Premier Financial Corp (OHIO) (PFC) 2015 Q3 法說會逐字稿

Good morning and welcome to the First Defiance third-quarter earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Andrea Brown with First Defiance Financial Corp. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's 2015 third-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 make your forward-looking statements related to the future financial results and business operations for First Defiance Financial Corp.

Actual results may differ materially from the 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 report on file with the Securities and Exchange Commission.

And now I will turn it over to Mr. Hileman for his comments.

Good morning and welcome to the First Defiance Financial third-quarter conference call. Last night we issued our 2015 third-quarter earnings release and now we would like to discuss that release and give insight 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.

I am pleased with the continued improvement this quarter in several strategic performance areas. Third-quarter 2015 net income on a GAAP basis was $6.7 million or $0.72 per diluted common share compared to $7.1 million and $0.71 per diluted common share in the third quarter of 2014.

The overall momentum gained during previous quarters continued in the third quarter with both solid loan growth and net interest income growth. Total loans at September 30 were up 6% over the year ago, which follows a solid second quarter. As we look to the fourth quarter and into 2016 our continued ability to grow our loan portfolio will be a key focus of our strategic plan.

We are very pleased to see loan growth across our footprint even in the face of strong competitive market pressures as all institutions are very aggressive to achieve loan growth. The effective new loan rate in the third quarter was 4.3% compared to 4.22% in the second quarter of 2015. The overall yield on loans for the third quarter of 2015 was 4.32%, down only 3 basis points from the third quarter of 2014.

We are very pleased with our margin considering the flat and very competitive rate environment. Loan portfolio growth contributed to the improving earning asset mix increasing our net interest income.

The growth in both our net interest income and our noninterest income revenues on a quarterly basis reflects contributions from our core business strategies. This is reflected in our solid net interest income growth this quarter of 5% over the third quarter of 2014 and 7% year to date over 2014.

We expect the net interest rate environment to be reflective of the continued anticipation of a fed increase within the next six months. We continue to measure our interest rate position and we are managing toward a neutral position.

Our net interest margin increased to 3.78% over the third quarter of 2014 margin of 3.73%. We did see some compression of the margin on a linked quarter basis. But we are satisfied with our margin trend and will continue to balance pricing discipline with growth.

Non-interest income generally improved across the board over the third quarter of 2014. Mortgage Banking saw a 9% improvement over the third quarter of 2014.

We were pleased to see our overall trend in mortgage loan production on a comparative basis with the third quarter of 2015 which showed a 31% increase in loans originated over the third quarter of 2014. We also had a 5% year-over-year increase in service fees and other charges which are up now 7% for the year to date.

The credit quality metrics continue to show overall improvement this quarter from a year ago; nonperforming assets declined approximately $6.3 million or 23% including nonperforming loans which decreased approximately $5.9 million or 26%. Approximately 49% of the nonperforming loans continue to make payments.

We remain committed to working on further reductions in both nonaccrual loans and nonperforming asset ratio. We did see the 30-day to 89-day past dues drop below the third-quarter of 2014 level and also on a linked quarter basis. We believe the overall asset quality trend will remain positive and reflect the corresponding loan-loss provision benefit.

We bought back 109,000 shares of our stock in the third quarter. Our buyback activity was impacted by our higher stock valuation in the second quarter.

We also are delighted to announce a 2015 fourth-quarter dividend of $0.20 per share representing an annual dividend yield of approximately 2.1%. We anticipate a continuation of a balance of dividends and stock buybacks as we focus on utilization of capital.

I will now ask Kevin Thompson to provide additional financial detail for the quarter before I conclude with an overview. Kevin.

Thank you, Don. Good morning, everyone. As a Don stated, earnings for the third quarter were $6.7 million or $0.72 per diluted share. This compares quite favorably to $7.1 million or $0.71 per diluted share in the third quarter of 2014.

You may recall that our third quarter last year did include several nonrecurring type items that aggregated to about $1.4 million after-tax or about $0.14 per diluted share. These items included securities gains of $299,000 after-tax; a tax free bank owned life insurance benefit of $903,000; a tax-free gain realized through a deferred comp plan to trust of $498,000; plus an adjustment to income taxes of $250,000, which included the write off of a portion of unused deferred tax credits.

So, with the exclusion of those items, earnings per share were up significantly more than a year ago. We are pleased with another very solid quarter with strong performance reflected throughout our results.

Compared to the third quarter last year our current results continue to reveal the benefits of our loan growth to our net interest margin, higher overall revenues in our fee income businesses, disciplined control of our operating expenses and continued trend in improving credit quality.

Now for some of the financial details, starting with the income statement. Our net interest income was $18.5 million for the third quarter of 2015, up from $18.4 million in the linked quarter which had one less accrual day and up $870,000 from $17.7 million in the third quarter last year.

For the third quarter of 2015 our margin was 3.78%, down 3 basis points from 3.81% last quarter, but up 5 basis points from 3.73% in the third quarter last year. Versus the prior year's third quarter the increase was mainly the result of strong loan growth, reducing excess liquidity and improving the earning asset mix and yield.

In the third quarter 2015 our yield on earning assets increased 7 basis points from the third quarter last year while declining 2 basis points on a linked quarter basis. Our cost of interest-bearing liabilities has remained relatively flat over the last year edging up 2 basis points from a year ago and up 1 basis point on a linked quarter basis.

Total new loans originated in the third quarter were put on at a weighted average rate of 4.30%, an increase from new loan yields of 4.22% in the second quarter of 2015. Our loan portfolio yield decreased 4 basis points in the third quarter of 2015 to 4.32% compared to the linked quarter.

We remained pleased with our strong earning asset mix reflecting the improvements from a year ago and we expect to maintain a strong mix as we continue to grow in the quarters ahead.

Total non-interest income was just under $8 million in the third quarter of 2015. This is down $1.4 million from the third quarter last year due to the nonrecurring type items in the prior year's results. Again, the third quarter of 2014 included a bank owned life insurance benefit of $903,000, a gain realized through a deferred comp plan trust of $498,000, and pretax securities gains of $460,000.

Comparatively, the third quarter this year had no securities gains and no significant nonrecurring type items. Excluding last year's gains total non-interest income was up $487,000 or 6.5%.

Service fee income was $2.8 million in the third quarter of 2015, up from $2.7 million in both the linked quarter and the third quarter of 2014. Insurance revenue was $2.3 million in the third quarter of 2015, essentially even with the linked quarter and down slightly, $56,000, from the third quarter of 2014.

Also our trust income reflects another strong quarter, totaling $370,000 in the third quarter, up 18% from $315,000 in the third quarter last year.

Regarding Mortgage Banking revenues, rates were again favorable during the quarter, seasonal activity remained strong and we posted increases in both purchase and refinance activity versus the same quarter last year.

Mortgage Banking originations were $68.2 million in the third quarter of 2015, down from $76.9 million on a linked quarter basis but up from $52.2 million in the third quarter of 2014. Overall Mortgage Banking income for the third quarter of 2015 was $1.7 million, down slightly from $1.8 million in the linked quarter, but up from $1.5 million in the third quarter of 2014.

Gain on sale income was $1.2 million in the third quarter of 2015, about even with the linked quarter and up from $1 million in the third quarter last year. In addition, the third quarter included a positive valuation adjustment to mortgage servicing rights of $24,000 compared to positive adjustments of $141,000 last quarter and $68,000 in the third quarter 2014.

At September 30, 2015, First Defiance had $1.3 billion in loan service for others. The mortgage servicing rights associated with those loans had a fair value of $9.9 million or 72 basis points of the outstanding balances serviced. Total impairment reserves, which are available for recapture in future periods, totaled $719,000 at quarter end.

Finally, we had a particularly good quarter in the sales of non-mortgage loans, that is SBA and FSA loans. We started ramping up this business and selling these loans on a flow basis last year. We did very well this quarter with gains of $543,000 versus only $40,000 in the third quarter last year, but expect gains at a much more moderate level going forward.

As for non-interest expense, third-quarter expenses totaled $16.8 million, up only $52,000 from the linked quarter and up only $77,000 from the third quarter of 2014. Compensation and benefits expense in the third quarter of 2015 was up $504,000 from last year, primarily due to higher incentives and merit increases.

Other noninterest expense was $2.8 million in the third quarter of 2015, down from $3.2 million in the same quarter last year. This was primarily due to reduced costs for advertising and management consulting versus a year ago.

Regarding provision expense, the third quarter of 2015 included a small credit provision of $27,000 while last quarter did not require any provision expense and the third quarter last year included $406,000. The third quarter of 2015 included net charge-offs of 3 basis points of average loans which compares with 2 basis points of net recoveries last quarter and 12 basis points of net charge-offs in the third quarter last year.

Our allowance for loan loss closed at $25.2 billion at September 30, 2015, up from $24.8 million at year end and $24.6 million at September 30, 2014. Credit quality improvements achieved during the past year led to an allowance percentage at the end of the third quarter of 1.45% which was down from 1.49% for the prior quarter end and down from 1.50% a year ago.

While the allowance to loan ratio has decreased the allowance coverage of nonperforming loans has increased. The allowance now represents 152% of our nonperforming loans, up from 109% at September 30, 2014. We still expect our performance going forward to benefit from continued improvement in our credit quality.

As for the levels of nonperforming assets, nonperforming loans decreased in the third quarter of 2015 to $16.6 million, down just slightly from $16.7 million on a linked quarter basis, but down 26% from $22.5 million at September 30, 2014. And our OREO balance decreased on a linked quarter basis to $4.9 million from $5.4 million last quarter and $5.3 million a year ago.

Overall nonperforming assets ended the quarter at $21.5 million or 0.97% of total assets, down from 1.29% of total assets at September 30, 2014. And we also had a significant decrease in our accruing troubled debt restructured loans, which totaled $13.8 million at the end of the third quarter, down from $22.2 million last quarter and $26.6 million at September 30, 2014.

Moving to the balance sheet, total assets remained fairly steady at $2.2 billion at September 30, 2015, up $31.8 million from last quarter end and up $77.2 million from last year. With our improved asset mix cash and equivalents decreased to $73.3 million from $96.7 million at September 30, 2014. Securities at $237.2 million remained basically even with a year ago.

Gross loan balances increased $97.3 million or 5.9% year over year and this past quarter loans increased $27.8 million as we continue to see steady strong loan demand as we transition into the fourth quarter.

Total deposits increased about $62.4 million from a year ago and up $29.7 million on a linked quarter basis. Non-interest-bearing deposits increased to $392.1 million at September 30, 2015 from $340.6 million a year ago.

Although lagging compared to our loan growth rate, we are pleased to maintain our low cost deposit funding mix and expect that deposit growth will continue to be the greater challenge as we look ahead.

Turning to our capital position, total period end stockholders' equity finished September 30, 2015 at $278.6 million, up just slightly from $278.2 million at September 30, 2014. During the quarter we had share repurchases of approximately 109,000 shares and over the past year we have repurchased approximately 314,000 shares.

Our capital position remains strong with period end shareholders' equity to assets at 12.50% at September 30, 2015 compared to 12.93% at September 30, 2014. The Bank's total risk based capital ratio is strong at approximately 13.5%.

Also in our release last night we announced the declaration of our quarterly dividend of $0.20 per share and are very pleased to provide that additional value to our shareholders.

Finally, regarding our year-to-date results, for the first nine months of 2015 net income was $19.9 million or $2.11 per diluted share versus $17.9 million or $1.79 per diluted share for the same period in 2014. That is an 18% increase in diluted earnings per share despite the prior year to date results benefiting from several nonrecurring type items which for the year to date totaled $0.12 per share.

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

Thank you, Kevin. I'm very pleased with the results so far this year and the progress we have made to position First Defiance for the rest of the year and into 2016.

The benefits of our initiative and pricing in account bundling changes are being reflected in stronger fee income. Our focus on several key areas we believe important to improve financial performance and drive greater shareholder value will continue as we build on the momentum gained this year.

These areas include core balance sheet growth with a focus on loan growth, overall revenue growth, expense control and improved asset quality. Steady progress is being made in all of these areas.

We do believe improvements in loan demand aided by further improvement in the economic environment will carry into 2016. Increased loan activity in the Fort Wayne, Indiana market area, Toledo market area and from the Columbus, Ohio loan production office is expected with favorable lending opportunities and with increase in lenders in these markets to serve clients needs.

With this added focus we would expect some additional level of expense next year as we build out lenders and structure to support this growth. The size of our current pipeline reflects growing confidence in our ability to continue to build our loads outstanding.

The lending environment remains very competitive; we feel we can accomplish loan growth at the current levels without making significant concessions in rate and other terms. Our average loan yield declined 3 basis points from the third quarter of 2014 and 4 on a linked quarter basis.

We understand it will be challenging to drive growth in loans and maintain yield management until market [rates] move higher. We are very focused on relationship management pricing and believe our delivery and service model is effective.

Our business banking initiative is progressing and more activity is expected from this segment through the remainder of this year and into next year. We anticipate this initiative will help drive more deposits and retail sales as well.

We continually look to enhance our electronic and mobile banking capabilities our customers -- giving our customers more choice on how to bank with us. Online account opening which launched in the first quarter has had a reassuring start and the number of accounts opened through this channel is steadily increasing.

While we are pleased with the start to this initiative, balance growth in these accounts has been somewhat slower to develop. Digital delivery environment is changing at an accelerated pace; we are committed to providing our clients a quality choice of products and services including Apple Pay and other digital wallet alternatives.

We will continue to focus on growth in our insurance and wealth management revenues as part of our strategic plan. We acquired a small insurance operation in the Lima, Ohio market this quarter which will help broaden our insurance agency footprint.

We are very inspired by our recent performance and look to constantly drive our performance through initiatives that will help us attain our goal of being a consistently high-performing Community Bank. We look to achieve this goal through a balanced approach and a long-term focus.

We understand that success requires focus and successful execution. We remain confident in our strategy and in the people dedicated to executing on that strategy. We feel that the performance of the organization reflects our focus on shareholder values and at the same time our commitment to being a strong community partner in the areas that we serve.

Our commitment remains steadfast to all our customers and shareholders and we appreciate the trust you have placed in us as we work to make First Defiance a consistently high-performing Community Banking organization.

Thank you for your interest in First Defiance Financial and we thank you for joining us this morning. We would now be glad to take your questions.

(Operator Instructions). Christopher Marinac, FIG Partners.

Don and Kevin, just want to ask a little bit more about sort of the loan pipeline. And also I know you mentioned at the tail end of the call about Fort Wayne and Columbus, but also curious if there is some activity in Michigan in addition to your other parts of the footprint?

Sure, good morning, Chris. Yes, our pipeline still is pretty robust. It has maintained this level I think for the last several quarters. We're still getting good looks at certain credits and that gives it a little bit more optimism about growing into next year. So I would say our pipeline is still pretty strong.

As it relates to your question -- Michigan. We are seeing some growth up there, but it is not as strong as what we think we can develop in other markets, Fort Wayne, Columbus. But clearly if we can drive a little bit stronger getting into Ann Arbor and some of those more growth markets we would be looking to do that as well.

Okay, great. And then just a quick question on the mortgage servicing. Is there any chance of a reversal this quarter or would there have to be a pretty big swing in rates to cause that to go the other way?

I think it would take a pretty good swing. At this point where rates are I think our expectation is that we are more likely to see more favorable impact on that than the other. But I don't think we are anticipating anything significant, Chris.

Okay, that is helpful. Then just the last question. I know you mentioned a little bit about expense growth next year for more lenders and just building out the platform. Would that still come in the ways of you having the positive operating leverage that you've had here the last several quarters?

We would expect that. But I think as we looked at that some of the timing and the lag of some of that effect might play through some of the numbers.

Got you. Okay, very good, guys. Thank you for the background.

Damon DelMonte, KBW.

Just to kind of follow up on the last question on the expenses. Could you just talk a little bit about areas in which you are going to be putting dollars to work in those three markets? Is it going to be the hiring of additional lenders? Is it going to be potentially opening up new branches? Could you just provide a little color around that, please?

Sure. I think what I am looking for is more of the compensation type expenses initially as we look to build out that lending and some of the support staff, the marketing expenses and all those things that will probably be accelerated as we move forward to get some of that additional growth.

Clearly branching is one thing we will look at, but I think right now we think we can -- it is more on the side of the business development types of costs.

Okay, all right, that is helpful. With regards to Mortgage Banking, what was the breakout between refi and purchase mortgages?

Let's see. It looks like about 65% purchase, 35% refinance.

Okay. And the mortgage pipeline, is that still looking pretty good as we head into the back end of the year?

It is holding up. Again we tend to have some seasonality to our business there. And spring/summer probably the peak periods. So as we get into fall/winter, again it feels pretty good, but it feels seasonal too (laughter).

Understandable. I guess with regards to the provision, you really haven't taken much in the way of a provision at all this year. You mentioned that credit trends continue to be favorable and that is going to impact the provision. So can we look at something that is close to zero again for next quarter and as we go into 2016?

A lot of that is going to be volume driven. And we had a pretty good drop this quarter in terms of our TDRs and very positive -- from our macro NPA to an asset ratio which includes OREO, nonperforming loans and the TDRs.

So we had a pretty positive impact on our allowance this quarter that pretty much mitigated the allowance need generated by the $28 million of growth. So -- can we replicate that in the fourth quarter? Yes, that was pretty significant this quarter.

And I think we would expect, again, a favorable impact of credit in terms of our performance overall but will it be zero? I don't know. Our volume expectations are still pretty steady. So I am thinking it might be North of zero (laughter).

Okay, fair enough. And then just my last question regarding loan growth. Commercial real estate seemed to drive a lot of the growth this quarter. Can you just talk about some of the types of credits that you are putting out for commercial real estate, maybe the size of them or the types of projects you are funding?

It is kind of a blend I think. We are funding -- we have some decent size customers. As their business model starts to improve they have additional lending needs so there is some additional borrowing opportunities with current client base. But -- and then we have additional opportunities for new businesses as well as we start to see some change with some of the larger institutions.

But I'd say it is a pretty good blend right now in the types of credits that we are offering between additional lending to our current client base, as they grow they can expand some of their operations and new clients. But clearly we are a focused CRE lender and that's where we are going to continue to see growth.

Are you seeing -- from a competitive standpoint are you seeing larger or smaller banks maybe making concessions on structure or terms that is making the competition a challenge?

The answer is definitely yes on that. We are seeing -- it is not consistent. One deal might be they are going to be very aggressive on the rate side of the transaction. Another side it might be the terms and conditions and an extension of the maturity.

We are seeing a little bit more of a prevalence from a lot of the larger ones to eliminate guarantees, personal guarantees where we were stronger on that several years ago and that was almost on every deal we are seeing a lot more competitive structures that those aren't required. So, it is across the board in different deals, different situations, Damon.

Okay. That is all that I had. Thank you very much, guys.

(Operator Instructions). [Eric Grubelich], private investor.

Just as a follow-up to that last question Damon asked you on the personal guarantees, are you waving those then or are you not doing that?

We are selectively not requiring those. But I think what we are looking at is how else can we structure that credit to offset some of that reduction in that guarantee position. In other words, we might require a little stronger debt service ratio, Eric, or something else to try to offset that.

But I can't -- we -- depending on if it is strong credit we will probably look to mitigate that some other way and not require that personal guarantee.

Okay. And then just I had two other things. The change in the TDR balance this quarter, was that a factor of those loans migrating out of the Bank? Or was it a matter of it is market rate, it has been on the books for 12 to 18 months, we are going to take it off TDR?

The bulk of that was due to a loan that left the Bank.

Okay, okay. And then just one final question. When you sort of roll forward for the next quarter, is there anything lumpy or sizable in your loan maturity that is at risk of same thing, maybe leaving the Bank on renewal?

So if you look at the past few quarters you have got -- you're probably somewhat of a consistent amortization of the portfolio and loans that are coming up for maturity. So my question is, at the end of the year here is there anything like a little bit larger than normal that might warrant concern?

No, I don't think we have identified anything specific in that regard. If our pipeline still holds strong, Eric, it will offset some of that. But I think it is not so much even at maturity, the competitive environment is such that that is not as much of an indicator as it used to be when we were more at risk.

If somebody comes in they are off cycle, if you will, asking to look at their transaction and their rates they are not necessarily waiting to maturity.

Okay, great. Thanks a lot. Have a good afternoon.

Daniel Cardenas, Raymond James.

Maybe some color on how aggressive you plan to go after deposit growth this quarter and how successful can you do that without significantly impacting your margin?

Well, I think deposit growth continues to elevate in terms of priority in our environment. We had a very good quarter in terms of deposit growth this past quarter. And we would love to see that kind of continued success as we go forward and continue to work our relationship model to that effect.

As we look at our margin right now we are very pleased where we are at. I mean our goal is primarily right now to try and sustain that margin and then grow our balance sheet. And in doing that we want to maintain our mixes on both sides to the extent we can.

And so again, that requires a lot of discipline, continues working, again, our relationship model effectively. And we feel very good about what we have been accomplishing and look to continue that as we go forward.

Our loan pricing basically has been consistent with our portfolio yield so we have been able to maintain that. And again, our deposit mix, we have been pretty successful at keeping a very positive end there. So if rates -- if we stay in this low rate environment we are hopeful that we can continue to execute down that path.

Okay, good. And then in terms of talent acquisition, talent expansion. I mean, where are you able to hire lenders from both geographically and maybe which institutions are you seeing the most success?

We are still able to -- we focus on trying to get some of these lenders (inaudible) within our footprint that know the business and know the community. And we have been fairly successful.

I have a couple new hires that were very senior lenders with some of the larger banks and wanted to come over to a smaller community bank environment again and be I guess a bigger fish in a littler pond as well for us.

So, we have been very successful with a couple larger regional thanks acquiring talent from them. And that is kind of where we are going to continue to focus.

Okay. And then maybe just some color on what the M&A environment is looking like in your footprint and what the chatter level is, if it's increased or decreased recently?

Sure. I would say it is probably pretty close to the same or slightly elevated from where it was last quarter. Still a lot of just conversations, a lot of talk about what the environment would be, what companies might look like together. Pretty consistent with what I guess I experienced the last quarter and the last couple of quarters.

So I haven't really seen a whole lot of acceleration. But pretty consistent talk as trying to still figure out what the playing field is. I guess a lot of that relates to rates, when that might change and what kind of pressures will be on balance sheets and income statements because of movement in rates.

All right, good quarter. Thanks, guys.

Having no further questions this will conclude our question-and-answer session. I would like to turn the conference back over to Andrea Brown for any closing remarks.

We would like to take that last question.

Damon DelMonte, KBW.

Just a quick follow up. On the share buyback activity did you guys say 109,000 shares were repurchased this quarter?

Correct.

And how many are remaining under the current authorization?

About 187,000.

Okay, perfect. Thank you, that is all that I had.

This concludes our question-and-answer session. I will now turn the conference over to Andrea Brown for any closing remarks.

Thank you for joining us today as we discussed our quarterly results. We appreciate your time and interest in First Defiance Financial Corp. Have a great day.

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