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Executives

Steven R. Lewis - Chief Executive Officer

David W. Gifford - Chief Financial Officer

Albert P. Blank - President and Chief Operating Officer, First Place Bank

Analysts

Daniel Arnold - Sandler O'Neill & Partners

First Place Financial Corp. (OTC:FPFC) F1Q10 Earnings Call Transcript October 28, 2009 10:00 AM ET

Operator

Welcome to the First Place Financial Corp. Fiscal 2010 First 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 filings. 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, www.firstplacebank.com.

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 Operating 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 and thank you for joining us for our first quarter of 2010 earnings call. Our release is really dominated by four, I believe, categories. Capital loans are up, our core deposits are up, expenses are down, and revenues are up – certainly all positives from a operational perspective.

The positive results were – literally poured into loan loss reserves, roughly 22.5 million. Our focus really has been on three areas – one is building reserves, two is preserving capital, and three is achieving superior operational excellence.

During the quarter, we incurred net loss of $5.9 million, and that was as a direct result of our desire to further build our reserves. Consequently, we added roughly 10 million to our allowance, which brings our reserves to 207 basis points of loan.

Also during the quarter we terminated our branch acquisition, (ph) three branch acquisition; that was a mutual termination in September. As a result, that did serve, preserve capital at the holding company.

In addition, although it’s somewhat very financially insignificant, I would say we did suspend –terminated our $0.01 per share dividend for the quarter. That saved about $170,000. The way we looked at it was that really roughly equates to what’s necessary to pay the quarterly TARP preferred dividend.

Capital is up. As I mentioned, risk-based capital actually increased about 30 basis points linked quarter to 12.67%. In addition, tangible common equity to tangible capital assets is up 21 basis points to 6.13.

Our parent company continues to hold more than $40 million in excess capital and cash, the bulk of which is being restricted primarily for bank capital needs, if and when needed. We keep that at the holding company in order to better manage the franchise tax position of bank.

Looking at mortgage banking, we continue to fulfill our pledge to take advantage of disrupted markets. Many of the larger players have changed how they do business and in some cases, actually, where do they business.

We are well positioned and have taken steps to enhance our market presence within our Midwest footprint, and our recent move into the D.C., suburban market of Rockville, Maryland has proved to be very beneficial in its early going.

In addition, the dramatic reduction of loan brokers due to an inability to obtain warehouse lines in the market has contributed to what are becoming historically wide margins in this business. As a result, we’ve booked nearly $4 million in gain on sale for the quarter. The December quarter looks favorable as well. Activity included sales of 507 million in mortgages during the quarter. We originated 458 million.

In addition, we continue to pursue our strategy of allowing loans held for sale to expand. Eventually, there is more benefit through the yield curve by delaying those sales from roughly three to four days out to roughly 45 days.

Now, this does have an impact on several metrics. Obviously, by carrying large balance, it holds back our capital levels a bit. It certainly holds back liquidity at least by definition, but it does have positive impact on margins and overly inflates are loans to deposits. But the gain, we’re probably earning an additional $250,000 a month as opposed to selling them immediately.

Our retail group continues to perform at just an outstanding level. Although the overall deposits dropped roughly $105 million, we continue to achieve our three goals of reducing our cost of deposits, which are down linked quarter about 33 basis points. Certainly, an improved deposit mix is enhancing that as well, as well as the income, and we are trying to continue our focus of attracting business and consumer core accounts.

The bulk of our deposit erosion was focused in the CD areas, predominantly in the CDARS program and some single-service relationships. As a result, CDs as a percentage of total deposits are down from 55% to roughly 50%. We expect that trend to continue.

Net account growth for the quarter, 179 business accounts, 423 households, again that is net growth. The income is up 47% over the first quarter of ‘09 and 7.3% on a linked quarter basis. All of that has contributed – has helped to contribute to the widening of our margin, which was 338 for the prior quarter. David Gifford is going to have a little bit more information as far as what to look for in our margins looking ahead.

As a result, we did achieve a record – really pretax pre-provision at just under $13 million for the quarter. Looking ahead to credit, as you can see from the release, unfortunately NPAs were up roughly $20 million for the quarter, NPL up roughly $24 million for the quarter. The difference there being REO; REO was down a notable 10%.

Charge-offs were roughly $11.4 million, however I should point out that we haven’t adopted a new charge-off methodology which specifically calls for us to write-off any specific reserves that are tied to a loan once it becomes non-performing. Consequently, our number although it’s down linked quarter from 15.8 to 11.4, of the 11.4, roughly $5 million represented the impact from that change. So charge-offs for the quarter on the old methodology was down quite significantly.

Looking a bit deeper into delinquency numbers and trends, roughly 58% of all of our delinquency is coming out of Michigan despite the fact that we only have about 35% of our loans in Michigan.

On the non-interest expense side, we are certainly continuing to see benefits from changing our business model to a sort of a hybrid regional model to a line of business. In addition to that, REO expense is down as well. Much of the gains we have realized from the efficiencies gained in the line of business have been reinvested into the credit or property management components of our business.

In fact, we have literally removed our property management group from the bank operations, if you will. We have brought in a new person to lead that process. I am absolutely convinced that, especially if you have a portfolio of roughly $33 million you need to treat it as a separate business, it is unique from banking when it comes to marketing you are getting maximum disposition of these properties moving out.

Our single-family mortgages today, 629 million on the books are actually in Ohio, 231 are in Michigan. Of the $1.2 billion commercial portfolio today, versus a lot of focus on commercial real estate. In the Ohio and Michigan markets roughly $540 million represents commercial real estate. Over 55% of that is located in the state of Michigan.

Our home builder and credit facility portfolio is down a bit, we were at about $106 million, we are now down to roughly 102 million. That portfolio, as you might have imagined, requires a fair amount of attention and we continue to work through those issues.

Looking ahead on a strategic basis, as you will find in the last several quarters, we’ll continue to focus on growing our mortgage banking group inside our Midwest footprint and taking advantage of these disrupted markets.

Our servicing portfolio, you may have noticed has been increasing, it’s roughly $2.3 billion today. We believe that there is very little impairment risk based on the coupons that are going into that portfolio. We believe that’s going to develop into a very nicely valued asset as rates move up in the future.

Our core account growth continues to be job number one here and it is certainly showing a lot of benefit in terms of mix and as well as our fee income being produced and we’ll continue that focus. We continue to maintain a modestly asset-sensitive balance sheet; you can expect to see that going forward.

And then finally, obviously preservation in build up of capital continues to be a focus for the organization as well as maintaining adequate reserves against the loan portfolio.

With all that, I’m going to turn it back over to Mr. Gifford, who is going to provide some additional highlight as to performance of First Place.

David W. Gifford

Thank you, Steve. Good morning. As Steve mentioned, our actions this quarter to strength our allowance for loan losses dominated the operating results for the quarter.

Net loss for the quarter was 5.9 million. After accounting for preferred dividends, our loss attributable to common shareholders was seven million, or $0.42 per common share. This – the net loss this quarter was an improvement over the net loss in June 2009 quarter and over the net loss a year ago in the September 2008 quarter.

Net interest income for the quarter was 25.6 million, up 8% from 23.7 million for the June quarter. Net interest margin improved to 3.38 from 3.06 in the June quarter. The majority of this improvement occurred in our cost to liabilities, which declined 31 basis points to 227 for the current quarter from 258 for the June quarter. We also received a small benefit from carrying a higher level of loans held for sale this quarter than we had historically.

Our margin contracted significantly in December 2008 quarter due to several rate cuts by the Federal Reserve Bank during that quarter. Throughout this calendar year, our liabilities have been repricing down and catching up with the rate decreases from last fall. So, we have experienced increases in net interest margin for three quarters in a row. We expect this process to continue during the coming quarter, but at a slower pace. I project that net interest margin for the December 2009 quarter will be in the high 350s.

Noninterest income was 11.7 million, up from the June quarter and the year ago quarter. Service charges on deposit accounts continue to grow as we continue to emphasize checking accounts. Net income was 3.1 million, up from 2.9 million for the June quarter. Mortgage banking income remained strong as we have continued to benefit from low mortgage rates and changing markets. Mortgage banking gains were 3.9 million for the quarter, up from 3.8 million for the June quarter.

The gain on sale of loan servicing rights of 0.7 million actually represents the final resolution of contingencies from two previous sales. So this is not a source of income that would recur on a regular basis. However, we would consider another bulk sale of servicing rights, if the market for those rights became favorable.

Noninterest expense was 24.3 million for the current quarter, which was a significant decrease from noninterest expense of 31 million for the June quarter. Real estate owned expense is down from 6.1 million in June to 1.1 million in September. Residential real estate market has stabilized and we would expect future quarters to run in the $1.5 million for quarter range.

Deposit insurance is down from three million to 1.4 million. We recorded a special one-time assessment in June which made that quarter approximately twice the normal rate. We believe that FDIC intends to fund itself with a three-year prepaid assessment, so we anticipate expense in the 1.4 to 1.5 million range going forward.

Pretax pre-provision income was about 13 million for the current quarter. This is a substantial increase from the previous four quarters. The provision for loan losses was 22.5 million for the September quarter. This provision significantly strengthens our allowance for loan losses.

During the September quarter, we consciously become more aggressive in reporting charge-offs as Steve described. These charge-offs of specific allowances totaled 5.3 million for the quarter. Charge-offs under our old method totaled 6.1 million.

The provision of 22.5 million was nearly twice as large as total charge-offs of 11.4 million. The allowance is now 2.07% of total loans, up from 1.60 of total loans at June 30. In addition, it has grown faster than non-performing loans. The allowance grew by 27.9% during the quarter, while non-performing loans grew by 22.8%. We have fully recognized all current credit costs and are in a position of strength going forward. Even during this quarter, with an unusual level of charge-offs, our pretax pre-provision income exceeded charge-offs, indicating that the operating revenues of the bank are fully covering the actual credit losses.

The effective tax rate for the quarter was 37.9. Going forward we anticipate that it will be slightly higher than the statutory rate of 35% when we are in a loss position and slightly lower than the statutory rate when we are in an income position.

Total assets declined by 159 million during the quarter through the declines of $91 million in loans held for sale, 28 million in interest-bearing deposits in other banks and 19 million in portfolio loans.

During the coming quarter we anticipate that portfolio loans will continue to shrink slowly. The volume of loans held for sale could increase or decrease depending on the level of long-term interest rates during the last half of the quarter.

All of our capital ratios at September 30 are up compared to the three months earlier primarily due to the reduction in the size of the balance sheet. Tangible equity to tangible assets is up to 8.27 from 7.96 three months earlier and total risk-based capital to risk-weighted assets at the bank is 12.67, up from 12.37 three months earlier.

Yesterday our stock closed at $2.84, that’s 23.1% of our book value and 24.3% of our tangible book value as of September 30. These levels continue to be significantly lower than historical levels. And at this point, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from line of Daniel Arnold with Sandler O'Neill & Partners. Please proceed with your question. Your mic is now live.

Daniel Arnold - Sandler O'Neill & Partners

Hey, guys. Good morning.

Steven R. Lewis

Good morning, Dan.

David W. Gifford

Good morning.

Daniel Arnold - Sandler O'Neill & Partners

Hey, just a couple of questions. First off on the revised net charge-offs methodology, I was hoping you guys can walk me through that a little more. Steve, I know you gave a number of how much that influenced charge-offs versus last quarter, I think I missed it a little bit. If you could just kind of give that number again, I’d appreciate it.

Steven R. Lewis

Sure. As you know last quarter we were about 15.8, this quarter about 11.4. However, the 11.4 is influenced by about $5 million of specific reserves that were on the books that we chose to write-off. Essentially what we’re saying is that we have, as you know we put specific reserves against performing loans and non-performing loans, so once the loan becomes non-performing, our new practices that that reserve will be written-off. Though it is an accumulated number obviously, they represented the – was represented by the $5 million, okay.

Daniel Arnold - Sandler O'Neill & Partners

So that means you guys have no specific reserves right now on any NPLs (inaudible)?

Steven R. Lewis

On any NPL, that’s correct.

Daniel Arnold - Sandler O'Neill & Partners

Okay. And going forward, so there were 5 million and now that seems like a catch-up issue. Do you expect then, I mean, will kind of the core rates then be in the third quarter 5 million less or...

Steven R. Lewis

Let me break that down just a little bit cleaner for you. Of the 5 million, 3.7 of it was from loans that were NPL prior to that – to this quarter.

Daniel Arnold - Sandler O'Neill & Partners

Okay.

Steven R. Lewis

1.3, 1.4 representative loans that went NPL this quarter that had specific reserves on them.

Daniel Arnold - Sandler O'Neill & Partners

Okay. So $3.7 million –

Steven R. Lewis

Okay. So of that number about three point – . Okay. So does that makes sense? And (inaudible) this is the commercial portfolio only.

Daniel Arnold - Sandler O'Neill & Partners

Okay, this is only the commercials.

Steven R. Lewis

That’s correct.

Daniel Arnold - Sandler O'Neill & Partners

So what – the methodology changes only for commercial or, so you have specific reserves (inaudible) the residential (inaudible)?

Steven R. Lewis

Yes.

Daniel Arnold - Sandler O'Neill & Partners

Okay. What was the reason for the change?

Steven R. Lewis

I think that if you take a look at commercial banks today, that tends to be more with their practices, Dan. I think this is more of a holdover from thrift days gone by and we want to be more consistent with the rest of the industry.

Daniel Arnold - Sandler O'Neill & Partners

Okay. We well – and given that, I mean is there any kind of a – are you guys are looking at doing a charter conversion or anything like that? Is that somewhere off in the near future?

Steven R. Lewis

No, I suspect the government is going to do that for us.

Daniel Arnold - Sandler O'Neill & Partners

Okay.

Steven R. Lewis

I think at this point in time until we figure out – until the government figures out what it’s going to do from a charter perspective, it doesn’t make sense for us to go down that road and spend the money to do it.

Daniel Arnold - Sandler O'Neill & Partners

Okay. Great, I appreciate that. Then on the OREO expense side, I think, you spoke about this little bit, obviously was off tremendously. And I think Dave said that you guys expect in the 1.5 million ratio. Is that mostly on the residential side that you guys are taking those OREO charges?

Steven R. Lewis

No, it’s really both commercial and residential.

Daniel Arnold - Sandler O'Neill & Partners

Okay. Have you guys seen an increase in your ability to move these things off the books any quicker than you have in the past?

Steven R. Lewis

Yeah, we clearly are moving – mover properties more off the books than on books this quarter. The homebuyer credit that the government was offering, certainly influenced that, and I think that’s still up for debate in D.C. We’re hoping that they continue, it certainly has a positive impact on our ability to move properties. In fact, they’re talking about expanding that to not just first time homebuyers, but any time. And that’s I think a positive for the real estate market in general.

Daniel Arnold - Sandler O'Neill & Partners

Great. On the mortgage origination front, obviously that continues to be very strong for you guys. How the origination has been so far into the fourth quarter?

Steven R. Lewis

Excellent. We’ve continued to see throughout the month of October the kind of volumes we had been seeing over the third quarter. In addition to that, as I’ve mentioned, we’ve been adding really veteran people from organizations who are changing their business model. They prefer our business model at the end of the day. So, within the existing LPO footprint with the expectation of the new office that we established in Rockville, Maryland, and an office in Grand Rapids in Michigan, we have been adding to that existing infrastructure. That obviously makes the LPO itself more profitable on a standalone basis. But the margins in the business right now are extremely attractive. I think the shrinkage of – obviously loan brokers going away, those have been unable to obtain warehouse lines of credit. That’s certainly having an impact on the profitability of the marketplace as well as where we’re getting volumes from. So we are very encouraged by what’s going on right now and certainly taking advantage of it.

Daniel Arnold - Sandler O'Neill & Partners

Okay. And then just on the loan servicing side, obviously you guys to positive earnings this quarter, I think you’ve been taking kind of valuation allowances. Do you expect those positive earnings to continue, assuming rate stay kind of where they are at right now?

Steven R. Lewis

As Dave indicated on the servicing side, sort of a make-up call there, we have sold servicing quite a couple of years ago, I think. And there’s always a trail impact to those sales. Those – that trail was cleaned up. There is always money that’s being held back until process is completed. As a result, it came in at almost $700,000 benefit to us.

Now, looking ahead where servicing is being valued and for quite some time we were selling loan serving release. We are no longer doing that. We haven’t been doing that for a while. At this kind of coupon levels we believe that it makes a tremendous amount of sense to retain the servicing and wait for rates to move up and obviously on the other side pricing will improve. So there is something to look forward to down the road.

Daniel Arnold - Sandler O'Neill & Partners

I wasn’t talking much about the gain on the sale of the rights versus just that home loan servicing line of income. But I think you guys are – you are saying that assuming rates go up, if rates go up obviously that should be a fairly positive impact. But I guess what I was asking is for the next couple of quarters if they stay the same, are you going to see that (ph) 150, 2,000 or so that you guys saw or (inaudible).

Steven R. Lewis

I think that’s a pretty fair projection, Dan.

Daniel Arnold - Sandler O'Neill & Partners

Okay.

David W. Gifford

Yeah, the line tends to run counter to the way mortgage banking does. So if we have a great quarter in mortgage banking, sometime it’s partially offset there and the other way around.

Steven R. Lewis

But we think the level of impairment risk generally, specially based time where we have the portfolio value is of any – should not be of any major consequence, unless rates were to go down significantly. And I just – I don’t think anybody is projecting that, certainly not on the 10 year end of the curve.

Daniel Arnold - Sandler O'Neill & Partners

Got it. And I think it’s going to be tough for them to lower rates any further than they have. But…

Steven R. Lewis

So we think this is a good strategy.

Daniel Arnold - Sandler O'Neill & Partners

And then one last question. On the salary and benefits front, you guys were down pretty significantly there. What caused the reduction?

Steven R. Lewis

There were a couple of things. If you compare it to the June quarter, about $300,000 was the benefit in healthcare. We don’t necessarily expect that to maintain itself going forward. And then we also had incentives in our mortgage banking area we paid in the June quarter because their annual incentives are volumes based and we had excellent volume in June.

Daniel Arnold - Sandler O'Neill & Partners

Okay. Actually, one last question as long as have you guys here. I know you said loans are going to shrink modesty and I think you probably continue to shrink the balance sheet. I would say the pace this quarter was a little bit faster than I would have expected, assets down 4.7%. Do you expect that to slow in the coming quarters or are you expect it to kind of maintain that (ph) clip?

Steven R. Lewis

I think the bulk of that reduction has to do with the change in the balance on our loans held for sale. I think in June we’re roughly 375 million. Loans held for sale are probably down a good 100 million from that level, and that’s prior to high watermark within June.

I would anticipate that that portfolio will – won’t be any larger at December than it is at the end of September. But that clearly had a big impact on what happened with the balance sheet.

I think If you look at the current portfolio, it was relatively flat, maybe up a $1 million for the quarter, residential portfolio down about, I think, roughly $6 million, certainly allowed the consumer home equity portfolio to shrink on a natural basis. But in terms of, do we expect the balance sheet to increase this quarter? No. So it will be at best flat, but I would anticipate some modest shrinkage, but perhaps not to the extent that you saw this most recent quarter.

Daniel Arnold - Sandler O'Neill & Partners

Okay. Great. Well, I definitely appreciate (inaudible).

Steven R. Lewis

No problem. Thanks for calling in Dan.

Operator

Mr. Lewis, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.

Steven R. Lewis

Just like to thank everyone for joining us on the call. Tomorrow First Place will be holding its annual meeting. We look forward to it, and look forward to talking to you all very soon. I would also add that Dave and myself will be at the Sandler O’Neill Investor Conference in November, and I am sure that it will be webcast, we invite you join us at that point in time. Thank you.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you all for participation. Have a wonderful day.

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