Q3 2019 Earnings Call
All participants will be in listen only mode should you need assistance they signal a conference specialist by pressing the star followed by zero.
After today's presentation, there will be an opportunity to ask a question.
You asked a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like 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 todays 2018 third quarter earnings Conference call. This call is also being webcast and the audio replay will be available at the first defiance website at <unk> de <unk> Dot com, providing commentary this morning, we'll be Don Hileman President.
CEO of first if I am.
Mr Executive Vice President and Chief Financial Officer, following their prepared comments on the company 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.
Sure financial results in business operation 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 Companys reports on file with the Securities <unk> exchange.
Michelle and now I'll turn the call over to Mr. heilman for his comments.
Good morning, welcome to the first Defiance Financial Corporation third quarter Conference call.
Last night, we issued our 2019 third quarter earnings release.
I like to discuss those results and give a look into the fourth quarter and set the stage for 2020.
Joining me on the call. This morning to give more detail the financial performance for the quarter is our CFO , Paul My Jester and at the conclusion of our remarks, Paul that sleazy or bank President Brad Beard.
Controller, and Treasurer, and I will answer any questions you might have [noise].
Overall, we had another strong quarter was sustained movement toward our financial goals [laughter] positive movement toward our strategic partnership what do you see I see the third quarter results reflect our expected operating performance and Paul will give more color and some of the nonrecurring items for the quarter and the challenges going forward and the anticipated answers.
Trading environment.
Net interest income for the corridor.
On a GAAP basis was 13.2 million or 66 cents per diluted common share compared with 11.3 million or 55 cents per diluted common share in the third quarter, 2018% to 20% increasingly p.
Our overall core performance this quarter continue to drive a solid return on average assets of 1.5 per cent compared to 1.47% and the third quarter of 2018.
Loan growth remain on target in the quarter at an annualized growth rate of 6.3% and on a year over year basis, our loan growth was 8.5%.
Our growth expectations remain in the mid to upper single digit level, we did see a decrease in loan yields of eight basis points on linked quarter basis, and an increase of 19 basis points compared with a third quarter 2018.
Our net interest margin for the quarter ended up at 3.88%. This is within range, we expected as we see lower yield loan yield and higher cost of funds impact in the quarter.
The total deposits were up 11.9% on an annualized linked quarter basis, and up 9.4% year over year.
We can to continue to see competitive rates on select lending deals with more requests for longer term fixed rates. Our noninterest income did benefit from more interest rate swap activity. This quarter, we anticipate some margin compression in the fourth quarter due to impart to downward pressure on asset yields in summary, mixing out of the balances on the line.
Ability side as well as more limited downward pricing of liability opportunities.
Through credit quality metrics have been anticipated and this quarter's improvement was evident when compared to both the third quarter of 18, no linked quarter basis.
At the ended the quarter, we ended up with nonperforming asset ratio, 0.44% and zero balances in Oreo.
I'll provide additional details our nonperforming assets and nonperforming loans in a few moments.
Yes efforts must continue to turn this momentum into stable to improving asset quality trends across the board in the near term. We're also pleased to announce a 2019 third quarter dividend of 22 cents per share representing a 29% increase over the third quarter 2018.
On an annual dividend yield of approximately 3%.
I'll now ask Paul to provide additional financial details for the quarter before I conclude with an overview Oh. Thank you Don Good morning, everybody I will review, our third quarter 2019 financial results and outlook for the remainder of the year.
As I noted Bottomline net income for the quarter was 13.2 million up 16% from 11.3 million last year.
Earnings per share was 66 cents up 20% from 55 cents last year.
Got any merger related costs EPS would have been 68 cents.
Overall the year over year comparison reflects our continued strong core profitability girl, which I will review in more detail shortly.
Starting with the balance sheet loan growth for third quarter 2019, with solid at 41 million, which represented over 6% annualize girl.
Year to date loan growth now stands at 125 million or 6.6% annualized growth.
Looking ahead, our loan pipeline remains robust and we still anticipate solid mid to upper single digit loan growth for the full year, assuming we have no significant unexpected payoffs in the fourth quarter.
Turning to deposits, we rebounded significantly in the third quarter with 80 million of growth or an annualized rate of 12%.
Year to date deposits are up 140 million or 7.1% annualized growth.
The overall growth has been solid for the first nine months of the year and we remain comfortable with the strength of our balance sheet.
Moving to the income statement, our net interest income was 29 million for the third quarter 2019, consistent with prior quarter and up 1.4 million worth 5% from the 27 and a half million in the third quarter last year.
The increase over the prior years, primarily driven by growth in earning assets.
Our margin this quarter was 3.88% down 15 basis points from second quarter.
As noted on our July earnings call. We did expect contraction the begin this quarter.
First we had some sizable interest recoveries in the second quarter that we did not having a third quarter.
That represents five basis points of margin decline on a linked quarter basis.
The remaining 10 basis points, a decline is primarily rate driven on both assets and liabilities.
Our yield on earning assets was down 11 basis points, mostly due to our loan portfolio, where yields declined eight basis points to 5.04%.
In addition to those interest recoveries this directly attributable to the two fed fund rate cuts and depressed yield curves for treasuries and library that happened during the third quarter.
Conversely, our cost of interest bearing liabilities was up six basis points, mainly due to a five basis point increase in our cost of interest bearing deposit.
This is improved from the nine basis point increase we experienced in the second quarter and as a successful reflection of our efforts to reduce deposit rates in concert with fed fund rate cuts.
This pattern should continue to improve as we work through the turnover of our time based portfolio.
The net impact was a 17 basis point decline in spread.
However increases in our interest, earning assets and noninterest bearing deposits helped offset that a bit for 15 basis point decline in margin or 10 basis points, excluding interest recoveries.
We do expect further contraction in the fourth quarter, partly due to a full quarter impact of the September fed fund rate Cod.
And as we continue to work on reducing deposit costs.
That contraction could be exacerbated by any additional fed fund rate cuts.
Separate from addressing our funding costs, we remain focused on cost containment and revenue enhancements as evidenced by this quarter's results.
Total noninterest income was 11.8 million in the third quarter 2019 up from 10, and a half million in the linked quarter and up from 9.9 million in the third quarter 2018.
The increases are primarily attributable to improvements in both mortgage banking and service fees.
Regarding mortgage banking revenues for the third quarter 2019 were 2.8 million up 685000 from the linked quarter and up 945000 from the third quarter of 2018.
Third quarter 2019 mortgage originations were 127 million up from 85, and a half million last quarter. It also up significantly from 74 million in the third quarter 2018.
Gain on sale income was 2.6 million in the third quarter 2019 up both from 1.8 million in the linked quarter and 1.3 million in the third quarter last year.
Partly offsetting these improvements was a negative MSR valuation allowance adjustment of 155000 after a negative adjustment of 190000 last quarter and compared to a positive adjustment of 8000 in the prior year.
Well, we are understandably pleased with third quarter mortgage banking income. These results are partly seasonal and also somewhat due to the third quarter rate environment. We do expect fourth quarter results to revert back to normal seasonality without any extra boost assuming rates stabilize.
Aside from mortgage banking, we generated service charges of 4 million up 692000 or 21% from last year.
And insurance commissions, a 3.3 million essentially flat from a year ago.
Third quarter service fees included an elevated level of swap fees due to the rate environment and some refinance activity.
Similar to mortgage banking, we would not expect a similar boost in the fourth quarter, assuming stabilize rates.
BOLI income increased 256000 from the linked quarter and 384000 from the third quarter of 2018.
These fluctuations primarily reflect 325000 of death benefits received in the third quarter 2019, compared to 93000, the second quarter 2019, and no such benefits in the third quarter 2018.
Overall, we're pleased with the performance of our core fee businesses in the third quarter.
Regarding non interest expenses.
Quarter, 2019 totaled 23.2 million down from 24.2 million in the linked quarter, but up from 22.3 million for the third quarter of 2018.
The expense fluctuations are both generally attributable to compensation FDIC premiums and merger costs.
Compensation and benefits Rose 1.2 million from last year, reflecting cost for our continued metro market expansion efforts, but declined 337 from last quarter due to expense control effort.
Yeah, JC insurance premiums were a credit of 255000 in the third quarter 2019.
Compared to a 255000 expense last year and 258000 expense last quarter.
This is due to the small bank assessment credits being applied in September as a result of the deposit insurance fund reserve ratio exceeding 1.38%.
We expect that to reverse in the fourth quarter with a net expense as we returned to full run rate expense by the first quarter 2020.
Lastly, we did recognize 540000 of merger related costs in the third quarter of 2019 compared to none in the prior quarter or prior year.
The net impact of all the above contributed to strong and improved operating profitability.
Pretax pre provision income was 17 and a half million for third quarter 2018, an increase of 15% from 15.2 million in both the linked quarter and third quarter 2018.
Regarding asset quality provision expense for the quarter was 1.3 million compared to last quarter's expense of point Threemillion and the third quarter 20, eighteens expense of 1.4 million.
The provision this quarter was more elevated than expected, partly due to net loan charge offs of 11000 versus net recoveries of 488000 last quarter.
Additionally loan growth for the quarter paired with a couple of higher qualitative factors drove an increase in the allowance overall.
Our allowance for loan loss at September 30, 2019 was 30.3 million up from 28.8 million at June 30, and up from 27.6 million on September 30 of last year with a year over year change, mostly driven by loan growth.
The allowance to total loans ratio at September 30, 2019 was 1.13% consistent with last year and up from 1.10% last quarter [noise].
The linked quarter increase reflects higher qualitative factors due to a meaningful increase in delinquencies.
As well as an increase in unemployment rates within our footprint back to prior year levels and a decrease in real GDP.
Nonperforming loans declined again this quarter to 14.7 million from 15.3 million last quarter and were down 30% from 20.9 million at September 32018.
Our Oreo balance remain zero this quarter from last quarter. It was down 1.7 million from third quarter 2018.
Our train troubled debt restructured loans. This quarter remained flat at 10.3 million from last quarter and were down 18% from 2000 12.6 million a year ago.
The allowance coverage of nonperforming assets at quarter end increased to 206% compared to 189% at June 30, and 132% a year ago.
We are still pleased with our overall recent trends and improvements from last year and remain confident in our asset quality as we continue to pursue our growth strategies.
Looking at our capital position total quarter end stockholders' equity was 418 million up from three non 393 million at September 32018.
As a reminder, during the first quarter. This year, we repurchased approximately 515000 shares for 15.1 million.
However, our capital position remained strong with a quarter and tangible equity to assets ratio of 9.67% down very minimally from 9.69% last year.
And a consolidated total risk based capital ratio of approximately 12.9%.
Our solid capital position continues to support our ongoing growth and shareholder value enhancement strategies.
In conclusion, our positive momentum continued in the third quarter with diluted EPS up 20% from last year return on assets of 1.58% versus 1.47% a year ago and return on equity at 12.71% versus 11.52% last year.
Our balance sheet remains solid operating profitability is high and our capital position is strong.
Well, we have indicated an expectation of additional margin contraction. We believe our continued cost containment and revenue enhancement strategies support our positive outlook for meeting our 2019 expectations.
Hi, good clarity if you exclude the various nonrecurring items such as gains on Beauly security sales the FDIC credit merger costs et cetera, normalized EPS would have been closer to 64 cents.
Then if you consider additional NIM compression and lower seasonal income for mortgage banking in services that realigns us closer to consensus.
That completes my financial review and I will now turn the call back over to Don.
Thank you Paul.
Very pleased with results this quarter and the increase in our core earnings and proven asset quality is steady loan pipeline strong deposit growth give us confidence or a solid performance will continue for the remainder of 19.
Please with the diversification of our growth as our leadership team is focused on execution of our market strategy with special attention.
Two loan and deposit growth expense control and improved asset quality as expected, we see stronger activity in our metro markets and I'm proud to announce our expansion plans in Dublin, Ohio.
To support this growth as part of our Columbus market area. In early 2020, we will be opening a new office and retail banking space and Dublin's bridged Park area.
These will be our first offices design with our branch of future models developed in 2018, a rapidly increase in commercial and personal client base.
I've been very encouraging we look forward should continue to success to match Columbus sectors, not Columbus is economic growth.
Our strategic community approach to Columbus will be reinforce through hires a longtime resonance development of emerging leaders, a growing branch network and powerful relationships with business and community members.
While we continue to expand our physical branch network that offers more personal interaction for our clients. We're committed to optimizing our digital channels to improve our client experience to build customer retention and attract new relationships.
As previously noted we will implement our new digital play banking platform that will enhance digital banking capabilities for our personal and business clients.
Platform will create a uniform user experience for clients employees that will allow us to deliver even greater levels of customer service. This enhancement as anticipated.
Is on the anticipated pace of implementation.
As we look to provide our clients within person and digital banking experience and have that enhance their lives. We also actively seek opportunities to have a positive impacts on the commodity communities. We call home. This is the premise of our annual pay at forward campaign. This year's campaign marks five years of beginning in the cycle.
Giving induced a distinct message of it starts here at putting the power of philanthropy into the hands of our bank insurance agency employees, we will invest $10000 into nonprofit organizations that are employees are most passionate about as part of the celebration community members are asked to visit.
First dashed fed dot com slash path forward to though daily from now until November 619.
More for which employee candidate they would like to support.
Before employees receiving the most of all this will receive a 2500 dollar donation or their chosen charity.
November 13th we will announce the selected donation winners and every employee will fulfill our commitment to starts to cycle by giving.
[noise] through nearly 7700 random acts of kindness.
They had forward as one of the many ways, we give our employees a voice in our charitable giving.
Hi, keeping decisions that impact our communities local we're better able to understand the support the needs of our communities and by empowering our employees to give back we are able to build happier communities until our employees were positivity.
These types of initiatives keep us focused on the communities, we serve and that foundation of us as a community bank.
As previously announced in early September 1st Defiance in the United Community Financial Corp, anticipating merging in the first quarter 2020 with core system conversions.
Following we recently filled filed our regulatory applications I believe we on schedule with that timeline integration teams composed of experienced employees from both organizations have already been established in identifying and addressing key issues concerning people processes and technology.
We are layers of management oversight and key integration roles and responsibilities and process. We are confident we will build upon our collective strengths and minimize employee and customer impact I'm very pleased with the progress to date on our strategic partnership.
And feel we are well positioned for a successful integration our strong performance client focus values and engaged employees consistently come together to deliver exceptional results for our shareholders.
First defiance will strengthen these principles to keep moving us forward and when I. Appreciate the confidence you placed in us as we work to make first defiance, a company known for providing smart solutions to our customers in community.
Thanks for your interest in first Defiance Financial Corporation and we thank you for joining US. This morning, we not be glad to take your questions [noise].
[noise], we will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the key.
Your question. Please press Star then too.
The first question comes from Nick Coutu Rally with Sandler O'neill and partners.
Good morning, guys.
Good morning head.
Oh I wanted to start with expenses, a very significant reduction this quarter with every line item improving from Twoq you certainly the deal complicates the outlook a little bit but could you help us think about the expense run rate in the fourth quarter.
Sure so.
What's the right off the top that FDIC item that all that will reverse.
I'm not sure exactly the how much of a net expense but.
Definitely closer to.
The normal run rate in for share buy one get it will be at the run rate. So thats one item there.
Don't need to worry about merger costs. Those are items that you know all expenses incurred but would exclude for core purposes. The rest of the items for the most cart our would be run rate type items at this point, we've implemented some cost savings strategies.
Throughout the organization and have those in place now so those should be good numbers to use go forward with.
You know some growth as we continue into the future.
Okay, Great and then secondly, I heard your commentary that you expect the NIM to compressed a little bit in the fourth quarter.
Could you update us on deposit pricing in your markets and have you seen an abatement in the competitive landscape given the interest rate environment.
Yeah, Yeah, I'll give some and then maybe Vince can can add some color to that but yes, we have seen deposit rates come in quite significantly throughout the course of three Q.
And here even in October so we've been.
Reducing those in line with as the fed cuts and so on and as the competitors out there cut as well and so.
The biggest item here in terms of.
The impact to our financials is just working through that CD portfolio. It just takes a little time for those items to rollover to lower rates and have an impact on the margin. So we're hopeful that that'll start here and for Q1 Q for sure.
And be a start to become a contributor after this quarter Vince.
I would just add Paul that we're very disciplined and managing the deposit portfolio and when we are making rate adjustments from a community banks standpoint, we're reaching out to clients and it's a high touch.
Scenario, it's not where somebody wakes up and their interest rates changed there's a lot of communication and some very focused retention activity. The go up with it so customers understand.
The rate changes mirror, what's happening with the fed and so weve enjoyed some pretty good retention as a result of it.
Okay, Great and then lastly, I just saw us a jump in early stage delinquencies. This quarter is there anything out of the ordinary there do you expect most of those to get resolved in the following quarter.
We would expect most of that get to resolve that's primarily one one large credit that we've been monitoring.
For quite a while back in.
Don't feel there's any loss than that but just do some timing the new stage delinquencies jumped up their substantially.
Terrific. Thanks for taking my question all right. Thank you.
Our next question comes from Damon Delmonte with KBW.
Hey, good morning, guys has gone today.
Hi, David.
Good good I guess just.
With regards the deposit growth this quarter could you talk little about what drove the increase in the balances.
Good rates.
We were we were sensitive to cutting too much too fast.
In some areas because we did want to support our our loan growth, which which did but.
By the end of the quarter you know we had done a very strong job on deposit growth. So those are up.
Very good and allowed us to implement some additional cuts here recently.
Because of that I mean at this point, where you overfunded into Fourq you on the loan side, which is which is good.
But yeah I mean, it was primarily rate driven.
What kind of led to the like the five basis point I'll kick in and interest bearing deposits.
Partly partly but also again it takes time to work through that CD pool, so while some areas checking and money market and commercial rates whatever those are immediate.
But the CD pool, which is obviously sizeable those need time to rollover each quarter and start to tick down but you had the in terms of the impact on the now that average cost was partly during because we got.
Better than expected volumes in the quarter at those rates.
It gives us some flexibility to Damon forward, yes downward pricing because of the growth.
Have experienced yep.
Got it okay.
And then.
From a pricing perspective on loans have you guys, you know and talking with customers about instituting floors to try to help.
Yes yourself a little bit.
Yeah, we are yes.
And that if you add go ahead.
I was just how are you able to quantify kind of when you look across the commercial portfolio, how many loans have floors and kind of at what rates.
No.
No we don't have that readily available, but we still have quite a few loans that do have floors that have triggered.
And this.
Drop.
Yeah, we're having to conversations I think that competitive the discussion we're having with.
Our lenders in the markets right now that.
It's a little challenging, but that's something we're focused on trying to institute, yes, I mean generally.
Can't give you a number of what what the average floor might be just thinking through some of the recent ones where in some cases, depending on the credit in the situation, we're putting the floor at the starting rate in some cases or.
If we expect another cut in the fed funds. So it might be another quarter basis point from the starting rate things like that but nothing significant we're not talking 100 basis points from starting rates or anything like that it's it's.
It's probably on average I'd say around 25 basis points Curtis.
Got you, Okay and then when you look at your your outlook for the margin.
What do you guys factoring in for additional cuts by the fed.
Well.
At least one possibly next week at least that's what the street indication is for sure and then possibly another one by the end of year that one if it did happen at the end of December wouldn't really have an impact.
On the for Q NIM.
Today, So it's more about next week.
As well as factoring and again, a full quarter impact for the one that happened at the end of September .
Got it even call it all at two for the quarter essentially okay.
Okay and then just lastly on are you guys are progressing along with you, but Cecil implementation and.
Have you quantified the you know the potential impact.
From that from you know.
Building till the reserve like how big of an increase you're expecting in your loan loss reserve.
Yes, we are progressing very well on c.. So weve continued to run our parallel runs each quarter.
In each quarter, we have been able to knock off open items on the less so things.
All right we've picked our loan segments, we picked our models for each segment, we're working on the drivers within each of those models and so on so we're getting closer and closer or not prepared to provide an estimate but consistent with what we've been saying, we don't expect it to be significant to us at the end of the day.
That the while the parallel runs in the final seasonal number will be higher than today's reserve, we don't expect a meaningful uptick.
At the end of the day in.
No significant impact on our equity ratios.
Got it okay. That's all it added for now thank you very much.
Thanks, Dan.
Again, if you have a question. Please press Star then one.
Our next question comes from Christopher Marai with Janney Montgomery Scott.
Thanks, Good morning.
About the credit Mark that you talked at or excuse me the interest rate Mark that you talked about in September do you revisit that before year end or does that simply just get deferred until you close in the first quarter in this kind of revisit where rates are yes, no that'll get deferred until close that was we used an estimate of what the rate environment looked at the time that we were.
Teeing up announcement there but.
It doesn't matter until we actually close so come first quarter, we'll have to revisit what the rates are at that time in comparison to in place rates in the portfolio and then work through that Mark at the end of the day and put that up.
Gotcha, and so if rates are higher as they are little bit are now versus September that I remember correctly actually helps you from an earnings perspective, the accretion gets better just directionally, yes, yes.
Great just wanted to clarify that and then just from a broader perspective, what are you seeing in terms of new hires in your market, whether its Columbus and your fastest gross market are really anywhere else on the first launched what Brad just curious on sort of you know new higher spend on lending team or or elsewhere.
Yeah, we're pretty well in place right now and already have the commitments on our new hires to.
Staff the growth in Columbus.
So we're pretty well set with that team there that might be water adds there.
You know, we're after experienced lenders to move the needle more quickly than.
Other types of hires there, Chris and then we're adding another lender up in our Ann Arbor, LPL as well and I've got that commitment so.
These are all experienced lenders that we expect to contribute fairly quickly to our pipeline.
Great. Thanks, very much my question.
Thank you.
Yes.
This concludes our question 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 rate. 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.