Premier Financial Corp (OHIO) (PFC) 2014 Q1 法說會逐字稿

Thank you. Good morning, everyone, and thank you for joining us today for the 2014 first-quarter earnings 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 Don Hileman, President and CEO of First Defiance; and Kevin Thompson, 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 would 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. Hileman for his comments.

Good morning, and welcome to the First Defiance Financial Corporation first-quarter 2014 conference call. Last night we issued our 2014 first-quarter earnings release, and now we would like to discuss that release and give you an outlook into the remainder of 2014. At the conclusion of our remarks, we will answer any questions you may have.

Joining me on this call this morning to give more details on the financial performance for the first quarter is our CFO, Kevin Thompson. Also joining us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

In a separate release last night, First Defiance and First Community Bank announced the mutual agreement to terminate the merger agreement announced earlier this year. It became clear that completing the merger was going to take significantly longer than originally anticipated, and terminating the agreement allows both companies to move forward, focusing on individual growth plans.

In the first-quarter earnings release, we announced net income on a GAAP basis of $5.2 million or $0.51 per diluted common share compared to $5.6 million and $0.55 per diluted common share in the first quarter of 2013. We continue to see steady improvement in our core operating results in the first quarter. In general, we see signs of increased economic activity in our local economies, and in some communities, very strong economic growth. Employment numbers have also improved in most of our core counties, but still have room for improvement to signal sustainable growth.

We expect the interest rate environment to be relatively stable at current levels in the near-term, as more viable growth is building the overall economy. We are pleased with our net interest income growth this quarter over the first quarter of 2013, driven by an increase in loan balances outstanding. Credit quality improvement positively impacted our results as our provision expense declined, due to lower net charge-offs this quarter. Credit quality metrics in our existing loan portfolio improved as we moved through the year and the first quarter.

Nonperforming assets declined approximately $7 million or 17% year-over-year. Nonperforming loans declined approximately $8.5 million or 24% year-over-year. While we have seen the lowest nonperforming levels in several years, we still see room for improvement as we work with our customers. Classified loans and nonaccrual loans also showed progress in the first quarter of 2014, staying on a downward trend.

The deposit side of the balance sheet continued to show strong growth in the first quarter of 2014. The growth has been primarily in non-interest-bearing and interest-bearing demand accounts, with more movement in the interest-bearing accounts this quarter. This is due in part to the low interest rate environment, leaving many people and businesses parking funds in non-term accounts rather than trying to tie up funds for an extended period of time.

On a linked quarter basis, we were able to maintain our margin at 3.61%. Noninterest income in the 2014 first quarter was up over the linked quarter but down from the first quarter of 2013. The linked quarter was impacted by the receipt of contingent insurance commissions in the first quarter. Mortgage banking income continues to be the most significant driver of prior-year comparisons. Mortgage loan production in the first quarter of 2014 declined 71% from the first quarter of 2013. Increased income from insurance and wealth management areas helped to mitigate the negative impact of mortgage banking in the first quarter.

Total noninterest expense decreased $581,000 from the first quarter of 2013, but increased on a linked quarter basis due to the impact of merger termination agreements. In general, we have maintained an expense trend consistent with long-term goals. We are pleased to announce a second-quarter dividend of $0.15 per share, which represents an annual dividend yield of approximately 2.2%, a continued strong performance and capital level to support this utilization of capital.

I will now ask Kevin Thompson to give you additional financial details for the quarter before I conclude with an overview. Kevin?

Thank you, Don, and good morning to everyone. As Don indicated, all-in, earnings for the first quarter were $5.2 million or $0.51 per diluted share, which included the merger termination costs of $511,000 after-tax or $0.05 per diluted share. This compares to $5.6 million or $0.55 in the first quarter of 2013. As you can see, excluding the one-time charge, earnings would be up for the quarter by a penny per share.

Aside from the merger termination costs, we were pleased with many aspects of our performance in the first quarter. Overall, our core fundamentals generated solid results despite the lower level of mortgage banking revenues that we've now experienced for the last three quarters. Year-over-year, we've seen expansion in net interest income, strong numbers in insurance and wealth management, along with lower credit costs and operating expenses.

Turning to the details and starting with the income statement, our net interest income was $16.8 million for the first quarter of 2014, down slightly from $17 million in the linked quarter, which had two more accrual days, but up nearly $300,000 from the $16.5 million in the first quarter last year. For the first quarter of 2014, our margin was 3.61%, flat with last quarter and down from 3.78% in the first quarter last year. A majority of the decrease versus the prior year has been a result of strong deposit growth exceeding loan growth. This has led to increased liquidity, which lowered our overall yield on earning assets and lowered our margin.

Our yield on earning assets declined 26 basis points from the first quarter last year, but only 1 basis point on a linked quarter basis. Our cost of interest-bearing liabilities was down 8 basis points from a year ago, and remained flat on a linked quarter basis.

Total new loans originated in the first quarter were put on at a weighted average rate of 4.57%, an increase from 4.5% in the fourth quarter of 2013. And our loan portfolio yield in the first quarter declined by just 1 basis point to 4.38% on a linked quarter basis. As our earning asset mix improves going forward through additional growth and loans and investments, we will expect our margin to improve accordingly.

Total noninterest income was $7.3 million in the first quarter of 2014, up from $6.5 million on a linked quarter basis and down from $9 million in the first quarter of 2013. The decline from the first quarter of last year was primarily due to lower mortgage banking revenues. Service fee income was $2.3 million in the first quarter of 2014, a slight decrease from the $2.5 million in the linked quarter and from $2.4 million in the first quarter of 2013. Insurance revenue was $3 million in the first quarter of 2014, up from $2.1 million in the linked quarter and even with the $3 million in the first quarter of 2013.

The first quarter is generally when we receive our contingent insurance commissions, which totaled $878,000 this year versus $944,000 a year ago. Also, our trust income, while a smaller revenue component, has shown significant growth from a year ago, now totaling $278,000 in the first quarter, up 35% from $206,000 in the first quarter last year.

Regarding the decline in mortgage banking revenues, higher rates during the quarter versus prior periods led to significantly lower volumes, primarily in refinance activity. Mortgage banking originations were $28.6 million in the first quarter of 2014, down from $43.4 million on a linked quarter basis, and down from $108 million in the first quarter of 2013, a time when refinance activity was still quite heavy for us.

Overall, mortgage banking income for the first quarter of 2014 was $1.2 million compared to $1.3 million on a linked quarter basis, and $2.8 million in the first quarter of 2013. Gain on sale income fell to $641,000 in the first quarter compared to $756,000 on a linked quarter basis, and $2.2 million in the first quarter last year. In addition, the first quarter included only a small valuation adjustment to mortgage servicing rights, a negative adjustment of $7000. This is similar to the linked quarter, which included a negative valuation adjustment of $4000, while the first quarter of 2013, the adjustment was a positive $473,000.

At March 31, 2014, First Defiance had $1.4 billion in loans serviced for others. The mortgage servicing rights associated with those loans had a fair value of $9 million or 71 basis points of the outstanding loan balances serviced. Total impairment reserves, which were available for recapture in future periods, totaled $1 million at quarter-end. As for noninterest expense, first-quarter expenses totaled $16.7 million, up from $15.9 million in the linked quarter and down when compared with $17.2 million in the first quarter of 2013.

Compensation and benefits in the first quarter was down $326,000 from last year, primarily due to incentives resulting from the recent transition in management. FDIC costs were down $271,000 in the first quarter versus last year, due to the improvement in the Company's risk category from a year ago. Other noninterest expense was $4.1 million in the quarter, up from $3.5 million on a linked quarter basis, and up from $4 million in the first quarter last year. The first-quarter 2014 included $786,000 of costs for determination of our merger agreement, while the first quarter last year included $581,000 of secondary market buyback costs versus only $25,000 in the first quarter this year.

Regarding provision expense, the first quarter of 2014 totaled $103,000, down from $475,000 last quarter and down from $425,000 in the first quarter last year. Net charge-offs were 7 basis points of average loans for the first quarter of 2014, which compares favorably with 39 basis points last quarter and 18 basis points in the first quarter last year. Our allowance for loan loss decreased to $24.8 million at March 31 from $25 million at year-end and $26.5 million at March 31 a year ago.

Credit quality improvements achieved during the past year led to an allowance percentage at first quarter-end of 1.58%, which was even with the prior quarter and down from 1.76% a year ago. While the allowance to loan ratio has decreased, the allowance coverage of nonperforming loans has increased. The allowance now represents 92.6% of our nonperforming loans, up from 75% at March 31, 2013. We expect the reserve percentage to track between the current level and 1.5%, as asset quality continues to improve.

As for the asset quality numbers, we've seen a decrease in nonperforming loans in the first quarter of 2014 to $26.8 million, down from $27.8 million on a linked quarter basis, and down from $35.3 million at March 31, 2013. However, our OREO balance increased on a linked quarter basis to $6 million from $5.9 million and up from a year ago. Overall, nonperforming assets ended the quarter at $32.8 million or 1.52% of total assets, down from 1.94% of total assets at March 31, 2013. Total classified loans also declined to $51.3 million at March 31, compared with $55.6 million on a linked quarter basis, and well below the $72.3 million at March 31, 2013.

Moving to the balance sheet, total assets were $2.16 billion at March 31, 2014, up $27 million from last quarter and up $124 million from last year. Cash and equivalents, including the higher liquidity mentioned earlier, increased to $211.2 million from $156.3 million at March 31, 2013. Securities increased $13.1 million from a year ago to $209.7 million. Gross loan balances increased $56.9 [million] or 3.8% year-over-year. This past quarter, however, loans declined $16.5 million, borrowing a similar seasonal pattern as last year's first quarter. We do see volumes beginning to increase in the second quarter, and are optimistic the momentum will build in the second quarter as it did a year ago.

Total deposits increased $104.3 million from a year ago and were up $24.8 million on a linked quarter basis. Non-interest-bearing deposits increased to $338.4 million at March 31, 2014 from $291.8 million at March 31, 2013. We remain pleased with our ability to generate deposit growth at a low cost of funds in this interest rate environment. However, loan growth will continue to be a top priority.

Looking at our capital position, total period end stockholders equity finished March 31, 2014 at $274.9 million, up from $262.6 million at March 31 a year ago. Our capital position remains strong, with period end shareholders equity to assets of 12.75% at March 31, 2014 compared to 12.8% at March 31, 2013. The Bank's total risk-based capital ratio is strong at approximately 15.7%.

Regarding our stock repurchase program, we did repurchase about 79,000 shares during the quarter and have now repurchased a total of about 150,000 of the 489,000 shares authorized last September. Also in our release last night, we announced the declaration of our quarterly dividend of $0.15 per share. We consider both of these actions important in bringing additional value to our shareholders.

That completes my financial review. And I'll now turn the call back over to Don.

Thank you, Kevin. As we move into the second quarter and the remainder of 2014, I am very pleased about where First Defiance is positioned. We have filed up 2013 with a strong core first quarter. We have put in place several new initiatives. Going forward, the combination of the loan growth, improved asset quality and expense control will play a role in helping us improve our financial performance. Unemployment rates throughout our markets have improved and we expect this trend to continue through the coming year.

Manufacturing led by automotive industry has been the primary reason for the rebound, and production at various facilities has increased, with significant improvement in our core margins. Overall economic use has been positive from both state and local economic development sources in all three of the states in our footprint, along with additional positive economic development news from business owners -- all of which helps to build on our optimism for future improvement.

Our three areas of internal focus at First Defiance are revenue growth, expense control, and core balance sheet growth. We do believe loan demand will improve in 2014 after the cyclical decline in the first quarter. Our current pipeline is encouraging, and our lenders tell us activities and inquiries are on the rise. The market remains very competitive, but we believe we can compete without making concessions in rate and other terms. It is important that we continue disciplined underwriting during this period of loan portfolio growth. We are committed to maintaining our underwriting standards and will not compromise on our standards to get loan growth.

As we have discussed, our new loan volume has been strong, but our portfolio has been impacted by significant paydowns. We have focused on this in the past and are hopeful that the value we add will become more apparent to our clients. We have defined several key initiatives for 2014 that we believe will allow for a more focused approach to business.

The first is business banking. We have organized a business banking group that will address the needs of our midmarket clients in an expedited manner. We will focus on building small business relationships with more products and services designed to meet their needs. Our business banking initiative kicked off the first of April. We have a full complement of business bankers and have started, in earnest, the sales initiative. We expect this product line to contribute to growth in 2014.

The second is alternative delivery. As technology continues to evolve, our customers want to be able to bank at their convenience. In 2014, First Defiance will be introducing several key services that can help our customers bank anytime, anywhere, through any device. These channels have the ability to produce revenue for the Company by providing a cheaper cost-per-transaction than we've seen in the past.

Alternative delivery channels such as mobile banking with mobile deposit, online banking, live chat, online mortgage applications, online credit applications, and online account creation, play a vital role in the future of our Company. We kicked off mobile deposit in March on a limited basis, and look to expand that offering in May. We also initiated an online mortgage application service within the quarter. We have started to receive applications through that channel, and we look to expand these services in 2014.

We continue to look for opportunities to strengthen and grow insurance and wealth management and sources of revenue. We expanded our growth efforts by streamlining processes and adding additional leadership in these areas to capitalize on strong opportunities in 2014. We also plan on opening our second Fort Wayne, Indiana location around the end of the second quarter, and look forward to continued growth in the Fort Wayne market area. We also opened a loan production office in the Columbus area in the first quarter, and look for that initiative to add loan growth in 2014 as well.

We are very heartened by our recent performance. And we all know that there's a lot of work to be done to be a high-performing community bank, which is what we strive to be every day. Our consistent strategy and business plan have served us well over the years, and we have shown in recent years our ability to adapt to meet different challenges. We remain confident in the strategy and the people we have working hard to execute our plan. We feel good about the start of 2014 and look forward to the rest of the year. We are committed to our customers and our shareholders, and appreciate the trust you have placed in us as we work to make First Defiance a high-performing community banking organization.

Thank you for your interest in First Defiance Financial Corp. And we thank you for joining us this morning. We will now be happy to answer your questions.

(Operator Instructions). Chris Marinac, FIG Partners.

Don and Kevin, I just wanted to delve a little bit more into, I guess, loan growth and kind of pipelines. And maybe you can just talk somewhat further about seasonality, and also sort of what you expect customer behavior the next couple of quarters?

We'll let Jim Rohrs answer that question, Chris.

First of all, the seasonality, as Kevin said, we experienced this last year and prior years also. A lot of that is driven by lines of credit for our ag customers who defer revenue into the current year from last year by holding over inventory and selling it this year, and then reducing the line of credit. So we are seeing those start to draw back as the ground starts to dry up and farmers are able to get back into the fields.

Relative to the pipeline, we -- our pipeline -- in the Credit department, these are loan requests where we have the financial statements -- and they are in the process of being analyzed -- are up about a little over 50% from a year ago. So we are really heartened by that. And that doesn't include deals that are in the pipeline where we're still in discussions but don't yet have the financials in the Credit department. So we are heartened by what we are seeing as an improved volume of loan requests. And we are still seeing very, very competitive pricing out there.

Okay, great. And then, I guess, as a follow-up, Jim, do you see the same strength in ag particularly? And do you have, I guess, a similar outlook on that business in terms of this year?

Yes. We are optimistic with the ag economy. I don't think this year is going to be as good as the last couple of years. I think commodity prices are down and I think input prices are up a little bit. We've seen a lot of run-up in farmland values, which is adding some kind of fixed expense onto I think a lot of customers' financial picture.

But I think this will be another good year for farmers. It's like any industry. You need to pick the winners, and if you are doing business with winners, you'll do very well. And we're optimistic about it. And that's a part of our portfolio we would like to see actually grow.

I might add -- this is Kevin -- it's not directly related to the loan growth, but more to the mortgage banking business; but similar type of pickup in activity here, as we are transitioning into the second quarter. Applications -- our mortgage applications, somewhat of a leading indicator for us in terms of volumes generally. We closed a loan a month after the application. We saw applications in March up 67% over February. And so far in April, we are seeing the April run rate be another 24% above what we saw in March.

So, we are encouraged that overall activity, both from on balance sheet loan growth, as Jim described, and some of the mortgage banking activities, it's picking up. And it seems like we're moving in the right direction there.

Okay, great. And just last question. Kevin, could you just remind us how much is left on the authorization for share repurchases?

Sure. As I said, we've now repurchased about 150,000 of the 489,000; so we've got about 339,000 shares left.

Great. Thanks. Sorry about that.

Okay. No, that's all right.

Damon DelMonte, KBW.

Just a question on the margin. I think the comment was that the new loans are coming on at around 4.57%. Is that for the entire portfolio? Or is that for just the commercial segment?

I believe that's the entire portfolio -- all new loans originated. It doesn't include renewals. But they -- their renewal rate was pretty similar, as I remember.

Okay. So, from that, I think you said that your total loan portfolio yield is around 4.38%. So, it's from that that you guys are optimistic that the margin probably has reached an inflection point and will start to trend up?

That has seemingly leveled off, and we think it will begin to trend up. And particularly if rates go up, we know we'll get some lift.

Okay. And then could you provide just a little more color on the background on the termination of the merger? I believe it was announced just back in February and now in April, what kind of led you guys to believe that the deal couldn't close in a timely fashion?

Well, through our process in talking with the client, it became evident that it would take longer than we expected. And both companies made the strategic decision to terminate the agreement and allow our employees to focus on growing our individual companies. You know, we have agreed that the details of the termination are going to be kept within the parties. But we feel it was in the best interest. We focused on what we want to do going forward; all the costs are reflected in the first quarter. And we are looking for future growth for First Defiance.

Okay, great. And then just to kind of circle back on the loan growth, is there a range that you're comfortable providing, as far as what you would expect on a year-over-year basis for total loan growth?

We're looking still at mid-single digit. Now, there is -- 4% or 5% is still what we're kind of targeting at this point.

Okay.

Yes, we've kind of moderated that based on -- we are still seeing very competitive pricing with a lot of the larger banks in our market area, Damon. So, with our strategy of maintaining some pricing discipline and focused on some things, we understand that we're not going to be as fast at growing in our loan portfolio as maybe if we were growing our prices and competing more on rate than what we planned to do, so.

It's been a little slower start than we were told. Again, the seasonality we understand; but with the business banking strategy just beginning to kick in, we are encouraged. And with the LPO that we've got down in Columbus, we are encouraged. And some of those things give us more optimism of reaching the upper end of that expectation. But next quarter, will really be the telling quarter.

Okay, great. That's all that I had for now. Thank you.

All right.

Thanks, Damon.

(Operator Instructions). As it appears there are no more questions, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, we appreciate your participation today and thank you very much.

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