Premier Financial Corp (OHIO) (PFC) 2015 Q1 法說會逐字稿

Good morning and welcome to the First Defiance first-quarter 2015 earnings conference call. 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 Tera Murphy, Assistant Vice President. Please go ahead.

Thank you. Good morning, everyone and thank you for joining us for today's 2015 first-quarter earnings conference call. This call is 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'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 will turn the call over to Mr. Hileman for his comments.

Thank you, Tera. Good morning and welcome to the First Defiance Financial Corporation first-quarter conference call. Last night, we issued our 2015 first-quarter earnings release and now we would like to discuss that release and give you a look into the remainder of 2015. At the conclusion of our remarks, 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 quarter is our CFO, Kevin Thompson.

We are very heartened with our first-quarter performance reflecting improvements in several key areas. First-quarter 2015 net income on a GAAP basis was $6.6 million, or $0.69 per diluted common share, compared with $5.2 million and $0.51 per diluted common share in the first quarter of 2014. Our overall performance this quarter was very strong creating momentum going into the second quarter. We experienced solid year-over-year and linked quarter loan growth. Loan growth this quarter was at a 9% annualized level, which is the strongest we have seen in quite a while. Our ability to grow our loan portfolio is a key piece of our strategic plan.

We are seeing contributions from across our footprint and expect stronger contributions going forward from our Columbus, Ohio loan production office and the Fort Wayne, Indiana market. Overall, we are seeing more optimism from our clients concerning economic stability. This is leading to an increased economic activity and more opportunities for us to serve our clients' needs. The competitive market continues to be very aggressive as all institutions are looking for loan growth. In some cases, we are seeing very aggressive rates and loosening of terms and conditions.

We are very pleased with our margin improvement this quarter, which reflects our disciplined pricing. Loan portfolio growth contributed to improving earning asset mix increasing our net interest income. Growth in both our net interest income and our non-interest income revenues on a quarterly basis reflects contributions from our core business strategies. We are also pleased with our strong net interest income growth this quarter of 8% over the first quarter of 2014. We expect the interest rate environment to be relatively stable at current levels in the short term, but anticipate an increase in market rates either in the latter part of this year or early in 2016.

We continue to measure our interest rate risk position and we are managing toward a neutral position. Growth on the deposit side of the balance sheet slowed this quarter and we also saw a shift from non-interest-bearing accounts into interest-bearing accounts. On a linked quarter basis, we were able to increase our margin to 3.88% from 3.76% and an increase over 3.61% in the first quarter of 2014. We are very satisfied with this quarterly improvement.

Non-interest income driven primarily by mortgage banking and contingent insurance income should growth both on a GAAP and core operating basis over the fourth quarter of 2014. We experienced an increase in insurance revenues on both the full year-over-year linked quarter basis. Interest income was also up on both a year-over-year and linked quarter basis. We did see a slowdown in the growth of service fees on a linked quarter basis, but still showed strong improvement from a year ago. We were very pleased to see our reversal of a trend in mortgage loan production on a comparative basis with the first quarter of 2015, which showed an 85% increase over the first quarter of 2014 in loans originated and up slightly from the fourth quarter of 2014.

Total non-interest expense decreased slightly from the fourth quarter of 2014 and increased on a year-over-year basis. The credit quality metric showed continuing overall improvement this quarter from a year ago. Non-performing assets declined $7.7 million, or 23% year-over-year. Non-performing loans decreased approximately $8 million or 30% year-over-year to $18.7 million. Approximately 71% of the nonperforming loans continue to make payments. We are very pleased with the reduction in nonaccrual loans and will focus on further reductions that will be reflected by an improving non-performing asset ratio. We are pleased with the decline from a year ago and the level of 30 to 90-day delinquencies to 0.14% of loans for the first quarter of 2015 compared to 0.21% of loans for the fourth quarter of 2014.

Overall, we are seeing improving asset quality trends across the board. We will continue to focus on reducing the non-performing and classified levels in the future. Regarding our capital management plans, we purchased outstanding warrants issued at the Treasury to purchase 550,595 shares of the Company's stock during the quarter. The Company paid approximately $12 million to repurchase the warrant. Our stock buyback program continued in the first quarter with repurchasing of 37,857 shares. Our buyback activity was impacted by the decision to repurchase the warrants.

We are also delighted to announce a second-quarter dividend of $0.20 per share representing a 14% increase over the previous dividend and an annual dividend yield of approximately 2.46%. Our ongoing strong performance in capital levels support this utilization of capital. I will now ask Kevin Thompson to provide additional financial details for the quarter before I conclude with an overview. Kevin.

Thank you, Don. Good morning to everyone. As Don indicated, earnings for the first quarter were $6.6 million or $0.69 per diluted share. This compares quite favorably to the $5.2 million or $0.51 in the first quarter of 2014, which was reduced by a merger termination cost of $511,000 after tax, or $0.05 per diluted share. However, even excluding last year's one-time charge, earnings would be up $0.13 per diluted share year-over-year. Needless to say, the first-quarter performance was very strong and included solid performance on many fronts. The quarter reflected continued expansion in net interest income, across-the-board increases in non-interest income, especially mortgage banking, significant credit quality improvement and controlled core operating expenses.

Turning to the details and starting with the income statement, our net interest income was $18.2 million for the first quarter of 2015, up slightly from $18.1 million in the linked quarter, which had two more accrual days and up $1.4 million from the $16.8 million in the first quarter last year. For the first quarter of 2015, our margin was 3.88%, up 12 basis points from 3.76% last quarter and up 27 basis points from 3.61% in the first quarter last year. A majority of the increase versus the prior year was the result of strong loan growth, reducing excess liquidity and improving the earning asset mix and yield.

The first quarter also included net interest recoveries on non-performing loans of about $264,000, which added about 5 or 6 extra basis points to our margin for the quarter. All included, our yield on earning assets increased 24 basis points from the first quarter last year and 11 basis points on a linked quarter basis. Our cost of interest-bearing liabilities was down 3 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 of 4.4%, an increase from new loan yields of 4.34% in the fourth quarter of 2014. Our loan portfolio yield in the first quarter of 2015 increased by 4 basis points to 4.42% on a linked quarter basis, which includes the impact of the recovered interest as well. Our earning asset mix now reflects much improvement from a year ago and we expect to maintain a strong mix going forward.

Total non-interest income was $8.3 million in the first quarter of 2015, up about $1 million from both the linked quarter and the first quarter of 2014. The improvement from the first quarter last year was primarily due to higher mortgage banking revenues, although we had improvement from a year ago in all major components of fee income. Service fee income was $2.5 million in the first quarter of 2015, a decrease from the $2.8 million in the linked quarter, but up from the $2.3 million in the first quarter of 2014. Insurance revenue was $3.1 million in the first quarter of 2015, up from $2.2 million in the linked quarter and up from $3 million in the first quarter of 2014. The first quarter is generally when we receive our contingent insurance commissions, which totaled $967,000 this year versus $878,000 a year ago. Also our trust income, while a smaller revenue component, continues to show significant growth from a year ago totaling $357,000 in the first quarter, up 28% from $278,000 in the first quarter of last year.

Regarding the improvement in mortgage banking revenues, lower rates during the quarter versus prior periods led to higher volumes in both purchase and refinance activity. Mortgage banking originations were $52.7 million in the first quarter of 2015, up from $48.3 million on a linked quarter basis and up from $28.6 million in the first quarter of 2014, a time when mortgage volumes were at their lowest point for us. Overall mortgage banking income for the first quarter of 2015 was $1.8 million compared to $1.3 million on a linked quarter basis and $1.2 million in the first quarter of 2014. Gain on sale income rose to $1.3 million in the first quarter of 2015 compared to $734,000 on a linked quarter basis and $641,000 in the first quarter last year.

In addition, the first quarter included only a small valuation adjustment to mortgage servicing rates, a positive adjustment of $26,000. This is similar to the linked quarter, which included a positive valuation adjustment of $11,000 while the first quarter of 2014, the adjustment was a negative $7000. At March 31, 2015, First Defiance had $1.3 billion in loans serviced for others. The mortgage servicing rights associated with those loans had a fair value of $8.9 million, or 70 basis points of the outstanding loan balances serviced. Total impairment reserves, which are available for recapture in future periods, totaled $885,000 at quarter-end.

As for non-interest expense, first-quarter expenses totaled $16.9 million, down slightly from $17 million in the linked quarter and up when compared to $16.7 million for the first quarter of 2014. Compensation and benefits expense in the first quarter was up $450,000 from last year primarily due to higher incentives and merit increases partially offset by lower medical insurance costs. Other non-interest expense was $3.6 million in the first quarter of 2015, which included 522,000 of fixed asset and OREO write-downs compared to $4.1 million in the first quarter last year, which included $786,000 of costs for the termination of a merger agreement.

Regarding provision expense, the first quarter of 2015 totaled $120,000, down from $162,000 last quarter and up slightly from $103,000 in the first quarter last year. The first quarter of 2015 included net recoveries of 10 basis points of average loans, which compares with 1 basis point of recoveries last quarter and 7 basis points of net chargeoffs in the first quarter last year. Our allowance for loan loss increased to $25.3 million at March 31, 2015 from $24.8 million at year-end and $24.8 million at March 31, 2014.

Credit quality improvements achieved during the past year led to an allowance percentage at first quarter-end of 1.50%, which was even with the prior quarter, but down from 1.58% a year ago. While the allowance to loan ratio has decreased, the allowance coverage of non-performing loans has increased. The allowance now represents 135% of our non-performing loans, up from 93% at March 31, 2014. We expect continued improvement in our credit quality, which should benefit our performance going forward.

As for the asset quality numbers, we saw a decrease in the nonperforming loans in the first quarter of 2015 to $18.7 million, down from $24.1 million on a linked quarter basis and down from $26.8 million at March 31, 2014. However, our OREO balance increased on a linked quarter basis to $6.4 million from $6.2 million last quarter and $6 million a year ago. Overall non-performing assets ended the quarter at $25.1 million, or 1.14% of total assets, down from 1.52% of total assets at March 31, 2014. Total classified loans also declined to $34.3 million at March 31, 2015 compared with $47.3 million on a linked quarter basis and well below the $51.3 million at March 31, 2014.

Moving to the balance sheet, total assets were $2.2 billion at March 31, 2015, up $22.4 million from last quarter-end and $37.7 million from last year. Cash and equivalents, including the higher liquidity mentioned earlier, decreased to $81.5 million from $211.2 million at March 31, 2014. Securities increased $39 million from a year ago to $248.7 million. Gross loan balances increased $120.6 million, or 7.7% year-over-year and this past quarter, loans increased $37.7 million. We've had a healthy start to the year and we see steady strong loan demand as we begin the second quarter.

Total deposits increased about $12 million from a year ago and about the same on a linked quarter basis. Non-interest-bearing deposits increased to $371 million at March 31, 2015 from $338.4 million at March 31, 2014. We are pleased with our growth, with our solid low-cost deposit funding, but expect deposit growth could be more of a challenge in the forecasted economic and interest rate environment.

Looking at our capital position, total period-end stockholders' equity finished March 31, 2015 at $273.1 million, down from $274.9 million at March 31, 2014. Over the past year, we have repurchased 506,000 shares for $14.6 million and this past quarter, we also repurchased the warrant issued to the U.S. Treasury under the TARP Capital Purchase Program for just under $12 million. Our capital position remains strong with period-end shareholders' equity to assets of 12.41% at March 31, 2015 compared to 12.75% at March 31, 2014. The bank's total risk-based capital ratio is strong at approximately 14.5%.

Regarding our stock repurchase program, we repurchased about 38,000 shares during the quarter and have now repurchased a total of about 173,000 of the 469,000 shares authorized last October. The effect of these repurchases and the warrant repurchase were not fully realized in the first quarter's average diluted shares. For reference, we calculate our total diluted shares at quarter-end March 31 to be 9.334 million shares and that is a further reduction of 277,000 from the first quarter's average.

Also announced in our release last night was the declaration of our quarterly dividend of $0.20 per share. We are very pleased to provide additional value to our shareholders. That completes my financial review and I will turn the call back over to Don.

Thank you, Kevin. I am thrilled with the start to 2015 and the progress we made to position First Defiance for the rest of the year. The benefits of our initiatives in pricing and account bundling changes are expected to build. We continue to focus on several key areas we believe important to improve financial performance and drive greater shareholder value. These include core balance sheet growth with a focus on loan growth, overall revenue growth, expense control and improved asset quality. We feel we are making steady progress in all of these areas.

The first-quarter expense level includes several items that we do not expect to recur and anticipate moving to a lower level in the second quarter. We do believe improvements in loan demand aided by further improvements in the economic environment will continue in 2015. We also expect more activity from our Columbus, Ohio loan production office with the addition of lenders allowing us to capitalize on strong opportunities. The size of our current pipeline reflects increasing confidence in our ability to grow outstandings. The lending environment remains very competitive, but we feel we can grow our business without making significant concessions in rate and other terms.

Our average loan yield increased 4 basis points on a linked quarter basis. It will be challenging to uphold growth in the loan yield until market rates move higher. We will stay focused on disciplined pricing and building strong relationships with our clients. We are seeing solid progress in our business banking initiative and more activity is expected from this segment in the coming year.

Our business bankers in each of our markets are 100% dedicated to this opportunity and increased production volumes are anticipated each and every quarter. We continue to look to enhance our electronic and mobile capabilities giving our customers more choices on how they bank with us. The launch of online account creation this quarter was our latest enhancement to our electronic capabilities. The digital delivery environment is changing at a very rapid pace and we are committed to keeping pace.

Growth in our insurance and wealth management revenues was also reflected in our quarterly results and will remain in our plan for revenue growth in the future. While organic growth is a primary focus, we are constantly looking for strategic acquisition opportunities in those areas. We are very inspired by our recent performance and look to constantly drive the initiatives that we believe will help us obtain our goal of being a consistently high performing community bank. We remain confident in our strategy and in the people working hard to execute our plans and evaluating new initiatives to enhance our overall strategy.

We feel very good about our first-quarter performance and look forward to the rest of 2015. We are committed to all of our customers and shareholders and appreciate the trust you have placed in us as we work to make First Defiance a high performing community bank. Thank you for your interest in First Defiance and we thank you for joining us this morning. We will now be happy to take any of your questions.

(Operator Instructions). Damon DelMonte, KBW.

Good morning, guys. How are you? So my first question is I think, Kevin, you mentioned that your outlook for loan growth -- you are seeing steady strong loan demand. How would you guys quantify that on an annualized basis? Are you confident you can get growth that is upper single digit, possibly low double-digit annualized, or do you still think it is somewhere in that mid to maybe lower upper range?

Yes, I think the latter more than the former. I don't think I am ready to go to double-digit yet, Damon, but it has been at a pretty steady pace as we enter the second quarter and basically consistent with what we saw in the first quarter.

Okay. So probably that mid to upper single digit, okay. Okay, that is helpful. Also, I think you mentioned that the buyback was out of focus this quarter because of the warrant repurchase. With shares trading close to 150% of tangible book value, is that still an attractive level for you guys to be active in the market?

I think it is still, but we are getting close to where we would have our internal cap on that buyback activity. So we would expect probably less activity going forward at these levels, Damon.

Okay. All right, that is helpful. And then also I think, Don, I think you had mentioned that there might be some items that you benefited from this quarter that wouldn't be repeatable in the coming quarters. I know one of them Kevin mentioned was, in the margin, you had some commercial income -- commercial loan-related income that benefited the margin. Were there any other items in either fee income or expenses that we would look to exclude from a modeling perspective?

Obviously, the contingent insurance commissions, which happened in the first quarter every year and they don't repeat on a quarterly basis. Otherwise, I don't know that there was anything singularly that would stand out. On the expense side, we don't expect the write-downs to recur, so that would probably come out. But it was a very strong quarter across the board. Mortgage volumes were strong. Games were wide. Whether all those factors can continue quite at those levels remains to be seen, but we again are feeling very good as we enter the second quarter.

Asset quality again evolved. We had very healthy recoveries in the first quarter. I don't know that we will repeat those numbers, but we expect asset quality to continue to move very favorably, but maybe not with that recovery level.

Got you. Okay, that is helpful. Thank you very much.

Christopher Marinac, FIG Partners.

I was wondering if you can give us a little more color on the mortgage business just in terms of kind of how that may unfold in the next couple of quarters. Did you have any activity that you may have had in the second and third that kind of came in the first quarter that skews its result?

There's probably a little of that, but not a lot. We are still seeing pretty good demand here in the second quarter and a lot of activity. So I think a year ago that was probably our low point for quite a while. So I think, on a comparative basis, we're going to get a little closer, but we had very strong activity in the first quarter even with a rough winter and so we expect a pretty good second quarter. That's going to be also when we look out further contingent on what happens with rates and if they stay in this range for the rest of the year, we expect to have pretty good performance in mortgage banking as the market starts to improve and there's some pent-up demand and we anticipate benefiting from that. But rates will be a big driver on that.

Got you. Great. And then I guess next question, separate from that, is your reserve policy. If you were not having recoveries, would the provision simply linearly change for any losses you are having on a net basis and is there a minimum level of reserve building that you want for the kind of growth you are seeing on the loan portfolio?

I think the math would probably be close to what you just described on the charge-offs. We have, like we said, benefitted from the recoveries. I don't know if we have a set number. I think as we continue to see improvement with asset quality then that puts us in a better position that the reserve requirements aren't going to be as heavy going forward. We would clearly like to have a loan provision that supports our loan growth as well. So I'm not prepared to actually give you a number on what that reserve expectation would be, but I think we feel we are well-reserved and probably on the high side today and it will moderate based on loan growth.

Right. I would add that when we look at our numbers, particularly like versus peers, we know that our non-performers have been higher than peers. We have been making steady progress and real good progress this past quarter and our reserve has been higher than peers on average. So as we continue forward and we see our numbers on the problem loans reduce, I would expect at some point we are going to see our allowance reduce closer to peers as well.

Okay, that's great. Thanks for that and just a quick final question. It just has to do with your loan to deposit ratio and your earlier comments about the mix of earning assets. Do you see further evolution for each of those, both the mix, as well as longer deposits. Can you push those even further?

I would say there's a little bit of room, but we are very comfortable with our current balance sheet about where it is. Could the loan deposit ratio move up a little bit? Sure. And in this environment, we think deposit growth is probably going to be a little tougher than loan growth, so we probably will see that edge up some. But we are not looking at dramatic change from where we are.

Okay. Great, thanks for taking all my questions.

Daniel Cardenas, Raymond James.

Could you give me a little bit of color as to what the level of paydowns and payoffs were in this quarter? Obviously not much of an impact on the overall loan growth, but are you seeing paydowns subside here?

Yes, comparative to last year, we are. Our paydowns were approximately $40 million in the quarter.

Okay. And then the competitiveness, you said a very competitive environment. Is that just kind of across the board or are you seeing maybe some of the larger banks step up a little bit in the first quarter?

I would say on select deals, it is across the board, but in general it would be the larger banks, Dan, that are showing more tendency to loosen terms and conditions as well as rate. But we are pleased with where we were. This has been pretty much the whole quarter, and we are pleased where we came out in that arena in the first quarter.

Great. And then as you look at the quarter, was the growth evenly distributed throughout the quarter or was it more heavily weighted to any one particular month?

I think it was pretty even. I can't recall any one month that was --.

It was pretty even.

Yes, pretty even. Actually I was just trying to go back -- and fairly even within all of our markets. We are seeing some growth obviously in Columbus where that is a new market for us and that is doing well, but that wasn't the only area to have growth for us; it's been across the board.

And do you have the footings for Fort Wayne and for Columbus, the loan footings?

We don't have those exact numbers, but I think we are very pleased with where we started. I think it is more the opportunity is what I was referencing there too that those are very strong growth markets and comparative to some of our other legacy offices and we feel there's a great deal of opportunity there. We have added some more lenders in both those areas and feel that's where we get a little bit more comfortable with some of the loan growth expectations we have because of their contribution.

Excellent. So looking at the margin, you said -- was it 5 to 6 basis points of interest recovery were in that number this quarter?

Right.

So the core margin may be closer to [3.82%] for this quarter?

Yes, 3.82%, 3.83%, kind of splitting the difference there, actually, which again was still a healthy increase from the linked quarter and a year ago.

Do you think you can sustain that margin coming into Q2 and beyond?

Well, I would say that again the benefits that we've had from improving the earning asset mix -- there's maybe a little bit more to play out there, but that has largely been reflected in the current margin. So I think while that has been done, I think, again, we think we can maintain the margin and grow from here. That would be our outlook.

And do you have any interest rate hikes budgeted into the margin for the rest of this year?

We are expecting something by the end of the year, but probably later as opposed to sooner. So from an annual standpoint probably not a significant effect.

Okay. So minimal impact and I take it not a lot of room left on the funding side to reduce those costs?

We have been saying that and every quarter it has dropped down, but I do think -- I really do think -- this time we are kind of at the bottom.

All right, excellent. Good quarter, guys. Thank you so much.

Eric Grubelich.

Don, just a quick question for you just on the loan growth. You sounded reasonably optimistic I think based on your answer to Damon's question about the mid to high single digit growth. Is that going to be again more on the real estate side? The true commercial has been kind of flat for a number of quarters now. Do you see any upside there?

I think the pattern will probably hold. Most of our growth will come with the commercial real estate side of it versus the pure C&I.

Okay. And with respect to the growth that you had this quarter, in terms of the sizes of the loans or the projects, is it kind of like what you've been doing for the last couple years or has there been a change in terms of appetite to take on bigger loan customers?

No, it has been very consistent with the size that we've had and actually I think as we continue to see success in that, our appetite for real large customers is getting a little less.

Okay. Okay, good to know. That's perfect. Thanks a lot, Don.

(Operator Instructions). And showing no additional questions, I would like to turn the conference back over to management for any closing remarks.

This now concludes our 2015 first-quarter earnings conference call. Thank you all for joining us this morning and thank you for your interest in First Defiance Financial. Have a great day.

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