Premier Financial Corp (OHIO) (PFC) 2003 Q2 法說會逐字稿

Good morning. My name is Mandy (ph) and I will be your conference facilitator. At this time, I would like to welcome everyone to the First Defiance, Second Quarter 2003 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. As a reminder, today, Tuesday July 22, 2003 this call is being recorded. Thank you. Ms. Carol Mary (ph), You may begin your conference.

Thank you. Good morning and welcome to the second quarter conference call for First Defiance Financial Corp. Thank you for joining us. This call is also being web cast and it will be available at the First Defiance website at www.fdef.com until August 29. This morning, we will start with comments on the quarter and the company's outlook from Bill Small, Chairman, President and CEO of First Defiance; and Jack Wahl, the company's Executive Vice President and Chief Financial Officer, followed by a brief question and answer session. Before we begin, I'd like to make a Safe Harbor statement for the call. During this call, management may make certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could vary materially depending on risks and uncertainties inherent to general and local banking, insurance and mortgage conditions, competitive factors specific to markets in which the company and its subsidiaries operate future interest rate levels, legislated and regulatory decisions or capital market conditions. For more details, please refer to the company's SEC filings. And now I will turn the call over to Mr. Small for his comments.

Thank you Carol, and good morning everyone. Thank you for joining us. I hope you had the opportunity to review the news release we published last evening announcing second quarter results for First Defiance Financial Corp. In the release, we reported net income of $2.9m or $0.46 per diluted share for the quarter. Although we are very much aware that the results were driven to a large extent by the gain on sale in this current environment, we are pleased with the results and more importantly with the underlying reasons for the performance.

Our community banking business model and conservative underwriting standards have allowed us to continue to grow both loans and deposits and to maintain very good credit quality even at the rate that loans are growing. We've also continued to grow a non-interest income and to manage our balance sheet by improving the mix of our assets. I'd also like to remind you that the second quarter results includes 24 days of operation of three branches that were acquired on June 6, from [RSC] Banking Company. The acquisition added over 87m in loans and a 165m in deposits to our balance sheet and brought our total assets at the end of the quarter to 1.05b.

I'm pleased to report that the execution of the transaction went extremely well. From an operation perspective, we took over the franchise on Friday June 6 and by Monday June 9 they were up and running on our system with only very minor glitches. Our operation staff and the branch employees at our newly acquired offices work very hard to make this transition seamless for our customers. And in that regard, we were very successful. In the first six weeks of operations, balance retention at these offices has been very solid. And looking at the quarter, income from continuing operations increased significantly again this quarter largely due to gains from the sale of mortgage loans. We saw continued unprecedented growth in residential mortgage loan origination and the corresponding growth in our gains from the sale of those mortgage loans.

In fact, as we noted in the news release, the number of mortgages originated during the second quarter of 2003 and the total loan amount were more than double the numbers originated in the same quarter in 2002. We also have gone from a lower risk best efforts pricing model in the secondary market sales process to a firm commitment model and as a result we are realizing better pricing on the mortgages that we are selling.

For the second quarter, gains on the sale of mortgage loans totaled $2.5m and for the first six months of 2003 those gains totaled 4.3m compared to 1.1m for the six months, first six months of last year. We also continued to grow our commercial and nonresidential real estate loans in the second quarter in addition to increasing the total as a result of the acquisition. Net interest income from the quarter was $6.8m, an increase of $1.2m over the same period last year.

As we observed in the news release, the low interest rate environment has generated substantial earnings for us, but it also kept our margins lower than we earlier projected. Aninterest margin for the quarter at 3.36% was however, just one basis point lower than last quarters 3.37%. As I noted earlier our credit quality has remained very good despite the significant growth on loans. Net charge off's annualized for the second quarter as a percentage of loan balances where only 11 basis points and are just $79,000 for 1 basis point for the first half of the year, after taking into account the net recoveries we realized during the first quarter.

The challenge we face like all other banks, is maintaining our interest rate margins in this environment. The positive rates really cannot fall any further from where they are now, but loan rates can. Frankly, our concern is that rates will stay where they are now for a prolonged period of time, or move up enough to drop the mortgage volume, but not enough to allow the margins to improve. Although we cannot control the interest rates environment, we have tried to position our balance sheet so that when rates do rise we will benefit from it. At this point I would like to ask Jack Wahl, Executive Vice President and Chief Financial Officer, to provide you more detail on the quarterly results. Jack.

Thank you, Bill. As Bill noted, we had a very strong quarter from an earnings stand point at $0.46 per share. Certainly the key number for the quarter was the $2.5m of gains we recognized from the sale of mortgage loans, which was an increase of just 549,000 in the 2002-second quarter. However, when you look at that number you also need to remember that the amortization expense related to mortgage servicing rights also increased significantly. The 756,000 in the 2003-second quarter from 137,000 in the 2002 period. And our reserve for mortgage servicing impairment increased by 366,000 in the 2003-second quarter compared to 168,000 in the same period last year.

The sharp decline in interest rates that has yielded this mortgage boom has also had a negative impact on our net interest income. So our net interest income for the quarter was $1.1m higher than the same quarter in 2002. We had hoped that results would be better given the improvements of our balance sheet from low yielding securities following the April 1st 2002 sale of The Leader Mortgage Company to better yielding commercial loans and commercial and non-residential real estate loans.

Having said that our margin drop just 1 basis point between the first and second quarter's of 2003. We had earlier forecast that the margin for the fourth quarter of this year would increase to the 3.7% level. Today we believe that rate will be closer to the 3.4% by this year's fourth quarter. We are encouraged by the increase in our non-interest income, which excluding gains from the sale of mortgages and the sale of securities, increased by $346,000,or nearly 16% quarter-over-quarter. (inaudible) there our continued growth in our service fees, growth in commission income from insurance and investment product sales and income from Bank Owned Life Insurance, which we invested in during the fourth quarter of last year.

On the expense side for the quarter if you exclude mortgage servicing, amortization, and impairment, expenses increased by $571,000 or 9.5%. If you further take out the expense related to the branches we've acquired, non-interest expense was up $462,000 or 7.7%. Most of that increase related to the addition of 13 positions within the company between June of 2002 and June of 2003, as well as the annual salary increases to all our employees, increased sales commissions to investments and insurance sales persons, increases in our group health insurance. As I noted, we recorded an adjustment to our impairment reserve of 366,000 for the quarter, that's reserves for mortgage servicing rights impairment.

The total reserve for impairment is now 1.9m, which could potentially be recaptured in income, if rates rise significantly. As we stated in the press release the acquisition of the three new branches had only a minimal impact on our results for the second quarter. That interest income increased by approximately 256,000 as a result of the new loans and deposits, which will mark to market as a part of our purchase price allocation. Non-interest income increased by approximately $18,000, while non-interest expense was approximately $109,000 higher. I should caution everyone not to extrapolate full-year pretax income from these 24-day results, as interest rates could change and actual expense levels will likely differ from what was recognized in the first 24 days of operation.

I would also like to note that we did not report any special merger-related charges during the second quarter related to the acquisition of the branches. Costs directly related to the acquisition were capitalized as part of goodwill. We recorded a total of approximately $16.7m of intangible assets associated with the branch acquisition. That amount was the result of the deposit premium we paid under the contract and the adjustments we made in allocating the purchase price. These purchase price adjustments included the recognition of a $2.9m discount of loan balances related to potential credit issues, as well as mark-to-market adjustments for both loans and deposits.

Of the $16.7m, approximately $772,000 was allocated to core deposit and tangibles, and the balance went to goodwill. Core deposit and tangible will be amortized over 10 years, while the goodwill is not amortized but is subject to periodic impairment reviews. The low interest rate environment resulted in a much lower core deposit and tangible than we had originally projected. We had initially indicated that the acquisition of the new branches would add approximately $0.06 per share for the balance of 2003 and $0.12 to $0.15 per share for 2004.

However the lower core deposit and tangible improves those projections by approximately $0.01 per quarter after-tax. Recording of the intangibles related to the acquisition reduced our tangible book value from $18.35 per share at the end of the 2003 first quarter to $16.11 per share at June 30, 2003. That concludes my analysis for the quarter; I would like to turn the call back to Will Small for further discussions of our ongoing strategies.

Thank you, Jack. To say the least, our entire First Defiance team had an active second quarter. In addition to the increased loan volume we completed the acquisition of the three branches that I mentioned earlier and transitioned the operations of those offices into our First Federal Bank in the Midwest network. The transition as we said has gone smoothly and has opened new markets in Ottawa and McComb Ohio and expanded our presence in Findlay, Ohio. We are further expanding our footprint in Findlay with a new First Federal branch, which is currently under construction. That will be our third location in that city. The new branch is scheduled to open during the fourth quarter of this year.

Later today, we will be breaking ground on our full-service banking office in Wahme, (ph) Ohio. We have operated a commercial lending office in Wahme for the past year and have generated over $45m in loan balances out of that location. The new office, which is expected to open early in 2004, will be our first full-service office in the Toledo market, which is the largest metropolitan market in our area and as such we expect to be able to continue to grow in that market over time.

The successful external element of our growth strategy has been complimented nicely here today with organic loan growth. Although, the economy is hardly robust, our market area remains relatively stable and we are confident that our commitment to community banking and the scale of our presence in the market will continue to produce growth opportunities.

For the remainder of 2003 we will be focused operationally on building our relationships with new customers at the acquired branches, continuing to grow our commercial and non-residential real estate loan portfolios, and preparing for the opening of the two new branches currently under construction. On a corporate level, we will continue to focus on effectively utilizing our assets and growing our earnings. One final note as we announced last week, our Board has authorized a new share repurchase program, this will be implemented upon the completion of our current program. We thank you for your interest and attention this morning and now we'll be happy to take your questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number one on your telephone keypad. We pause for just a moment to compile the Q&A roster. Again, if you would like to ask a question at this time, please press star, then the number one your telephone keypad. At this time sir, there are no questions.

All right, if there are no questions we will thank you for joining us and encourage you to contact us at anytime with questions and conclude the call. Thank you.

Thank you for participating in today's First Defiance second quarter 2003 earnings call. You may now disconnect.