Premier Financial Corp (OHIO) (PFC) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the First Defiance fourth quarter 2003 conference call. (OPERATOR INSTRUCTIONS) Thank you. Ms. Carol Merry, you may begin your conference.

Thank you. Good morning, everyone, and welcome to the First Defiance fourth quarter and full-year 2003 conference call. Thanks for joining us.

This call is being webcast also and it will be available at the First Defiance web site at www.fdef.com until February 27th.

This morning we will start with comments on the results 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. That will be followed by a brief question and answer session. But before we begin, I will 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; legislative and regulatory decisions; or capital market conditions. For more details please refer to the Company's SEC filings.

Now I would like to turn the call over to Mr. Small for his comments.

Thank you Carol and welcome everyone to the First Defiance Financial Corp. conference call covering our results for the fourth quarter and year end 2003. We issued a press release last evening detailing these results, and hopefully you have had a chance to review that information and we will expand on that here this morning.

Fourth quarter results were a good finish to a strong year, with fourth quarter earnings per share coming in at 44 cents, resulting in earnings per share for the year at $1.91. This compares to 2002 earnings from continuing operations at 94 cents per share. This capped a year of continued growth and expansion at First Defiance and allowed us to continue to make progress toward higher performance targets.

Our return on assets for 2003 was 1.24 percent, return on equity was 9.97 percent, and our efficiency ratio for the year was 60.31 percent. While we will look to keep improving these numbers, we are very pleased with the significant progress that was made this past year.

Before I turn it over to Jack Wahl to give you the financial details, I would like to give you some of the performance results, first, for the quarter; then for the year 2003.

Net interest income was up again in the fourth quarter, as we continued to be able to grow loans, primarily nonresidential real estate loans, commercial loans, and home equity loans. On the other side of the balance sheet we reduced interest expense, despite the fact that we grew deposits and other interest-bearing liabilities. This resulted in improvement in our net interest margin to 3.51 percent for the fourth quarter compared to 3.46 percent for the third quarter of 2003 and 3.40 percent for the fourth quarter of 2002.

Last quarter in our release and conference call we discussed the anticipated impact of rising mortgage rates on revenue. We had a preview of that in the month of September and really experienced it throughout the entire fourth quarter as the refinance business slowed dramatically and gain on sale of mortgages dropped off significantly from 2.3 million in the fourth quarter of 2002 to 583,000 in the fourth quarter of 2003.

This drop in non-interest income was offset in part by increased service fee income -- which was up almost 19 percent over the fourth quarter of 2002; a 20 percent increase in insurance and securities sales commission over the same period, and increased income from our bank owned life insurance.

We also recorded a $656,000 gain on the sale of securities in the fourth quarter of 2003.

Non-interest expense for the fourth quarter was up less than three percent over the same quarter last year, despite the addition of the three offices that were acquired in June 2003 from the RFC Banking Company.

Increases in compensation and occupancy expense were offset by declines in amortization of mortgage servicing rights, recovery of some of the impairment reserve on the servicing rights, and a reduction in Ohio franchise tax expense.

Credit quality remained strong during the fourth quarter, as non-performing assets to total assets dropped to 28 basis points from 32 basis points in the third quarter of 2003.

Net charge-offs were up slightly in the fourth quarter, but for the year were at five basis points.

These are performance numbers that we are very proud of and are the result of a great job by our lenders and credit administration staff.

Reviewing the year 2003, our earnings were driven by the $5 million increase in net interest income and $5.9 million increase in non-interest income. The increase of 165 million in our loan portfolio during the year was a major component. This increase was the result of the acquisition, along with very strong organic growth. The non-interest income was really driven by the strong gain on sale of mortgages during the first three-quarters of the year. As I mentioned earlier, though, non-interest income continues to grow in several of our other sources of fees and commission.

At this point I'd like to ask Jack Wahl, the CFO of First Defiance, to give you the numbers behind all of this, and then I will return to give you a look ahead at 2004 before we open it up your questions.

Thank you, Bill, and good morning, everyone. As expected our mortgage gain on sale income dropped in the 2003 fourth quarter to 583,000 from 2.3 million in both 2003 third quarter and the fourth quarter of 2002. The good news is that despite that drop we still managed to earn 44 cents per share for the fourth quarter.

The level of gains recognized in the last three months of 2003 is probably indicative of approximately where we will be for each quarter of 2004. Our budget for 2004 calls for gains to be in the range of approximately $225,000 per month or 650 to 700,000 per quarter.

The reduction in income from our mortgage business is being replaced by increases in both our net interest income and in other sources of non-interest income. For the fourth quarter of 2003 our net interest income before the provision for loan losses was $8 million, an increase of $145,000 over the third quarter and an increase of nearly 1.4 million over the 2002 fourth quarter. Net growth is due both to continued loan growth and an improvement in our margin.

Our average loan balances were up $18 million from the third quarter and our reported margin improved to 3.51 percent in the fourth quarter from 3.46 percent in the 2003 third quarter.

Our other sources of non-interest income were in line with third quarter amounts and up significantly from amounts earned in the fourth quarter of last year. For example, service fee income increased by $197,000 or 18.8 percent from the 2002 fourth quarter to the 2003 fourth quarter and insurance and investment sales commissions increased by $149,000 or 20 percent between those same two periods.

We also took advantage of favorable bond pricing in the investment portfolio during the 2003 fourth quarter as we sold some of our corporate and municipal securities to realize gains of $656,000. The proceeds from those sales were reinvested in mortgage-backed securities with a similar duration to the assets sold and with yields that were also comparable to the yields on the assets sold.

Slowdown in mortgage loan prepayment speeds also has helped the results of our investment portfolio, as the amortization of the premiums we've paid on our investment and mortgage-backed security investments has slowed significantly.

Looking at our non-interest expenses, as we noted in the earnings release, total expenses for the 2003 fourth quarter increased just 2.7 percent from the expense level in the fourth quarter of 2002, despite the fact that we added three new branches in June of this year and opened a de novo branch in Findlay late in the quarter.

These favorable results are impacted by the fact that mortgage servicing rights amortization dropped from 662,000 in the 2002 fourth quarter to just 143,000 for the 2003 three-month period. MSR amortization is driven by mortgage prepayments, which obviously slowed late in 2003. We also recovered an additional 335,000 of MSR impairment for the quarter, as the value of our servicing continues to recover. The average value of servicing is now 0.87 percent or 87 basis points of the nearly 430 million unpaid principal amounts of loan serviced. That's a 14 basis point improvement in the value from September of 2003. We still have 606,000 of impairment reserves available to potentially be recovered in the future.

Excluding amortization and impairment, our non-interest expenses increased by 8.7 percent between the 2002 fourth quarter and the 2003 fourth quarter, with most of that increase in compensation and benefits. Comp and benefits are up year-over-year because of staffing increases due to the branch expansion, as well as the addition of several support positions to manage the growth. We are pleased that for the year we were able to hold the increase in the cost of our group health insurance plan to approximately six percent.

Non-interest expense for the 2003 fourth quarter, excluding amortization and impairment of MSRs, actually dropped slightly from the 2003 third quarter levels.

Finally, in looking at the 2003 fourth quarter results, the effective tax rate for the quarter was 35.8 percent, a fairly significant increase from the 30.8 percent rate that we had provided income tax expense at during the first nine months of the year. This increase provides some additional expense for several specific items that came to our attention during the year end closing process. Going forward, we expect our effective tax rate will be in the 32 to 33 percent range.

That concludes my comments this morning. I'd like to turn the call back to Bill Small for his overview on our future strategy.

Overall I'm pleased with the performance of First Defiance Financial Corp. for 2003. As you can see, the financial performance was strong, but in addition to that we completed the acquisition of three branches and successfully integrated those offices into our system. We also open our 18th office on the east side of Findlay in December. This is our third location in a strong, growing market, and are nearing completion of our 19 office in Maumee, a suburb of Toledo, that is scheduled to open next month.

The dynamics in 2004 will most likely be somewhat different than this past year. We feel that our business plan has prepared us well for what lies ahead.

In the earnings release, we provided some detailed earnings guidance for 2004. That guidance comes straight from our 2004 operating budget and is our estimate of where we think earnings will be with the successful achievement of some very aggressive loan and deposit growth targets.

We anticipate loans to continue to grow and expect that growth to be about 17 percent in 2004. We also are projecting double-digit growth in deposits, with a focus being on non-interest-bearing checking accounts. We expect the gain on sale of mortgage loans to be around 650 to 700,000 per quarter this coming year. Net interest margin should be around 3.55 to 3.6 percent for the first quarter of 2004, rising to around 3.75 percent by the end of the year. Our forecast assumes a 50 basis point hike in rates by the Fed by midyear.

Based on these assumptions, earnings for the year 2004 are projected to be in the $1.90 to $2.00 per share range. The target for the purpose of calculating senior management bonuses for 2004 is the upper end of that range.

Based on the timing of growth in loans and deposit ratably over the twelve months of 2004, we expect earnings in the first quarter to be in the 42 to 45 cent range, improving each quarter to the 55 to 60 cent range by the fourth quarter. Factors such as changes in interest rates or economic conditions, management decisions on branching and acquisitions, as well as a variety of other matters, may impact these estimates. Although not in our budget, we will continue to look for growth and expansion opportunities during the coming year to go along with the strong organic growth that we expect.

That concludes my comments for this morning, but we'd be happy to address any questions that you might have for us. For instructions on the Q&A procedures, I will turn the call back over to Carol.

Operator, would you please remind our listeners how to ask a question?

(OPERATOR INSTRUCTIONS) Christopher Mernik (ph), Big Partners (ph).

Good morning. A question for you on the MSR discussion; can you tell us what the average basis point servicing fee you have?

The average servicing the fee is 25 basis points.

I'm assuming that has not changed much over the last several quarters?

No it has not.

Fair enough. Can you talk also in a bigger picture perspective, how important would it be for the next year or two or three for you to be in a different part of your general region in terms of either pushing further to the west or further south or elsewhere?

We're very comfortable here in Northwest Ohio and it's been a good market area for us. We think there's good diversity in the overall economy here between a nice diversification within the industrial base and then also a strong agricultural area.

We certainly think that there may be some opportunities to expand beyond that, both in some contiguous areas here in Ohio. But also the fact that we border Indiana and Michigan creates some opportunities possibly to move into either of those states. We have continued to keep our eyes open and try to develop relationships with others throughout this market area. I think any of our expansion plans, the way we look at it right now, in order for us to continue to execute our community banking business plan, we would want it to be within contiguous areas, pretty much. But there certainly are some opportunities to spread it out a little bit further than where it currently is.

Would de novos and the expansion like you've done in Findlay be the preferred route for the time being?

I think that, again, we certainly want to look at opportunities both ways. If the right acquisition comes along and we feel that we can get the proper return on that acquisition, we certainly would not be afraid to take it. We're very pleased with the way we were able to successfully integrate the one we did this past year. At the same time, over the last five years or so, we've done a lot of -- a fair amount of de novo branching, and we will continue to look for those opportunities too. But I guess I would give equal weight to both at this point.

Last question -- have you seen any further signs of aggressiveness on either pricing for either loans or deposits from some of the big banks that you compete with?

I think most of the pricing pressure that we have seen has actually come from other community bank community banks for the most part, especially on the deposit side. On the loan side, every once in a while we've seen some of the larger banks get a little bit aggressive on some really high-quality credits. We are out there competing with a lot of the big ones and throughout our market area there's pretty stiff competition everywhere. We certainly feel that our opportunities are good to expand both our lending and our deposit base, but at the same time we certainly have to be conscious of not giving things away.

That's helpful. Thanks Bill.

Terry Maltese, Sandler O'Neill Asset Management.

I have a couple of what are hopefully some quick questions. On the guidance that you gave of -- the earnings guidance, am I correct in saying that assumed 650 to 700,000 a quarter of gain on sale of mortgages and no security gains?

Yes, that's correct.

Two quick things that I know you said and I missed. Did you say the margin in the first quarter should start around 355 to 360 and go to 375 by year-end?

That is correct.

What did you say in terms of first quarter EPS?

42 to 45 cents per share.

Okay. Last question -- you mentioned that the guidance assumed 50 basis points of rate increase by midyear. How sensitive are the earnings to that? In other words, if we don't get that 50 BIPS, what does that mean to your earnings?

Our earnings are mildly asset sensitive, so our margin would be probably in the lower end of the range that we cited without the 50 basis point increase.

Great. Thank you.

Julianne Cassarino, Prospector Partners.

I was wondering about the guidance from the gain on sale of mortgage loans. You give guidance of 650 to 700,000 per quarter, yet this quarter was 583. I was just wondering why increase -- what would cause it to go up in 2004? Are you assuming that the full impact of the fallen refis is done?

I think there are a couple of factors. Historically fourth quarter mortgage businesses is slower, at least for us it always has been. And also on top of that, I think that there's probably -- there was probably a rush late third quarter for people to do a lot of refinancing, trying to beat any rate increases. So there was probably some of the fourth quarter numbers that found their way into the third quarter basically. So we anticipate, based on our past performances and everything that we think of 650 to 700 is probably reasonable.

Thank you.

In addition to that, I would just add one more thing. We also have a couple of new branches coming on board, and that should also help contribute to it.

Martin Jai (ph), FTN Midwest Research.

Good morning. A question on the net interest margin. I know you guys are assuming 50 basis points increase. Are there any other assumptions behind those projections, like, for example, the restructuring of your liability side?

I can't say exactly where the numbers are going to come in. It's based on our projected growth in deposits, which are weighted more heavily toward growth in core deposits and hopefully especially non-interest-bearing deposits -- commercial checking accounts and other interest-free checking accounts.

Is it safe to say maybe like the FHLB advances will sort of decrease over time because you have core deposit growth?

I think that you'll see the FHLB advances at about the same rate that they're at in fourth quarter.

How much of that will be repriced within, say, a year or three years, the maturity schedule for that advances?

The advances are -- only a small amount of those will be repriced after one year. Most of those are fixed for a longer period of time.

Like five years?

Five years, yes.

Thank you.

Steve Covington, Stifel Nicolaus.

Most of my questions have been answered, but just a quick one, more general in nature. Seventeen percent loan growth is clearly a very solid target, or aggressive target, I should say. Can you just give us a general idea on what you're seeing in your markets? Or is there anything unusual in this year's loan balances? Or have you made any strategic hires recently that's going to lead you to make those numbers?

We think there's a couple of things. We have added, during this past year, a couple of pretty experienced seasoned commercial lenders that we think will continue to bring some of their book over into First Federal, into the bank. Also, with continued expansion into the Toledo market, we think that's going to give us -- now that we're going to have a full-service office there, it's going to create some additional opportunities for us. And really when you look at it, we're still relatively new in a commercial lending business. We really launched this initiative back in 1998, so even in some of our more established, seasoned markets, we think there's still some good growth opportunity and we're pretty confident we can hit that 17 percent bogey.

That is great. Thanks guys and thanks for all the detail.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

If there are no further questions, we thank you for joining us today. This will conclude our call.

Thank you for your participation in today's conference. You may disconnect.