Premier Financial Corp (OHIO) (PFC) 2012 Q1 法說會逐字稿

Good day, and welcome to the First Defiance Financial Corp. 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 Ms. Terra Via, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's first-quarter 2012 conference call. This call is also being webcast and the audio replay will be available at First Defiance's 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 the future financial results and business operations for First Defiance Financial Corp. Actual results may differ -- vary from the current management forecast 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, Terra. Good morning and thank you for joining us for the First Defiance Financial Corp. conference call to review the 2012 first quarter. Last night we issued our earnings release reporting the first-quarter 2012 results, and this morning we would like to discuss that release and look forward at the balance of 2012. 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 Executive Vice President and CFO, Don Hileman. Also with us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

First-quarter 2012 net income on a GAAP basis was $4.2 million or $0.37 per diluted common share; this compares to net income of $2.7 million and $0.25 per diluted common share in the 2011 first quarter. The 2012 first-quarter earnings results are an encouraging start to the year, but still demonstrate the challenges of the last several years.

Among the strong positives in the quarter was our non-interest income which was driven by very solid mortgage production throughout the quarter and we held the line on expenses. However, while we see improvement in the overall credit quality at the Bank continuing, we still saw asset issues negatively impacting earnings.

Margin compression also worked as a deterrent to higher earnings as the historically low interest rate environment drags on. 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 several key metrics.

Reduction in classified loans and lower delinquencies are both strong indicators of the overall improvement of the credit quality. However, increases in non-performing loans, primarily driven by additional loans placed on non-accrual, and another quarter of high levels of charge-offs continue to show the late period effects of the recent economic recession.

Some of these increases are the result of credits finally working their way through the cycle and also to changes in our treatment of credits based on guidance from our new regulator. The increases involve credits that had been previously identified as having weaknesses, but we have adjusted our procedures and the treatment of some of these credits based on the new guidance.

Loan balances dropped during the first three months of 2012 in virtually all loan categories after two consecutive quarters of growth. Soft loan demand, strong liquidity position on the part of borrowers and a very competitive lending environment all contributed to the decrease in loans. Loan balances have been affected by the higher level of charge-offs the last several quarters also.

One significant characteristic that was very notable this quarter was the decline in outstanding balances on farm lines of credit. Many of our agricultural customers have had several consecutive strong performance years that puts them in a position to utilize cash for input expenses this year, and as a result they have idled or dramatically reduced draws on their operating lines. This is obviously a positive for all, but it has had a negative impact on loan balances.

The one strong area for loan production during the first quarter was in residential real estate loans. Mortgage production continued, in fact increased its strong performance that goes back to the middle of last year. First-quarter 2012 mortgage production more than doubled the 2011 first quarter.

In the month of March 2012 production alone nearly exceeded the entire first-quarter 2011 level. This is not only the result of outstanding work by our loan originators, but a tremendous and efficient effort by our underwriters and processors to keep up with our originators.

On the deposit side of the balance sheet we continue to see balances grow even as rates remain near record lows. The mix continued to change in a favorable way as CD balances declined, dropping by almost $12 million. But this was more than offset by growth in DDA's and money market savings accounts as customers parked funds in hopes of higher rates in the future. This resulted in an increase in deposits of over $74 million since the end of 2011.

Net interest income was virtually unchanged compared to first quarter 2011 while loan balances were down compared to the linked quarter. They were a couple million higher than the first quarter of 2011 levels and this helped offset the net interest margin compression.

Net interest margin was down 11 basis points from the first quarter of 2011. The change in the deposit mix and disciplined pricing has helped us control the compression of the margin in this challenging rate environment.

Non-interest income was the real star of the show in the first quarter led, as I said earlier, by very strong mortgage loan production. While this was driven to a large extent by refinancing by home owners, we still were able to grow the servicing portfolio, demonstrating our ability to increase market share.

The increase in insurance revenue over first quarter 2011 was positively impacted by increases in contingent revenue as well as the increased production resulting from the July 2011 acquisition of another insurance agency located in the Toledo area. The result of these items is an increase of almost $900,000 year over year in insurance revenue.

Wealth management income also was up and we continue to hold steady on other fee income sources. Non-interest expense was up compared with the linked-quarter but down compared to the first quarter of 2011. Increases in compensation and benefits year over year were offset by lower FDIC insurance premiums and reductions in credit-related expenses. The FDIC insurance premium reduction is a result of the change in the assessment calculation affected by the Dodd-Frank legislation.

Before I turn it over to Don for more detail on the quarter I do want to report that we issued an additional press release last night announcing that our Board has approved the payment of a common dividend to our shareholders. The dividend of $0.05 per common share will be paid on June 1 to shareholders of record as of May 15, 2012.

Our prudent capital management throughout the extended economic recession has put us in the position to declare this dividend. We will carefully monitor our capital position and evaluate future dividend decisions in the same prudent manner.

I'll now ask Don Hileman 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 2012. Don?

Thank you, Bill, and good morning, everyone. The first quarter was an overall good start to the year. We saw strength in Mortgage Banking as well as an improvement in insurance revenues. Total non-interest income grew 42% year over year and 7% on a linked-quarter basis.

We are encouraged with the overall profitability in the first quarter of 2012. We saw solid mortgage production throughout the first quarter of 2012 which has continued into the second quarter. Net income was $4.2 million or $0.37 per diluted share compared to $2.7 million or $0.25 per diluted share in the first quarter of 2011, a 44% improvement.

Lower other non-interest expenses also added to the improvement in profitability. Credit-related expenses, which includes net gain/loss on the sale of OREO, OREO repairs and write-downs and collections in secondary market buyback costs were $698,000 in the first quarter of 2012 compared with $1.4 million in the first quarter of 2011. We saw continued high volume mortgage activity this quarter compared to the last two quarters.

Overall mortgage banking income for the quarter was $2.4 million compared with $1.3 million in the first quarter of 2011 and $1.9 million on a linked-quarter basis. The gain on sale income of $2.5 million in the first quarter of 2012 compared with $726,000 in the first quarter of 2011 and $1.7 million in the fourth quarter of 2011. We also recorded a negative valuation adjustment to mortgage servicing rights of $79,000 in the first quarter of 2012 compared with a positive valuation adjustment of $171,000 in the first quarter last year.

At March 31, 2012 First Defiance had $1.3 billion in loans serviced for others. The mortgage servicing rights associated with those loans had a fair value of $8.5 million or 68 basis points of the outstanding loan balances serviced. Total impairment reserves, which are available for recapture in future periods, totaled $1.6 million at quarter end.

We did not have any other than temporary charges in the first quarter of 2012, reflecting a stable economic environment as it relates to our remaining investments in trust preferred collateralized debt obligations, or CDO's. Management believes the probability is very low that we will have any significant OTTI charges in the future. The stability of the market place and continued analysis of our current portfolio assisted us in making this conclusion.

Turning to other operating results, our net interest income was $17.2 million for the first quarter, relatively the same when compared to the first quarter of 2011 and $17.5 million on a linked-quarter basis. For the first quarter of 2012 our margin was 3.78%, down 11 basis points from the first quarter of 2011 and 5 basis points on a linked-quarter basis.

The continued high level of liquidity along with lower loan yields has impacted the margin. Overnight deposits increasing to $217 million at the end of the quarter with $143 million on a linked-quarter basis.

We have accelerated our strategy to increase securities purchased selectively deploying lower yielding overnight deposits into securities on the short to intermediate end of the yield curve until loan demand is consistent. Our available for sale securities portfolio increased to $243 million at March 31, 2012 from $233 million at year end 2011 and $180 million at March of 2011.

We have been purchasing investments in the four- to five-year weighted average life range. We believe that the economic outlook in our market area continues to remain somewhat subdued. We do not anticipate any significant improvement in the near term. We also do not anticipate any actions by the Fed to raise rates in the near term. We will continue this strategy until we see evidence of sustainable net loan growth. Even with the give up in yield associated with the high liquidity level, we believe the higher liquidity position continues to be important and gives us added flexibility, but not necessarily at these levels.

We placed a strong emphasis on non-interest-bearing deposit accounts and saw balances grow this quarter. Non-interest-bearing balances represented 16% of total deposits at March 31, 2012. We saw continued competitive asset pricing pressure in the first quarter as well as a decline in loan balances.

We saw the decline mostly in the commercial category where the competitive pricing has been particularly aggressive. Our yield on earning assets declined 9 basis points while our cost of funds declined 4 basis points on a linked-quarter basis.

We've seen a broader base of very competitor pricing in our market area, which puts added additional pressure on loan growth and asset yields. Non-interest income was $8.4 million in the first quarter, up from $5.9 million in the first quarter of 2011. Fee income was stable at $2.7 million in the first quarter of 2012, up slightly from $2.6 million in the first quarter of 2011 and declined from $3 million on a linked-quarter basis.

NSF fee income was $1.1 million for the first quarter of 2012 compared to $1.2 million for the first quarter of '11 and $1.4 million on a linked-quarter basis. Insurance revenue was $2.5 million in the first quarter of 2012, up from $1.7 million in the first quarter of '11 and $2 million on a linked-quarter basis.

Year-over-year increase in insurance revenue is a result of the additional revenue provided by the acquisition of a full-service agency which closed July 1, 2011. This acquisition added approximately $622,000 in revenue in the first quarter of 2012. The linked-quarter comparison was impacted by contingent income of $504,000 received in the first quarter of 2012. Contingent income is usually booked in the first quarter of the year.

Other non-interest income increased in the first quarter of 2012 from a negative $151,000 for the same period in 2011. This was primarily the result of recording net losses of $60,000 on real estate owned property in the first quarter of 2012 compared to net losses of $291,000 for the same period in 2011.

We also recorded an increase in the value of the assets of the deferred compensation plan of $131,000 in the first quarter of 2012 compared to an increase of $28,000 in the same period of '11. Overall non-interest expense decreased to $16.3 million this quarter compared to $16.6 million in the first quarter of 2011, but up from a linked-quarter basis of $15.6 million.

The first-quarter compensation benefits expenses were $8.5 million, up from $7.8 million in the first quarter of 2011, an increase from $8.1 million on a linked-quarter basis. The increase in compensation and benefits expense over 2011 first quarter and the linked-quarter is primarily due to the Company granting pay increases coupled with an increase in commission expense related to increased insurance revenues. Also the acquisition of Payak-Dubbs added $407,000 in compensation and benefits expense in the first quarter of 2012.

Other non-interest expense decreased to $3.3 million in the first quarter from $4.1 million in the first quarter of 2011, but increased from $3.2 million on a linked-quarter basis. The main driver behind the decreases between 2011 and '12 first quarters is the $508,000 reduction in credit-related costs. On a linked-quarter other non-interest expense increased $103,000 primarily due to an increase in legal and other professional expenses of $252,000.

The following is a three quarter trend of certain significant expenses. Real estate owned expenses were $417,000 in the first quarter of 2012 compared to $718,000 in the first quarter of '11 and $741,000 in the fourth quarter of 2011. Credit and collection expenses were $248,000 in the first quarter of 2012 compared to $193,000 in the first quarter of '11 and $242,000 in the fourth quarter of 2011.

Secondary market buyback losses were $228,000 in the first quarter of '11 and $23,000 in the fourth quarter of 2011 while there were no losses in the first quarter of 2012. While we had elevated net charge-offs this quarter, we believe the overall credit quality is improving. We have focused on working through troubled credits and moving into the credit process. Overall we believe our credit risk profile of the Company is moving in the direction of improvement.

Our provision expense totaled $3.5 million, down from $4.1 million on a linked-quarter basis and up from $2.8 million a year ago. Our allowance for loan losses decreased to $28.8 million from $33.3 million at December 31, 2011. The allowance percentage decreased to 1.96% from 2.77% a year ago and from 2.24% on a linked-quarter basis. The allowance represents 58.64% of our non-performing loans. The allowance to non-performing assets was 54.84% at March 31, 2012.

The 2012 first-quarter provision was $4.4 million less the net charge-offs for the quarter. We had 11 credits that totaled $6.2 million of the total charge-offs for the quarter. The increased level of charge-offs are the result of previously identified credits with weaknesses finally working their way through the cycle and also changes in our treatment of credits based on guidance from our new regulator.

The reserve level is adequate, based on the continued general weakness of the economy, but as we see improvement in the economic environment and as we continued -- and continued reductions of classified loans, we would expect a reduction in the required allowance level. We did see a slowdown in new credits migrating to a substandard rating this quarter as well as an overall reduction of substandard credits. Classified loans declined 18% this quarter; total classifieds decreased $22.1 million to $100.4 million at March 31, 2012 from $122.5 million at December 31, 2011. We expect to continue the improvement in 2012 in the level of classified assets.

Annualized net charge-offs were 218 basis points for the first quarter of 2012, down from 249 basis points on a linked-quarter basis and up from 85 basis points in the first quarter of 2011. Of the total charge-offs 55% related to commercial real estate loans, 33% to commercial loans, 9% residential and 3% home equity.

As we see improvements in our asset quality trends, as well as in the economy, we will be more confident that we will -- we are headed toward a consistent steady improvement in the level of classified loans.

Non-performing assets ended the fourth quarter at $52.6 million or 2.45% of total assets, up from 2.24% total assets at December 31, 2011 and down from $54.7 million or 2.65% of total assets a year ago. Total non-performing loans increased to $45.4 million from $39.3 million on a linked-quarter basis and were up from $41.0 million at March 31, 2011.

Non-accrual loans saw an increase in the first quarter of 2012 from the fourth quarter of 2011. Management continually evaluates the likelihood of the Company not recovering the full principal and interest as agreed to in the original contract.

Restructured loans remained relatively stable on a linked-quarter basis. Restructured loans are considered non-performing but -- because of changes in the original terms granted to borrowers. It's important to note that these loans are still accruing.

Total past due and non-accrual rate was 3.4% at March 31, 2012, up from 3.21% at March 31, 2011. The delinquency rate for the loans 90 days past due and/or on non-accrual increased to 3.05% this quarter, up from 2.62% in the fourth quarter of 2011 and up from 2.76% on March 31, 2011.

While we are not satisfied with the overall levels of 90-day delinquencies and non-accruals, of the total non-accrual loans of $45.3 million, $25.3 million or 56% are under 90 days past due. We are also pleased loans that are delinquent 90 days or more past due declined $2 million or 11% in the quarter driven by charge-offs. We are also encouraged by the decline in the 30-day to 90-day levels of delinquencies this quarter compared to the fourth quarter of 2011 and the first quarter of 2011.

As I have mentioned in the past, we expect this indicator to be somewhat choppy in the near term until we see a consistent downward trend develop. Our OREO balance declined on a linked-quarter basis and ended the first quarter at $3.4 million, the lowest level since June of 2008. The OREO balance is made up of $2.7 million of commercial real estate and $675,000 of residential real estate. We had additions of $264,000 in the first quarter offset by sales of $286,000 and evaluation adjustments of $137,000.

We are pleased with the declining level and the overall sales activity this quarter. We expect to see continued movement in credits in and out of OREO as we move problem loans to resolution; this activity consistent with this quarter which is an improvement over prior periods. We saw the balance sheet increase from the first quarter of 2011 with total assets of $2.1 billion at March 31, 2012.

On the asset side, cash and equivalents grew $14.5 million or 6% over the year to $249.9 million at March 31, 2012. Securities grew $63.3 million or 35% over the year to $243.6 million. Gross loan balances increased to $2.7 million year over year and declined $13 million on a linked-quarter basis.

Loan activity in general has shown mixed signs of picking up and we will continue to be prudent in our new lending activities. We have been disciplined in our underwriting and have not focused on growth at the expense of taking on greater credit risk or lowered rates aggressively to increase loan volume.

Total deposits increased 97 -- or $79.3 million over the same period a year ago and increased $75.1 million on a linked-quarter basis. We are pleased with the mix of deposits as we have seen a growth in non-interest-bearing account balances. Non-interest bearing balances increased to $265.7 million at March 31, 2012, up from $219.4 million March 31, 2011. Deposit mix and pricing opportunities are a continued focus of our overall strategy in the efforts to reduce our class of funds in this interest rate environment.

As noted, we completed a common stock offering in March of 2011, that increased shareholders' equity by approximately $20 million. Total shareholders' equity ended March 31, 2012 at $281.4 million, up from $263.1 million March 31, 2011. Our capital position remains strong with average shareholders' equity to average assets improving to 13.45% at March 31, 2011 -- '12, from 11.81% at March 31, 2011.

The Bank's risk-based capital ratio is strong at approximately 15.7%. As our financial performance improves we continue to evaluate our overall capital levels and our strategy for dividends and the repayment of our CPP investment. The Board continually assesses our involvement in this program. As we've previously said, we continuously review our capital position and believe we can repay the CPP funds without additional equity offering.

While we know there are still many challenges to deal with moving forward, we believe that we have made continued progress and are moving in the right direction and are well positioned for future success. That completes my overview of the quarter and I'll turn the call back to Bill.

Thank you, Don. As we progress through 2012 we are still trying to assess the speed and strength of the economic recovery. Based on national economic indicators and our observations here in the local markets, we certainly see evidence of strengthening. Balance sheets of clients and their cash flows continue to improve. However, there still remains some hesitancy on the part of many to declare the economy totally out of the woods.

Many business people express concern about what the future holds in regards to regulation, taxes and healthcare costs. We hear reports from many clients of increases in orders and overall improvement in their operating environment, but they are advancing cautiously and making capital investments and adding to their permanent workforce.

Sustaining and increasing the speed of the recovery is going to depend to a large degree on the level of confidence growing within the business community. We see the trend toward optimism, but it is guarded optimism. 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 return to higher levels of profitability.

We do not see any sudden and huge increase in loan demand on the immediate horizon and this requires our focus on building our other revenue sources and controlling costs. We are committed to maintaining our underwriting standards and will not compromise on this to get loan growth. Pricing will be a challenge in this competitive environment. And while we are not going to be out trying to buy business with illogical rates, we will work hard to maintain our existing relationships.

We look for overall loan demand to slowly pick up as the economy improves. As stated previously, we had hoped to carry the growth momentum of the two previous quarters into the start of this year, but that did not happen. We are hearing from existing customers of possible expanded needs in the near future and we are also getting a chance to look at new relationship opportunities. Only time will tell what growth this might produce for future periods.

Unemployment rates throughout our markets have lowered in recent months, but still are higher than the national rate. Manufacturing, led by the automotive industry, has been the primary reason for this area's improvement. While our direct loan exposure to the automotive industry is minimal, many of our customers have ties to it that impact their results with the overall performance of this sector.

We are keeping a cautious eye on the regulatory and legislative scene. The good news is that with this being an election year and having a split legislature, little if any new legislation will be enacted. However, there are still many unanswered questions regarding the Dodd-Frank legislation passed in 2010, and our industry continues to work hard to help shape the final regulations that would have the least damaging effect to banks and their customers.

Our mission at First Defiance is to be a community financial services provider that offers a complete line of financial products with a 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.

I was just wondering, you mentioned part of the increase in non-performing loans this quarter was regulatory driven. I guess just to clarify, does that mean there was no deterioration in the credit, it's really just a classification issue?

I'd say primarily it was just a classification issue. I mean, I'm not saying all of it was related to that, but most of it was how we look at the accrual status versus the classification.

The one I guess bright spot in it was, John, there were no new credits that we had not previously identified. So it was -- as Don said, some of it was just the classification part of it. There was a little bit where we had some additional deterioration of value that impacted some of the changes also.

Okay, thanks. And then on net charge-offs this quarter, could you quantify just how much of the charge-offs had specific reserves against them?

It would have been about 60-some-percent.

Okay. And then just switching over to the margin, could you talk a little bit more about maybe some of the opportunities you have on the funding side of the balance sheet, potentially CDs you have maturing at more favorable rates or anything you can do with your borrowings?

Yes, we're getting pretty tight on our cost of funds in our opportunity to reduce the CD. We've been in a pretty aggressively low environment for a while now and a lot of the renewals are coming in pretty -- tighter to what they were a year ago.

So I think we have still some mix opportunity there, but roll off of CDs into like products, there's not going to be a whole lot of additional reduction in cost of funds there. But we still think we have a pretty -- some decent opportunity for a continued mix change.

Okay, great. And the last one I had was do you have any updates on your MOU?

Well, we're still -- at this point we still have not gotten our OCC report from their first exam. We've been told that this is an issue that most thrifts are having with the OCC exams as OCC tries to standardize some variances that they found in OTS's approach. So until we get that, get the official report, we really don't have any definite indication on that.

Okay, thanks for taking my questions.

(Operator Instructions).

Seeing as there's no further questions, this concludes our call. Thank you for joining us today.

The conference has now concluded, thank you for attending today's presentation. You may now disconnect.