risk while it is in run off mode, and, fifth, to get a significant amount of the home-equity loans off our balance sheet, which we did last night.

This has been a very expensive process but we are focusing on completing the final step through our capital offering.

John, Will, and I and Jody would be happy to take your questions now.

(Operator Instructions) [Greg Kessler], Kessler Investments.

Thank you.

The question I have is related to the 10-K.

Under item 10 related to the financial backstop provided by Cummins and private investors, it reads as though that is tied to the successful completion of receiving TARP money.

The 10-K goes on to say that there is a slim likelihood of that happening.

Yes, I can understand the logical inference there.

Let me clear that up.

We said several times in the 10-K TARP or its equivalent.

I haven't looked at that particular language to see if we said it every single time.

But essentially the TARP program as its criteria are currently constructed, is the one under which we are saying we don't think we fit.

There were exceptions being made to it earlier, but they appear not to be being made today.

So we have a proposal in to the government for a public-private partnership approach that would either modify the criteria for TARP or create a new program.

And if we can get them to accept that then that will meet the investors' criteria.

Thank you.

[Greg Somerville], [Tecumseh Capital].

Will, with regard to the proposed capital raise, one, is there sort of a plan B if this proposal to the government fails?

And as I looked at this, I mean, I am trying to go through and look at total capital.

It looks like to sort of be for capital adequacy purposes you need maybe another $65 million and I am assuming you want more than that as you go forward.

But is the other alternative to just continue to shrink the balance sheet to maintain capital adequacy that way?

Yes.

That is the primary other alternative, yes.

So is there a plan B besides that?

Everything seems to be changing constantly.

If we continue to shrink the balance sheet we have to do that in a way that eventually restores profitability that then allows us to grow capital again and allows us to grow the balance sheet because you can't shrink it forever.

We fully understand that.

But in terms of a muddling through strategy, if the capital plan is not successful that is probably the most practical one.

The other wild cards out there are there are lots of proposals that come up every week that could change the landscape.

There was NOL carryback provision in the original stimulus bill that had it been passed in its form would have added $60 million to the Bank's capital.

It was yanked at the last minute and it's back in the Senate version of the budget bill.

Who knows?

The ABA has approached the regulators saying why do you have this cap on excluding LLL above 1.25%?

That money is there, why can't it count as capital?

Regulators can't you change the regulatory formula so that all of the LLLs could count?

That would be $80 million for us so we don't want to have to be in a muddle through but small changes in policy could have a huge effect on us.

Is there any capital available out there at any price?

I realize that is a desperate move but there is certainly a lot of liquidity sitting on the sidelines right now.

We wouldn't rule out anything if our primary plan doesn't come to fruition.

Mark-to-market potentially some changes tomorrow.

Is there anything in that that might be beneficial to you?

Well, there is some discussion as recent as today that there is a possibility of making some of those changes retroactive.

Typically the accounting standard setters don't allow those sorts of changes to be retroactive, but as recently as today there was some discussion about making some of those retroactive.

We believe the majority of the other-than-temporary impairment that Greg talked about a few minutes ago was from liquidity-related impairment.

Not credit-related impairment, which is the way that the standard setters are bifurcating these impairment and fair value issues between ones that are caused by lack of liquidity in the market place and those that are caused by credit-related issues.

Okay.

All right, thank you.

(Operator Instructions) I show no further questions -- we do have a question from Kip Wright, Kirr Marbach.

Could you give us a little color on what you have seen in the first quarter or some tone of business?

Obviously filing three months after the end of the quarter a lot has happened since that point in time and I was wondering if you could give some color related to what has happened since 12/31.

Well, it's really early to say.

I think our trends are consistent with what we read about in trends in the industry.

But the quarter ended yesterday, so I don't have a lot of color on how this is really going to come out.

As far as deposit gathering and the like, could you give any color on that?

Has the press, the news events, has that caused any problems with deposit gathering?

As I said in my remarks at the beginning, we have built up liquidity including in the first quarter over anticipation of having to release full-year results and not even, frankly, at the time being certain we would have the good news that we got the deals closed to remove the home equity loans from the balance sheet.

So we have a good liquidity position right now to handle a stress scenario if it comes upon us.

We made the announcement a couple of weeks ago and it has not led to major movements in the deposit base.

Okay, thank you.

At this time we have no further questions.

Thank you very much.

We appreciate your interest in us and your support of us.

We look forward to talking to you about first-quarter earnings in just a couple of weeks.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect at this time.