Premier Financial Corp (OHIO) (PFC) 2011 Q1 法說會逐字稿

Good morning, and welcome to the First Defiance Financial Corp. 2011 first-quarter earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Miss Mary Beth Weisenburger, Senior Vice President. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thank you for joining us for today's first-quarter 2011 conference call. This call is also being webcast and the audio replay will be available at the First Defiance website at FDEF.com.

Providing commentary this morning will be Bill Small, Chairman, President and CEO of First Defiance, and Don Hileman, Executive Vice President and Chief Financial Officer. Following their prepared comments on the Company's strategy and performance they will be available to take your questions.

Before we begin I'd like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for First Defiance Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the Company has no control.

Information on these risk factors and additional information on forward-looking statements are included in the news release and in the Company's reports on file with the Securities and Exchange Commission. And now I'll turn the call over to Mr. Small for his comments.

Thank you, Mary Beth. Good morning and thank you for joining us for the First Defiance Financial Corp. conference call to review the 2011 first quarter. Last night we issued our earnings release reporting the first-quarter 2011 results and this morning we would like to discuss that release and look forward into the balance of 2011. At the conclusion of our presentation we will answer any questions you might have.

Joining me on the call this morning to give more detail on the financial performance for the first quarter is CFO Don Hileman. Also with us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

First quarter 2011 net income on a GAAP basis was $2.7 million or $0.25 per diluted common share area. This compares to net income of $1.5 million and $0.12 per diluted common share in the 2010 first quarter. The 2011 first-quarter earning results are an encouraging start to the year. These improved results are a direct reflection of better asset quality performance during the quarter and the Bank's ability to maintain its net interest margin.

The primary driver on asset quality was the significantly lower provision expense in the first quarter of 2011 compared to last year's first quarter. This helped offset reduction in non-interest income and an increase in non-interest expense.

Credit quality has been the most significant factor impacting earnings over the past couple of years. And while we are still seeing a degree of stress on certain credits, overall we saw marked improvement in the maturity of the loan portfolio. Reduction in classified loans and other real estate owned, along with stabilizing values, contributed to the lower provision. The stabilization of property values resulted in fewer and less severe write-downs than previously identified problem assets.

We're also encouraged by the reduction in non-performing assets for the second consecutive quarter, lower delinquencies and a reduction in troubled debt restructured. Net charge-offs were also a factor in the improved earnings as they were down compared to both the linked-quarter and the first quarter 2010. We anticipate the level of charge-offs will be choppy over the next several quarters as more of the problem assets work through the system. However, we are confident we have adequately reserved for these assets.

Loan balances dropped again during the first three months of 2011 in virtually all loan categories. Both normal amortization and pay downs on lines of credit contributed to the reduction as loan demand remained soft through most of the quarter. We did start to see a pickup in borrowing requests in the latter part of the quarter and several significant commitments on the commercial side are waiting to be closed and funded.

Residential mortgage funding is well off the pace of the last half of 2010, but is at more normal historic levels. One positive on the residential side is we are seeing a significantly higher percentage of purchases rather than the refinancing loans that were more prevalent in 2010.

Even with the drop in loan balances net interest income for the quarter was up slightly over the first quarter 2010 results. Net interest margin was also up 4 basis points over the first quarter 2010 and flat with the linked-quarter. Pricing discipline on both loans and deposits along with the change in the deposit mix were positive contributors to the margin performance.

Non-interest-bearing deposit average balances were up 20% compared to March 31, 2010. Non-interest income was down in the first quarter of 2011 as lower mortgage income and reduced fee income caused by recent regulatory changes and changes in consumer's management of their checking accounts were not offset by increases in insurance and Wealth Management revenue.

The increase in insurance revenue over first quarter 2010 was positively impacted by increases in contingent revenue as well as the increased production resulting from the May 2010 acquisition of the group benefits business from a local agency. Non-interest expense was basically flat with the linked-quarter but up compared to first quarter 2010. The primary difference year over year was in compensation related categories.

I will now ask Don Hileman 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 2011. Don?

Thank you, Bill, and good morning, everyone. The first quarter saw stronger profitability and progress in improving asset quality metrics, as well as higher net interest income. Net income was $2.7 million or $0.25 per share compared with $1.5 million or $0.12 per share in the first quarter of 2010.

The improvement in profitability was driven by an improvement in credit quality and corresponding impact on the provision for loan losses. Credit-related expenses still remain significantly with a total of $1.4 million in the first quarter of 2011 compared with $1.3 million in the first quarter of 2010 and on a linked-quarter basis.

Our markets are persistently showing the effects of the difficult economic environment. We are pleased with the trend of reducing unemployment rates in our market area and meaningful economic growth is slow in developing. We are encouraged that the overall trend is indicating improved economic activity; however, it will be irregular and take time to solidly develop with an extended ramp-up period well into 2011.

We are pleased with the first-quarter results and see opportunities to improve further. I will begin with a discussion on credit quality. Our provision expense totaled $2.8 million, down from $6.9 million a year ago and down from $5.7 million on a linked-quarter basis.

Our allowance for loan loss increased to $40.8 million from $39 million at March 31, 2010. The allowance percentage increased to 2.77% from 2.47% a year ago. The change in the percentage is driven primarily by the lower average loan outstandings. The overall reserve remained basically flat on a linked-quarter basis.

The first-quarter provision was $282,000 less than charge-offs for the quarter. The overall reserve level is consistent with our anticipation of higher near-term charge-offs as we continue to work through problem credits. Annualized net charge-offs were 85 basis points for the first quarter of 2011 compared with 114 basis points in the first quarter of 2010 and 158 basis points in the fourth quarter of 2010.

Of the total charge-offs 68% related to commercial real estate loans, 16% residential, 6% home-equity and consumer and 10% commercial loans. Of the total commercial real estate charge-offs 68%, or $1.6 million, was due to two credit relationships. As we see improvements in our asset quality trends as well as in the economy we'll be more confident the asset quality trends have turned the corner toward steady improvement.

Our OREO balance declined on a linked-quarter basis and ended the first quarter at $9.2 million. The OREO balance is made up of $7.2 million in commercial real estate and $1.90 million of residential real estate. We also had additions of $1.8 million in the first quarter of 2011 offset by sales of $1.6 million and valuation adjustments of $573,000.

We continue to be active in seeking potential buyers of these properties and are encouraged with the recent activity. We have more buyers of OREO properties and we expect to see some stabilization of values in the near-term. At March 31 our allowance for loan losses represented 2.77% of total loans outstanding, up from 2.7% on a linked-quarter basis, and represents 89.53% of our non-performing loans.

The allowance for non-performing assets was 74.56% at March 31, 2011, up slightly from 73.05% at March 31, 2010. Non-performing assets ended the quarter at $54.7 million, or 2.65% of assets, down from 2.78% of total assets on a linked-quarter basis and up slightly from $53.4 million or 2.59% of total assets at March 31, 2010.

Total non-performing loans decreased to $45.6 million from $47 million on a linked-quarter basis and were up from $40.6 million in the first quarter of 2010. Restructured loans decreased $1.4 million from last quarter. Restructuring loans are considered non-performing because of the changes in original terms granted to borrowers. It is important to note that these loans are still accruing.

Total classified loans increased $5.2 million to $131.9 million at March 31, 2011 from $126.7 million at March 31, 2010 and decreased $1.2 million from $133.1 million at December 31, 2010. We're encouraged with the near-term trend and continue to expect improvements in our overall risk profile throughout 2011.

Total delinquency rate was 3.2% at March 31, 2011, down from 3.36% at March 31, 2010 and down from 3.4% on a linked-quarter basis. The delinquency rate for loans 90 days past due or in non-accrual increased to 2.76% this quarter, up from 2.68% in the fourth quarter of 2010 and up from 2.1% at March 31, 2010.

We are not satisfied with the overall levels of 90-day delinquencies. However, of the total non-accrual loans of $41 million, or $12.4 million or 30% are under 90 days past due.

We are very pleased with the improvement in the 30-day nine-day level of delinquencies. The 30-day nine days past due decreased 67% from $20 million a year ago to $6.6 million in the first quarter of 2011 and decreased on a linked-quarter basis from $11.1 million in the fourth quarter of 2010. This improvement helps the single improved credit quality trends as we work through the current problem credits.

Mortgage banking was down in the first quarter impacted by rising rates and seasonal patterns. We've seen a tapering off of applications over the last several months. Overall mortgage banking income in the quarter was $1.3 million compared to $1.8 million in the first quarter of 2010 and $2.7 million on a linked-quarter basis.

We had a gain on sale income of $726,000 in the first quarter of 2011 compared with $1.2 million in the first quarter of 2010 and $1.8 million in the fourth quarter of 2010. We also recorded a positive valuation adjustment to mortgage servicing rights of $171,000 in the first quarter of 2011 compared with positive valuation adjustments of $321,000 in the first quarter of 2010 and positive valuation adjustments of $1.1 million on a linked-quarter basis.

The positive valuation adjustment in the first quarter reflects the steady change in the level of market interest rates over the last several quarters that affect the assumed prepayment speed of the underlying collateral. At March 31, 2011 First Defiance had $1.3 billion of loans serviced for others. The mortgage servicing loans associated with those loans had a fair value of $9.6 million or 76 basis points of the outstanding loan balance service.

Total impaired reserves, which are available for capture in future periods, totaled $953,000 at quarter end. In the first quarter reported charges of $2000 for other temporary impairment compared with the first-quarter of 2010 charge of $70,000. This fact reflects a more stable economic environment and relates to our investments in trust preferred collateralized debt obligations.

Management of [the lease] probability is low; we will have any significant OTTI charges in the future. The stability of marketplace and the continuing analysis of the current portfolio assist us in making this conclusion.

Turning to the other operating results, our net interest income was $17.2 million for the quarter compared to $17.1 million for the first quarter of 2010 and $17.8 million on a linked-quarter basis. For the quarter our margin was 3.89% which was a 4 basis points increase from the first quarter of 2010 and flat on a linked-quarter basis. We've been successful in lowering our cost of funds to offset the decline in asset yields.

We have seen more aggressive competitive pricing pressure and the downward repricing of variable rate loans based on the current yield curve. The continued high level of liquidity has also impacted the margin as we have seen an increase in overnight deposits which were $207 million at the end of the quarter.

We have selectively increased the securities portfolio in order to deploy lower yielding overnight deposits into securities on the short to intermediate term and of the yield curve. We will continue the strategy over the next quarter until loan demand picks up.

We have been staying in the four to five year weighted average life range. Even with the give up in yield associated with the high liquidity level we believe our liquidity position continues to be important and gives us added flexibility in the overall liability pricing.

We're placing strong emphasis on non-interest-bearing deposit accounts and saw the balances grow this quarter. Non-interest-bearing deposits represent 14% of total deposits. We are focusing on pricing opportunities to maintain and expand the margin. We are particularly focused on asset pricing discipline and the challenges of maintaining asset yields.

Our cost of funds declined 10 basis points on a linked-quarter basis with the yield on assets declining 10 basis points as well. Non-interest income was $5.9 million for the first quarter, down from $6.8 million in the first quarter of 2010. Fee income declined to $2.6 million in the first quarter of 2011 from $2.9 million on a linked-quarter basis and from $3.2 million in the first quarter of 2010.

The decline in fee income is directly attributable to the downward trend in net NSF fee income as a result of new regulations. Net NSF fee income was $1.2 million for the first quarter of 2011 compared with $1.6 million for the fourth quarter of 2010 and $1.8 million in the first quarter of 2010.

Insurance revenue was $1.7 million in the first quarter of 2011, up from $1.3 million on a linked-quarter basis and up from $1.3 million in the first quarter of 2010. The year-over-year insurance revenue increase is driven by an increase in contingent income in 2011 to $329,000, from $91,000 in the first quarter of 2010 and the acquisition of a group benefits business line in the second quarter of 2010. This acquisition added approximately $207,000 in quarterly revenue.

Non-interest income also included loss on the sale of OREO of $311,000 in the first quarter of 2011. Overall non-interest expense increased to $16.6 million this quarter compared to $14.4 million in the first quarter of 2010 and was basically flat on a linked-quarter basis. The first-quarter compensation and benefits expenses increased to $7.8 million from $7.2 million on a linked-quarter basis and from $6.5 million in the first quarter of 2010.

The increase is in compensation and benefit expense over the first quarter of 2011 -- or over 2010 is due to the Company freezing pay in 2010 coupled with no bonus accrual in the first quarter of 2010 based on the Company not meeting certain performance targets. The Company also had the additional compensation cost of about $100,000 in the first quarter of 2011 associated with the May 2010 acquisition of the group benefits business line.

Healthcare costs also increased $180,000 over the first quarter of 2010. Our total FTE level was consistently around 500 throughout the year. We believe we are close to the optimal staffing level necessary to maintain our quality customer service culture our customers desire and expect from First Defiance. FDIC insurance expense decreased $[133,000] in the first quarter of 2011 compared to the first quarter of 2010.

Our non-interest expense increased to $4.1 million in the first quarter of -- from $3.3 million in the first quarter of 2010 and declined from $4.4 million on a linked-quarter basis. Increases in expenses over the prior year were primarily due to secondary market buyback losses of $228,000 and auditing and examination services of $168,000.

On a linked-quarter other non-interest expense declined $308,000 primarily due to approximately $800,000 of core conversion (inaudible) expenses in the fourth quarter of 2010 and a decrease in real estate owned expenses of $54,000. These decreases were offset by the aforementioned secondary market buyback losses and additional non-run rate charges of $248,000 in the first quarter of 2011.

The following is a three-quarter trend of certain significant expenses. Real estate owned expenses were $718,000 in the first quarter of 2011 compared to $772,000 in the fourth quarter of 2010 and $798,000 in the first quarter of 2010. [Credit] and collection expenses were $193,000 in the first quarter of 2011 compared to $162,000 in the fourth quarter of 2010 and $349,000 in the first quarter of 2010.

Secondary market buyback losses were $228,000 in the first quarter of 2011 compared to no losses in the fourth and first quarters of 2010. We saw the balance sheet remain relatively flat from the first quarter of 2010 with total assets of $2.06 billion at March 31, 2011. On the asset side cash and equivalents grew $81 million over the year to $235 million at March 31, 2011. Securities grew $32 million over the year to $180 million.

Gross loan balances declined $105 million year-over-year and declined $48 million on a linked-quarter basis. Loan activity in general continues to be weak, but we are seeing some signs of an increasing commercial loan pipeline.

We continue to be prudent on our new loan activities. We have been very disciplined in our underwriting and have not focused on growth at the expense of taking on greater credit risk or lower rates to increase loan volume. We've been intent on making sure our service levels have not suffered as a result of increased loan -- increased levels of loan workouts. We have been able to develop strong new relationships with good commercial clients.

Total deposits declined $8 million from March of 2010 but increased $17 million on a linked-quarter basis. We are pleased with the mix of deposits as we have seen a growth in non-interest-bearing accounts. Non-interest-bearing deposits increased to $219 million at March 31, up from $187 million at March 31, 2010. We continue to focus on growth in non-interest-bearing balances in correlation with our overall strategy and efforts to reduce our cost of funds in this interest-rate environment.

As mentioned previously, we completed a common stock offering in March of this year and increased shareholder's equity by $20 million. Total shareholder's equity at March 31, 2011 was $263 million, up from $236 million at March 31, 2010. Our capital position remains strong with shareholder's equity to assets improving to 12.76% at March 31, 2011 from 11.45% at March 31, 2010.

The Bank's risk capital ratio was strong at approximately 14.8%. We believe we are on target to repay our CPP investment in the latter part of 2013 without additional equity offering. The Board continually assesses our involvement in this program.

We recently applied to the Small Business Lending Fund in order to give us a possible alternative over refinancing our CPP investment. At the present time we have not made a final determination as to our course of action. That completes my overview for the quarter and I'll turn the call back to Bill.

Thank you, Don. As we progress through 2011 we are aware that there are still challenges to a sustained economic recovery. Our three primary focuses remain asset quality, expense control and core deposit growth. We have made significant strides in all three of these areas in recent quarters and we must continue with this effort to meet the challenges and return to higher levels of profitability. We are hoping that recent indications of stronger loan demand continue to build and reverse the recent trend of declining balances.

The overall economic climate throughout our market area shows indications of strengthening. Commercial clients were showing improving cash flows and stronger balance sheets as 2010 wound down and we are seeing these validated in year-end audited statements. Many are also reporting significant pickup in work orders and in some cases new hiring. Most of our commercial clients are keeping a cautious eye on oil prices and the impact this is having on fuel, fertilizer and other petroleum-based products.

We look for overall loan demand to slowly pick up as the economy improves. As stated previously, we already saw indications of this uptick late in the first quarter and we anticipate this will continue. Pricing on both loans and deposits will be critical in maintaining our margin, especially as the fed continues to work at keeping interest rates down.

Unemployment continues to run slightly above the national rate throughout our market area and this may continue to stress some of our customers. However, we are pleased to see some improvement in the employment data and the additional consumer confidence that this seems to bring with it.

Don mentioned our common stock offering completed at the end of the first quarter with gross proceeds of slightly over $21 million. This additional capital creates liquidity at the holding company and an independent source of capital that will give us more future flexibility without needing to upstream capital from the Bank.

We are keeping a cautious eye on the regulatory and legislative scene as regulators are now working on developing the regulations that will implement the Dodd-Frank Act. There are still many unanswered questions regarding this legislation and our industry is working hard to help shape the final regulations to have the least damaging effects to banks and their customers.

Our mission is to be a community bank that provides a complete line of financial services with the relationship oriented approach on a profitable basis. The staff we have throughout this organization understands the importance of relationship banking and the importance of delivering on that mission. I thank them for their diligence and loyalty and I thank you for joining us this morning on the call. And now we would be happy to take your questions.

(Operator Instructions). John Barber, KBW.

Good morning, everyone. I think you said classified loans are done $1.2 million linked-quarter. I was just hoping you could talk about any trends you're seeing and your expectations going forward for classified loans. Thanks.

I'll let Jim Rohrs, our President of the Bank, answer on that, John.

Well, we project three quarters out through the end of the year what credits we think will come off of our classified list and we've got about $20 million that we think could come off by the end of the current quarter. Now that's going to be offset somewhat by the potential for other credits to potentially be downgraded back into the classified.

But we're hopeful to have probably somewhere around a $12 million to $15 million reduction in classifieds in the next quarter and then that trend hopefully continuing for the balance of the year -- maybe not in such great numbers.

We have a fairly large number coming off in the second quarter because of companies with calendar fiscal year ends where we get their [CP8] prepared financial statements in the second quarter. And based on interim financials and preliminary year-end statements we already have, we have strong reason to believe that they'll be upgraded because of improving cash flow.

Okay, that's good to hear, thanks. My next question was related to the $228,000 rep and warranty charge you took this quarter. I was just wondering what triggered the repurchase.

Agency requests. They've been more aggressive in looking at issues and forcing buybacks. We had it in previous quarters, just not on a comparative -- but it was a little bit more demand from them to repay.

Okay. And (multiple speakers).

I don't know if there's any particular pattern in the issues, but that was the total, John.

That's something I think, John, you'll see that many in the industry are facing. It's particularly -- Fannie Mae and Freddie Mac are reviewing these loans very, very closely and many banks have faced issue. And as Don said, we've had it in some of our other quarters, just not in the linked-quarter or the first quarter of 2010.

Okay, thanks. And can you talk about the upcoming change in regulators, if you expect there will be any changes to how you guys run your business on a day-to-day level? And then any actions you've taken to kind of help with that transition? Thanks.

Yes, we've been in contact. The OCC will become our primary regulator at the Bank and the Federal Reserve will be our primary regulator at the holding company as the OTS is phased out as of July 21. We have been in contact with both those agencies.

In fact OCC, the deputy comptroller out of the Chicago region heads -- who up the Chicago region and his assistant deputy comptroller that works out of the Cleveland office, which will be the office that will primarily be responsible for our examination, both of those are coming for an on-site visit at our invitation. They're going to be here next Monday so they'll get a chance to meet our management team.

Don and I both have been to OCC outreach meetings that the fed has also attended. I don't see any significant change in our approach to our business plan as a result of that. We're feeling that our business plan, the way it's structured right now at the Bank, has been very much a commercial bank strategy for a number of years. And a strategy that's obviously the OCC is very familiar with.

And at the holding company level, obviously we'll be entering a new era there with the fed regulation that I think the -- in part the liquidity and the independent capital at the parent that was created through the recent stock offering I think puts us in good shape there. So there's -- obviously you're always a little bit anxious when there's a change, but I think we're properly prepared for it.

That's all I had. Thank you very much.

Thank you.

(Operator Instructions). Don Burgess, Burgess Capital.

Yes, could you comment on dividend policy going forward and how you're thinking about that?

As I'm sure most of our listeners are aware, we had suspended our dividend in the fourth quarter of 2009. We continue to assess it on a quarter-by-quarter basis as we've gone through the economic cycle that we've been in; we just felt that it was prudent to preserve as much capital at -- especially at the Bank as possible.

We do continue to assess it. We certainly are encouraged by the improvement in that we're starting to see in the economy. And our Board will continue to evaluate based on current economic conditions and economic forecast and regulatory environments and make decisions based on that. Obviously we're hoping to get back to paying a dividend sometime in the not too distant future.

Thank you.

You're welcome, thank you.

(Operator Instructions). I'm showing no further questions at this time. So we're going to conclude our question-and-answer session. I would like to turn the conference back over to Mary Beth Weisenburger for any closing remarks.

We'd just like to thank everyone for their participation today and this concludes our call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.