Premier Financial Corp (OHIO) (PFC) 2004 Q1 法說會逐字稿

The First Defiance conference call will start momentarily. Good morning, my name is Monica and I will be your conference facilitator. At this time I would like to welcome everyone to the First Defiance first quarter 2004 conference 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. As a reminder, ladies and gentlemen, this call is being recorded. I will now turn the call over to Carol Merry. Miss Merry, you may begin your conference.

Thank you. Good morning everyone, welcome to the First Defiance first quarter 2004 conference call. Thanks for joining us. This call is also being webcast and will be available at the First Defiance website at www.fdef.com. This morning we will comment on results and outlook from Bill Small 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'll make a Safe Habor statement. Management may make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Acts could vary depending on risks and uncertainties inherent to local banking, mortgage conditions, competitive factors, future interest rate levels, legislative and regulatory conditions and market conditions. For more details refer to the company's SCC filings.

Good morning, everyone, and thanks for joining us. I hope by now you've had an opportunity to review the news release we published last evening announcing first quarter results for First Defiance Fiancial Corp. I'd like to start by reviewing some of the highlights and then turn it over to Jack Wahl, our Chief Financial Officer. In our release we reported net income of 2.5 million or 39 cents per share for the first quarter of 2004. This compared to 2.7 million or 43 cents per share for the same quarter last year. Like many financial institutions across the country, First Defiance Corp experienced an anticipated decline in gains from the sale of mortgage homes during the first quarter of 2004. We watched volumes decline during the last quart of 2003 and continue to decline in the first two months of this year.

We did experience an uptick in March as mortgage rates [innaudible]. However, despite last month's increase gains on sale of mortgage homes for the first quarter totalled $589,000 compared to 1.8 million in the first quarter of 2003. In addition, we had a much lower gain on the sale of investment securities in the first quarter of 2004 than in the prior year first quarter. Also on the first quarter we recorded an additional charge for impairment of servicing rights of $237,000. This was not anticipated but was triggered by the drop in market rates late in the quarter. As market rates started to rise again, we feel it is likely that we will be recovering this charge in the near future. There were some very positive performance results during the quarter. I'm pleased to report that our first quarter 2004 net interest income increased compared to the first quarter of 2003 by 24.6%. This increase is primarily due to growth and interest earning assets, and increased net income margin in the first quarter of 2004 compared to the first quarter of 2003.

In particular we have seen marked increases in commercial loans which were up over 12%, commercial real estate loans increased by 42% and home equity loans up over 38% compared to first quarter 2003. However, because of the popularity of fixed rate mortgages which we sell almost entirely on the secondary market, our residential mortgage home balances are lower on average by approximately $12 million from where we projected they would be. This lower balance will negatively impact our interest income on this segment of our loan portfolio for the remainder of the year. On the interest expense side we were able to reduce our interest expense from 4.8 million from 5.4 million in the first quarter of 2003. We accomplished this even though current quarter average balances are up over 21% from the year ago period. The change in the mix of deposits also benefited us as we continued to stay focused on calling non-interest bearing deposits.

As a result of this, our margin did improve to 3.57% at the end of the first quarter compared to 3.37% from March 31, 2003. In the midst of all this loan growth, we continue to maintain a strong credit quality position. Our nonperforming assets to total assets ratio was 26 basis points at March 31, 2004 compared to 31 basis points during the same period last year. Net charge-offs for the first quarter this year totalled just $56,000 or 3 basis points on an annual basis. If you've been following the growth and progress of our company over the past year, you know we acquired three banking offices in June of 2003 and opened a de novo branch in Findlay,Ohio in December 2003. In addition, we held a grand opening for our 19th community banking office in Ohio, a suburb of Toledo, in February of this year. This expansion resulted in an increase of non-interest expenses compared to the first quarter of 2003. Non-interest expense was up about 7% primarily due to this expansion.

This was a challenging quarter for the community banking industry just as most of us anticipated that it would be. Earnings were off from last year's strong performance but many of the core fundamentals showed strong indications for continued growth. I'll now turn the microphone over to Jack Wahl, our Executive Vice President and Chief Financial Officer, to provide more details on the quarter results. Jack.

Thank you, Bill. and good morning, everyone. As we mentioned our net income was 2.5 million or 39 cents per share down from 2.7 million or 43 cents per share in 2003. However, the decline was primarily due to the drop in the gain of sale on mortgage loans as well as lower gains in the investment portfolio which were $98,000 in 2004 compared to 631,000 last year's first quarter. The decline in gains was partially offset by an increase in our net interest income which jumped to 8 million for the 2004 first quarter from 6.4 million in 2003. This 24.6% increase is due to 160 million or 27% increase in our average loans outstanding and a 36 basis point improvement in our interest rate spread. The spread improved because our yield on interest earning assets dropped just 40 basis points between the 2004 and 2003 quarters, while our cost of interest bearing liabilities fell 76 basis points.

Yields on assets declined by just 40 basis points in part because of an improved mix between loans and investments of 2004 compared to 2003. Loan yields nationally dropped 60 basis points between those two periods but loan balances, which have a higher yield in investment securities. made up 79.6% of interest earning assets in the 2004 first quarter compared to 71.8% in 2003. The increase in loan balances year over year is due in part to the acquisition of branches in Finley [inaudible] Ohio completed late in the second quarter last year in which we acquired 79 million in loans. A bigger factor actually is the continued strong growth in our commercial real estate and commercial loan portfolios which combined were 359.6 million on March 31, 2003 and grew to 478.5 million at March 31, 2004, an increase of 33% in that 12 month period.

Also we are pleased with the growth in our home equity loan balances which have increased from 53.9 million to 74.8 million during the same time period, an increase of nearly 39%. On the liability side of the balance sheet, our deposit balances increased by 167 million last June with the acquisition of the three branches. However, since that time we have let some of our higher cost certificates of deposit run off without replacing them. Most of that runoff is in broker deposits. Overall between first year and first quarter this year our cost of deposits dropped from 2.58% to 1.79%. Based on those factors, our net interest margin improved to 3.57% on a tax equivalent basis for 2004 first quarter compared to 3.37% in the 2003 first quarter.

The margin also was a fixed basis point improvement over the 3.51% margin reported for the 2003 fourth quarter. Our non-interest income dropped in total to $3.4 million in the 2004 first quarter compared to $4.8 million in the first quarter of 2003. However, if you exclude gains from loan sales and gains from the sale of securities, balance of non-interest income actually increased by $375,000 with most of the increase in service fees which were up by 267,000 or 27% and in insurance and investment sales commissions which increased by 136,000 or nearly 15%. Overall our total non-interest expense increased to 7.5 million for the 2004 first quarter from 7.0 million in 2003. Compensation and benefits increased by 606,000 or 16% while occupancy increased by 112,000 or 15%.

These increases are due to the addition of the three banking centers acquired last June as well as costs associated with de novo branches opening in Finley in December and [inaudible] in February of this year. The [inaudible] facility didn't open until midway through the quarter. The staff of that branch wasn't on our pay roll the full quarter as they were being trained. Those increased expenses were partially offset by a $351,000 drop in the expense for amortization and mortgaging servicing rights which declined because of the reduction in mortgage refinancings in the quarter. Also we recognized a adjustment to our reserve for mortgage servicing rights impairment in the 2004 first quarter of $237,000. We recorded a similar adjustment of $240,000 in the first quarter of 2003.

Overall our impairment reserves for our servicing total $843,000 March 31, 2004, and we anticipate that if rates stay at the levels they are currently at, we'll be reducing those reserves in future quarters. Overall the servicing value for the 436 million of loans we service for others is 74 basis points March 31, 2004. As we noted in the earnings release, we have reassessed our forecast of earnings for 2004 based on current trends. We had initially thought our margin for the full year would be in the 3.66% range. Based on lower than expected loan balances and lower earnings on investment portfolio, that margin will likely be closer to 3.60% for the year.

Also, we have lowered expectation for mortgage loan gains from $650,000 per quarter for the remainder of the year to 500 thousand per quarter for the remaining three quarters. As a result of these provisions, we believe our income for the full year 2004 will be in the range of $1.80 to $1.90 which is approximately 10 ponts lower than our original forecast of $1.90 to $2 per share. That concludes my comments. I'd like to now turn the call back to Bill.

Thanks, Jack. Before we get to the audience questions, I'd like to take a moment to review our strategy for the remainder of the year. As Jack noted, we have lowered our guidance for 2004 by 10 cents per share from our original projection. This revised guidance is based on what we feel is a realistic expectation of where [inaudible] by year end. While we expect our commercial and consumer loans and core deposits to grow to levels we initially forecast, that growth for the first quarter is slightly behind the pace we anticipated which has a negative impact for the margin for the full year.

Also we noted mortgage balances are lower than expected and our funding costs are higher than anticipated which both of these also have an effect on our margin. All of this leads to reduction in our earnings forecast. However, we do believe that our business strategy is sound and we'll continue to stay oncourse. We will also continue to explore expansion opportunities as we look for acquisitions in our immediate and adjacent markets and potential to open bank branching sites. We believe our community banking approach is a special type of customer service and has been the key to our past success, is a critical component for our future success. [Inaudible] Q-and-A.

At this time, I would like to inform everyone if you would like to ask a question, press star then the number 1 on the telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Steve Covington.

Good morning, guys.

Hi, Steve.

Good morning, Steve.

Just a couple quick questions. First, does your guidance include any recovery from the MSR Allowance or reserves, I should say?

If we have that recovery, Steve, we'll be in the upper end of the range.

Okay. And then secondly, from reviewing, it seems as if your balance sheet is slightly asset-sensitive and I was just wondering, does your margin assumption include any change in the short-term rate?

It includes a mid-year 25 basis point increase in rates and a second fourth quarter 25 basis increase in rates.

Okay. And then, lastly, and this is kind of a big picture, the strong growth in the non one to four family part of your loan portfolio, is that come from any one particular market or spread pretty evenly?

It's been pretty well spread, Steve. We obviously are benefitting from some of the newer markets we are in, the Bowling Green, Toledo have given us great growth potential there especially with season lenders we have been able to pick up. A lot of that with commercial real estate and I've talked about this some in the past, we're not talking high-rise office buildings and malls and things of that sort. Most of it is owner ouped space. Under our thrift charter it is to our advantage to classify as much of that as commercial real estate as possible.

Okay. Thanks, guys.

Your next question comes from the line of Martin Jai of FTN Midwest Research.

Hi, Bill, Jack. A couple of questions. First on the deposit side. I noticed a total deposit balance in the lower length quarter, and look closer, your savings deposit is up by $3 million. And the CDs over 100,000 up by almost 10. Can you just give me a little bit more color on that and also going forward for the rest of the year, what's the deposit growth outlook?

The CD increase in the CDs greater than $100,000 is primarily public funds money that we just happened to pick up. The overall mix and change in some of those balances we find that our core account balances are typically lower in the first quarter because of retail customers paying their credit card bills and tax payments and those types of things. We expect that those balances, the growth in those balances will accelerate now that we're past the first quarter.

Going forward, you see greater growth?

We see greater growth than we experienced in the quarter, that's correct.

Okay. And the next question is for the securities portfolio, what is the average duration as of end of first quarter?

It's about 3.4 years.

Okay. And for the loans, C&I loans was dipping and CRE loans was increasing, what's the rest of the year whole picture in terms of the loan originations?

We think overall our entire commercial category has great growth potential just in a meeting yesterday, reviewing what's in the pipeline right now and everything, we think there's still some very solid growth potential both in the CNI and in the commercial real estate areas. As we stated in the discussion here earlier, we got off to a slower than anticipated start. I think the combination of seasonal and weather we've had in January and February wasn't real conducive to a lot of areas of business. Certainly things started to perk up latter part of February through March and remain very, very strong as we've come through the first half of April now. So, we're expecting to have no problem hitting any of our targets as far as our commercial loan year end numbers are concerned.

So in other words maybe lalter half of the year, loan growth in those categories were accelerate relative to the first quarter?

Yes.

All right. Thank you, guys.

Your next question comes from the line of Jerry Conan.

Good morning.

Good morning, Jerry.

Two quick questions. First of all, follow-up on the one question. I notice that you folks have significantly deleveraged the balance sheet in terms of the bond portfolio. Just curious with rates having moved in the other dration, what's your thoughts to that. And curious about your guidance, if you back out what I call a 40 core number for the quarter, that would be $1.40-$1.50 for the rest of the year and that's about 47, 50% for the quarter so I'm just curious what gives you your comfort that you can achieve that kind of a run rate. Thank you.

The first question relative to the investment portfolio, we just have, you're correct, we have deleveraged a little bit as we've had loan growth that we've funded with the investment portfolio given where rates were as those securities matured, it was easier decision to not reinvest and put that money in loans. With rates having come back up a little bit, we do expect that we will probably be adding to our portfolio here in the second quarter.

Okay.

As to the guidance, it's basically a function of the anticipated loan growth. We expected our commercial and commercial loan balances would increase by 17% for the year, and most of that growth is projected to occur starting now through the end of the year, and it's that, those increases that are going to allow that run rate to increase from 40 to closer to 50. We think the second quarter is still going to be probably -- it will be better than the first quarter. Probably be in the range of 40-45.

So really a second half ramp up.

Yes.

Great. Thanks a lot.

Okay Jerry, thank you.

Your next question comes from the line of Chris Mernik of SIG Partners.

This is David for Chris. Two quick questions for you. Wanted to ask about the difference in the tax rate from this quarter to last quarter. And also wanted to talk a little bit about your expense estimates for the rest of the year and what plans are for expansion for the rest of the year.

I'll let Bill answer the second question as I look at that tax rate from an expansion standpoint, David, we are continuing to look at opportunities for additional acquisitions. From a capital standpoint, we're certainly in a position to do that and we think hopefully there's going to be a couple possibilities that may develop down the road here. What are we looking for ideally? Something that would be something close into our market. We cover right now ten counties in northwest Ohio. There's no reason that we would ignore crossing over into Indiana or Michigan as part of that expansion.

Ideally if we could find a good community banking operation anywhere in say up to 300-500 million range, we think that might afford us a good opportunity for expansion from an acquisition standpoint. From a de novo standpoint, our past strategy has been to basically look for communities where community banking has been vacated and that's been a very good strategy for us to follow. We will continue to look for those opportunities, and also for maybe a few fill-in opportunities in between. The tax question.

As far as the tax rate, the release shows that the fourth quarter effective rate was 35.8%. Actually when we did our year end provision, we caught a large loan that had been misclassified as a tax exempt loan that was actually a taxable loan. There was a little bit of a catch-up adjustment correcting that. Just had an impact in our effective tax rate. The rate for the first quarter 30.71% is reflective of where we think the rate will be for the full year 2004.

Okay. Great. Thanks.

Thank you.

Your next question comes from the line of Martin of FTN Midwest Researcher.

Hey, guys, another quick question. Your equity to total asset ratio is 9-10%. Do you have plans to buy back some of the shares?

We currently have an authorization out there for roughly 620,000 shares that is available to us to use; however, we've, at this point, we have what we consider a relatively disciplined buyback program. We don't want to be out there basically driving the price of the stock. We, again, think there are opportunities that may develop down the road that will give us a better use of that capital and that's the position we take at this point, Martin.

Thanks.

Once again I would like to inform everyone if you would like to ask a question, press star then the number 1 on the tef keypad. We'll pause for just a moment to compile the Q&A roster. There are no questions in queue at this time.

All right. If there are no questions, well, thank you for joining us today and encourage you to call at any time with questions. We will now conclude the call. Thank you.

This concludes today's First Defiance first quarter conference call. You may now disconnect.