Premier Financial Corp (OHIO) (PFC) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the First Defiance Financial Corporation second-quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Carol Merry. Thank you, Miss Merry; you may begin.

Thank you. Good morning and thank you for joining us for today's second-quarter 2007 conference call. This call is also being webcast, and the replay will be available at the First Defiance Website at www.fdef.com until September 3, 2007.

This morning we will begin 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'd like to remind you that certain statements made during this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, such as expectations about the Company's plans, business performance, future initiatives and results, as well as market conditions in which the Company may operate, are based on information currently available to the management of the Company and are subject to risks and uncertainties.

Actual results could vary materially because of factors discussed in yesterday's news release and the management discussion and analysis section of the Company's Form 10-K, or in other reports and filings with the Securities and Exchange Commission. First Defiance Financial Corp. assumes no obligation to update any of the forward-looking statements. And now I'll turn the call over to Mr. Small for his comments.

Thank you, Carol. Good morning, and I also want to thank you for joining us for the First Defiance Financial Corp. conference call to review the 2007 second-quarter results. Last night we issued our earnings release for the second quarter 2007, and this morning we would like to discuss that release and look forward to the second half of 2007. At the conclusion of our presentation, we will answer any questions you might have.

I would like to begin by giving you an overview of the quarter, and then Jack will give you more financial detail on our performance. Second-quarter 2007 net income was $3.61 million, or $0.50 per diluted share, down from $3.95 million and $0.55 per diluted share in the 2006 second quarter. The 2006 second-quarter results, however, included the sale of our credit card portfolio that resulted in an after-tax gain of $260,000, or $0.04 per share.

The continuation of margin pressure, along with higher non-interest expense, impacted earnings on the negative side in the second quarter. But continued growth in non-interest income and better loan growth were strong positives for the quarter. Net interest income continued to be pressured by the challenges of the current rate environment. While we did see about a 1% decrease in quarterly net interest income year-over-year, the 2007 second-quarter result was up about 1% over the first quarter of this year. This is a result of improved loan growth in the second quarter after a slow start in loan production at the beginning of the year.

Net interest margin remains a challenge for our industry. Net interest margin dipped to 3.58% as of June 30, 2007, as the increased loan production did not offset the tightening spread. The margin also was impacted by the issuance of $15 million in trust preferred securities at the end of the first quarter of this year.

We have seen some relief on deposit rates in recent months. This, along with our improving deposit mix, will be important factors in positively impacting our margin going forward.

We were pleased with the increase in loan production during the second quarter. Commercial and commercial real estate balances increased over $16 million at June 30 compared to balances at March 31, 2007. Pricing continues to be competitive and we continue to stress to our lenders the need to be prudent in underwriting and pricing.

Several deposit initiatives have resulted in notable increases in the number of new DDA accounts, resulting in the improved deposit mix that I referred to earlier. Changes in our cash management program and the increase in remote deposit customers also contributed to the growth in non-interest bearing balances. We will maintain our focus on these areas to continue improving the deposit mix.

Credit quality did show some improvement in the second quarter but is still not up to our expectations. We sold a large OREO property during the quarter, and were able to finalize a foreclosure on another large commercial property, opening the way for us to work on the sale of that property.

Overall, delinquency numbers were better in the second quarter than they were at March 31st. However, we did have another large development loan relationship that has fallen over 90 days past due. This is an area that will receive our constant attention and we do expect improvement over time.

Non-interest income was up almost 20% over the second quarter of 2006 when the onetime gain on the sale of the credit card portfolio last year is excluded. Service charges, insurance and investment commission income and mortgage banking income all showed considerable increases this year over the June 30, 2006 results. Initiatives that we have had in place over the last year are now producing the type of results that we had expected. The growth of non-interest income remains critical to our success with the margin pressure we are experiencing.

Non-interest expense was up in the 2007 second quarter, with compensation and benefits accounting for a large portion of the increase. Consistent with our overall growth, we have added a number of positions. The hires have been both on the revenue-producing side as well as several in nonrevenue-producing positions.

Our Lima Shawnee branch, which opened in July 2006, and the insurance agency that we acquired in February of this year impacted the staffing numbers and compensation this quarter over the 2006 second quarter. Higher claims and higher projected costs resulted in significant increases in employee health insurance expenses. It is important for us to keep our focus on efficiency in this tougher revenue environment, and we are delivering that message throughout the organization.

I will now ask Jack Wahl to give you the financial details for the quarter, before I wrap up with an overview and look at what we see developing for the balance of 2007. Jack?

Thank you, Bill, and good morning, everyone. This morning I will try to give you a little bit of color on what was actually a fairly uneventful quarter in terms of operating results.

The earnings release provides a comparison between the second quarters of 2007 and 2006, and also a comparison of the year-to-date periods ended June 30 for each year. In general terms, our net interest income for the 2007 second quarter after provision for loan losses was lower by just $29,000 from the same period in 2006, which is less than 3/10 of a percent.

During those same periods, non-interest income increased by $543,000, while non-interest expense was up by $1.1 million. If you exclude the $400,000 gain from the sale of the credit card portfolio from the 2006 second-quarter results, non-interest income grew by $943,000 between the two quarters. And after-tax, our net income in total would be down just $82,000 between the two periods.

When you compare the results of the 2007 second quarter to the first quarter of this year, a couple of points stand out. First, net interest income increased by $138,000 despite the fact that net interest margin shrank by 5 basis points. Second, noninterest income, excluding insurance contingent income, increased by more than 15% between the two periods.

Net interest margin tightened to 3.58% in the second quarter from 3.63% in the first quarter. Our yields on interest-earning assets declined by just 2 basis points, and our loan yields, which comprise the vast majority of our earning assets, dropped just 1 basis point in the second quarter to 7.37%.

During the same period, the cost for our interest-bearing deposits increased by 5 basis points to 4.01% from 3.96%. We have seen an overall increase in our loan portfolio between the first and second quarter, though commercial and commercial real estate growth are being offset by a declining mortgage portfolio. During that same period, our liability mix has changed as the average balance of both interest-bearing and non-interest-bearing deposits have increased, while our FHLB advanced balances have declined significantly. Also included in the mix change on the liability side is the impact of the issuance of $15 million in trust preferred securities at a fixed rate of 6.44% on the last business day of the first quarter.

While our net interest income increased in the second quarter by $138,000, our provision for loan losses was also higher by $118,000. Resulting in net interest income after provision, it was essentially flat between the 2007 first and second quarters. Our provision expense this quarter was lower than our net charge-offs of $910,000. Approximately two-thirds of the total charge-offs related to one large commercial relationship, where we wrote down the balance of the loan upon foreclosure. Most of that charge-off had been provided for in previous quarters.

Non-interest income increased by $63,000 between the first and second quarter of 2007. If you exclude insurance sales contingencies, which are recorded primarily in the first quarter, noninterest income between the first and second quarter grew by $756,000, or 15.6%. Factors driving the growth in revenue included the recognition of a full quarter of income from the acquisition of the Bowling Green Insurance agency, which resulted in increased revenue of $197,000, excluding contingencies, and improved mortgage banking income, which was up by $294,000.

The majority of the increase in mortgage banking between the first and second quarters is due to higher gains. This improvement is due to the seasonality of the business, as the second and third quarters are typically our best for mortgage loan production.

Non-interest expenses between the first and second quarters increased by just $111,000, which is almost exclusively due to increases in our group medical insurance costs. Our group medical plan year ends on April 30th and our projected costs following the renewal, which drives our monthly expense accrual, were up significantly. As we disclosed in the release, our group medical costs increased by $231,000 between the second quarter of 2006 and the second quarter of 2007.

When you net all of the factors in our results for the 2007 second quarter, we finished the period with net income of $3,611,000, which was just $5,000 more than we reported in this year's first quarter.

Year-to-date, our net income is lower by $587,000. Tax-equivalent [and] net interest income declined by $410,000 between the two six-month periods, as margins have tightened by 15 basis points to 3.61% for the first half of 2007. If you look at our results in 2006, you will note that our margins started to tighten significantly beginning in last year's third quarter. Also, we had the $400,000 gain from the sale of the credit card portfolio in 2006, with no comparable onetime or unusual items recognized so far in 2007.

As we outlined in the earnings release, year-to-date, our non-interest income has increased by $1.6 million -- $2 million if you exclude the gain from the credit card portfolio sale, which is more than 22%. During that same time, our non-interest expense has increased by $2.1 million, which is almost 10%. As we noted, the majority of these cost increases are in comp and benefits, both due to pay increases and staffing additions.

That concludes my comments this morning. I will now turn the call back over to Bill, and then we will try to answer your questions. Bill?

Thank you, Jack. As we progress through 2007 and beyond, we need to be innovative in our approach to offering relationship banking services that meet our customers' need and produce the returns expected by our investors. We are working diligently to reach the full potential of our newer and larger markets, such as Findlay, Toledo and Lima.

Last quarter, we announced our plans to enter the Fort Wayne, Indiana market, and we will be opening our banking center there in early August. We continue to evaluate new market opportunities where we believe significant growth opportunities exist.

The news media has given a lot of coverage to the fact that Ohio has one of the largest foreclosure rates in the nation, and our area is not immune to this problem. However, I will again tell you we have never been involved in subprime lending, and even though our residential foreclosures have increased, any losses related to these foreclosures have been minimal. We will continue to monitor all residential spec construction loans and real estate development lending with added scrutiny as the housing market remains weak.

We've been pleased with the results that we are seeing from several of our non-interest income initiatives, especially those related to non-interest bearing accounts. The introduction of our remote deposit product within the last year, as well as some targeted marketing campaigns, are helping us grow these deposits also. We continue to look for opportunities to find additional sources of non-interest income to help supplement the net interest income that has softened in the current rate environment.

The overall economic climate throughout our market area is one of guarded optimism. We have experienced some plant closings and layoffs in recent months, but on the whole, employment numbers have improved over the previous year. Many of our commercial customers still report business is steady, with a growing pipeline. Some of our trucking clients do report some spottiness in their business, primarily dependent on the industries that they haul for. All of this taken together gives us a positive feel for the economy in Northwest Ohio.

We have worked hard to execute our strategy in this challenging environment and to adapt to the changes in the business cycles. We said at the beginning of the year that it was going to be a tough year, and the first half certainly bore that out. We are focused on finding and growing revenue sources, as well as focusing on operating efficiently. That is pretty simple blocking and tackling, but that is what it takes in times like this to be successful.

We thank you for joining us this morning, and now we will be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Christopher Marinac from Fig Partners.

Good morning, Bill. Good morning, Jack. I wanted to ask you about the sort of flow of talent, if you will, in your markets. Are you seeing more folks, available commercial lenders, other staff that you couldn't hire before as things have slowed this year? Is that creating any more opportunities to build in the future?

I think there are -- there certainly are some opportunities out there, Chris. And I think probably the biggest catalyst in that has been the acquisition of Sky Bank, Sky Financial by Huntington. That certainly has created some, I guess, some employment -- some hiring opportunities. As far as anything that is resulting from a little bit softer lending market, I'm not sure so sure that we've seen much of anything that is resulting from that, as much as we are from maybe this merger -- or this acquisition.

Okay. And I guess to that point, also related to the infrastructure that -- Bill, that you are going to do in Fort Wayne, what is your tolerance for the efficiency ratio over time? Given where it is now, can you tolerate it going up much from here, or where do you want to see it settle out?

Well, we certainly hope that it won't go up from where it is right now. Ideally, we would like to get that back down to 60 or even slightly below 60. Again, with a community banking business strategy, it is hard for us to imagine that it is going to get down in low 50s or anything like that.

But we are trying to go in -- as we go into Fort Wayne, we are certainly aware of the fact that every time we do a de novo branch that it's going to add some expense and have some carrying costs for a period of time. But hopefully, we are very much aware of that, and are approaching it in the proper way as far as trying not to overspend in getting into that market.

Okay. And the last question, Bill. How are businesses pricing -- or maybe perhaps not pricing -- some of the new technology on remote capture and other sort of electronic funds. I mean, is that something that is adopted more and more?

Yes, I think we've been pleasantly surprised by the success we've had, knowing what -- some of the larger banks that have offered the product for a longer period of time than we have. We've tried to be out doing demos on a pretty regular basis. And I would say at this point we are probably slightly ahead of what our anticipated pace was as far as being able to sign on new customers for the remote deposit capture.

I think that we continue to try to leverage our technology and so far I think it is paying off for us. And hopefully as we get further into it and as this whole thing matures a little bit more, we are really going to reap some benefits.

Great. Thanks very much.

[Chris Siedman] from Hovde Capital.

Hi, guys. Quick question for you. Actually two quick questions. First one is related to credit quality. Given that the movement in and out of nonperformers this quarter pertains to just a few loans but they are kind of large in size, I was wondering if you guys can give us a little bit of color on, for instance, the OREO asset that was sold during the quarter, whether or not there was charge taken on disposition. And also the new 90-day delinquency, just the size and nature of that credit and maybe an idea as to how much you might have reserved on that so far.

I'll kind of talk on the specifics as far as the properties are concerned and then let Jack talk a little bit about the dollars and such associated with it. But the property that we took in to real-estate owned this quarter is a commercial property in Toledo. I guess, unfortunately, it is a sizable credit for us. But I guess on the plus side is the fact that it is located in probably the most desirable commercial area of the Toledo market.

So that certainly is a property that at least we have control of it now; we've waited a long time to get it through the foreclosure process. And now we can begin actively marketing that property.

The property that went 90 days on us, or the credit relationship that went 90 days, involves a credit that has got, I think, three different real estate development projects, again in Lucas County, the greater Toledo area. And it is just a very soft market right now. But we continue to work with our borrower, and hopefully are going to be able to get a resolution to that relatively soon. Jack, I don't know if you want to touch on some of the numbers.

Relative to the charges that we took, included in the provision was a write-down of the value of the asset that Bill was just referring to, that moved from loans into REO. And this is the commercial property in the Franklin Park Mall area of Toledo. And we wrote that down, charged off actually about $600,000 related to that relationship, and we had previously provided for that.

In terms of moving assets out of OREO, we did record additional write-downs of about $175,000. That was a combination of disposing of the one large property and costs associated with that. And we also realistically wrote down some of the value of some of the properties that remain in OREO that aren't moving. And so we think we probably have them valued a little higher than -- had them valued a little higher than what they are actually worth.

Okay. And then just a separate question on the mortgage banking business. Obviously, with the second and third quarter being strong quarters for mortgage production and the increase in gain on sale that you had, relative, for instance, to the warning that [Nat City] had in their mid-quarter update, can you just talk a little bit about how margins -- gain-on-sale margins are holding up in the marketplace? And maybe the timing on the sales that you had in the second quarter, if perhaps the bulk of those were early in the quarter, or if, in fact, you are just seeing a different trend than Nat City was portraying, whereby margins are holding up better?

We saw, as far as production throughout the quarter, it was pretty steady throughout all three months. So that certainly was encouraging, and we are hoping that that momentum carries on through into the third quarter.

As far as margins, I thought they tightened up a little bit in the last part of the quarter, and hoping that that's just a temporary thing, because I thought they were already tight enough. But we will -- I guess that remains to be seen.

Okay. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS) Eileen Rooney from KBW.

Hi, guys. Can you hear me?

Yes. Good morning.

I just had a couple of questions. The first is on share repurchase. Just wanted to get your thoughts on that; it didn't look like you guys had done anything this quarter.

And then also, the service charges were really strong. And in your press release, you mentioned something about more competitive fees as well as the overdraft privilege program. And I was just wondering what -- if you can give a little more color on what that was exactly.

As far as the -- I will address the noninterest income first, and the overdraft privilege continues to be a strong program for us. And we reevaluated basically our entire fee structure for some changes, many of which were implemented at the first part of the year. We went through and tried to assess where we were at on a competitive basis and where opportunities existed, and we found several that we were able to implement and certainly have helped us out.

We've also got some other changes that have come on throughout the year and some that are just starting here at the beginning of the third quarter that we think will still give us some additional opportunities there. This is an area that, again, we've been aggressively looking at. I guess maybe the question is, why wasn't it looked at earlier?

But certainly, with the way the net interest income has been pressured with the rate environment out there, it's certainly made it imperative that we look for all of our opportunities on a noninterest income side. And that is what we've been focused on. And, as we said here and in the release, it looks like these are -- many of these things are already paying off, and we think there is still some potential as some of these others mature that we will continue to see some success there.

As far as the share repurchase, Eileen -- and I apologize -- I don't have the equity roll-forward in front of me. But our total share count -- our shares outstanding are down about 50,000 shares over last quarter. And we did have a number of fairly large option grants that were exercised during the quarter. So just in round numbers, I would estimate that we repurchased 75 to 80,000 shares in the quarter and we had about 25,000 shares or so exercised.

And we will continue to be opportunistic acquirer as the -- when the price drops we will be in the market and when it goes back up we probably won't be.

That is great. Thanks, guys.

There are no further questions at this time.

All right. If there are no further questions, we thank you for joining us today and this will conclude our conference call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.