Premier Financial Corp (OHIO) (PFC) 2004 Q3 法說會逐字稿

Good morning.

My name is Bonnie and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the First Defiance third quarter 2004 earnings conference call.

Today's call is being recorded today, October 19th, 2004.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer period. (Operator Instructions).

Thank you.

Ms. Merry, you may begin your conference.

Thank you, Bonnie.

Good morning, everyone.

Welcome to the First Defiance third quarter 2004 conference call.

We appreciate you joining us.

This call is also being web cast and will be available at the First Defiance website at fdef.com until November 30th.

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, followed by a report on the financial performance by Jack Wahl, the Company's Executive Vice President and Chief Financial Officer.

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 by 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.

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 for the First Defiance Financial third quarter 2004 conference call.

Last evening, we released our earnings for the 2004 third quarter and would like to expand on that discussion here this morning.

As we typically do, I will review the activity for the quarter, then I will turn it over to Jack Wahl, our Chief Financial Officer, to give you a more detailed look at the numbers for the quarter and the first nine months of 2004.

The third quarter was a very busy period for us here at First Defiance and one full of announcements and releases.

However, I think the main story for the quarter was that the core operation at First Defiance continued to show solid performance.

Net income for the quarter was 1.7 million, or 26 cents per share, total assets were 1.102 billion at September 30, net loans and total deposits increased to 851.4 million and 779.3 million, respectively, at the end of the quarter, an increase of over 110 million in loans and over 50 million in deposits sense December 31 of 2003.

The most significant event that resulted in a negative impact on earnings was a $1.9 million charge recorded during the quarter and announced last week to settle certain contingent liabilities related to the 2002 sale of our Leader Mortgage Company Subsidiary.

After-tax, the charge amounts to 1.25 million, or 20 cents per share.

We are pleased to have reached a settlement in this matter, and while we have agreed to confidentiality in this settlement, I can tell you that it dealt with losses related to servicing the government insured loans in foreclosure at Leader and in no way relates to any of our existing operations and will not have any impact on our operating results going forward.

We previously recognized an after-tax gain from the sale of Leader of 7.7 million, or $1.16 per share.

So even with the recognition of this item, we are still satisfied that this sale was the right decision for our company.

The third quarter of 2004 was also a very active month for First Defiance on the acquisition front.

We announced the signing of two definitive agreements for acquisitions during the quarter.

On August 4th of this year, First Defiance entered into an agreement to acquire ComBanc Inc. and its wholly-owned subsidiary, The Commercial Bank, both headquartered in Delphos, Ohio.

The Commercial Bank has four offices; one in Delphos, two in Lima and one in Elida.

Combined, those offices had 175 million in deposits and 120 million in loans as of June 30th of this year.

The purchase price of ComBanc is valued at $38 million based on the August 4th, 2004 First Defiance stock price, with ComBanc shareholders having the right to select payment of the purchase price in either cash or shares of First Defiance common stock, subject to an aggregate consideration mix of not more than 50 percent common stock.

First Defiance expects the transaction to be accretive to earnings by 3 cents to 5 cents per share in 2005, with no repurchase assumptions or revenue synergies assumed.

Last Wednesday, October 13th, First Defiance entered into an agreement to acquire the Genoa Savings and Loan Company, which has four locations in the Greater Toledo, Ohio market, including banking offices in Genoa, Oregon, Maumee and Perrysburg, Ohio.

Combined, the banking offices had 84 million in deposits and 72 million in loans at June 30th, 2004.

It is our intention to close the Maumee office and combine its operation into our existing Maumee branch less than a mile away.

The purchase price of Genoa Savings is 11 million and will be paid in cash.

We expect the transaction to be accretive to earnings by 1 cent to 3 cents per share in 2005, with no revenue synergies assumed.

Both of these acquisitions are consistent with our announced strategy to grow in existing and adjacent markets.

The markets present good opportunities to continue growing both deposits and loans.

Our First Federal Bank brand is known in these areas and we believe that our reputation and business plan will add value to retail and business customers at these locations.

We look forward to working with the staffs, customers and shareholders of both Commercial Bank and Genoa Savings for successful transitions.

Management anticipates closing the ComBanc transaction in late January 2005, while the expected closing of the Genoa Savings transaction is in late March 2005.

We realize it's a challenge to integrate both the ComBanc and Genoa Savings branches into our networking and culture within a short period of time, but it is one that I know we will able to handle based on the experience, expertise and organization of our transition team.

Upon completion of the two transactions on a pro forma basis, using June 30th, 2004 data, First Defiance will have 1.37 billion in assets and 1.01 billion in total deposits.

Operationally, the third quarter was another solid quarter for First Defiance in a year that is presenting many challenges as the interest rate environment continues to defy logic.

We've benefited from the Federal Reserve's rate increases as we saw continued margin improvement.

These rate increases, along with the continued growth of our loan portfolio and controlled increases in interest expense resulted in a substantial increase in net interest income for the quarter.

At the same time, the reluctance of the bond market to follow the lead of the Fed has kept mortgaged rates much lower than we anticipated.

As a result of the continued low interest mortgage rates, we booked an MSR impairment charge of 321,000 this quarter, compared to an impairment recovery of $987,000 in the third quarter of 2003.

On an after-tax basis, that is a swing of 13 cents per share.

Noninterest expense, excluding the impairment and the contingent liability settlement, was down compared to the third quarter of 2003.

Noninterest income continues to lag behind last year’s third quarter because of the drop in gain on sale of mortgages, which was $1.8 million less than in the third quarter of last year.

Excluding gain on sale of loans and securities, non-interest income was up slightly over that period.

We also continue to be very pleased with our credit quality.

Our nonperforming assets declined to just over $2 million as of September 30th, 2004, a reduction of more than $1 million from the previous quarter.

These figures are at their lowest level since the end of the 2001 second quarter.

That is especially impressive when you consider that our outstanding loan balances have increased by more than $330 million during that time frame.

At September 30th, 2004, our nonperforming assets were just 18 basis points of our total assets and our allowance for loan losses to nonperforming loans was almost 500 percent.

These are all indicators that our core operation is very sound.

I would now like to call on Jack Wahl, our CFO, to give you the financial data for the quarter.

Jack?

Thank you, Bill, and good morning everyone.

In analyzing the 2004 third quarter, you need to start by factoring out two large adjustments.

As Bill noted, we reported net income for the quarter of 1.7 million, or 26 cents per share compared to 3.7 million, or 58 cents per share for the third quarter of 2003.

However, if you exclude the charge for the settlement of the contingent liability from the 2004 third quarter results, our income for that period would have been 2.9 million, or 46 cents per share.

Further, if you add back the after-tax impact of the non-cash mortgage servicing rights impairment from the 2004 third quarter, which was a 209,000, or 3 cents per share after-tax, and subtract the after-tax impact of impairment recovery from the 2003 third quarter, which was 642,000, or 10 cents per share after tax, then you would be comparing income of 3.1 million, or 39 cents per share for the 2004 third quarter with 3 million, or 48 cents per share, for the 2003 third quarter.

The impairment charge results from the drop in value of our mortgage servicing rights from approximately 0.95 percent of the outstanding balance of loans serviced at the end of June to 0.80 percent at the end of September.

Our servicing is valued by an outside third party and is driven by national mortgage-backed securities prepayment speeds, which are a function of the recent drop in the 10-year treasury rate.

The interesting thing, however, is that locally, we have not experienced any recent increase in the repayment of the mortgages we're servicing for others and we really don't anticipate any major runoff of that asset unless mortgage rates drop further from today's levels.

Our anticipation is that long-term rates will eventually rise and that the 640,000 of impairment reserves that we currently have on our balance sheet will come back into income.

In the meantime, we do not anticipate any major increases in the amortization of our MSRs.

And frankly, if that does occur, it will be accompanied by increases in mortgage gains.

Focusing on what I would characterize as our quarter earnings results for the quarter, we are pleased that our margin improved by 2 basis points over last quarter to 3.58 percent for the 2004 third quarter, compared to 3.56 percent for the 2004 second quarter and 3.46 percent for the 2003 third quarter.

Three primary factors contributed to the margin improvement.

First is the growth in the loan portfolio, which on average increased by nearly $119 million between the third quarter of 2003 and the third quarter of 2004.

This growth occurred primarily in the commercial real estate loan and commercial loan categories, although we have also had solid growth in all loan categories in 2004, including home equity loans, first mortgage loans and consumer loans.

The second factor that contributed to margin improvement is the improved mix between loans and investment securities and deposits at other banks.

In the 2003 third quarter, loans comprised 75 percent of interest-earning assets, while securities and deposits made up the other 25 percent.

During the 2004 third quarter, loans made up nearly 84 percent of interest-earning assets.

As a result of the improved mix, our yield on total interest-earning assets improved to 5.68 percent in the 2004 third quarter from 5.64 percent in last year's third quarter.

That improvement occurred even though the average yield on loans dropped between 2003 and 2004.

The third factor that contributed to the improved net interest margin was a 7 basis point drop in our overall funding cost, which was driven by slightly lower interest rates and a $3 million increase in the average balance of non-interest-bearing deposits.

The margin improvement was critical to our overall results as the $750,000 increase in net interest income helped to partially offset the significant drop in mortgage gain on sale between the 2003 and 2004 third quarters.

Our gain on sale income was just $518,000 in the 2004 third quarter, compared to 2.3 million in the same period in 2003.

The 2003 third quarter was the last in a series of four quarters, dating back to the fourth quarter of 2002, where we had at least 1.8 million in mortgage gains.

We would characterize the 2004 third quarter level as a more typical level of income associated with mortgage originations.

Actually, our purchased mortgage originations in 2004 have exceeded the purchase mortgage activity we experienced in 2003 during the mortgage boom.

We also took $302,000 in gains from the investment portfolio in the 2004 third quarter to help offset the reduction in mortgage income.

Although we recognize 1.6 million of securities gains in 2003, none of those were recorded in the third quarter.

At September 30th, 2004, we continue to have unrealized gains in excess of $1.5 million in our available-for-sale investment portfolio.

If you examine the levels of non-interest income and non-interest expense for the 2004 third quarter compared to the prior year, you will note that fee income, excluding gain on mortgage and securities sales, increased slightly while noninterest expense, excluding MSR amortization and the recording of the contingent liability, remained essentially flat between the two periods.

Year-to-date, excluding the impact of the settlement of the Leader contingency, our earnings have dropped from $1.47 per share in 2003 to $1.35 per share in 2004.

For those nine-month periods, our mortgage gain on sale income is 4.7 million lower in 2004 than it was in 2003.

That decline has been partially offset by a $3.6 million increase in net interest income, a $600,000 increase in service fees and a 375,000 year-to-date increase in insurance and investment sales commissions.

On the expense side year-to-date, our compensation and benefits expense is up by 1.1 million, due primarily to the inclusion of three banking offices acquired in late 2003 for the full nine months in 2004 versus just three months in 2003.

As Bill mentioned, we anticipate that the ComBanc and Genoa acquisitions combined will increase our earnings per share by between 4 cents and 8 cents in 2005.

Those estimates are based on relatively modest growth levels and what I would characterize as moderately conservative estimates of cost savings that we will achieve.

The recording of the purchase accounting entries for the ComBanc acquisition will result in approximately 17 million of intangible assets after considering potential mark-to-market adjustments, while the Genoa acquisition will result in approximately 5 to 6 million of intangible assets.

We estimate that the two transactions will dilute our tangible book value by approximately $2.35 per share initially and that we will recover that dilution over approximately 10 years in the ComBanc acquisition and approximately seven years in the Genoa acquisition.

We noted in the earnings release that our earnings for the 2004 fourth quarter will be in the 47 cent to 52 cent per share range and for the full year 2004, we have lowered our estimate to $1.60 to $1.65 range to reflect the recognition of the settlement of the Leader contingency.

Street estimates for 2005 have us in a range of between $2.05 and $2.19 per share.

And while we have not yet completed our budgeting process for next year, we have done some high-level forecasting and at this time, we expect we will be somewhere in net range.

That concludes my comments this morning.

I would now like to now turn the call back to Bill for his overview on our strategy going forward.

Thanks, Jack.

Looking ahead to 2005, I believe we are well positioned for earnings growth.

Our strong production in commercial loans and nonresidential real estate loans will allow us to benefit when market rates rise, as we expect them to.

The economic outlook for Northwest Ohio continues to improve and we're very excited about the opportunities we have for revenue enhancements in the new markets we are acquiring.

As noted, we're anticipating these acquisitions to be accretive by 4 cents to 8 cents per share combined in 2005 and those estimates do not take into account any revenue growth or income enhancements beyond planned cost savings.

We think that our approach to community banking and our focus on sales and profitability in the markets will provide us with many additional opportunities to grow revenue and increase profitability that we have not included in our estimates.

Our challenge in the coming year will continue to be to grow our low-cost deposits, especially commercial and retail checking account balances.

There is no question that we can continue to successfully grow our loans and our track record on credit quality has been good.

But, for us to exceed our profitability goals in 2005 and beyond, we're going to have to successfully grow those low-cost deposits balances.

We're confident that our expanded market area will enhance these opportunities.

I want to thank you for joining us this morning, and we will now take your questions.

(Operator Instructions).

Chris Marinac, Fig Partners.

I was curious -- I'll just get Jack to elaborate on the tangible book dilution.

Is part of the reason that you're not getting any new equity from Genoa Savings is that's an all-cash deal?

Yes.

Okay.

So, the hit from that is greater than it would be on ComBanc, if you looked at them standalone?

That's correct.

Okay, I just wanted to clarify that, that's great.

And then Bill, can you talk about from a competitive standpoint, are you seeing your competitors price more aggressively than perhaps last quarter?

And then also from the same token, was there a difference in the quarter, in terms of overall demand intra-quarter, compared to last quarter?

Did the momentum get better or worse?

I think the pricing on the deposit side has been more aggressive, Chris.

We certainly have seen a number of companies and kind of all across the board, some of them a little bit longer-term CDs.

But certainly on the money market accounts, the pricing on the funding side has been much more aggressive.

On the loan side, for the most part throughout most of our market area, pricing has remained relatively reasonable.

And actually, our pricing on mortgage loans was starting to improve here towards the end of this quarter significantly over where it started to slack off earlier.

Okay.

And then a follow-up of -- how long into next year do you want to integrate before you're ready to make another acquisition?

Is there any timetable as to when you're out of the market now?

If any of my staff is listening, I better say a long time.

No, I think that, Chris, we had anticipated this for quite some time that as aggressively as we were out looking, that we very likely would be doing -- working on the integration of a couple of these, all or simultaneously.

But we are not going to stop trying to continue to cultivate relationships.

We probably won't be knocking on doors as hard as what we have been in the past.

But we will keep our eyes and ears open.

And if an opportunity presents itself that has strategic value to this company, we're going to give it a hard look.

Great, Bill.

Thanks so much.

(Operator Instructions).

Gerard Cronin, Sandler O'Neill Asset Management.

Good morning.

Nice quarter.

Two quick questions.

Number one, could you elaborate on the (technical difficulty) million-dollar decline in nonperforming assets?

I was just wondering if that was one big credit or several small ones?

And secondly, just on the margin, I am curious with the Fed having moved three times, why we did not see more margin expansion this quarter?

I know it was up a couple of basis points.

But what prevented further expansion this quarter and what do you guys see going forward?

Thank you.

I will talk about the credit numbers and I will let Jack talk about the margin.

It was not any one single.

I think it was just a continued strong effort on the part of our credit people to, number one, keep our commercial lenders on top of their accounts and make sure we address any issues that we detect early on.

I think that certainly has benefited us.

And I think that as we continue to keep that credit culture ingrained in our lenders, I think that is going to hopefully allow us to continue to report these strong credit numbers.

But it was just, I think, just an overall effort across the board, rather than any one or two single credits.

I will let Jack comment on the margin.

To further elaborate on the answer Bill just gave, Gerry, last quarter, we also had several fairly large credits that were in the 90 to 95-day past due category that just, we were just waiting on some things to get rewritten.

And we were a little more careful this quarter to make sure we did not have any of those.

On the margin, a couple of factors kept that margin from expanding more than what we might have expected, or less than what we might have expected.

One factor is that we have a fairly significant amount of commercial loans where we have that were subject to floors in the rate agreement.

And in the first couple of -- Fed moves didn't take us above the floor.

Further, I think we have had a little bit of a change in the mix we have been putting new loans on.

There have been more variable rate loans that are going on the books at a lower rate that will experience some margin expansion as rates go up from here, but the initial rate still is relatively low, and I think that has caused the overall rate mix to be a little bit lower than probably what we had anticipated.

Very good, thank you.

Al Savastano, Midwest Research.

Good morning, guys, how are you?

Just a question on the integration.

If you can give me an idea of how you plan on managing that with the two companies there, and just the pace of everything.

I guess just follow up a little bit more from the first question?

The organization that we've put together on this and the way we it structured has allowed us to, in certain areas, to basically develop two different themes for the integration process.

There obviously is some overlap in some of that, but fortunately the roughly two months we have between these has allowed us, for instance, our HR people to go through the interviewing and staffing process on the first one and completing that before we even were at the point of announcing the second one.

So it's basically a result of some good planning, hopefully some very good planning and what we have learned from our past experiences in some of the integration issues that have come up and other acquisitions that we have made.

So I think that that is certainly is big.

Training is something that we have always out a lot of emphasis on here within our own organization, and that will be a very big part of the integration process.

We begin training as early as we can, actually setting up kind of a dummy system to train the people on, and that will be going on simultaneous.

But again, we have some experienced people that we have dedicated to that.

I think that that's going to work it through pretty well.

Great, thank you.

(Operator Instructions).

At this time, there are no further questions.

If there are no further questions, we thank you very much for joining us today and remind you that you can always call with questions.

And this will conclude our conference call.

This concludes today's conference call.

You may now disconnect.