Premier Financial Corp (OHIO) (PFC) 2018 Q1 法說會逐字稿

Good morning, and welcome to First Defiance First Quarter 2018 Earnings Conference Call.

(Operator Instructions)

Please note that this event is being recorded.

I would now like to turn the conference over to Tera Murphy with First Defiance Financial Corp.

Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us for today's 2018 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 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, Tera.

Good morning, and welcome to the First Defiance Financial Corporation's first quarter conference call.

Joining me on the call this morning to give more detail on the financial performance for the quarter is our CFO, Kevin Thompson.

Last night, we issued our 2018 first quarter earnings release and I would like to discuss the release and give you a look into the remainder of 2018.

At the conclusion of our remarks, we will answer any questions you might have.

We're very pleased with the continued movement toward achieving our strategic goals.

Net income for the first quarter of '18 on a GAAP basis was $11.7 million or $1.15 per diluted common share compared to $5.1 million or $0.54 per diluted common share in the first quarter of 2017.

As a reminder, merger-related costs were $0.27 per diluted share in the first quarter of 2017.

Our first quarter 2018 results reflects strong profitability with an ROA of 1.6% compared to 0.79% in the first quarter of '17.

Again, impacted by merger charges and 1.26% in the fourth quarter of 2017.

Net charge-offs turned to recovery in the first quarter of '18, reflecting a net recovery of $1.7 million compared to net charge-offs of $190,000 in the first quarter of '17, and net recoveries of $28,000 in the fourth quarter of '17.

Our overall core performance this quarter remained strong and starts the year off on a positive note.

We experienced year-over-year in linked-quarter annualized quarter net loan growth of 5.4% and 1.6%, respectively.

We are acknowledging the less than targeted growth rate, the quarter was impacted by several significant payoffs.

However, we expect the growth rate to increase in the future as the first quarter loan growth trend seemed to be seasonally weaker.

Our ability to grow our loan portfolio remains a key piece of our strategic plan.

The lending environment is very competitive with rates and structure pressures relating to terms and conditions in the uncertain economic environment.

We did not see any significant movement in local market rates after the recent Fed hike.

Despite this environment, it is encouraging for us to seek contributions from our entire footprint and end the first quarter with a pipeline up from year-end.

We believe that we would -- can still achieve our annual goal of upper single-digit loan growth.

Total deposits were up 5% year-over-year and 8.9% on a linked-quarter annualized basis.

We are also very pleased with our margin improvement this quarter with the first quarter -- over the first quarter of '17 in our linked-quarter basis.

Credit quality metrics showed overall improvement this quarter from the fourth quarter of '17.

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 nonperforming and classified asset levels in the future, leading to improvements in our nonperforming asset ratios.

In regards to our capital management plans, we are also very pleased to announce a second -- a 2018 second quarter dividend of $0.30 per share, representing a 20% increase and an annual dividend yield of approximately 2.09%.

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, everybody.

As Don stated, net income for the first quarter was $11.7 million or $1.15 per diluted share, significantly up from the prior year results of $5.1 million or $0.54 in the first quarter of 2017.

The year-over-year comparison is a bit noisy, mostly due to the large loan loss recovery in the first quarter this year and the completion of the Commercial Savings Bank, or CSB, acquisition and merger expenses in the first quarter last year.

But even when you clear away the noise, the progress in our performance is quite evident.

First, I'm going to run through some of the details in our financials and then I'm going to provide a summary at the end of my remarks.

Okay, starting with the balance sheet.

After very strong growth in the fourth quarter last year, first quarter 2018 growth was lower, reflecting expected seasonality, but also a higher level of loan payoffs, which constrained net growth on the loan side.

In total, loans had net growth of about $10 million in the first quarter after growing $73 million last quarter.

Significantly, our new loan originations in the first quarter of $137 million were only $9 million less than last quarter, indicating our loan production remained strong.

While we do anticipate some significant additional payoffs here in the second quarter, we look for our net growth to pick up, particularly over the second half of the year.

As for deposits, we had an increase of about $54 million this past quarter after an increase of $77 million last quarter.

So our momentum remains strong on the deposit side, supporting our opportunity for continued growth in our balance sheet.

Overall, we are very pleased with our balance sheet, our low-cost deposit growth, strong earning asset mix, with perhaps a little extra room for more loan growth, all supporting our profitable margin, which leads me to the income statement.

Our net interest income was $25.7 million for the first quarter of 2018, up from $25.4 million in the linked quarter and up $4 million or 18.7% from the $21.6 million in the first quarter last year.

The increase over the prior year first quarter is primarily driven by growth in average balances, which is enlarged a bit since the prior year quarter only included 5 weeks of the CSB balances acquired in February 2017.

But it also reflects margin expansion from a year ago as the loan portfolio yield has increased with the rate hikes over the past year.

Deposit funding costs have been less impacted.

Our margin this quarter was 3.95%, up 7 basis points from last quarter and up 14 basis from 3.81% in the first quarter last year.

On a linked-quarter basis, our yield on earning assets was up 8 basis points as our loan portfolio yield rose to 4.65%.

Our cost of interest-bearing liabilities was up 3 basis points on a linked-quarter basis, mostly due to marginal rate impacts.

Our earning asset mix and funding mix remained strong and with our balanced exposure to interest rate changes, we believe that our margin will continue to perform well considering our growth expectations coupled with the anticipated Fed actions.

Total noninterest income was $10.7 million in the first quarter of 2018, up from $9.9 million in the linked quarter and up from $10.5 million in the first quarter of 2017.

Recall that the first quarter 2017 included $1.5 million enhancement gain on a BOLI purchase.

In addition, the first quarter is generally when we receive our contingent insurance commissions, which were good this year totaling $1 million, however, down from a very strong $1.2 million a year ago.

So excluding the noncore and seasonal items from each year, noninterest income was up year-over-year about $1.9 million or 23.6%, mainly due to growth in all of our businesses, further bolstered by our 2017 acquisitions.

Regarding mortgage banking, revenues for the first quarter of 2018 were $1.7 million, up 4,000 from both the linked quarter and first quarter 2017.

The first quarter mortgage bankings originations were $50.7 million, seasonally down compared to $63.8 million last quarter, but up from $48.9 million in the first quarter 2017.

Gain on sale income was $1.1 million in the first quarter of 2018, essentially flat compared to the linked quarter in first quarter last year.

In addition, the first quarter included a positive valuation adjustment for mortgage servicing rights of $37,000 compared to positive adjustments of $69,000 last quarter and $33,000 in the first quarter of 2017.

At March 31, 2018, First Defiance had $1.4 billion of loan service for others.

The mortgage servicing rights associated with those loans had a fair value of $9.8 million or 76 basis points of the outstanding loan balance in service and total impairment reserves, which were available for recapture in future periods, still totaled $396,000 at quarter end.

As for noninterest expense, first quarter expenses totaled $23.3 million, up from both $21.1 million in the linked quarter and $23.1 million for the first quarter of 2017.

The first quarter 2018 included $544,000 in other expenses for OREO write-downs, while the first quarter of 2017 included expenses attributable to the merger and conversion of CSB, which totaled $3.6 million, primarily in compensation and benefits expense and other expenses.

Excluding these nonrecurring items, noninterest expenses would be up $3.2 million or 16.2%, mostly due to the operating expenses for the now completed 2017 acquisitions.

In addition, the first quarter 2018 reflected costs for nonexecutive employee bonuses of approximately $300,000.

We indicated last quarter that we would be reinvesting some of the expected benefits in tax reform.

This represents our initial expenditure, and we expect to be making additional investments going forward, but should expect -- it should impact expenses at about the same level as this quarter.

Regarding asset quality.

Obviously, the resolution through payoff of one of the large loans that we downgraded last year had significant and visible impact on our asset quality numbers this quarter.

The payoff both reduced nonperforming loans and generated a significant recovery.

All in, loan loss recoveries for the first quarter totaled $2 million.

And after charge-offs of $316,000, net loan recoveries for the quarter were $1.7 million.

This contributed to a credit provision on the income statement of $1.1 million in the first quarter of 2018.

Last year's first quarter reflected $190,000 of net loan charge-offs and a provision expense of $55,000.

With the recoveries this quarter offsetting the large loan loss taken in the second quarter of last year, our net charge-offs to loan ratio for the last 12 months is now less than 2 basis points.

Our allowance for loan loss at March 31, 2018, was $27.3 million, up $25.7 million in March 31 last year with the change primarily driven by the growth in loans, as the allowance to total loans ratio at March 31, 2018 was 1.16% compared to 1.14% last quarter and 1.15% a year ago.

In addition, the remaining CSB-acquired loans are currently carried at a discount of $3.7 million or 1.9% of balances.

As for the nonperforming balances, nonperforming loans declined this quarter to $27.9 million from $30.7 million last quarter end but were still up from $15.1 million at March 31, 2017.

The year-to-year change is still primarily due to one of the 2 large credits downgraded in the second quarter last year but which we are pleased to say continues to show the performance improvement that we expected.

Our OREO balance also decreased slightly this quarter to $1.4 million from $1.5 million last quarter but was up from $705,000 in the first quarter last year.

And as noted earlier, we did take some OREO write-downs of $544,000 in the first quarter.

Overall, nonperforming assets ended the quarter at $29.4 million or 0.97% of total assets, still up from $15.8 million or 0.54% of total assets at March 31, 2017, but back down below 1%, which is where we want to be.

Our accruing troubled debt restructured loans this quarter were $13.7 million, down slightly from $13.8 million last quarter versus $9.8 million a year ago.

With the change in the nonperforming assets at quarter end, the allowance coverage of nonperforming assets was 93% compared to 83% at December 31, 2017, and 163% a year ago.

Needless to say, we're pleased with what transpired in the quarter and remained confident in our overall portfolio strength and asset quality as we continue to pursue our growth strategies.

A few comments on income tax expense.

Comparing year-to-year, the first quarter 2018 reflects the benefits of the new lower corporate tax rate of 21% compared to the higher rate in the first quarter last year.

In addition to the higher tax rate last year, taxes also included a $1.7 million expense in connection with the surrender of a BOLI policy.

Again, this expense nearly offset the $1.5 million enhancement gain on the new BOLI purchase.

Our expected effective tax rate going forward is still about 18.5%.

Looking at our capital position.

Total period and stockholders' equity finished the quarter at $379.2 million, up from $354.2 million at March 31, 2017.

Our capital position remains strong with quarter end shareholders' equity to assets of 12.56%, up from 11.99% last year.

The bank's total risk base capital ratio is approximately 12.7% at quarter end of March 31, 2018.

Our healthy capital position continues to support our strategies for growth and shareholder value enhancement.

Now I'd like to provide an overview and recap of our EPS from our perspective.

The $1.15 per share earned in the current year quarter includes a credit provision of $1.1 million, which resulted from recoveries in the quarter of $2 million.

If not for the recoveries, we would have a provision expense of about $900,000.

So the benefit from the recoveries to earnings was about $0.15 per diluted share at the new marginal tax rate of 21%.

In addition, we had some OREO write-downs totaling $544,000, which added after-tax per share cost of about $0.04 per diluted share.

So adjusting for these 2 items, our first quarter results would be about $1.04 per diluted share.

Looking at last year's first quarter, these results included $0.27 per diluted share impact of merger and conversion expenses and $0.02 per diluted share reduction resulting from the repositioning in our bank-owned life insurance portfolio.

Now adjusting for those items in the first quarter last year, our EPS would be $0.83 per diluted share.

So comparing the $1.04 this year to the $0.83 last year, the difference actually round down to about $0.20 per diluted share or 24.5% increase.

If you break these results down further, you'd find that the adjusted pretax preprovision EPS would be up about $0.165 or 14%.

The adjusted provision actually reduces earnings about $0.08 and the change in taxes increased earnings about $0.12.

Again, all totaling of $0.20 -- about 25% increase.

So in summary, we are off to a very good start to 2018.

Our balance sheet is solid, our margin is performing well, our operating profitability is strong, our asset quality is improving and our outlook for the year remains very positive.

That completes my financial review.

I'll now turn the call back over to Don.

Thank you, Kevin.

I am very pleased with the results this quarter in the core earnings improvement.

We continue to focus on several key areas that we believe are very important.

As noted, we wanted to include our core balance sheet growth with a focus on loan growth and deposit growth, overall revenue growth, expense control and improved asset quality.

We will continue to look to make progress in these areas throughout 2018.

We have restructured key leadership positions to allow for more direct responsibility for growth in the metro market areas of the company, which include Fort Wayne, Indiana, Toledo and Columbus, Ohio.

All of our metro markets did see loan growth for the first quarter, and we anticipated a rise in loan demand over the course of the year.

Overall loan growth was contained by contraction in our legacy markets this quarter.

While lending environment remains very competitive, we feel we can accomplish loan growth without making significant concessions in rate and other terms through a strong process of relationship building and quality client-focused service.

We are pleased that we have maintained a positive trend in the margin as well as the growth loan yield.

We understand it will be challenging to drive growth in loans and maintain the old management and understand some trade-offs will probably be necessary as we move through the year, and we are heavily focused on relationship management pricing.

Our delivery and service model is effective in helping achieve this balance.

Improving asset quality was more challenging than expected, but we feel comfortable with where we ended the quarter with NPAs at 0.97% of assets.

We continue to strive to lower this ratio throughout 2018.

We are concentrating on deposit growth initiatives to overcome challenges in attracting core deposits at the correlated pace with loan growth.

As I mentioned last quarter, we expanded our physical branch presence in Sylvania, Ohio as part of the Toledo metro market and we plan to open our downtown Fort Wayne, Indiana office around the first of May.

Throughout 2018, we will continually look to enhance customer experience through enhancements of our digital channels.

Our customers' expectations, especially pertaining to these digital delivery methods, continues to rise, and we believe it is important to strengthen our technology capabilities to exceed their expectations while providing a live interactive experience for clients in our offices.

We are encouraged by the recent performance and look to constantly drive our performance through initiatives that will help us obtain the goal of being a consistently high-performing community bank.

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 the areas that we serve.

We remain dedicated to all of our customers and shareholders, and we appreciate the trust you have placed in us as we build a stronger First Defiance.

Thank you for your interest in First Defiance Financial Corp., and we thank you for joining us this morning.

We will now be glad to take your questions.

(Operator Instructions) Our first question comes from Nick Cucharale from Sandler O'Neill.

First, some nice margin expansion this quarter and I heard you expect the margin to continue to perform well, but I was hoping you can expand on your outlook for the NIM and if you are seeing any funding pressure on the horizon.

We've been very fortunate and experienced a limited pressure on the deposit side.

I mean, that's really where a lot of the benefit to the margin is coming from is the limited change in our funding costs compared to what we're able to achieve on the asset side.

As rates continue to rise, we continue in our outlook always to be very cautious on that end and expect that there's -- the pressure has got to increase.

The question is how much.

And that's a little tougher to tell, but I think given where we're at, we still expect our margin to be very strong as we go through the remainder of the year and be significant -- still very significant contribution to our profitability overall.

Okay.

Great.

And then I just wanted to clarify your commentary on the expenses.

So last quarter, we've talked about some of the plans to reinvest some of the savings from tax reform back into the business.

And with some of that coming through this quarter with the bonuses, is it fair to say that you expect to reinvest another $700,000 back into the business and for that to be ratably?

Is that -- am I thinking about things correctly?

Yes and maybe a little more.

It was roughly $300,000 a quarter over the remainder of the year.

I mean that's...

Right.

I think we said $1 million, but it's between $1 million and $1.2 million.

Over the course of the year, we expect to reinvest.

Okay.

And then lastly, I just wanted to get some more detail on the trust line.

I know you changed the accounting method in the fourth quarter, which makes the year-over-year comparables a little bit difficult.

But is your expectation for trust income to remain around current levels at a good go-forward rate?

Well, we like to think it could continue to grow.

But it's not going backwards if that's what you mean.

Yes.

No, I think that would be a good...

It's just an approach that should be equal to or better than where we are this quarter.

Our next question comes from Damon DelMonte with KBW.

So my first question is just dealing with the margin.

Kevin, could you just drill a little bit deeper on that reported 3.95% and kind of outline with the -- what the core margin was, x accretable yield?

The contribution from the acquisition in terms of marks on our margin this past quarter was pretty nominal.

I want to think if I remember the night -- the number, it's like $60,000.

So our core margin is pretty much there.

We did have some interest recoveries, but even they -- let me think -- about $160,000.

So that helps some, but nothing -- no significant benefits to the margin other than our core balance sheet.

So the quarter-over-quarter increase is truly driven by an expansion on the loan yield side.

And I'm assuming that's driven by the Fed hike we got in March?

Or is that also just a better pricing you're seeing in different loan categories?

It's a cumulative thing, okay?

As rates have gone up in loans that are renewing and repricing and new business, I mean I think there's a cumulative buildup that we are experiencing in our portfolio.

And that's been a net pickup, needless to say.

And so that's been a positive by the deposit side.

Like I said, we've been able to contain our pricing changes effectively, so that the benefits from the loan pricing continue to expand our margin.

Got you.

Okay.

And then what are you expecting for additional rate hikes this -- the remainder of the year, 1 or 2 more increases?

I think we've got 2 more expected.

But again, 1 later in the year, which probably would have less effect on the current -- with the current year's results.

Got you.

Okay.

That's helpful.

And then I think you guys alluded to seeing additional expected payoffs in the second quarter and then loan growth's kind of ramping up in the back half of 2018.

So are you looking at something like a low single-digit growth rate for the second quarter and then kind of double-digit growth in the back half of the year that kind of nets you out to that -- to the upper single-digit level?

I think that's a fair representation.

We're going to say that we expect pickup, but more marginally in the second quarter than we expect in the second half of the year.

And we give you a little color on the payoffs.

We got a couple of large (inaudible) have sold their businesses.

So it's not -- and actually this to competitors.

It's more of business decision and those are a couple of substantial balances that we know of.

Right.

The business environment has been pretty active in our market, which is a good thing overall.

Okay.

All right.

And then, I guess, just lastly, could you just give a little bit of an update on your expansion efforts in the Columbus, Ohio marketplace?

Yes, we still continue to grow in there, primarily driven by the -- leading with loans.

We do have a full-service office, but it's a little slower to grow the deposits in there.

But there still is a focus.

But so I would see consistent growth in Columbus and a stronger loan growth.

And as I said, the metro markets where we did have the growth this quarter, we were contracting in our legacy market.

So there's support allowed for overall loan growth for the company in the first quarter.

Got you.

Okay.

And then do you have an update as to what the outstandings are in the Columbus market?

I believe it's like $190 million right now.

It was the leading -- I know it was the highest growth market for us this past quarter, which I believe was up $24 million.

The next question comes from Christopher Marinac from FIG Partners.

Just want to follow up on the loan growth in the nonlegacy, or I should say newer markets.

Would that be primarily coming on the commercial real estate side?

Or would you have a blend of C&I and other related loans within the portfolio?

It would be primarily (inaudible) on the CRE portfolio going forward here right now.

That's a migration we're focused on to try to have a little bit more blend going forward, but most of that growth in the first quarter would have been CRE.

Okay.

And then what's the outlook for potential recoveries of past charge-offs?

Don, is that something that could be out there?

Or would this chunkier be to close the end of them?

I think there should be some little.

At a lower level, there's still some opportunity there.

Clearly, this was the biggest one.

Nothing like of this magnitude.

Nothing close to this magnitude.

And that was all related basically to one -- to the large credit that we...

Wrote down.

Wrote down in the second quarter of last year, so it kind of just came back through.

Got you.

And then if you booked out a couple of quarters, would you envision the loan-to-deposit ratio changing much?

I know that it came down this quarter with the deposit growth, but just curious if that would bump up to elevated levels?

Or do you want to manage it here in this sort of low to mid-90s?

Our expectation has been that it will probably will flow it up a little bit, not hitting 100% necessarily, but probably more in the upper 90s over time, and that's our expectation.

But we've, again, been very fortunate with our deposit growth.

And if our deposit growth continues very strong and keeps that ratio down a little bit, I think I'd be okay with that.

Our next question comes from Daniel Cardenas with Raymond James.

Just a couple of quick questions there for you guys.

In terms of charge-offs, I mean, you guys just stated in your comments, Kevin, extremely low.

How are you guys thinking about charge-offs levels on a go-forward basis?

Do we start to see them return to maybe a more normal level?

Or is it possible that we kind of still keep them in sub-10 basis points on a go-forward basis, at least through the remainder of '18?

Yes, we're still thinking sub-10 basis points.

Our planning generally is around 5 basis points, at least in this near-term horizon still.

Okay.

Great.

And then maybe just in terms of deposit growth outlook.

I mean, do you think it can be consistent with the loan growth objectives that you stated that kind of the higher single-digit loan growth?

Or could you actually even perform better than that?

Yes, I'm not sure I would expect, as we talked about, the loan growth ramps up to a double-digit level.

I'm not sure I would expect the deposit growth to quite get to that level.

I think if we can sustain the pace we're on, I think we'll feel pretty good about our results for the year, and that's kind of where I think our thinking is.

Yes.

Great.

Good.

And maybe just a quick update on M&A, what you guys are seeing.

Is it a quiet environment right now?

Are there a lot of discussions?

And what do you feel are your prospects for announcing the deal within the next 12 months look like?

It was a little quieter here over the last 3 months, I think, in activities.

Our expectation is that it will be a little bit more noisy if you will.

We still feel good about our prospects.

We think we're well positioned.

As our value and our stock are at these levels, I think we become more attractive as an acquirer.

So we're still pretty optimistic about our opportunity to do something in the near term, Dan.

Is the appetite kind of more for the metro markets?

Or is that still up for debate?

That's still up for debate.

I think, clearly, we'd like to look at all opportunities where it might fit best with us in our franchise and how we operate in around our potential.

We'd be definitely looking at probably the same thing everybody's going to be looking at, the loan to deposit mix, the funding sources that we have available and an acquisition what we'd look like on a combined basis and the loan growth opportunities and capabilities.

So those things would be important as I'm sure they're important to everybody.

(Operator Instructions)

Okay.

This concludes our question-and-answer session.

I would like to turn the conference back over to Tera Murphy 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 has now concluded.

Thank you for attending today's presentation.

You may now disconnect.