Premier Financial Corp (OHIO) (PFC) 2018 Q4 法說會逐字稿

Good morning, and welcome to the First Defiance Fourth Quarter and Year-End 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

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

Thank you.

Thank you.

Good morning, everyone, and thank you for joining us for today's 2018 fourth quarter and year-end 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.

Good morning, and welcome to the First Defiance Financial Corporation's 2018 Fourth Quarter and Full Year Conference Call.

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

Also joining me is Paul Nungester, Director of Finance and Accounting; and Brent Beard, our Controller.

Last night we issued our 2018 fourth quarter and full year earnings release, and now we'd like to discuss that release and give you some insight into 2019.

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

I'm very satisfied with the fourth quarter and the full year 2018 results and the great momentum that the fourth quarter provided in growth, financial and strategic performance.

Fourth quarter 2018 net income on a GAAP basis was $12.1 million or $0.59 per diluted common share compared to $9.4 million and $0.46 per diluted common share in the fourth quarter of 2017.

For the year ended December 31, 2018, First Defiance earned $46.3 million or $2.26 per diluted common share compared to $32.3 million or $1.61 per diluted common share for 2017.

At quarter-end, our total assets were $3.2 billion, up 6.3% from a year ago.

We had healthy growth trends both in loans and deposits in the fourth quarter.

Total loans at December 31, were up 8.2% over a year ago and up 13.6% on a linked-quarter annualized basis.

Total deposits were up 7.5% year-over-year and 15.3% on a linked-quarter annualized basis.

The efficiency ratio decreased to 57.29% from 59.22% on a linked-quarter basis, and down from 59.37% at the end of the fourth quarter in 2017.

Our fourth quarter 2018 results reflects strong profitability with an ROA of 1.53% compared to 1.26% in the fourth quarter of '17.

Net charge-offs moderated lower in the fourth quarter, reflecting a net recovery of $220,000 compared to a net charge-off of 1.58 last quarter and recoveries of $28,000 in the fourth quarter of 2017.

Our allowance for loan losses ended the year with a strong 1.12%.

We were pleased with the continued positive momentum in lowering our nonperforming loans to assets at 0.64% at year-end, down on both the linked quarter and compared with year-end of '17.

We were very satisfied to see an increase in loans across our entire footprint in the fourth quarter, even in the face of strong competitive market pressures and somewhat uncertain economic conditions.

While our legacy markets provided a consistent growth rate, our metro markets contributed to growth at an accelerated pace.

Total new loans originated in the fourth quarter were put on at an average weighted rate of 5.28% compared with 4.54% in the fourth quarter of '17 and 5.12% in the third quarter of '18.

The overall yield on loans in the fourth quarter of 2018 was 4.95%, up 37 basis points from the fourth quarter of '17.

Our core business strategy contributed to both growth in our net interest income and the solid performances of our noninterest income revenues on a quarterly basis.

This is reflected in our solid net interest income increase in 2018 which was 12% over last year.

Net interest income also increased 3.5% on a linked-quarter basis.

We have moderated our expectations on the interest rate environment to be reflective of recent indications of more moderate changes to the federal funds rate increases over the course of 2019.

We continue to measure our interest rate risk position, and we are managing toward a neutral to slightly asset-sensitive position.

We're very satisfied with the consistency of our margin considering the very competitive operating and rate environments.

Our net interest margin increased to 4.02% over the fourth quarter of 2017 margin of 3.88%.

We are very pleased with the continued strength of our margin, and we expect our margin trend will continue to reflect a balanced and pricing discipline with growth.

The credit quality metrics show continued improvement this quarter from last quarter and was significantly better than the year-end 2017.

Our nonperforming assets to total assets were 0.64% this quarter compared to 1.08% in the fourth quarter of '17 and 0.73% last quarter.

Our overall capital planning supported by ongoing solid performance in capital levels.

We are very pleased to announce an increase in our 2019 first quarter dividend to $0.19 per share, representing a 27% increase from a year ago and an annual dividend yield of approximately 2.8%.

Under existing authorization, we bought back 231,000 shares of common stock in the fourth quarter.

At year-end, 524,000 shares of common stock remained available for repurchase.

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

Kevin?

Okay.

Thank you, Don.

Good morning, everyone.

As Don stated, net income for the fourth quarter was $12.1 million or $0.59 per diluted share.

These results included a positive adjustment of $636,000 after tax or $0.03 per share for an accounting correction to our deferred compensation plan.

With or without the adjustment, these results compare very favorably to prior year fourth quarter results of $9.4 million or $0.46 per diluted share.

That's an increase in diluted EPS of 28.3% in total over the prior year and 21.7% excluding the accounting adjustment.

Other nonoperating items in the fourth quarter of 2018 netted to less than $0.005.

Fourth quarter last year did include a modest impact from tax reform, which was more than offset by other nonoperating items, securities gains and a change to accrual accounting for our trust income.

Altogether, nonoperating items increased earnings in the fourth quarter last year about $0.01 a share.

Excluding the accounting adjustment, the fourth quarter 2018 result reflects strong profitability, with an ROA 1.45%; return on tangible equity of 15.7%; net interest margin of 4.02%; solid expense control with an efficiency ratio of 59.47%; stable asset quality, with net loan recoveries in the quarter; and very positive growth momentum for both loans and deposits.

Now for the details behind these highlights.

Let's start with the balance sheet.

For the fourth quarter, total loan growth was $83.7 million, 13.6% on an annualized basis and up from $71 million last quarter and $27 million organically in the second quarter.

We were very pleased to have our elevated growth rate continue in the fourth quarter and expect continued upper single-digit growth going forward into 2019.

On the other side of the ledger, total deposits also had a very strong finish to the year, reflecting an increase of $96.5 million, an annualized growth rate of 15.3% and up from last quarter when we had an increase of $35.3 million in deposits.

So we were even more pleased to have such solid growth on both sides of the balance sheet in the quarter.

This enabled our healthy earning asset mix of low-cost deposit funding to maintain our profitable margin and provided added lift as we enter into 2019, which leads us to the income statement and net interest income.

For the fourth quarter 2018, net interest income was $28.5 million, up from $27.5 million in the linked quarter and up $3.1 million or 12.2% from the $25.4 million in the fourth quarter last year.

The increase was primarily driven by growth in our balance sheet, but also it reflects margin expansion from a year ago.

Loan yields have increased with the rate hikes over the past year, while deposit funding costs, aided by a healthy mix of noninterest-bearing deposits, have been less impacted.

As a result, our margin this quarter was 4.02%, up 2 basis points from last quarter and up 14 basis points from 3.88% in the fourth quarter last year.

On just the linked-quarter basis, our yield on loans was up 10 basis points to 4.95% for the fourth quarter 2018, while our cost of interest-bearing liabilities was also up 10 basis points on a linked-quarter basis.

The margin expansion for the quarter coming from the contribution of our strong noninterest-bearing deposit balances, which average 22.8% of total deposits in the fourth quarter.

With our outlook for continued balance sheet growth and our balanced exposure to interest rate changes, we believe that our margin will continue to perform well and generate continued solid growth in net interest income.

Now before turning directly to the noninterest income and expense components, let me provide some comments on our deferred compensation plan and the accounting impacts of those components.

The significant change in the stock market over the fourth quarter along with an accounting correction generated some significant line item variances that I'd like to clarify.

The deferred compensation plan, which originated in 2005, today has about $5 million in assets and liabilities, which are approximately matched in terms of investment elections.

Every quarter, other income and other expense reflect changes in the assets and liabilities, respectively.

However, because the assets are inside our co-lease structure, the earnings are tax exempt, while the expense side is fully tax deductible.

These results have always been part of our operating results with generally a neutral impact.

For perspective, looking back over the past 5 years, whilst quarterly net income -- the quarterly net income impact of this plan has at times been both positive and negative to earnings, but it has never had an impact greater than $0.01 a share per quarter or more than $0.02 per year over that period.

This holds true for the fourth quarter and the year 2018 as well.

That said, we are making an accounting change which we expect to further reduce any impact of the plan on earnings going forward.

This correction resulted in a onetime reduction to expense of about $806,000.

So let's get back to the numbers.

Total noninterest income was $8.4 million in the fourth quarter of 2018, down from $9.9 million in the linked quarter and down from $9.9 million in the fourth quarter of 2017.

The fourth quarter 2018 did include a negative impact of $690,000 due to the reduction in the deferred compensation plan assets versus a $170,000 positive impact last year.

In addition, the fourth quarter last year also included a change to accrual-basis accounting for our trust income, which added an additional $428,000 to revenues that quarter.

Now securities gains for the fourth quarter of 2018 were $97,000 compared to $160,000 in the fourth quarter last year.

So excluding the deferred compensation plan impacts, securities gains and additional trust income from last year, quarterly noninterest income was down year-over-year about $100,000, a little over 1%.

We had strong improvement in service fees, which was up $272,000 or 8.9%, driven primarily by overall organic growth.

However, that was more than offset by lower mortgage revenues and additional other income reductions.

Mortgage banking revenues for the fourth quarter of 2018 were $1.4 million, down $432,000 from the linked quarter, but also down $293,000 from the fourth quarter of 2017.

The fourth quarter mortgage banking originations were $60.9 million, with $44.9 million committed for sale compared to $63.8 million originated and $51.8 million committed for sale in the fourth quarter of 2017.

We also had a somewhat larger seasonal decline in the pipeline at year-end than we experienced a year ago.

As a result, gain on sale income was $758,000 in the fourth quarter 2018 compared to $1.3 million on a linked-quarter basis and $1.1 million in the fourth quarter last year.

On the positive side, early indications in January signaled some pickup in volumes.

Insurance commissions were $3.1 million in the fourth quarter 2018, up from $3 million in the same quarter last year.

Trust revenues were $503,000 in the fourth quarter, essentially flat with a year ago, excluding last year's accrual adjustment.

Trust income was also impacted by the declining market conditions during the quarter.

As for noninterest expense, all-inclusive fourth quarter expenses totaled $21.2 million compared to $22.3 million in the linked quarter and $21.1 million in the fourth quarter of 2017.

Now excluding the onetime accounting correction of a negative $806,000 and the change in deferred compensation plans with -- liabilities, which was a negative $1,051,000 in the fourth quarter 2018 and a positive $200,000 in the fourth quarter last year, noninterest expenses would be $23.1 million compared to $20.9 million, up 10.2%, primarily due to reinvesting some of the benefits of lower tax rates in support of our metro market growth strategies.

On a reported basis, our efficiency ratio was 57.29%.

However, excluding the onetime accounting correction from noninterest expenses, the fourth quarter efficiency ratio would be 59.47% versus 59.37% in the fourth quarter 2017.

Regarding asset quality.

Provision expense in the fourth quarter of 2018 totaled $472,000 compared to a provision expense of $1.4 million last quarter and $314,000 in the fourth quarter last year.

Provision in the fourth quarter 2018 was mainly driven by growth in the loan portfolio as the fourth quarter included net loan recoveries of $220,000 and improving asset quality metrics.

Our allowance for loan loss at December 31, 2018, was $28.3 million, up $692,000 versus September 30 and up $1.6 million from a year ago.

The allowance to loan ratio at December 31, 2018, was 1.12%, down 1 basis point from last quarter and down 2 basis points from last year-end.

As for the nonperforming balances, nonperforming loans, OREO balances and troubled debt restructurings, all declined in the fourth quarter.

Nonperforming loans declined this quarter to $19 million from $20.9 million at last quarter-end and was down significantly from $30.7 million at December 31, 2017.

Our OREO balance decreased this quarter to $1.2 million from $1.7 million last quarter and $1.5 million in the fourth quarter last year.

Our accruing debt restructured -- troubled debt restructured loans this quarter were $11.6 million, down from $12.6 million last quarter and $13.8 million a year ago.

With the change in nonperforming assets over the last year, at year-end 2018, the allowance coverage of nonperforming assets was 140% compared to just 83% at December 31, 2017.

We are very pleased with our asset quality position and improvement achieved this past year, but are always looking for improvement to further strengthen our growth strategies.

Looking at our capital position.

Total period-end stockholders equity finished the year at $399.6 million, up from $373.3 million at December 31, 2017.

During the quarter, we repurchased approximately 231,000 shares, leaving approximately 524,000 shares remaining under our current repurchase authorization.

Our capital position remains strong with quarter-end shareholders' equity to assets 12.56%, up from 12.47% last year and the banks' total risk-based capital ratio is approximately 12.6% at quarter-end December 31, 2018.

Our capital position remains solid in support of our strategic growth and shareholder value enhancement objectives.

Regarding our year-to-date results.

For the year 2018, net income was a record $46.2 million or $2.26 per diluted share, up from net income of $32.3 million or $1.61 per diluted share for the year 2017.

That's a 43% increase overall.

However, 2017 was impacted by several nonoperating items, mostly the acquisition cost for our mergers, but also our BOLI restructured transaction in the first quarter, the trust income accrual change, security transactions and the impact of tax reform.

The nonoperating items together reduced earnings about $0.13 per share in 2017, while 2018 had only the deferred compensation onetime accounting adjustment in the fourth quarter and some securities gains, which, together, increased earnings about $0.04 per share.

So our core earnings or -- as we calculated are up about 28% in 2018 over 2017.

Needless to say, we are very pleased with these results.

That completes my financial review.

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

Thank you, Kevin.

I can easily say I'm delighted that 2018 marked our sixth consecutive year of record earnings for First Defiance.

And as a community bank, our definition of success goes well beyond the numbers of our financial statements.

Our employees have consistently risen to the challenge of finding smart solutions for our clients, communities and our shareholders.

The synergies between our employees, both internally and within the communities we serve have taken us to higher levels of performance and elevated our customer experience.

In 2018, successful execution of our growth plans, particularly in the metro markets of Fort Wayne, Indiana; and Toledo and Columbus, Ohio, helped us surpass $3 billion in assets.

Our commitment to these markets was evident through our dedication of resources, to align leadership in a way that keeps our decision-making close to the customer, the addition of staff to support growth and the expansion of our branch network.

We believe that the addition of our 44th full-service branch in Downtown Fort Wayne positions us well for growth in an area of Fort Wayne that is experiencing exciting economic development.

In addition, we feel well prepared for future expansion as we completed prototypes of our branch -- of the -- of our branch of the future.

Our growth in both legacy and metro markets added opportunities to spread our Better Together philosophy.

Our employees rallied behind our inaugural better -- Building Better Communities initiative in June by donating over 600 volunteer hours to create life-changing experiences for families and to share knowledge and resources with current and future homeowners.

The spirit of giving back continued as our employees performed over 700 random acts of kindness throughout our markets on a single day in November.

The cycle of giving continued as we funded $10,000 worth of community-generated ideas through the same Pay it Forward annual campaign to make places we call home even stronger.

It's movements like these that hit the core of who we are.

We not only want to lead positive experiences within our communities but for our customers as well.

As the client experience was a top strategic initiative for 2018, we were able to successfully implement enhancements to our treasury and management services, to provide new solutions like lockbox services, enhanced current products and procedures to make managing a business easier and more efficient.

As industry trends shift to banking that largely occurs outside of the branch, we were delighted to introduce online and mobile services common for larger financial institutions to our community bank clients.

Our online banking in our online account opening enhancements give our customers more flexibility to perform transactions and open new accounts online at any time.

With the introduction of card controls within the First Federal mobile app, customers have a resource at their fingertips to control their debit card by sending spending limits, blocking access to card if it is misplaced, and more.

And most recently, by joining the MoneyPass ATM network, our customers now have access to more than 32,000 ATMs nationwide without a surcharge fee.

As the banking behaviors of our customers change, we are committed to bring technology and convenience to our unique community banking experience.

This momentum we have built in the past 12 months will carry us forward in 2019.

We will continue to focus on several key areas we believe very important, including core balance sheet growth with a focus on loan growth and deposit growth, overall revenue growth, expense control and improved asset quality that will improve our NPLs to assets beyond what we experienced in 2018.

While the lending environment remains very competitive, we feel we can utilize both our metro and legacy markets to achieve high single-digit 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 very focused on deposit growth initiatives to develop a sustainable growth engine that will provide long-term organic deposit growth at a correlated pace with loan growth.

We also continue to focus on growth in our insurance and wealth management revenues as part of our strategic plan.

Building off an extensive internal education campaign for wealth management, we are also in position to share our wealth management solutions with our customers as we celebrate the 20th anniversary of our wealth management division.

We're commemorating this milestone by paying it forward to 20 life-changing organizations throughout the year, while sharing our wealth manage -- our wealth of knowledge in the form of helpful tips and personalized guidance.

Heightened focus on digital strategy will help us further enhance the customer experience in person through our digital channels and within our internal operations.

Our customers' expectation and specially pertaining to digital delivery methods are changing at an accelerated pace, and we're a commitment -- committed to providing our clients quality products and services within an environment they prefer.

We rely on our employees to help us identify ways to improve our customer experience and be part of implementing innovative solutions to reduce friction.

Our performance for 2018 and our plans for 2019 reflects our focus on shareholder value, and at the same time, our commitment to be a strong partner in the communities we are proud to call home.

We are confident that our emphasis on strategic initiatives and living our Better Together philosophy will continue to take us to new heights.

We appreciate the trust you have placed in us, and thank you for joining us and for your interest in First Defiance Financial Corp.

We will now be glad to take your questions.

(Operator Instructions) And our first question will come from Nick Cucharale of Sandler O'Neill.

Just first, with respect to the 231,000 shares you repurchased in the quarter, what was the average execution price?

It's just over $27 a share.

$27.38.

Okay.

And then secondly, a very strong quarter for loan growth.

Geographically, was it broad based or were there some especially notable pockets of strength across your footprint?

Brent?

Yes.

It was -- mainly in the fourth quarter, it was really over all of our footprints and not really one that's sticking out.

If one was going to stick out, it would be in the southern market where we had the most growth here in Q4, but pretty well evenly stretched across our entire footprint.

Okay, great.

And then in terms of the margin, I heard your remarks that you expect the margin there to perform well in the coming periods.

I was just hoping you could give us some color there.

Is your expectation that the margin holds a pretty tight range for the next few periods?

Or how are you thinking about that?

Paul, you want to take that?

Yes, overall, as Don alluded to earlier, obviously, there's some headwinds out there, so we're factoring that in.

We're very pleased with the performance we had on the margin so far.

But we can see it tightening a bit here into '19 with the uncertainty around Fed funds and things like that.

We need to keep our eye on that and see how that kind of plays out.

But we've been managing well.

We've been expanding our loan yields and have good pricing discipline on the deposit side.

So while we might lose a couple of basis points here in '19 compared to '18, overall, we're still expecting a good trend there and strong performance.

Okay, great.

And then I saw the tax rate ticked up a bit in the fourth quarter.

What's your expectation for the tax rate in next period and across 2019?

Yes, Nick, that was largely due to some of this deferred comp adjustments, particularly on the other income side.

As I indicated, those are tax-free dollars, so the negative item kind of had a funny impact on the effective tax rate.

As we go forward, we're still looking around 18.5% range.

On a GAAP basis, right?

On a GAAP basis, that is correct.

Your next question will come from Damon DelMonte of KBW.

Just wondering, Kevin, just with some of the noise that was going on in the expenses this quarter, what would be a decent range for a quarterly run rate on expenses as we look into '19?

Yes.

If we adjust -- there's a couple ways to kind of look at this, depending -- again, if we adjust the fourth quarter for the odd impacts of the deferred comp plan, that was around a $23 million, $23.1 million number.

It's -- and that would bring our full year expenses for 2018 to around $91.3 million.

We look at our expectations for 2019, we're looking to grow overall expenses in the 5%, 5.5% range.

As we look at the first quarter, which includes some resets on things and all, we would -- that's probably going to be up 1% to 1.25% over this adjusted fourth quarter level, and then we'll progress from there over the year.

That help?

Yes, it does.

Very much so.

And then can we maybe just go back to the outlook for loan growth.

Can we just talk a little bit about which of the metro markets would you feel the most comfortable with being the biggest driver of the growth opportunities?

Is it the Columbus, Ohio, area?

Or Fort Wayne?

Or Toledo?

Or maybe it's all 3?

But kind of just give a little bit of more perspective on where you see the best opportunity.

Sure.

Yes, I think Columbus is going to continue to be a very strong market for us as we drive our performance.

Fort Wayne is showing very positive signs of continued strong loan growth there.

And Toledo, I think, is where we expect to perform well as well.

So I think it's a combination of all 3 of those core legacy markets.

And then if we look to expand in some other metro markets from a loan-production standpoint too, to supplement those 3 core.

So we expect strong results in all of them, actually, Damon.

Okay.

And then as far as the asset classes where you're seeing the best growth opportunity.

Is it just commercial real estate?

Or are you seeing it on the actual C&I side?

Or how about in that regard?

Clearly, we're seeing most of it on our CRE standpoint.

That's what we are.

We're a CRE lender.

Majority of our portfolio growth is coming out.

We expect that to be consistent.

We're really looking at the types of CRE loans to make sure we're well positioned for the future there.

But we expect a good chunk of our growth there as well.

But we're also looking for the opportunities to balance it out with some C&I growth as well.

(Operator Instructions) And our next question will come from Christopher Marinac of FIG Partners.

Looking at the next couple of quarters, does the potential for CECL in 2020 kind of change things from an M&A perspective?

Does it make sellers more interested in talking with you?

Just curious if that is something to -- that would be a catalyst as this year unfolds?

Sure.

Chris, this is Don.

I haven't -- quite frankly, I haven't had a lot of conversations where that's been the majority of the discussion yet.

I think it's probably on somebody's mind.

But I would imagine that if you start -- after the first quarter when a lot of us will have run dual, get a little bit better understanding what that all means, there might be an impact.

But I'm not really seeing that right now, Chris.

Okay, great.

And then I guess just kind of separate kind of question on credit.

Has anything changed from your standpoint in terms of kind of how your watch list develops?

I know that there's some of your industrial type of companies may have a different outlook than before.

Just kind of curious on how it positions today compared to how credit felt 90 days ago.

Yes, I don't know if there's a lot of change in how we feel about our credit in particularly over the 90 day period.

We still feel pretty good about where we're positioned for the next -- at a minimum the next several quarters from a credit standpoint.

I don't think -- as our comments reflected, we still think there's opportunity for us to continue to drive some positive movement in our nonperforming loans downward.

And we're not seeing any indication through heightened activity in our watch list that give us any pause to say that's not possible at this point.

So I think we're probably feeling about the same as what we felt 90 days ago, yes, as far as our watch list and our credit quality.

Yes, I would agree with Don's comments.

I don't think we see too many things emerging on the horizon that have been significant to us.

And for the most part, we've had a lot of success in resolving maybe some longer standing problem credits and difficult things, and I think we look to see some of that continue into 2019.

So we're looking for continued positive credit trends, reducing nonperforming levels, which from an earnings standpoint, we think will continue to contain provision expense.

When we look into 2019, yes, we obviously had a pretty good year in 2018, we might see higher provisions, but not necessarily a lot higher, maybe $750,000 a quarter or so from a provision expense.

It takes upon continuing improvement trends on the nonperforming levels and low levels of losses, which we had net recoveries in 2018.

Don't know if we will do that in 2019, but we expect, again, continued good experience.

So our outlook is still very positive here, Chris.

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 and year-end 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.