First Place Financial Corp. F4Q 2008 Earnings Call Transcript

Jul.24.08 | About: First Place (FPFC)

First Place Financial Corp. (OTC:FPFC) F4Q 2008 Earnings Conference Call July 23, 2008 10:00 AM ET

Executives

Steve Lewis - President and CEO

Dave Gifford – CFO

Tim Beaumont - CCO

Analysts

Daniel Arnold - Sandler O'Neill

Chris McGratty - KBW

Operator

Welcome to the First Place Financial Corp., Fiscal 2008, Fourth 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 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 and Dave Gifford, Chief Financial 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.

Steve Lewis

Good morning and thank you for joining us. I would like to provide an overview of the results for the fourth quarter of our 2008 fiscal year, and I would also like to provide a fair amount of detail associated with asset quality, so you can get a better perspective on what our position is, if I get into that detail please bear with me.

As you can see from last nights release we gave report $2.9 million in earnings or $0.18 per share. I would like it also please consider the one-time merger charges of roughly $0.5 million in connection with the acquisition of OC Financial on June 30th. We welcome them to the First Place organization and look forward to the additional growth opportunities their locations in Columbus and Cleveland will bring.

In addition and more importantly we recorded a non-cash valuation adjustment primarily on a mutual fund, that is comprised of mortgage securities. In addition, we have some other small equity holding that were essentially mark-to-market. That impairment totaled $1.4 million pre-tax, without these non-operational charges earnings per share was $0.25. Margin expanded again this quarter growing to 3.13%, that’s the result of some aggressive re-pricing strategies on our part, that’s contributed positively to our overall results. Our funding mix also improved during the period.

Our mortgage banking continued to buck the negative national trends as evidenced by the $2.4 million in pre-tax gains that we earned for the quarter. And a 9.3 million for the year which actually set a new company record in a 28% ahead of last year performance. We maintained our focus on growing commercial relationships, as noted by a 7% annualized growth rate for fourth quarter and an 18% growth rate for the year.

We purposely constrained our growth really in all portfolios especially in the residential portfolio due to the volatility and some of the uncertainties itself plaque this environment. Consequently, asset growth was held at roughly 3.5% for the year and that was really relatively flat at removal of some modest acquisition activity.

Positive management has clearly been challenging as a result of an unusually competitive market, this was primarily due to the liquidity challenges of some of our larger competitors that had a negative impact on re-pricing opportunities. Despite these conditions we were able to grow our deposits and improve our mix as I previously mentioned and particular is our success in growing our business accounts as an example for the quarter we grew a net 238 business accounts, but the year 766 business accounts as you look at the consumer checking accounts for the quarter a net 639 for the quarter for the year, 3,343 checking accounts were grown. This has contributed nicely to the positive results in our margins category.

I also have been pleased with our continued efforts regarding cost control, those positive results have been overshadowed somewhat by the dramatic increase in expenses to manage the influx of real estate owned. Dave is going to cover that in a lot more detail as well as provide a bit more insight as to margins and what to look forward to in the coming quarters.

Moving on to asset quality, we have experienced some positive results. First, our strategy to accelerate the recovery process on troubled collateral has been successful. In the case where loss of property is inevitable we have avoided the fore-closure process by obtaining deed in lieu of fore-closure. Some of our markets are particularly overwhelmed with fore-closure consequently that time line can be excruciating when long.

Our strategy results in higher chare-offs a bit sooner in higher property management expenses a bit sooner, but these expenses will clearly be greater if we permitted a typical recovery path to run its normal course. As a result REO increased approximately $10 million for the quarter, but we have control of the property, we have control of this condition and ultimately its earlier liquidation.

In addition, we have activated a subsidiary of the bank that has actually been somewhat dormant, we have turned that into a more of a property management subsidiary. Today, we have moved 41 of the properties that are in the REO category under its management. We are in the process today of structuring it to be more focused on driving [8:35] properties as you look at the market price not just in this region but nationally obviously rental activity is up and pricing on properties are down. We are very focused on more aggressively looking at rent-to-own properties and getting those assets in a performing status. This is something that’s just recently got underway and its going to be in full swing in the first quarter of the ’09 fiscal year.

Non-performing loans declined from 2.2% of the portfolio to 1.9 or nearly $7 million. Although the allowance to loan losses declined 3 basis points our coverage ratio on non-performing loans increased from 50% to 56%, and the value of the non-performing loans moved to REO, truly represent a realistic realizable value result of some of the intent evaluation scrubbing that we put this through. In fact, the once NPL goes into -- once a non-performing loan moves into the real-estate owned category, we use some fairly conservative appraisals and then hit them with another 10 to 19% reduction in book value.

With respect to residential delinquency, we have actually been cautiously optimistic about a positive trend that’s been developing since February, but we really haven’t talked about it.

Quarter-over-quarter for one-to-four family properties was actually down. The delinquency was down 15%. Multi-family was down 83%, and our lines of credit, equity lines of credit where delinquency was down 20%. Obviously, some of these results are impacted by moving some of the loans into an NPA status, but the buckets were not refilled after that transition took place.

Our commercial portfolios, excluding the roughly $100 million that we have in our builder line continue to perform extremely well. Out of over $1.1 billion in loans, only 6.6 million is delinquent or roughly 59 basis points. If there is one portfolio to focus on by any investor, I think it needs to be our builder relationships, which totals about $100 million. 27.4% of this portfolio is currently classified. It accounts for roughly 20% of total delinquency at the bank. 60% of our portfolio is in Ohio, another 24% is in Michigan.

The total delinquency for that $100 million is roughly 18% or $18 million. Of the $18 million, roughly a third of that is considered non-performing loan. 40% of that 6.2 million has been specifically reserved for. Of the remaining $12 million in delinquency, we are projecting roughly a 30% loss, assuming that the current trends in the marketplace do not materially improve.

Further, as we look at the homebuilder portfolio, I would like to give you a breakdown of what’s in that $100 million if you bear with me, once again, with regard to credit facilities there is roughly 19 million. In land development, we have roughly 39 million, in lot inventory, just under 12 million. In raw land about 6.7 million and in residential spec roughly 24 million, totaling about $101 million.

Our charge-offs for the quarter were $5.5 million as reported. Those charge-offs are defined as follows. Roughly 19% for the commercial portfolio, which as you can imagine is assigned to the builder lines. 34% is in the consumer portfolio and 46% of the charge-offs went to the residential portfolio.

As noted earlier, real-estate owned totaled just under $24 million, that’s represented by a 169 properties. If we now be able [ph] kind of activity we had, we have added 85 properties during the quarter and eliminated 30. Of the 85 additions, 30 of them were obtained using our deed in lieu strategy. That represents almost $8 million in net book value.

The average charge-off from in terms of moving a loan from a non-performing loan status to REO was 15.6%. On average as we look at our experience over the last eight quarters, roughly $0.20 on the $1 has been lost.

With regard to the -- the time we have identified delinquency issue to the liquidation point, roughly 20% of the loan value has been written-off. As you take a look at how we are reserving, roughly 30 basis point is reserved against non-performing single-family units.

Because we maintain our focus on the deed in lieu strategy, we are forecasting charge-off for the next quarter to be in the high-50 basis point range to the mid-60 basis point range.

Consumer confidence locally, recently we see the boost here in the Mahoning Valley, as a result of the commitment by General Motors to bring the next generation of small cars to the Lordstown, Ohio plant. For the announcement it will add 1,400 jobs that is estimated as another 900 spin-off and support jobs will also be created. Consequently, we have seen a pick-up in housing activity here in the Valley.

We spent considerable time evaluating our dividend level, relative to the rest of the market and more importantly our own performance. As previously stated, our target payout ratio has been in the 40 to 50% range. We have been well in excess of that range for the previous three quarters.

Coupled with an uncertain environment, we believe the preserving capital is the prudent step to take. This step to different degrees has become common place in a market where capital has become extremely expensive.

While we are encouraged by some of our asset quality trend, this industry is not out of the woods yet. These developing positive trends need to make their way to the bottom line. This is a quarter-by-quarter decision by our Board, which we hope to reverse in the very near future.

Finally and as previously announced, our acquisition of the Camco Financial Corp. is in process. As part of that agreement Camco reduced their dividend by roughly 50%. We feel that both institutions need to arrive at the [outer] as strong as possible, this step by us in reducing our dividend to assist us in achieving that goal.

I would also like to comment on there are some that is speculated that the cash component of the transaction with Camco might be raised via capital. As I sit here today we have no current expectations or plans to raise the cash components through capital. We intend to do that through a debt financing as previously announced.

I would like to turn podium now over to Mr. Gifford, who is going to provide you with some additional insight.

Dave Gifford

Thank you, Steve. Good morning. As Steve mentioned we are in 2.9 million for the fourth quarter of our fiscal year or $0.18 per diluted share. Net interest income of 22.9 million was up 1 million from the March 2008 quarter. The Federal Reserve has not lowered rates since April 30 of this year and that has allowed our liability re-pricing to catch up other asset re-pricing.

Net interest margin for the quarter was 3.13% up 15 basis points from the March quarter. This was primarily driven by a decline in deposit costs. The cost of deposits came down 62 basis points from 361 for the March quarter to 299 for the June quarter.

Looking forward we do not expect to make much progress in net interest margin next quarter. By specifically, deposit maturities are significantly smaller, the rates on maturing certificates are higher, significant rates have been rising in recent weeks and we do not anticipate any change in short-term rates from the Fed during the next quarter. Therefore, we expect net interest margin to be flat for the next quarter with no significant change up or down.

Non-interest income of 7.5 million was down 1.4 million from the March quarter due primarily to 1.4 million rather than (inaudible) of securities. The impairment that Steve mentioned was concentrated in a $15 million adjustable rate mortgage mutual fund that was written down by 1.2 million. In addition, we have a $10 million investment in Fannie Mae preferred stock. While we do not anticipate any future impairment both of these equities securities can be impacted by changes in the mortgage market which is exhibited significant volatility over the past year.

As Steve noted that mortgage banking results were a bright spot in this quarter’s result. I would like to update you on an accounting change coming up. In July, we will adopt FAS 157 and FAS 159. We anticipate using this opportunity to begin to record our loans held for sale at fair value. This would put all aspects of mortgage banking on fair value accounting and reduce fluctuations in mortgage banking gains.

In the past we have experienced accounting fluctuations due to hedges been recorded at fair value and loans held for sale been recorded at the lower of cost for market. Non-interest expense for the quarter was 21.2 million or 2.60% of average assets, it included $451,000 of merger cross on the OC Financial acquisition that are non-recurring costs. Without those merger costs core non-interest expense was 20.8 million or 2.55% of average assets. Real estate owned expense for the quarter was 894,000 or 0.11% of average assets.

Its running at a historically high level due to the high level of REO and due to write-downs of the carrying value of REO properties during the current quarter. We expect REO expense to come down in the up coming quarter and be in the $400,000 to $600,000 range. Further declines beyond that will be contingent on how soon we are able to bring down to the level of the absolute dollars of REO on our balance sheet.

Non-interest expense as a percent of average assets without the merger costs and the volatile REO expense was 2.42% for the June quarter compared with 2.37% for the March quarter. That 5 basis point increase was primarily due to low commercial loan volume which reduced labor dollars capitalized as loan cost.

Balance sheet growth has been minimal during the past quarter. In fact, our growth of $52 million in assets was composed of assets of 68 million acquired with OC Financial and a decline of 16 million in all other assets. Similarly, the increase in loans of 33 million was composed of 42 million of loans acquired with OC Financial and a decline of $9 million in other loans. There is a limited supply of loans that meet both our interest rate and credit expectations.

While Steve noted that we increased the number of deposited accounts this quarter, this did not necessarily translate into dollar increases in deposits during the quarter. Total deposits increased $40 million during the quarter and this was composed of $43 million of deposits acquired with OC Financial. A $3 million decrease in brokerage deposits and no significant change in retail deposits.

The lack of quality loan demand enabled us to set retail deposits rates conservatively this quarter and make significant progress in lowering our average deposit costs. We expect the trend of slow growth in assets to continue through the next quarter. Annualized asset growth for the September 2008 quarter is expected to be less than 3%. Our capital ratios declined slightly this quarter. Equity to total assets was 9.51% at June 30, down from 9.54% at March 31. The majority of this decline was attributable to declines in the market value of securities available for sale.

First Place remains well capitalized under regulatory capital guidelines. We do not have any authorization from our Boards purchase treasury shares at this time. At June 30, 2008 our book value per common share was $18.72, and our tangible book value per common share was $12.43. Yesterday our stock closed at $11.36 which is 91.4% of our tangible book value per share.

We will now move on take questions.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions). Our first question comes from the line of Daniel Arnold with Sandler O'Neill.

Daniel Arnold - Sandler O'Neill

Hi, good morning guys.

Dave Gifford

Good morning, Dan.

Steve Lewis

Good morning.

Daniel Arnold - Sandler O'Neill

A couple of quick questions for you. The first is on the dividend cut. You mentioned that you were targeting a pay out ratio of 40% to 50% now with $0.085 dividend that kind of implies in EPS range of $0.17 to $0.21. And I was wondering if that was something you were looking at for this quarter alone or if that was a trend going forward and how is the EPS range we should be looking at?

Steve Lewis

Well, the short answer is this quarter alone. Historically, we have stated strategically that we'd like to see a fair ratio in that 40-50% range. As I indicated earlier we are clearly outside that range for last three quarters in a row, looking at this quarter it was again it was this quarter's decision only, and we will evaluate this very closely each quarter as we proceed.

Daniel Arnold - Sandler O'Neill

So the dividend could go back up significantly in future quarters?

Steve Lewis

Subject to earnings, absolutely.

Daniel Arnold - Sandler O'Neill

Alright. And then I just wanted to talk about the security is right down a little bit just same was it drilled down a little bit into what's going on with that $1.4 million and exactly what kind of securities you are in now. I know you have said a mutual fund that by MBS and I was wondering if you can give may be a little bit more specific?

Steve Lewis

David knows that fund intimately, so I am going to turn it over to David.

Dave Gifford

It's an adjustable rate mortgage mutual fund which has relatively short duration and it invests in [GFC] back mortgage backed securities and private mortgage backed securities they perceive some downgrades on the ratings of the individual securities within the fund and that caused the market value of the fund to come down.

Daniel Arnold - Sandler O'Neill

How much more do you get and what was the total value of that and (inaudible) now?

Dave Gifford

It got written down from about $16 million to $15 million during the quarter. So, our book value remaining is about $15 million.

Daniel Arnold - Sandler O'Neill

Is it possible to see further write-downs as a matter or is that something you don’t think it’s likely?

Dave Gifford

That’s tough to predict, certainly possible.

Daniel Arnold - Sandler O'Neill

Are those all prime mortgages or are they sub-prime, what kind of mortgages are we looking out there?

Dave Gifford

There are securities and then that are based on all mortgages but none of them are sub-prime.

Steve Lewis

Okay. One more comment, Dan? Alright, as we look at the private mortgage backed securities in that fund in each case there is a tranche ahead of us that absorbs losses so that we generally do not anticipate any credit losses in that fund, and to-date none have been reported. It's just an increase in the delinquencies on those underlying mortgage-backed securities that’s driving the reduction in the raving and therefore into reduction of market value.

Daniel Arnold - Sandler O'Neill

Okay and then just one more question, on the credit front. The charge-offs in the quarter exceeded your permission level by a little bit. And I just wanted to see kind of what you were thinking about the overall allowance for loan losses and you think you bring that down a little bit. And I was wondering if you guys -- we’re seeing kind of -- yeah obviously MPL is coming down little right there, some improvement but and do you expect significant kind of decrease in charge-offs going forward or do you think that MPAs are going to continue to trend down as we go forward?

Steve Lewis

In some ways you have answered the question a bit, Dan. The increase in the MPAs as we have indicated we look at the whole foreclosure process sort of a train and we are trying to short that track on the train and we have been successful in doing that and now we feel pretty good about the net realizable value a realistic values that we are going to get out of those REO properties it ensure all time pretty intense scrubbing and then even a hair cutting process after some fairly conservative appraisals have been performed on them.

So, we feel real good about the valuation levels there and that’s indicated in the projections with regard to any future losses we might expect with evasion. We are also pretty encouraged and clearly the reduction is the non-performing loan is moving some about into REO but that bucket did not refill. And also what we are seeing is hard delinquency trends are encouraging to us. So, we actually believe that from a credit quality standpoint things improved for the quarter.

Daniel Arnold - Sandler O'Neill

As you guys look at you walk through us through 90 days pass-through one of those allowances we are doing.

Steve Lewis

We have Tim Beaumont, Chief Credit Officer and let him answer your question, Dan.

Tim Beaumont

We look at and try the trend now where asset quality is going what are leading indicators obviously due to classification of the assets and we have seen the growth really an asset classifications there in the commercial segment and especially the builder side of things. And so we look at that and I guess in around of battle here answering your question hopefully reserving for classification, based on classification and based on MPL and we think that if the where the MPLs really are going to come from predominantly going forward are going to be in any place, they are going to be in the door developer side.

Daniel Arnold - Sandler O'Neill

So you guys ever seen I mean in commercial real estate and C&I lending is holding up pretty well. And it's really kind of credit related to residential mortgages be it on the builder side or be it on the distributional mortgages that have really seen the problems.

Dave Gifford

And that’s seen obviously that’s why we are providing as much focus and details we can on that $100 million portfolio. So people can truly understand the risk there, but for the 90 day perspective as you look at the entire loan portfolio from March to June of that actually went down about $8.5 million.

Daniel Arnold - Sandler O'Neill

Okay.

Dave Gifford

That’s all portfolios overall.

Daniel Arnold - Sandler O'Neill

Alright, great. Well I appreciate the answer, guys.

Operator

Our next question comes from the line of Chris McGratty with KBW.

Chris McGratty - KBW

Hi. Good morning, Steve. Good morning, Dave.

Steve Lewis

Good morning.

Dave Gifford

Good morning.

Chris McGratty - KBW

A different question on the capital, I think perhaps you guys have said intangible capital target internally of 6 to 7. It looks like you are at the mid point now and not based on my estimation after the Camco you are going to drop to the low 6% range. Is that targets still hold for you guys?

Steve Lewis

Our estimates are about a 25 basis points decline in intangible assets we [can’t go do].

Chris McGratty - KBW

Okay. So, just look up for all the 6% to 7% range.

Steve Lewis

Yes, we will be in the 6 in the quarter range, obviously we are in a capital preservation mode as evidenced by the dividend cut. I think our focus quite frankly is little bit more on the bank levels or regulatory side of things and that transaction is actually modestly accretive to risk based capital levels.

Chris McGratty - KBW

Where does that take your concern?

Steve Lewis

Up about 5 basis points.

Chris McGratty - KBW

Okay. Thanks.

Operator

[Operator Instructions]. Seeing as there are no further questions, I would like to turn the call back to management for any concluding remarks.

Steve Lewis

We just like to thank everyone for joining us this morning. Once again I am particularly pleased with the performance of all the business units in the bank and some of the things we have done for franchise expansion perspective. Clearly, a great deal of focus, energy, resource continues to be on the asset quality area, but in conclusion we are cautiously optimistic by some of the trends that we have witnessed albeit in the short-term. All projections I have seen to get this dilemma in housing market is either half way through or two-thirds the way through. I respect those forecast and we are trying to manage the company accordingly.

So, again thank you for joining us, have a great day. Do you have any follow-up questions we will be in all day long.

Operator

Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation.

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