First Place Financial F3Q09 (Qtr End 3/31/09) Earnings Call Transcript

| About: First Place (FPFC)
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First Place Financial Corp. (OTC:FPFC) F3Q09 (Qtr End 3/31/09) Earnings Call April 23, 2009 10:00 AM ET


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 & Partners LP


Welcome to the First Place Financial Corp's Fiscal 2009 Third 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,

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.

Steven R. Lewis

Good morning and thank you for joining us, especially for adjusting here schedules for last minute delay on this, our third quarter earnings release. In today's rapidly changing environment, the accounting world has proven to be no exception with regard to these changes and it seems that our last minute issues that crop-up tend to be more than norm.

However, we were able to successfully navigate through that and I get the release out last night to you. Obviously, we are very pleased to be back in the block, or perhaps more importantly are some of the strategic achievements however accomplished in particular with the balance sheet. It seems in today's environment that flexibility and debt have quickly become top priorities for many of us.

Some examples at First Place, as previously reported, we were invited to participate in Treasury's, the Capital Purchase Program, which we accepted. We entered that program on March 13th with a funding of roughly $73 million and we issued there the preferred stock. Of the $73 million, we pushed about 31 million, down into the bank. We are estimating that that has increased our risk-based capital to north of about 12.7% of the bank. And obviously, we've bolster the flexibility as a holding company as well.

In addition to in addition improving liquidity was clearly a focus for us. Organic deposit growth during the quarter was outstanding, and that allowed us to reduce our wholesale balances by $31 million. Once again the $73 million of funding that came in through the CPP program enhanced that liquidity position as well.

Our organic deposit growth was achieved inclusive of reducing deposit costs by approximately 22 basis points for the third quarter. As I've reported in previous quarters, core account growth has been priority one for us and we had another outstanding quarter evidenced by net growth in business accounts of 831 and in consumer DDA accounts 1124, also net producing almost 2000 new net core accounts for the company, that obviously affects fee generation levels which were clearly above prior levels. Mr. Gifford will have some more information for you on that as well.

We continue to allow mortgage balances to decline in addition to our quest to enhance balance sheet agility; we have no appetite to hold 30 or paper below 5%. Clearly, the marketplace has no appetite for adjustable rate mortgage desire. As a result, our loan-to-deposit ratio has declined to a roughly 99% that's the lowest level it's been in many years. We are targeting a 95 to 105% of operating range.

Our commercial balances also declined during the quarter and despite all the criticism that banks aren't lending, the commonest perception is that easy credit leads to economic recovery, it never has. Fact is that demand is extremely weak with the exception of what's going on in mortgage banking.

During the quarter, we were pleased to complete the integration of OC Financial, a recent acquisition in the Columbus, Ohio marketplace. We have some very strong lending operations in Columbus and the OC will provide some much needed retail support and we intend to maximize that relationship in one of the best markets in Ohio.

During the quarter, we also planned and quickly executed a corporate realignment. These changes will not only improve our operational consistency and reduce some complexities in the company, it will allow for some additional centralization thereby enhancing some efficiencies going forward.

Consequently, there is approximately $300,000 of severance included in our compensation numbers and there is our obviously for other quarterly results.

As part of that initiative, our Michigan division which we operate under the Franklin name adopted the First Place name and while there was some modest expense associated, it does help us greatly in the back office and support areas and simplifies a much in a way of our marketing efforts. Those modest expenses were absorbed within existing marketing budgets.

Our mortgage banking group which is led by Mr. Bruce Wenmoth, simply knocked the bowl out of the park this quarter and crushed all prior record. The market was obviously right for us, but as previously reported, we've been adding to this business unit. I also think that they have done a great job managing hedging activity in light of some fluctuating rates as a result and as recorded will produce $6.8 million in gain on sales for the quarter.

And during the month of March, we accepted over 400 million in mortgage applications which should certainly give us a good head start into the fourth quarter.

Despite a lot of reverie that the banking industry is in the clearance, I remain concerned and we remain conservative. Our asset quality numbers certainly showed some signs of stabilization and that's very obvious from the NPA and NPL numbers that you had an opportunity hopefully to take a look at, but we remain concerned.

We continue to manage a significant level of real estate owned as you are aware and while we see -- we're seeing sales of properties improve, the cost to maintain them tends to skew our core operating efficiency results. As an example, we spent approximately $1 million dollars managing those properties during the quarter.

In the release you'll notice that REO is roughly flat at $35 million activity during the quarter, we took in for and we sold for and that was better than what we've had in prior periods. We're showing that enclose now close are now matching.

Charge-offs for the quarter were 4.6 million, we responded to that by adding roughly one and a half times that to our provision as we continue to perpetuate our philosophy to stay out in front of we deem as uncertain markets. Additional benefits coming to us obviously the allowance for loan losses increased to 1.28 to 1.41% and our coverage ratio of NPL improved to nearly 52%.

In recent months, we have adopted a much more aggressive and I should say granular approach to evaluating our allowance for loan losses and I think it's certainly appropriate in this environment, but we are much more confident in terms of the reserve in process that we have in place today.

Some conclusions and some outlooks for the fourth quarter before I turn it over to David to give you a more in depth look at the numbers. First, it sounds like a broken record, but please look for continued our growth in organic deposits especially with respect to our core accounts. Our retail focus has never been stronger and especially during this environment where customers are looking for new banking relationships.

Expect a fairly strong fourth quarter for mortgage banking performance. I mentioned the $400 million head start in March; April volumes are also high. We are probably -- we are estimating roughly $4 million to $5 million from gain on sales in the fourth quarter.

Our commercial growth will likely be zero or to negative for the quarter, for the reasons outlined previously. We anticipate modest margin expansion through some deposit and borrowing. Our pricing reset will occur, and then have already started to occur, although decent yield enhancement strategies that will impact our liquidity levels as well.

Core operating expenses will decline as we realized benefits from the recently executed realignment. Our charge-offs will likely increase to levels near the second quarter, which were roughly $7 million. We have a number of fairly large commercial credits that we'll be transitioning from NPL to REO. We do not anticipate any additional reserving on those credits but they will make change, and that will cause the increase in the charge-offs.

We are also anticipating that non-performing loans will increase during the fourth quarter. We could experience the uplift in delinquency. In January, not unlike many of our peers, we are working aggressively to manage that delinquency down, but we are going to take any more conservative forecast and speaking to you today.

And of course, we are estimating roughly $2.5 million pre-tax charge with respect to the special assessments likely to come from the FDIC for the next quarter. All-in-all, I find the fundamentals of the company are in great shape right now. We are still of course even though we're making great strides I think on the expense side of our business, dramatic increases in FDIC costs and in the ongoing costs of managing REO tend to came applause with successes that we're having.

I would like to turn it over now to David Gifford, who's going to give you a bit more of an in depth look at our figures for the quarter. David?

David W. Gifford

Thank you, Steve. Good morning. As Steve mentioned, one of the most important things that happened this quarter was issuing preferred stock and warrants to the U.S. Treasury in exchange for $73 million of new capital. This impacted not only our capital but also our liquidity, our earnings and some are disclosed in our press release. I'll highlight those areas as I talk about our results.

Net income for the quarter was $2.5 million or $0.14 per diluted common share. Our income statement now comes down to net income and then deducts preferred stock dividends to arrive at income available to common shareholders. It's that last number we used as the numerator in computing our earnings per share.

Net interest income for the quarter was $21.7 million, down from $21.8 million for the December quarter. Our net interest margin for the quarter was 2.85% up from 2.81% in the December quarter. We've been carrying a higher than normal level liquidity for all of the past quarter, based on conditions in the financial markets. And on March 13th, we received our Capital Purchase Program funds of $73 million; further boosting liquidity.

In the coming quarter, we intend to work that liquidity down in two ways. First, we will repaying our wholesale funding, including borrowings, brokerage CDs and public funds.

Second, we will be investing in loans held for sale produced through our mortgage banking activities. Those loans are a short-term investment in loans, but long term yields and little credit risk.

In addition, we continue to re-price our retail certificates of deposit downward based on current market rates.

All three activities will work together to increase our net interest margin to approximately 3% next quarter. Non-interest income is up $1.2 million or 12% from the prior year to $11.1 million for the current quarter. Recent actions by the Federal Government to purchase mortgage-backed securities have driven long term fixed residential mortgage rates lower than they have been in several years. This has helped us produce mortgage banking gains of $6.8 million, up from $2.1 million in the December 2008 quarter, and up from $3.9 million in the December 2000 -- in the March 2008 quarter.

Low interest rates have also generated high levels of payoffs of loan service for others, leading to a high level of amortization of loan servicing rights. As a result, we lost $1 million on loan servicing activities in the current quarter, compared to the loss of 400,000 in the March 2008 quarter.

In December 2008, we implemented a new checking account overdraft program and promoted with our customers. This has resulted in increased activity in the program during the current quarter. That and increases in our numbers of checking accounts have significantly increased our deposit account fees.

Our services charges on deposit accounts were $2.7 million for the current quarter, up 25% from $2.1 million a year earlier. Non-interest expense was $23 million for the current quarter. I think it's best to discuss non-interest expense while making some comparisons with the December quarter and focusing on the areas where there was significant change.

First, the December quarter included $93.7 million write-off of goodwill, and $1.1 million in merger expenses. These were non-core expenses and there were no similar expenses in the current quarter. The cost of salaries and benefits was $11.4 million in the current quarter, up $1.6 million from the December quarter.

Comparing with the preceding quarter, the current quarter included $300,000 in severance costs, an increase of $500,000 in payroll taxes; $200,000 increase in healthcare costs and an increase of $500,000 in incentive costs related to residential lending and deposit production results.

The increase in payroll taxes is due to by then on unemployment taxes that are levied on a fixed amount of calendar wages each year. So these tend to increase in the first quarter and then trend downward over the course of each calendar year.

Another area that has been significant in recent quarters is REO expense. REO expense in the current quarter was 1.1 million compared with 1.4 million in the December quarter. The cost of maintaining REO properties has been stable between quarters. The reduction of 300,000 is due to a reduction in the losses on the sale of REO.

Going forward, we anticipate that REO costs will remain in the $1 million to $1.2 million range for at least the two next quarters. The remainder of non-interest expense after deducting goodwill write-off merger expenses, salaries and benefits and REO expense has been stable. That total was 10.5 million for the March 2009 quarter compared with 10.6 million for the December 2008 quarter.

FDIC insurance continues to change and every change seems to be an increase. Our FDIC insurance expense for the March 2009 quarter was $1 million. We are projecting expense of $1.5 million for the June 2009 quarter.

In addition, as Steve mentioned, there is a proposal for a one-time charge in June 2009. There have been several proposals for the size of the charge. If the charge is 10 basis points, we will have additional FDIC insurance expense of $2.5 million. So we have the potential to recognize $4 million in deposited insurance costs next quarter between the recurring insurance and the one-time charge.

Our effective income tax rate was 6.58% for the first six months of the fiscal year and was 6.31% for the first nine months. These rates are unusually low because almost all of the goodwill write off last quarter was a non-taxable transaction.

We anticipate that our effective rate for the fourth quarter will remain in the 6% to 6.5% range. Total assets grew approximately $100 million during the quarter due to higher levels of liquidity.

As we worked our liquidity down over the next quarter and increased our investment in loans held for sale, we expect that the total assets will stabilize. We would not expect any significant reduction in total assets unless residential lending decline significantly, and our investment and loans held for sale goes down.

While I spoke to you three months ago, our stock had closed at $2.42, illustrating a 20% of tangible book value per share. Yesterday, we closed at $6.24 or 50% of tangible book value per share.

What I believe that 50% of tangible book value is more reasonable number than 20% tangible book value. I am really not able to explain what's driving the pricing of community banks like First Place in recent months. I suspect that too often we have just lumped in with the large money center banks that have significantly different risk profiles.

We will be glad to answer any questions at this time.

Question-and-Answer Session


(operator instructions). Thank you. Our first question is coming from Daniel Arnold of Sandler O'Neill.

Daniel Arnold - Sandler O'Neill & Partners LP

Hey, guys, good morning.

Steven Lewis

Good morning, Daniel.

Steven Lewis

Yeah, just a couple of questions here. First, just on the credit front. It just looks like a pretty strong quarter for you guys. It looks like that held in better than I would have expected. I just wanted to see what you guys are seeing going forward. What's the 30-80 (ph) you're doing, how is it watch worth looking, those kinds of things?

Albert Blank

Hey, Dan, it's Al Black, how are you?

Daniel Arnold - Sandler O'Neill & Partners LP

How is it going on?

Albert Blank

Good. The month of January was kind of a rough month as far as delinquencies are concerned. If you following the news, you'll find that naturally on the mortgage front, we experienced the same thing that everybody else did. I think there were a lot of job layoffs that occurred in December and January-February was kind of rough for people.

We've experienced there some slow pace and some delinquencies during that period of time and our delinquencies have risen. We've been working with customers both on residential and commercial front and have had some good experiences getting people back on track doing some modifications, doing some workout plans and things of that sort.

So it's a little bit early to tell whether or not we're going to able to push these people back into current status and some of them may just maintain in that delinquent level for a while. So, it's going take a while to get some real clear vision as to what the NPLs and NPAs are going to do over these next couple of months.

The honest truth is depending on what happens in the employment rates and depending on what happens on property values, it has a strong correlation as to what happens in our NPLs. So we have some concerns, but we're working through with our customers.

Daniel Arnold - Sandler O'Neill & Partners LP

I mean, you said January was tough, what happened in February and March? What do you see in April? So it's kind of -- I mean is it the same kind of trends or delinquencies of similar rates or has it slowdown a little bit?

Albert Blank

No, we had a bump in delinquencies in January and then we were able to maintain that same level in February and March. So it gives us some optimism, but whereas Steve was talking we're very cautiously optimistic about the next quarter.

Steven Lewis

I think for internal purposes Dan, I mean we're estimating about $5 million increase in NPL for the quarter. We're trying to be conservative with that, but if we're unsuccessful, then that's the number that I would model.

Daniel Arnold - Sandler O'Neill & Partners LP

Okay. That's very helpful. And then just kind of moving a little bit to the expense side here, it looks like you guys have some initiatives underway. Do you guys have any kind of sense of what the overall cost saves from -- from some of the organizations is going to be?

Albert Blank

Probably about $1 million annually. I think that's a conservative number, but I am -- we are really confident with at least that figure.

Daniel Arnold - Sandler O'Neill & Partners LP

Okay. And then one last thing here or actually two more things; one, on the tax rate just looks like Dave mentioned that you guys are looking for a 6% to 6.5% range in the calendar second quarter, did I hear that right?

Steven Lewis

Yes. Well for the fourth quarter, second calendar quarter right.

Daniel Arnold - Sandler O'Neill & Partners LP

What's the reason that's coming in so low?

Albert Blank

It's because whenever we compute our taxes we have to look at the whole year and see what are our -- we estimate our effective tax rate to be for the whole year and then we book that amount, that effective tax rate each quarter. And the whole year of course is influenced by the huge goodwill transaction at December 31st.

Daniel Arnold - Sandler O'Neill & Partners LP

I guess for the my sense, but why are the delta so big from this quarter?

Albert Blank

Because it doesn't -- when you're looking a large taxable loss, the number gets magnified very easily on a small amount of income for the quarter.

Daniel Arnold - Sandler O'Neill & Partners LP

Okay. And then just the last question here is on the mortgage income, it looks like you guys kind of got in to $4 to $5 million there. Has that slowed down a lot for you guys, or is it still going as stronger as it was in the first quarter, because you guys are obviously came there in the first quarter with respect to mortgage banking income?

Albert Blank

Volumes, I mentioned in March, we picked again a 400 million and apps (ph) and April volumes were also pretty going strong, margins tightened up in this business and again that's way we backed down a bit from the gains recorded in the prior quarter. So we are estimating $4 to $5 million for Q4.

Daniel Arnold - Sandler O'Neill & Partners LP

Okay, perfect. I appreciate the time guys.

Albert Blank

Sure thing Dan.


(operator instructions). Thank you. We have a follow-up coming from Daniel Arnold of Sandler O'Neill.

Daniel Arnold - Sandler O'Neill & Partners LP

If can get a little bit more time, one thing I just wanted to ask about kind of mortgages from a housekeeping issue. What exactly was going on with the small charge you guys took for a change in the fair value of securities? I just wanted to see what exactly was going on there?

Steven Lewis

That's a continued adjustment, we have an investment in our mutual fund that we've had around for a while. And it lost a little additional value here in the current quarter, but we still have an investment there of about $12 million.

Daniel Arnold - Sandler O'Neill & Partners LP

So, that's the one that you guys have taken some marks down previously, right?

Steven Lewis

That is correct.

Daniel Arnold - Sandler O'Neill & Partners LP

Now, is this an OTTI charge that you guys are taking here or...

Steven Lewis

No, no.

Daniel Arnold - Sandler O'Neill & Partners LP

Because it looks like different from valuations, from I guess accounting standpoint?

Steven Lewis

Last July 1st, we elected to take this asset and account for on fair value basis. So, whether it goes up, or whether it goes down, we will put the charge to our income statement.

Daniel Arnold - Sandler O'Neill & Partners LP

Okay. And, so, just the remaining exposure on this was $12 million?

Steven Lewis


Daniel Arnold - Sandler O'Neill & Partners LP

Okay. All right guys. That was it from me guys. Thanks, again.

Steven Lewis

Hey, Dan.


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

Steven Lewis

I'd like to thank everyone for listening in on the release. Again, we're very pleased with our third quarter results. And hope we'd be able to keep it going next quarter. Thanks.


This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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