Premier Financial Corp (OHIO) (PFC) 2008 Q1 法說會逐字稿

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  • Operator

  • Hello and welcome to the First Defiance Financial Corporation first-quarter 2008 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded.

  • Now I would like to turn the conference over to Ms. Carol Merry. Ms. Merry, you may begin.

  • Carol Merry - IR

  • Thank you, Camille. Good morning. Thank you for joining us for today's first-quarter 2008 conference call. This call is also being webcast, and the audio replay will be available at the First Defiance website at fdef.com until April 30, 2008.

  • 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 would like to remind you that certain statements made during this conference call, including during the question-and-answer period, are forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to change, risks, and uncertainties that may cause actual results to differ materially. First Defiance assumes no obligation to update such statements.

  • For a complete discussion of the risks and uncertainties, please refer to materials filed with the SEC, including the Company's most recent Form 10-K and 8-K filings.

  • Now I will turn the call over to Mr. Small for his comments.

  • Bill Small - Chairman, President, CEO

  • Thank you, Carol. Good morning and thank you for joining us for the First Defiance Financial Corp. conference call to review the 2008 first-quarter results. Last night we issued our earnings release for the first-quarter 2008 results, and this morning we would like to discuss that release and look forward to the balance of the year. 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 first three months of 2008, and then Jack will give you more financial detail on the quarter.

  • First-quarter 2008 net income on a GAAP basis was $3.42 million or $0.47 per diluted share. This was down from $3.61 million and $0.50 per diluted share in the 2007 first quarter.

  • The 2008 results include part of the costs associated with our acquisition of Pavilion Bancorp, which closed on March 14, 2008. Excluding the after-tax impact of those charges, First Defiance had earnings of $3.91 million or $0.54 per diluted share for the quarter ended March 31, 2008.

  • The 2008 first-quarter results include 17 days of operations of the eight banking centers acquired in the Pavilion acquisition. In his remarks, Jack will give you additional detail on the numbers related to this transaction.

  • Closing on the Pavilion acquisition and the immediate conversion of their operation and systems over one weekend required a lot of time and energy during the first quarter. Few people realize all the work and planning required to accomplish this successfully, and all that needs to be completed while making sure that the existing operation is performing up to its expectations.

  • A skilled and talented group of employees from both companies led by Denny Rose here at First Federal Bank did an exceptional job to make it all happen. This was our largest acquisition yet, and teams from throughout the combined organization worked extremely hard to make the transition as smooth as possible for our new customers.

  • With all the closing and conversion activity going on, it is especially pleasing to see the solid performance that we posted in the 2008 first quarter. In a quarter that included a surprising and unprecedented 125 basis point rate cut by the Fed in the last 10 days of January, followed by another 75 basis point cut in mid-March, we had plenty of headwinds.

  • Because of the flexibility we strive to develop in our business plan, combined with the quick reaction of our management group, we were able to make virtually immediate downward adjustments in our deposit rates to help mitigate the results the Fed cuts have on the asset side of the balance sheet.

  • As a result, in a period of a 200 basis point reduction in Fed rates, we were able to improve our net interest margin by 24 basis points compared to fourth-quarter 2007.

  • The margin also was favorably impacted by an increase in non-interest-bearing deposits and the Pavilion acquisition, as Pavilion has historically operated at a higher margin than First Defiance.

  • However, in the 2008 first quarter, the Pavilion results were included in only the last 17 of the 91 days; and with the immediate action on our part to address deposit rates, it was a key in improving the margin.

  • The first quarter is usually a period of lower loan demand, but loan growth was strong on a relative basis during this quarter. The January Fed cut had a short-term impact on the 10-year Treasury, which brought residential mortgage rates down and sparked a flurry of refinance activity that kept the mortgage pipeline busy throughout February and March.

  • Commercial loan demand also remained strong throughout the quarter as we continued to pick up business, especially from larger regional banks for a variety of reasons, including opportunities created by bank consolidations.

  • On the deposit side, the seasonal runoff of deposits early in the year was in line with expectations, as we allowed some higher-priced CDs to leave the Bank. The success of our concentrated effort to increase non-interest-bearing deposits was very evident again in the first quarter of 2008, and we continue to see our deposit mix progress closer toward our target levels.

  • The provision for loan losses more than doubled in the 2008 first quarter compared to the first quarter of 2007. The significant increase was due primarily to an increase in the loan loss reserve for one loan caused by a reduction in the appraised value of that loan's real estate collateral. Excluding the specific allowance recorded for that one loan, the Company's provision was in line with the level of provision expense recorded over the last several quarters.

  • Overall, these are among the toughest credit times this industry has seen in quite a while. We certainly are not immune to those difficulties; but I think our portfolio has held up well as we look around and see the negative impact others are experiencing.

  • While our nonperforming assets increased $5.2 million from the end of December, nearly $5.7 million came on the books with the Pavilion acquisition. Nonperforming loans originated by First Federal Bank actually decreased during the 2008 first quarter, while other real estate owned balances on original First Federal loans decreased by $246,000.

  • Although we doubled our loan loss provision compared to last year's first quarter, the impaired loan that I mentioned earlier that caused most of the increase is paying as agreed.

  • Our net charge-offs for the quarter are higher than we like, but they still represent only 15 basis points of average loans outstanding, calculated on an annual basis. Our expectation is that the ratio of net charge-offs to average assets will trend higher for the balance of the year, both because of the acquisition and because of our market area's overall economic condition.

  • We're seeing increases in delinquencies and we definitely have to work harder to keep our borrowers from falling past due.

  • Our local economies remain generally healthy, though far from robust. The Southern Michigan counties where the former Pavilion branches are located are probably struggling a bit more than most of the communities where our Ohio branches are located. But we anticipated this going into the acquisition and are prepared to deal with it.

  • We are seeing a higher level of delinquencies in our consumer loan portfolios than what we are accustomed to and we likely will see an increase in chargeoffs of this type of loan during the balance of 2008.

  • While we don't have subprime loans on our balance sheet, falling housing values in our market area will have a negative impact on our asset quality. Overall, however, I feel comfortable with our level of allowance for loan losses at March 31.

  • First Defiance's non-interest income for the 2008 first quarter increased over the first quarter of 2007, driven primarily by the increase in mortgage banking activities that I spoke of earlier.

  • Gains from the sale of mortgage loans more than doubled in the first quarter of 2008. The increase was partially offset by adjustments to mortgage servicing rights. These types of negative adjustments are not uncommon during periods of increases in mortgage loan sales -- sales gains related to falling interest rates.

  • Income from the sale of insurance products increased for the 2008 first quarter at First Defiance's insurance subsidiary, First Insurance & Investments. The increase is attributable to a full quarter of revenue from the late February 2007 acquisition of the Huber Harger Welt & Smith Agency in Bowling Green, Ohio.

  • The insurance market continues to be soft from a premiums standpoint, so sales growth needs to come from developing additional new business, and our people have worked hard to accomplish this.

  • First Insurance typically recognizes contingent revenues during the first quarter of the year. These revenues are bonuses paid by insurance carriers when the agency achieves certain loss ratios or growth targets, and the commissions were higher again this year. This is our third consecutive year of very strong contingent commissions. It is a reflection of effective management of our relationships with our insurance carriers.

  • Total non-interest expense for First Defiance increased 14.5% from the noninterest expense recognized in the 2007 first quarter. The 2008 amount includes some of the acquisition-related charges. If those costs are excluded, non-interest expense increased by 8.1%. As I mentioned at the start, Jack will give you further detail on the acquisition-related costs.

  • Compensation and benefits increased between the 2007-2008 first quarter due to year-over-year compensation increases and a full three months of compensation associated with the Huber Harger Welt & Smith Agency, compared to just one month in 2007.

  • Occupancy expenses increased due to the Pavilion acquisition as well as the December 2007 opening of the First Federal's new operations center; the Fort Wayne, Indiana, branch opened last August; and the Glandorf, Ohio, branch that we opened in February of this year.

  • I will now ask Jack Wahl to give you the financial details for the quarter before I wrap up with an overview and a look at what we see developing for the balance of 2008. Jack?

  • Jack Wahl - EVP, CFO, Treasurer

  • Thank you, Bill, and good morning, everyone. I will start by giving you some detail on the Pavilion acquisition. We paid approximately $28 million in cash and we issued 1,039,000 shares of First Defiance stock to purchase Pavilion.

  • The accounting rules currently in effect require us to value the shares we issued at the price on the announcement date. In our case, per share value at that time was $26.12 per share; and the total value of the acquisition, not counting legal, accounting, and investment banking fees, was $55.16 million.

  • Net of the cash paid, the acquisition added approximately $285 million in assets to our balance sheet, including $231 million in loans and approximately $27 million in intangible assets. On a preliminary basis, we have estimated core deposit and customer relationship intangibles totaling $6.6 million and goodwill of $20.5 million.

  • We also estimated a positive market value adjustment of $5.3 million to Pavilion's loan balance; a $1 million positive adjustment to their mortgage servicing rights; and a market value adjustment that increased Pavilion's fixed-rate deposits by $750,000.

  • All of these purchase accounting adjustments are subject to further revision as final valuations are completed by various consultants and appraisers over the next couple of months.

  • As Bill noted, our quarterly results included only 17 days of operations from the Pavilion acquisition, and it's difficult to pinpoint exactly how much impact the acquisition had on our bottom line because of all the moving parts. Based on our 2008 budget, the estimated impact of the acquisition in March -- and therefore on the first quarter -- was between $100,000 and $150,000.

  • Bill also noted in his remarks that we recorded $750,000 of acquisition-related costs in the 2008 first quarter. These costs primarily consisted of the termination of a number of long-term contracts that Pavilion had entered into that are no longer necessary, and stay bonuses paid to Pavilion employees that were not offered jobs with First Defiance but who were needed through a transition period.

  • Our estimate of remaining acquisition-related costs is $1 million to $1.25 million, a substantial reduction from our initial estimate of a total of $3.5 million of such costs.

  • Our initial estimate of the cost to terminate Pavilion's participation in a multiple employer defined benefit pension plan was too conservative by approximately $900,000. And we had included certain separation and change of control costs in our initial estimate that were expensed by the seller prior to the closing.

  • Our estimate is that the majority of the remaining acquisition-related costs will be incurred in our second quarter.

  • While the completion of the acquisition was a big story for the quarter, an equally important story is the substantial improvement in our net interest margin. As Bill noted, our margin improved by 13 basis points over last year's first quarter and by 24 basis points from the 2007 fourth quarter.

  • In terms of dollars, our net interest income increased by $1.6 million or 13.4%.

  • The yield on our interest-earning assets declined by 45 basis points from last year's first quarter and by 26 basis points from the '07 fourth quarter. During those same periods, the average costs of our interest-bearing liabilities dropped by 59 basis points from last year's first quarter and by 53 basis points from the fourth quarter.

  • Our interest rate spread, which was 3.26% in the 2007 first quarter and 3.13% in the 2007 fourth quarter, expanded to 3.4%. The average balance of non-interest-bearing deposits was $124.6 million for the 2008 first quarter compared to $97.9 million in last year's first quarter and $114.1 million in the 2007 fourth quarter, which helps our margin.

  • Also, the average balance of our consolidated stockholders equity increased by approximately $7.5 million over the last quarter, which also had a positive impact on our net interest margin.

  • I do need to point out that though we closed the Pavilion transaction on March 14, I was able to hold the cash portion of the funding until March 28, which had a positive impact on net interest income of approximately $50,000 pretax.

  • Focusing elsewhere on our income statement, Bill has already noted the increases in our provision for loan losses as well as the growth in our non-interest income.

  • I will point out that our total mortgage banking income increased $332,000 or 42% in the 2008 first quarter compared to the same period last year on strong mortgage loan demand. Our gains from sale of loans doubled from $512,000 to $1.1 million. During the same period, our mortgage servicing rights amortization also more than doubled to $352,000 from $141,000.

  • We also recorded $142,000 of impairment to the value of our mortgage servicing rights based on our March 31, 2008, valuation compared to just $10,000 of impairment recognized in last year's first quarter. We believe mortgage gains will remain at higher than normal level in the second quarter before dropping to more routine levels during the second half of 2008.

  • I'd also like to point out that we recognized total securities losses of $81,000 in the quarter, which included the recording of $100,000 of expense associated with the impairment of one of our trust-preferred investments, which was deemed to be other than temporary.

  • We have approximately $1.5 million invested in three separate trust-preferred equity notes. These investments are high yield, but also high risk if the underlying banks or insurance companies have difficulties. Some of the reduction in the value of these investments is driven by their lack of liquidity. We intend to continue to hold these investments to the maturity date.

  • However, some of the reduction in value is caused by deferrals of interest payments by one or two banks in the trust-preferred pools. We will continue to monitor these investments for potential additional other than temporary impairment charges.

  • Overall, our noninterest expense for the quarter was $13.5 million, $12.75 million if you exclude the acquisition costs, which is an 8.11% increase over last year.

  • Compensation and benefits expense remains the most significant cost. They were up $572,000 from last year. Approximately $250,000 of the increase is due to normal salary increases over the last 12 months, while the balance relates to a half-month's compensation for the acquired branches; staffing increases in central operations to serve the larger Bank; and a full quarter of expense for the insurance agency we acquired in Bowling Green, Ohio, at the end of last February.

  • I realize our results for this quarter have a lot of noise in them, primarily from the acquisition. As a result, I'm sure it's difficult to estimate what the run rate is for our net income going forward.

  • Our budget for the 2008 second quarter is projecting consolidated net income of $4.3 million or $0.53 per share excluding any acquisition-related charges. Actual results may be lower than that targeted level, as we are waiving a substantial amount of fees over the first 90 days of operating the former Pavilion branches as we transition those customers to our systems and fee schedules.

  • That concludes my analysis of the financial results of the quarter. I will turn the call back to Bill for his concluding remarks, and then we will try to answer your questions.

  • Bill Small - Chairman, President, CEO

  • Thank you, Jack. As we progress through 2008, we will continue to be innovative in our approach to offering relationship banking services that meet our customers' needs and produce the returns expected by our investors.

  • We are working hard to ensure the full integration of our recent acquisition, as well as to reach the full potential of our newer and larger markets such as Findlay, Toledo, Lima, and Fort Wayne. We are pleased with the early results in Southeast Michigan and with the growth in our new offices in Fort Wayne and Glandorf.

  • Overall, the economic climate throughout our market area continues to vary from industry to industry. We have experienced some plant closings and layoffs in recent months; but on the whole, employment numbers have improved over the previous year.

  • We see many companies large and small making capital investments in their facilities, and many of our clients express confidence in the balance of 2008.

  • Agriculturally, we're coming off three consecutive strong years. Farmers are anxious to start planting; and assuming weather conditions are decent, most are expecting another good year based on commodity prices.

  • Obviously, many of our commercial clients are concerned about fuel cost, and that will continue to be something that bears watching.

  • We have worked hard to execute our strategy in this challenging environment and to adapt to the changes in the business cycles. The strength of this organization shows in the solid performance that we had in the first quarter of this year, even with the additional challenges of the acquisition and the Fed's rate cuts.

  • We're focused on finding and growing revenue sources as well as on operating efficiently to step up and meet these challenges. I think we have demonstrated that the plan and the team that we have at First Defiance is the right formula to continue to produce successful results.

  • Again, we thank you for joining us this morning, and now we would be happy to take your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Eileen Rooney from KBW.

  • Eileen Rooney - Analyst

  • Good morning, guys. I just had a question on the guidance that you gave. Just wondering what sort of margin assumption you had factored into that, and also in terms of any further Fed rate moves that you had factored in there?

  • Jack Wahl - EVP, CFO, Treasurer

  • Actually, that is strictly off of our budget which we prepared in the fourth quarter of 2007, so it hasn't been adjusted for any Fed rate moves.

  • The margin in that assumption was in the 3.75% to 3.80% range, which is consistent with where our margin came in, in the first quarter.

  • Eileen Rooney - Analyst

  • Okay, and what about in terms of credit quality? Does that forecast sort of incorporate what you had mentioned in the press release about your expectations for delinquencies right now in the consumer portfolio?

  • Bill Small - Chairman, President, CEO

  • Yes, I think that Eileen, we feel that we've got everything pretty well scoped out as far as that goes. We are seeing some more deterioration in some of our home equity, but nothing that is what I would call of an alarming level. But certainly higher than what our historical performance has been.

  • Eileen Rooney - Analyst

  • Okay, thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS) Brett Villaume, FIG Partners.

  • Brett Villaume - Analyst

  • Good morning. Of the increase in net interest margin, could you give a guess as to what percentage of that was from Pavilion?

  • Jack Wahl - EVP, CFO, Treasurer

  • We don't really -- again, with all the moving parts, it is kind of difficult to break that out. I will say that through the first two months of the quarter, our margin was significantly higher than what we had initially forecast.

  • With only 17 days of operating the acquisition, it had a modest impact. But most of that increase was due to our own reduction in funding costs.

  • Brett Villaume - Analyst

  • Okay. My other question was regarding the deposits coming from Pavilion. What percentage of those were CDs, specifically jumbo CDs?

  • Bill Small - Chairman, President, CEO

  • You know, I don't have that number. I look at it from the other side. I know their non-interest-bearing was right in the 20% level as far as their portfolio mix, Brett. But I don't have right offhand the information that -- on their jumbo CDs.

  • Brett Villaume - Analyst

  • Okay. Well, thank you, gentlemen.

  • Operator

  • Michael Lipman from FTN Midwest Securities.

  • Michael Lipman - Analyst

  • Good morning, Bill and Jack. So for these margin assumptions, 3.75% to 3.8%, is that a 2008 number? Or are you saying in the next quarter or so (multiple speakers)?

  • Jack Wahl - EVP, CFO, Treasurer

  • That is just the next quarter.

  • Michael Lipman - Analyst

  • Okay. Then am I correct that last quarter you kind of alluded to a 3.90% margin by year end? Does that still hold up?

  • Jack Wahl - EVP, CFO, Treasurer

  • I hesitate to really answer that just because things are so volatile. We really haven't projected beyond next quarter.

  • Again, we're very pleased with where our margin -- how well our margin has held up so far. But there's a lot of factors that go into that.

  • Michael Lipman - Analyst

  • Okay, well I won't push any more than that. I guess on this, the one major loan that went into NPA status, can you give me some more details on what kind of loan that is, how big it is, where it is? I assume it associated with Pavilion, obviously.

  • Jack Wahl - EVP, CFO, Treasurer

  • Actually, no, it's not. It's a First Federal loan. Beyond what we have already disclosed -- it's a loan in the Toledo market. It had already been identified as being impaired, because of weaknesses in the credit, although it's always paid as agreed. The collateral value of the underlying collateral, when we had an appraisal the value was substantially lower. So we increased our allowance so that our exposure equaled basically the appraised value of the collateral.

  • Michael Lipman - Analyst

  • But it's still performing --

  • Jack Wahl - EVP, CFO, Treasurer

  • It is still performing.

  • Bill Small - Chairman, President, CEO

  • Yes.

  • Michael Lipman - Analyst

  • I guess along those lines on the reserve, you moved up to about a 120 reserve now. Are you comfortable at this level? Would you proceed further reserve building if there is further credit deterioration?

  • Bill Small - Chairman, President, CEO

  • We certainly -- if there was -- if we detected that there was additional deterioration, we definitely would be addressing that through the reserves. We spend an awful lot of time, as we do every quarter, probably some additional since we did have a new portfolio or new -- that came on with the acquisition, in making sure that we had everything pretty well scoped out again.

  • While we did go up to the 120 level, and we're very comfortable at that based on what we see right now, as long as we don't have any more serious deterioration, I would not see us making any significant increase other than what would just come through our normal growth.

  • Michael Lipman - Analyst

  • Okay, great. I guess lastly, in the press release you say in 2Q '08 you're expecting acquisition charges between $1 million and $1.25 million. Is that pretax or after-tax?

  • Jack Wahl - EVP, CFO, Treasurer

  • That is pretax.

  • Michael Lipman - Analyst

  • Okay, great. Thank you guys.

  • Operator

  • (OPERATOR INSTRUCTIONS)

  • Carol Merry - IR

  • Are you showing any more?

  • Operator

  • There are no questions currently in the queue.

  • Carol Merry - IR

  • Okay, if there are no more questions, we thank everyone for joining us and this will conclude our call.

  • Operator

  • Thank you. That does conclude today's conference call. You may disconnect now.