Premier Financial Corp (OHIO) (PFC) 2017 Q1 法說會逐字稿

Good morning and welcome to the First Defiance first-quarter 2017 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Vice President, Tera Murphy, with First Defiance Financial Corp. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's 2017 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'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 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.

Thank you and good morning and welcome to the First Defiance Financial Corp. first-quarter conference call. Last night we issued our 2017 first-quarter earnings release. Now we'd like to discuss the first-quarter results and give you a look into the remainder of 2017.

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 pleased with the continuing movement toward our strategic goals. In the first quarter, we made notable progress in executing our strategic goals, especially with the close of the Commercial Bancshares transaction, which added $369.5 million in total assets net of $12.3 million in cash, $285.7 million in total loans and $308 million in total deposits to First Defiance. We were very pleased with the results of the integration and I thank all the Commercial Savings Bank and First Federal Bank team members for their hard work and dedication to making the conversion a success.

I am also pleased to announce that in the first part of April we closed on the addition of a full service employee benefits consulting organization, Corporate One Benefits, which will add approximately $2.9 million in annual insurance revenues. This acquisition complements First Insurance Group, our agency, and its overall book of business.

As for net income for the first quarter of 2017 on a GAAP basis was $5.1 million, or $0.54 per diluted common share after merger-related costs of $0.27 per share compared to $7.2 million or $0.79 per diluted common share in the first quarter of 2016. Our overall core performance this quarter, excluding merger- and conversion-related expenses, remains strong and starts the year off on a positive note. We experienced year-over-year and linked quarter annualized core net loan growth of 7.1% and 2.7%, respectively.

However, we are satisfied with the overall growth as the first-quarter growth trends tend to be seasonally weaker. Our ability to grow our loan portfolio is a key piece of our strategic plan. The lending environment is very competitive with rate and structure pressures relating to terms and conditions and an uncertain economic environment.

We did not see any significant movement in local market rates after the Fed hike. Despite this environment, it is encouraging for us to see contributions from across our entire footprint and to end the quarter with a solid pipeline, up from year end, and we believe we're on track with our annual goal of upper single-digit loan growth.

This, coupled with stronger confidence from segments of our clients concerning economic stability and the economic environment, leads us to believe we have positioned ourselves for continued disciplined loan growth for the remainder of 2017. We're also very pleased with our margin improvement this quarter over the first quarter of 2016 and on a linked quarter basis, the growth in both our net interest income and our non-interest income revenues on a quarterly basis as a result of contributions from our core business strategies.

Non-interest income was driven primarily by BOLI income, insurance revenues and service fees. Kevin will provide more color on the BOLI income in a few minutes.

We saw a slight increase in year-over-year mortgage banking revenues while we saw a decrease on a linked quarter basis. Total non-interest expense increased from the fourth quarter of 2016 primarily due to merger- and conversion-related costs. But we did see an increase in core compensation and benefits.

The credit quality metric showed continued overall improvement this quarter from the first quarter of 2016. Non-performing assets declined to 0.7% from 1.03% in the first quarter of 2016. Non-performing loans decreased approximately $2.6 million or 15% year-over-year to $15.1 million.

Approximately 71% of the non-performing loans continued to make scheduled payments. We also had a decrease of $1.5 million or 13% of restructured loans. We're satisfied -- we also are satisfied with the level of 30-day delinquencies at 0.19% of loans for the first quarter of 2017.

Overall, we expect to see stable to improving asset quality trends across-the-board in the near term. We will continue to focus on asset quality through reducing the non-performing and classified asset levels in the future leading to improvements in our overall non-performing assets ratio.

In regards to our capital management plans, we are also pleased to announce a 2017 second-quarter dividend at $0.25 per share, representing a 14% increase and an annual dividend yield of approximately 2%.

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

Thank you, Don. Good morning, everyone.

Again, as Don stated, net income for the first quarter $5.1 million, $0.54 per diluted share and this includes $0.27 per diluted share from an impact of merger and conversion expenses and $0.02 per diluted share reduction resulting from a repositioning in our bank-owned life insurance portfolio. This compares -- the result overall to prior-year first-quarter results of $7.2 million or $0.79 per diluted share. When we peel back the numbers, we are very encouraged by our operating results in the first quarter and our outlook for 2017.

Turning to the details and starting with the balance sheet, first-quarter growth in our loan and deposit balances was predominantly due to our acquisition of Commercial Savings Bank, or CSB, which added $285.7 million in loans and $308 million in deposits. Organically, loans grew about $13 million and deposits increased about $84 million, which included some run-up right at quarter end that we would expect to moderate growth expectations for the second quarter.

Total net loans finished the quarter up 23% from a year ago which included 15.9% from CSB and 7.1% organic growth while deposits were up 26.9% from the prior year with 16.5% from CSB and 10.4% organic growth. First-quarter average balances were only impacted by the CSB acquisition for the last five weeks, or about 40% of the acquired balances. So we will see an increase in averages again next quarter from the acquisition. And CSB's 93% loan to deposit ratio combined well with our balance sheet to keep our earning asset mix strong, our deposit costs low and our margin profitable.

Which leads me to the income statement. Our net interest income was $21.6 million for the first quarter of 2017, up from $20.5 million in the linked quarter and up $2.5 million from the $19.2 million in the first quarter last year.

The increase over the prior year includes the addition of CSB for the last five weeks of the quarter. Our margin this quarter was 3.81%, up 5 basis points from last quarter and up 1 basis point from 3.80% in the first quarter last year.

On a linked quarter basis, our yield on earning assets was up 6 basis points as our loan portfolio yield rose to 4.41% and our overall mix improved with the addition of CSB. Our cost of interest-bearing liabilities was up 1 basis point on a linked quarter basis impacted slightly by both rate and mix.

As stated earlier, with the addition of CSB, our earning asset mix and margin remains strong and steady as we continue to grow our balance sheet and our interest rate risk remains basically neutral and well-balanced for our expectations of continued action by the Fed.

Total non-interest income was $10.5 million in the first quarter of 2017, up from $8.3 million in the linked quarter and up from $8.6 million in the first quarter of 2016. The first-quarter 2017 includes a $1.5 million enhancement gain on a BOLI purchase while first quarter last year included $131,000 of securities gains plus $317,000 of net gains on the sale of OREO.

In addition, the first quarter is generally when we receive our contingent insurance commissions, which were very good this year totaling $1.2 million versus $799,000 a year ago. So excluding these noncore and seasonal items from each year, non-interest income was up year-over-year about $460,000 or 6.2%. Service fees, trust income, and mortgage banking were all up while base insurance commissions declined versus the first quarter last year.

Regarding mortgage banking, revenues for the first quarter of 2017 were $1.7 million, down $190,000 from the linked quarter but up $199,000 from the first quarter of 2016. The first-quarter mortgage banking originations were $48.9 million compared to $63.4 million last quarter and $51.1 million in the first quarter of 2016. Gain on sale income was $1.1 million in the first quarter of 2017 compared to $1.2 million on a linked quarter basis and $994,000 in the first quarter last year.

In addition, the first quarter included a positive valuation adjustment to the mortgage servicing rights of $33,000 compared to positive adjustment of $241,000 last quarter and a negative adjustment of $21,000 in the first quarter of 2016. At March 31, 2017, First Defiance had $1.3 billion in loans serviced for others. The mortgage servicing rights associated with those loans had a fair value of $9.7 million or 72 basis points of the outstanding loan balances serviced. Total impairment reserves, which were available for recapture in future periods, totaled $489,000 at quarter end.

As for non-interest expense, first-quarter expenses totaled $23.1 million, up from both $18.2 million in the linked quarter and $17.3 million for the first-quarter 2016. The increase this quarter was mainly due to expenses attributable to the merger and conversion of CSB which totaled $3.6 million in the first quarter of 2017 and which were primarily in compensation and benefits expense and other expenses.

The first-quarter 2017 also included about five weeks of operating expenses for the addition of CSB. Comp and benefits expense in the first-quarter 2017 was up $4.2 million from last year mainly due to $2.8 million of merger costs plus higher costs for health benefit plans, incentive compensation, merit increases and (technical difficulty) new staff primarily as a result of the CSB acquisition, as well.

Other non-interest expense was $4 million in the first-quarter 2017, up from $2.9 million in the same quarter last year mainly due to $667,000 of CSB merger expenses.

As for income tax expense, this quarter included $1.7 expense in connection with the surrender of a BOLI policy. This expense was nearly entirely offset by the $1.5 million enhancement gain on the new BOLI purchase with the difference being more than made up by the end of the year and improved performance.

Regarding asset quality, provision expense in the first quarter of 2017 totaled $55,000 compared to a credit provision of $149,000 last quarter and $364,000 provision expense in the first quarter last year. The first quarter of 2017 included net charge-offs of 4 basis points compared with net recoveries of 2 basis points last quarter and net charge-offs of 2 basis points in the first quarter a year ago.

Our allowance for loan loss at March 31, 2017, was $25.7 million, up $81,000 versus March 31 last year. However, the allowance to total loans ratio at March 31, 2017, was only 1.15% compared to 1.33% last quarter and 1.41% a year ago. The decline in the ratio was primarily due to the addition of the acquired CSB loans which were discounted and recorded at fair value with no allowance.

Excluding the CSB acquired loans, the allowance to loan ratio would be 1.32%, only 1 basis point down from last quarter end. At quarter end, the allowance coverage of non-performing loans was 171%, up from 145% at March 31, 2016. While impacted by the accounting for purchased loans, we expect the allowance to loans percentage to continue to reflect strengthening asset quality.

As for the asset quality numbers, non-performing loans increased slightly this quarter to $15.1 million from $14.3 million on a linked quarter basis, partially due to the CSB acquisition but was down from $17.7 million at March 31, 2016. Our OREO balance increased this quarter to $705,000 from $455,000 last quarter but was down from $1.1 million in the first quarter last year.

Overall, non-performing assets ended the quarter at $15.8 million or 0.54% of total assets, down from $18.8 million or 0.80% of total assets at March 31, 2016. Our troubled debt restructured loans this quarter were $9.8 million, down from $10.5 million last quarter and $11.3 million a year ago.

Looking at our capital position, total period-end stockholders' equity finished the quarter at $354.2 million, reflecting the acquisition of Commercial Bancshares and thus well up from $280.4 million at March 31, 2016. Our capital position remains strong with quarter-end shareholders' equity to assets of 11.9%, down just slightly from 12.06% last year.

The bank's total risk-based capital ratio is approximately 12% at quarter end March 31, 2017. Our healthy capital position continues to support our growth and shareholder value enhancement strategies.

So, in summary, we have a solid balance sheet. The acquisition of CSB is in the books and fully integrated. Our operating profitability is strong and our outlook remains very positive.

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

Thank you, Kevin. The core overall results in the first quarter of 2017 and our important progress has positioned us for success in 2017. We continue to focus on several key areas that we believe are important to improving financial performance and driving greater shareholder value.

These areas include core balance sheet growth with a focus on loan growth and deposit growth, overall revenue growth, expense control and improved asset quality. We look to make continued and steady progress in all these areas in 2017.

Asset growth is off to a good start in the first quarter due to the acquisition and organic growth. And we also anticipate additional growth from the acquired branches and believe improvements in loan demand aided by further improvements in the economic environment will carry through to 2017.

As we have discussed before, we have looked to strategically grow our overall position in the metro markets of Ft. Wayne, Toledo, and increased loan production in Columbus, Ohio, and we are seeing increased activity in these areas. We still believe the growth rate in the high single digits is appropriate for the remainder of the year.

While the lending environment remains very competitive, as previously noted, we feel we can realize loan growth without making significant concessions and raising other terms through a strong process of relationship building and quality client-focused service. This has been a model that we believe in. We understand it.

It will be challenging to drive growth in loans and maintain yield management until market rates move higher and we see a consistent view to sustainable economic growth. We're very focused on relationship management pricing and believe our delivery and service model is effective and is contributing to a strong margin performance.

We are seeing our customers strive a changing pattern in transaction and service on the retail side. This shift along with changing customer demographics will have an impact on our business model.

We continuously look to enhance our electronic and mobile capabilities, giving our customers more choices on how to bank with us and responding to their requests unveiled during our research. As a result, we have expanded our smart ATM network and look to further expand our capabilities in 2017.

We spent both time and resources to gain understanding of the needs of our current clients and potential clients as new client relationships are essential. We're looking to better understand the needs and behaviors of millennials as market research indicates this is an increasingly important segment of the population. This group is distinct in their needs and the use of banking products and services and we must be prepared to service this generation.

In concert with this, we are taking a closer look at how our customers interact with us both inside and outside the branches. We are pleased with the increases in activity in both electronic and mobile transactions including online account opening, mobile deposits, electronic payments and the use of mobile wallet features and look to grow this further in 2017.

The digital delivery environment is changing at an accelerated pace and we are committed to providing our clients, retail and business clients, a quality choice of products and services. As the banking behaviors of our clients change, we will focus on adapting our service and sales model for a more convenient, better client banking experience for all our customers.

We will also have continued focus on growth in our insurance and wealth management revenues as part of our overall strategic plan. This was evidenced by the recent insurance acquisition. We believe these revenue sources will help us in our ability to grow non-interest revenues in an environment with added pressure on NSF and deposit fees.

The ongoing improvement in credit quality is encouraging and reflected by load charge-offs and the overall lower non-performing asset ratios. We are focused on and committed to improving our results relative to our peer group. We're very pleased by our recent financial performance and look to constantly drive our performance to initiatives that we will -- believe will help us obtain our goal of being a consistently high performing community bank.

We understand the headwinds and challenges ahead including economic, regulatory and operational factors. We believe we can accomplish our goals through a balanced approach and a long-term focus on shareholder value. We remain confident in our strategy and in the people we have dedicated to executing it.

We feel that the performance of the organization reflects our focus on shareholder value and, at the same time, our commitment to be a strong community partner in areas we serve by not only donating funds and employee volunteer hours but creating valuable partnerships with community organizations. This in our minds is a community bank difference. We strongly -- we remain strongly committed to all our customers and shareholders and we appreciate the confidence you placed in us to make First Defiance a Company to be proud of.

Thank you for your interest today. And at this point we'll take any questions.

(Operator Instructions) Damon DelMonte, KBW.

Hey, good morning, guys. How's it going today?

My first question is could you just give us a little bit of an update on the merger integration and how that is going as far as system conversions and personnel and signage and things like that? How far along are you in that process?

We think we're done. We had a very successful system conversion the same weekend it closed. A few little things needed to be cleaned up, but those are all completed at this point.

All the personnel adjustments have been completed. Signage and all that was done at the close of the transaction. So we're feeling really good about where we are at this point with all that integration behind us, Damon.

Okay, great. And then kind of building on that, as we look at the expense base going forward I know you didn't have a full quarter of the impacts from the expenses on there. But, Kevin, could you kind of give us a little guidance as to what we could expect for a range for quarterly expenses going forward?

Sure. Obviously, the $23 million that we had this quarter was bloated by the one-time costs which were about $3.6 million. So just kind of taking that down get you in the mid-19s.

We did have, as Don indicated, a little bit some higher costs than expected in some of our compensation areas related to some incentive costs and with our strong results. But if you take the operating expectations from adding CSB in now and for a full quarter probably gets you in the $20 million, $20.5 million range.

Okay, that's helpful. All right.

And then, the margin, it increased this quarter to 381. I think it was like 376 last quarter. How much of that was related to the accretable yield from the transaction?

Not much at all, Damon. In fact, it would be less than a basis point. We think the overall loan mark on the portfolio was about $5 million, I want to say, the accretable portion.

In fact, under $5 million, and it was under $100,000 for the quarter that was recognized. So not a big impact at all.

Okay, great. And then I guess just lastly, could you just talk a little bit more about the benefits of consulting acquisition that you included in the release? Can you maybe put some color around the size of this and the potential financial impact?

Yes, it's an employee benefits consulting group, so they focus on that. That added about 30%-some to our total revenues for the agency. We're expecting about $2.9 million annualized revenues from that acquisition.

So it really fits in well with our overall book of business at the agency and adds some additional stable, we believe, revenues on the non-interest income side. So it's all -- we're real pleased with it, and consistent with our pattern and strategic plan to grow that business and we were able to bolt this on this quarter, so --

And did these guys just focus in Ohio or are they elsewhere in the Midwest?

With insurance, they are going to go wherever they can make a sale. But it's primarily going to be in Ohio markets, and we're going to match them up with where our footprint is now. They are located in our market.

Got you. Okay. That's all I had for now.

Thanks a lot. Appreciate it.

(Operator Instructions) Daniel Cardenas, Raymond James.

Morning, guys. Just a couple follow-up questions on the Corporate One Benefits.

Can you give us maybe a little bit of color of what the expenses are going to look like for this? And is that built into that $20 million to $20.5 million quarterly run rate you suggested, Kevin?

Well, that's a good question. As a fresh acquisition here, as I would think about it, that would probably push us maybe certainly to the top end of that and maybe a little bit over.

With the $2.9 million in revenues, let's just take a 25%, 30% EBITDA-type ratio is going to get you to around $2 million. Divide that by $400,000 or $500,000, so maybe tuck that on top of what I said earlier. That's a good clarification, Dan. Thank you.

All right, and you've locked up all the key personnel in Corporate One, correct?

Yes.

All right.

We locked them up for a three-year period.

And then looking at loan growth, maybe a little bit of color as to the pipelines. I know Q1 can traditionally be soft, but how are the pipelines looking coming into the second quarter?

Yes, they jumped up pretty good. And we're pleased -- I think the strongest pipeline might be -- well, it's kind of across the South -- our Southern market has the strongest, I'm just looking at some numbers here we had by our market areas, Dan, and I think there to the South.

Columbus we expect to be pretty strong and looks like we've got some stuff in the Ft. Wayne and our Western market is going to be strong again, as well. Probably our weaker market is in the north as we start to build out where we want to -- how we want to attack that. But I think our other markets are going to have a pretty strong pipeline going into the second quarter here.

Our pipeline from last couple quarters is probably up close to 40%.

Wow, okay. That's good. That's good.

Yes, we are pleased with that.

And as you look at the categories, is there any one particular category that is dominating the pipelines? Is it C&I, is it CRE?

It is who we are.

CRE.

Got you. (laughter) All right, perfect.

And then congrats on the quick integration of your last deal. Does this mean that you guys are ready to do another transaction?

Yes, I would say if the opportunity is there, I am. I think our team wants to catch their breath, but I think organizationally we would be -- we think we're ready, yes.

Okay. And then last --

It was a good experience for us to -- we hadn't done one for quite a while. And I think we've got some lessons learned of how we can do things better differently and going forward too, so --

Got you, got you. Okay.

And then tax rate, what's a good tax rate to assume for you guys for the rest of this year, kind of staying where we saw it in Q1?

Well, on a core basis, we're generally probably I am thinking a little over 30%, 30.5% or so seems to be where I am thinking. That's on a -- not on a tax equivalent basis, that's on just a core basis.

Got you, okay. Perfect. All right.

That will do me for right now. Thanks, guys.

(Operator Instructions) Okay, this concludes our question-and-answer session. I would like to turn the conference back over to Vice President Tera Murphy for 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.