First Place Financial F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

| About: First Place (FPFC)

First Place Financial Corp. (OTC:FPFC) F2Q09 (Qtr End 12/31/08) Earnings Call January 21, 2009 10:00 AM ET


Kim Wadman - Investor Relations

Steven R. Lewis - Chief Executive Officer

David W. Gifford - Chief Financial Officer

Albert P. Blank - President and Chief Operating Officer


Daniel Arnold - Sandler O'Neill and Partners L.P

Christopher Mcgratty - Keefe, Bruyette and Woods

Larry Ringler - Tribune Chronicle


Greetings, and welcome to the First Place Financial Fiscal 2009 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A Q&A session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Kim Wadman. Thank you, Ms. Wadman. You may begin.

Kim Wadman

Welcome to the First Place Financial Corp. fiscal 2009 second quarter conference call. There will be a question-and-answer period at the end of the presentation. (Operator instructions).

Before we begin today's call, I would like to remind everyone that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company or its management, statements on economic performance and statements regarding the underlying assumptions of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to several important factors described in the company's latest Securities and Exchange Commission filing. The company assumes no obligation to update any forward-looking statements made during this call.

If anyone does not already have a copy of the press release issued by First Place yesterday, you can access it at the company's website

On the conference today from First Place Financial Corp. we have Steve Lewis, President and Chief Executive Officer; Dave Gifford, Chief Financial Officer; and Al Blank, Chief Executive Officer. We will begin the call with management's prepared remarks and then open the call up to questions.

At this point, I would like to turn the call over to Mr. Lewis.

Steven R. Lewis

Good morning. On behalf of the First Place management team, I'd like to welcome those who are dialed in to participate in this morning's conference call.

Mr. Gifford, Mr. Blank will join me and provide in coverage with respect to our results from the second quarter of our 2009 fiscal year. I'm going to offer some highlight along with some strategic comments. Mr. Gifford, will delve into the more detailed financial prospective. Mr. Blank, will overview the current status of our asset quality conditions and give you some forward-looking comments. We'll conclude with our outlook for the remainder of the fiscal year.

You can see from the earnings release the results were materially impacted by the economic realities being experienced in both Northeast Ohio and especially in Southeast Michigan. In addition, we had several non-recurring items that provided some noise with respect to our operational result.

Now for the quarter, results were obviously dominated by credit issues and those non-recurring items, resulting in a net loss of $2.6 million to $0.16 per share. However, after adjusting for the non-recurring items to our coverage this moment, our operations were impacting the black.

Within the credit component, NPLs were up modestly from $63 million to 67. Overall NPAs, however, increased from 89 million to 102 million. As a result, provision was roughly a $7 million, excuse me, charge-offs for the quarter roughly $7 million and we provided $9.2 million. Philosophically we continue to aggressively face today's valuation scenario realistically with respect to recovering amounts on properties we are taking back. That is why we have aggressively provided the $9.2 million for the quarter.

With respect to margin, margin declined roughly 26 basis points. That is due to an intentional buildup of liquidity keeping deposits, cash deposits obviously very short,. Other contributors include the increase in the NPAs that I mentioned just a moment ago.

The higher liquidity plus see deposit growth and a conservative philosophy have all impacted the margin. Rates are down. We are asset sensitive. Dave will give you a little bit more color on just how sensitive that clearly affected the yield in our assets of that portfolios. And finally our deposit mix has obviously changed. Our first preference has been to move money to CDs and walk again.

With respect to the non-recurring items, headlined by the termination, voluntary termination of the deal to acquire Camco Financial Corp. There were some merger integration charges, non-recoverable that needed to be charged off approximately $1 million.

In addition, an old story that continued impairment of securities and some fair value adjustments about $2.5 million for the quarter for the six months of the total adjustments, there are $12 million of our results. The good news if there is any is that all of our exposure to many Fannie Mae or Freddie Mac preferred securities has been eliminated as we have sold all of those positions. We still do have a mutual fund with fair value exposure. Again David is going to cover that in a bit more detail.

And then finally our MSR impairments for the quarter was roughly a $1 million.

A new charge, I guess as you look at results from this quarter end and moving forward is going to be the increase in deposit insurance which affected us a little over a $1 million for the quarter in operating results.

Mortgage banking activity was notable at $2.1 million. Volumes were relatively flat from last quarter were margins have improved. We continued to sell north of 90% of all of our volume. This business unit has picked up steam at the levels they are. As you look at even our December activity, we received applications for over $331 million. Hopefully we'll get all of those processed during this quarter and that is the trick. It's getting them closed in a fairly difficult interest rate environment.

Strategically, we've not been de-leveraging per se. However, we have intentionally kept growth in check. Obviously our mortgage portfolio has shrunk by about $34 million that is intentional. And commercial portfolio growth has been very modest, a net 20 million for the quarter. The activity in the commercial portfolio includes gross originations for the quarter of roughly $66 million. Of that 66 million, 22 million was in C&I and 44 million was in commercial real estate. Of the 66 million, roughly 23 million was a variable and the fixed component is $43 million. We do not fix anything in the commercial portfolio beyond five years. The majority of our originations were in the state of Ohio.

Our deposit activity was stronger in the quarter as evidenced in the release, a $135 million, a 125 of which was organic. Much of this growth is going to be used to reduce broker deposits and borrowings. Our customers, as I had mentioned a moment ago have really flocked to CDs. We continued to view these as core deposits. This money was transferring out of saving accounts and money funds.

In addition to that we have really stepped up our deposit strategy, which includes lettering, some tearing and so much more aggressive segmenting of our customer groups. I think this has resulted in much better effective customer counseling.

With respect to capital; our capital preservation is clearly in the best long-term interest of our shareholders. Because of recent performance and certainly an uncertain credit outlook the Board unanimously agreed to reduce the dividend for a penny per share. I would like to remind all of our investors that this continues to be a quarter-by-quarter decision.

Our goodwill was also evaluated this quarter by a third-party expert. There is been a lot of goodwill impairment announcement during this most recent quarter. The conclusion of the analysis of First Place is that there is no goodwill impairment at this time. It will obviously be evaluated again as we go into the future.

With respect to merger and acquisitions, clearly as a result of the evidence of the voluntary termination of Camco deal, we are de-emphasizing our merger and acquisitions in this environment. That does not mean we won't look at doing something relatively small. But generally speaking, as you know we've had a fairly acquisitive history. We are dramatically de-emphasizing that. And instead focusing on our core improvements and our core metrics and particularly our core businesses, specifically retail and in how we support those specific business lines. We've had some nice evidence. We continued to see positive results in growth of our core accounts, particularly business core accounts.

Our cost controls are... been very effective. Clearly we need to net up REO expense, FDIC insurance and some other added non-recurring items that we do not control. Dave is going to cover that in a bit more detail. And we are very pleased with some of the results there.

Degeneration was also strong led by our new overdraft protection program that did just get put into place. December 1st, we expect continued increasing results from that going forward.

All that being said, I am going to turn it over to David to give you a bit more detail.

David W. Gifford

Thank you, Steve. Good morning. As Steve mentioned, we lost $2.6 million this quarter, which was a loss of $0.16 per share. As we dig into the details of what happened this quarter, I think you'll see that much of the bad news relates to items that were unusual and there is good news in several of our core businesses.

Net interest income for the quarter was 21.7 million, down from 23.4 million for the September 08 quarter. That decrease was primarily due to a similar decline in the net interest margin to 2.81% from 3.07% in the September quarter. This was due to two factors: first; we remained asset sensitive over the short-term. So the three fed rate cuts we experienced during the quarter, totaling 175 basis points caused our asset yields to drop more rapidly than our liability costs.

Secondly; we made a conscious decision to build liquidity during the quarter due to the turbulence in the financial markets. This changed our asset mix to include more short-term, low yielding assets and when our cash balances reached their peak in mid-December, the fed cut, the target rate on overnight fed funds to a range of 0 to 25 basis points.

The good news is that short-term rates cannot go any lower. After our prime-based loans fully repriced in January, we can expect our liability costs to reprice down during the following months. As a result, the net interest margin should only vary by a couple of basis points in the March quarter, and then begin to rise slowly in the June quarter.

Non-interest income was 4.5 million for the quarter, up from a loss of 1.6 million in the September 08 quarter, and up from 700,000 in the year ago December 07 quarter. Non-interest income for the quarter included the decline of 2.5 million in the fair value of securities; 1.1 million of that decline was on Fannie Mae preferred stock. As Steve mentioned, we sold that stock during the quarter and therefore have eliminated any exposure to future losses on it. The other 1.4 million was related to a mutual fund invested in an adjustable rate mortgage backed securities which we still own.

Service charges on deposit accounts were 2.5 million for the quarter, which was an increase of 19.2% over December 07 and 14.9% increase over September 08.

Mortgage banking benefited significantly from a decline in mortgage rates that began in late November and has continued into January. Mortgage banking gains of 2.1 million have increased 97.7% from the December 07 quarter and 18.6% from the September 08 quarter. These lower rates have generated a significant volume of refinances, which should continue this quarter if rates remain at current levels.

Non-interest expense was 22.9 million, an increase of 7% from the September 08 total of 21.4 million. The most significant factor in this increase was an increase of $1 million in merger charges related to the terminated Camco merger. If you remove the merger expense, the increase between the current and preceding quarter was only $500,000 and only 2.2%.

In addition, we have been experiencing declines in a number of overhead areas where we have direct control and we've been experiencing increases in credit related charges and deposit insurance levied by the FDIC.

REO expense and FDIC insurance totaled 2.7 million for the quarter, up from 1.5 million in the September 08 quarter.

Although some of the declines are small, we've actually experienced decreases in a number of our overhead categories, including salaries and benefits, occupancy expense, professional fees, loan expenses, marketing and amortization of intangible assets, when you compare the December 08 quarter to the September 08 quarter.

The last income statement category that requires some explanation is the income tax benefit of 3.6 million we recorded this quarter. Our effective tax rate changes from quarter-to-quarter based on our estimate of the effective tax rate we expect for the whole year. The tax benefit we recorded this quarter gets us to an effective rate year-to-date of 35.5%. We would anticipate that our effective rate for the next quarter would remain at about the same level.

Total assets grew 62 million during the current quarter. The most significant changes were $42 million growth in cash and interest bearing deposits, and $31 million of growth in loans held for sale.

The growth in cash was a conscious decision to increase liquidity. The increase in loans held for sale reflects the recent increase in mortgage banking activity due to falling rates. Strong growth and deposits during the quarter financed this growth and allowed us to reduce our borrowings at the same time.

Despite our net loss of 2.6 million this quarter, our shareholders' equity declined only 1.6 million as we experienced an increase in the value of securities due to the decline in short-term and long-term rates during the quarter.

Total equity to assets was 9.16% at December 31st, down from 9.38% at September 30th. Our regulatory capital ratios will remain in the well capitalized category at December 31st.

At quarter end, our book value was $18.23 per share and our tangible book value per share was $12.

Yesterday was another bad day for bank stocks. The market value for our stock seems to go down every time bad news comes out on any one of the top ten banks even though they have a much more diverse array of products and carry vastly different risks than our balance sheet.

Our stock closed yesterday at $2.42 or 20% of our tangible net worth per share. Historically, banks' stock trade at some multiple of their tangible net worth rather than their fraction of the tangible net worth.

I'm in a loss to explain why our stock and another stocks are trading at such low levels. Obviously, there is significant upside potential on the market for our stock as well as other community banking organizations.

Al Blank, our Chief Operating Officer will continue now with comments on asset quality.

Albert P. Blank

Thank you, David. David and Steve and our press release have provided a significant amounts of information on the headline numbers associated with our asset quality. I would like to take a moment to talk a little bit more specifically about our commercial loan portfolio, our residential portfolio and our consumer loan portfolio, as well as talk about some of the activities that we are conducting to make sure that the asset quality in these portfolios is maintained.

As Steve mentioned, our commercial real estate portfolio continues to perform very well. Our overall delinquencies at the end of December were 1.83% as compared to 2.51 at the end of September. Additionally, our NPLs at the end of December were 1.5% compared to 1.43 at the end of September.

We continued to feel comfortable with that portfolio for a host of reasons. Our lenders, our portfolio managers and senior management have continued to stay very close to the customers and borrowers in that portfolio. And we continued to get financial information from these customers as well as manage and monitor their vacancy rates. And at this point in time, we are very satisfied with results from the information that we have received.

Additionally, we continued to make commercial real-estate loans. We make them a little more cautiously than we have made in the past. We're looking for more capital injection from our borrowers. We're looking for a better debt service coverage ratios and we are continuing to look for strong borrowers with good properties. But we do believe that there are significant opportunities out there in the marketplace to continue to enhance that portfolio.

The other area of lending which has received a lot of press lately is obviously residential mortgage lending and the delinquencies in those portfolios. We also drill a little bit deeper into our portfolio this quarter and took a look at where the properties actually are residing. We found that $641 million of our portfolio is in the state of Ohio, $228 million is in the state of Michigan and throughout the United States is another $110 million.

One of the questions that we're all been asked is do you have any exposure to Florida, Arizona, California and Nevada states which have suffered significantly. While we have some exposure to those states, we feel that's a very manageable number. And addition to that they are customers that residing our bank customers, who have bought second homes in those marketplaces.

In Florida, we have $17 million of residential loans; California, we have 5.4; Arizona, we have 3.7; and Nevada, we have 1.2. So, as you can see the exposure is very minimal on those areas of the country that have experienced the most difficulty.

Our Ohio portfolio of $641 million continues to perform very well with delinquencies at 3.96% and NPLs at 2.57%. The other large segments of our portfolio is our Michigan portfolio at $228 million. The delinquency in that portfolio is 6.9% and the NPLs are at 5%.

One of the other portfolio is obviously that we continued to monitor and watch very carefully is our consumer loan portfolio. Based on the minimal equities of this generally associated with this portfolio, we have monitored the current customer base. We have continued to seek information on their credit scores and make adjustments as appropriate.

Overall, size of the portfolio has been slacked for a period of time now. As you take a look quarter-over-quarter the variances only a $117,000. If you remember in September 96.6% of our customer base was current. Today that... excuse me, at the end of September, 97.3% were current. Today, it's at 96.6%. So again that portfolio has maintained its stability.

From a geographic breakdown, $81 million of that portfolio is in Michigan and $275 million of that portfolio is in Ohio. The Ohio portfolio is performing a bit better than the Michigan portfolio, which you would probably expect based upon the economic conditions in those two states.

The Ohio portfolio delinquency is at 2.88% compared to 3.72% in the Michigan marketplace. NPLs in Ohio are 2.3% and 3.71 in Michigan. Either state, so as you look at them, you will find that those portfolio percentages will compare favorably to peers. In the residential world and in the consumer world we continued to originate loans in both of those marketplaces, trying to maintain the asset quality that we have. Our standards have increased a little bit, but we believe that those portfolios have always been originated with asset quality in mind.

And on that note, I turn it over to Steve for his final conclusion.

Steven R. Lewis

I'd like to provide for our listeners a bit of a forecast, if you will on some of the major components of the operation. A little bit more of the same in some of the major categories, specifically the balance sheet overall should be flat to modestly growing. We anticipate continued modest growth in the commercial area.

In the mortgage area, anywhere from flat to shrinking. That will be impacted by the volumes of loans that we have in the help for sale bucket which should be fairly robust over the next couple of quarters. And continued hot, relatively high liquidity balances. I think as long as this environment persist its prudent to continue doing that and not necessarily focusing on the margins.

On deposit growth, we expect some additional improvement, especially in cost and balances. We have these new deposit strategies that I had mentioned previously. Those are proving to be quite effective. And also there has been notable changes in the competitive pricing environment finally. As a result, we're actually down to certificate costs.

Our strong mortgage banking gains are anticipated for both the third and the fourth quarter as we expect rates to remain low. A flattening NPA perspective is expected. We actually have an overall exited delinquency and declines in the third, excuse me from the first to the second quarter as long as we're able to continue disposing it our REO in a reasonable fashion.

One of the barriers to that is Michigan. That is the one area where we are having difficulty. Moving properties today, Michigan represents roughly 62% of the REO balances that we have today. Hopefully, once we move into the spring season, activity will pick up. And who knows maybe the new administration applies some stimulus in that regard as well.

Stronger fee income is anticipated with respect to our deposit accounts. As again we look in to the full implementation of the new overdraft protection programs and there is a handful of other areas we're looking to make improvement. We think we now have minimal fair value exposure in particular to the mutual fund that we own. And we'll be watching that very closely.

Our deposit insurance is now baked into all of our forecasts as we move forward. Margins going to be positively impacted by the drop in deposit pricing. And that's going to be offset somewhat by the rise in liquidity and flat asset growth. Consequently, we are projecting a relatively flat margin figures for the next couple of quarters.

Cost remain in check to decreasing. OC financial integration is scheduled for March. That will provide some modest improvement and consolidation that will impact predominantly the fourth quarter. Also, we are in a process, planning processes to consolidate our insurance operations that will also impact our fourth quarter.

And then finally, we are aggressively focusing on all of our core business lines support areas and in terms of improving their efficiency and their alignment.

With all that said, I am going to now open it up for questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. (Operator instructions). Our first question is coming from Daniel Arnold with Sandler O'Neill. Please state your questions.

Daniel Arnold - Sandler O'Neill and Partners L.P

Hi. Good morning guys. Can you hear me now?

Steven Lewis

Yes. Good morning, Dan.

Daniel Arnold - Sandler O'Neill and Partners L.P

Okay, great. Just a couple of questions here. First, I just wanted to talk about this liquidity issue that you guys are seeing and you're going to move to deposits and other banks. I was wondering why you chose to do that as supposed to other short-term investments and what kind of yields you're getting on those deposit accounts?

David Gifford

The overnight investments give us the best available liquidity. We may move some of those dollars into short-term investments, but there really is no lot of gains in last three months or six months.

Daniel Arnold - Sandler O'Neill and Partners L.P

Alright. And I mean is it just kind of straight safety issue, or are you just hesitant to take any sort of credit risk with these things?

David Gifford

Yeah. It's just being prudent at this point, because a lot of the chaos we've seen in the last six months, it's just a safe thing to do.

Daniel Arnold - Sandler O'Neill and Partners L.P

Okay. And what kind of yields are you guys getting on those deposit accounts?

David Gifford

Right now, just 25 basis points on the overnight balances.

Daniel Arnold - Sandler O'Neill and Partners L.P

Do you expect those to go up at all or are you happy with the levels of liquidity that you have now, and knows any deposits... any increase in deposit balances on the liability side, yield just flow into investments or do you think you're going to continue to put those into deposit accounts as well?

Steven Lewis

Of anything, we're I guess de-levering a little bit from that perspective for those come in. We are paying down broker deposits and not renewing any fact that the borrowings that might be coming to. So, I would probably say depending on deposit level, changes of few liquidity levels remained fairly steady.

Daniel Arnold - Sandler O'Neill and Partners L.P

Okay. So I mean is this just I guess the size of the increase threw me off a little bit. So I just wanted to make sure that's what something we are going to see continue or this was kind of a onetime adjustment at all?

Steven Lewis

We're pretty comfortable at the levels that we're at right now. We recognize that, if there is any criticism we're probably being a bit too conservative, but I'm willing to accept that.

Daniel Arnold - Sandler O'Neill and Partners L.P

Okay. Next question is on the size of balance sheet. It looks like you guys are looking to continue to grow that. And you kind of mentioned, de-leveraging a little bit there. I was wondering if that's something that you guys have considered at all may be shrinking the size of the balance sheet?

Steven Lewis

We're increasing and shrinking components within the balance sheet. We've indicated our long-term strategy to continue increasing the mortgage components... excuse me, the commercial component within the loan portfolio and we've been doing that. And it's fairly been serving two masters. I think we're reducing our exposure to for the one to four family. I think we're down about $34 million in that portfolio this quarter alone. We're going continue to allow that to run-off and selectively put things into that portfolio. We've been very, very careful about what we've added.

On the other hand, now the commercial opportunities that are out there are probably some of the best we've ever seen. In fact, we are seeing some opportunities that two years ago wouldn't have really come our way. And consequently we're getting better pricing, we're certainly getting better terms that are covenants within the marketplace. So, we have allowed modest amount of growth in the commercial portfolio.

Overall, I think a lot of it's going to be depends on how much deposit growth there is and how quickly we allow the balance sheet to grow at this particular point. But more or less we're pouring money from the mortgage portfolio into the commercial portfolio.

Daniel Arnold - Sandler O'Neill and Partners L.P

Okay. And just as you guys look at credit going forward, first of all I mean, you guys have been pretty aggressive re-pursuing this season move foreclosure strategy. And I was wondering how affective you guys were being at actually moving the properties, say you collected the deals off (ph)?

David Gifford

We took 20 deal in lieu in the most recent order. And as I had mentioned, I think this deal we're having right now is in Michigan. We've got about 121 of the 216 properties in Michigan.

The ability to move those but that market is just extremely stagnant. Right now there is a huge consumer confidence issue and the uncertainty of the auto industry is certainly a prevailing component there. Other areas where we have properties, in Ohio and what not, we have been moving them through on a fairly steady basis. So that, I think, the open variable is and the wildcard continues to be Michigan as to how quickly we could push those through.

On the other hand, we've got some pretty aggressive rent-to-own programs that are out there and we've had some success with that as well.

Daniel Arnold - Sandler O'Neill and Partners L.P

Have you guys had any trouble in kind of moving commercial properties at all? I mean, as end user primarily residential property that you are talking about?

Albert Blank

You're correct Dan. It's been primarily residential. We just recently, this quarter, taken three commercial properties back and we'll be looking to sell them here in the very near future.

One of the things that is kind of a hidden benefit of taking a deal in lieu is that the sooner you get the property, the better conditions the property is in, which you find that after about two years of a foreclosure profit. No maintenance of any type has been done to the property and the actual collateral you get back is in a pretty dilapidated condition.

So we much rather get the property in control sooner than later, even if I... this is the perhaps the most ideal time of the year to move property to bring obviously we think will be much better and there is more real estate activity, tight weather on the properties through January, February, and March, clean the property up and prepare it for sale in the spring.

Daniel Arnold - Sandler O'Neill and Partners L.P

And I think Steve, you said that you expect NPL is going forward. What makes you think that that conditions are going to I guess level out as opposed to continue to deteriorate?

Steven Lewis

We watch our delinquency trends very, very closely. In aggregate delinquency overall from quarter-to-quarter even that if you net out what's been transferred NPA has dropped. That is a positive sign for us. Also we're looking forward to whatever stimulus occurs in the economy as well.

So, we've definitely seen a slowdown there. And some of it is certainly a hopeful settlements that we can do this. But a big part of it, of course, is going to be moving properties an assumption that we're going to be able to move properties out of NPA.

So basically what's happening is we've seen a slowdown in terms of what's coming in, but an even slower pace of what's going out in this time of the season. So, a combination of reduced liquidity and anticipation, excuse me, a reduced delinquency and a pick up of properties moving out as the spring season approaches.

Daniel Arnold - Sandler O'Neill and Partners L.P

Are you guys forecasting them for your provision levels to come down from where they were this quarter?

Steven Lewis


Daniel Arnold - Sandler O'Neill and Partners L.P

Slightly, okay. And then last question, just on the capital fund, obviously you guys continually will capitalize tangible equities and assets of over 6.2%, but with the dividend cut, I think capital preservation has become obviously a big concern. For you guys and the rest of the industry... well, first of all, where do you stand on TARP?

Steven Lewis

We had announced while back that we had in fact applied for TARP. We ended up having to re-file that application because of the termination of Camco deal. The Camco deal was part of that, was part of our pro forma and what not. We are asked then pull it back and net out the Camco transaction as we submitted which we have done. It is in process as we speak.

Daniel Arnold - Sandler O'Neill and Partners L.P

Okay. And then... I mean, do you guys, if TARP doesn't stand out or kind of conditions changed, do you have any plans to trade the capital or any other kind of ways?

Steven Lewis

Not presently.

Daniel Arnold - Sandler O'Neill and Partners L.P

Not presently, okay. All right. I think that pretty much covers for me. I appreciate it guys.

Steven Lewis

No problem, Dan. Thanks for calling.


(Operator instructions). Our next question is coming from Chris Mcgratty with Keefe, Bruyette and Woods. Please state your question.

Christopher Mcgratty - Keefe, Bruyette and Woods

Hi. Good morning, guys.

Steven Lewis

Hi, Chris.

Christopher Mcgratty - Keefe, Bruyette and Woods

Just a question on the mutual fund investment. Looks like your market down by about 11%. Correct me if I am wrong, was this markdown previously?

David Gifford

Yes, it had been.

Christopher Mcgratty - Keefe, Bruyette and Woods

What was the... I guess what was the original market per value this and then as compared to 12.7?

David Gifford

The original was about $15 million and now it's, yeah, 12.7 million.

Christopher Mcgratty - Keefe, Bruyette and Woods

Okay. And then can you provide a little bit more detail on, I guess in underlying collateral?

David Gifford

The underlying collateral is the combination of agency issued mortgage-backed securities and privately issued mortgage-backed securities, in approximately equal parts. And the agency mortgage-backed securities and that mutual funds have been growing recently well and the private mortgage-backed securities have had significant declines in their market value.

Christopher Mcgratty - Keefe, Bruyette and Woods


David Gifford

That's what's driving the market price down.

Christopher Mcgratty - Keefe, Bruyette and Woods

Right, okay. And just carrying forward in the coming capital, what's your comfort range in the TC ratio or what's it for? You'll fix in the quarter, and I think this quarter and I'm wondering what... how high you are thinking about capital?

David Gifford

Now, that's the fixed percent number is certainly is the number that's... is on my radar screen.

Christopher Mcgratty - Keefe, Bruyette and Woods

Okay. That's helpful. Thank you.


Our next question is coming from Larry Ringler with the Tribune Chronicle. Please state your question.

Larry Ringler - Tribune Chronicle

Yeah. I was wondering if there is any update you can provide on Cornerstone Advisors and as far as the efficiencies?

Steven Lewis

Yes Larry. We had announced at the last conference call that we had engaged the Cornerstone Consulting and their job was to comment and really take a look at the company, from top to bottom doing a lot of benchmarking analysis. This company really has been, since going public in 1999 I mean we have... we found roughly seven acquisitions. And so our organizational structure and processes has really been build one and another.

While we're being sort of basically taking it high amount with regard to merger and acquisitions we focus, this was a great time to take a look at and re-examine exactly everything that we're doing for benchmarking perspective.

They have been involved for quite some time. We have reviewing their results, which are not finalized this time. So, we're encouraged by some of the things that they shared with us. But it's in completed at this particular point in time, but what we have found are some opportunities to really improve the effectiveness in terms of how we support our business... our core business lines.

Larry Ringler - Tribune Chronicle

Okay. Any timeframe when you might have it completed?

Steven Lewis

This quarter.

Larry Ringler - Tribune Chronicle

Okay. All right, thanks.

Steven Lewis

Sure thanks.


There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Steven Lewis

It's obviously a difficult environment. I mean saying that is incredibly redundant. Again, I can't emphasize enough that in our particular case draw economic issues, particularly job losses or job downsizing has dramatically impacted our credit quality. That is the one variable that we continued to face as we move forward.

However, we are extremely confident in the safety of the organization. I think everybody is growing in the same direction and the organization understands what the stakes are. We're very pleased really with the progress that we've made from an operating perspective. And really have some optimism as we began growing into 2009 year.

So, we look forward to further dialogue with you going forward. And thank you for your time invested this morning with us. Good bye.


Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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