Q4 2019 Earnings Call

in the fourth quarter, but

Loans at December 31st, we're up 9.4% over a year ago and up 15.5% on linked quarter annualized basis total deposits were up 9.5% year-over-year and 15.9% on a linked quarter annualized basis the efficiency efficiency ratio decreased to 60.08% from 60.29% at the end of the fourth quarter of 18 including merger-related costs are our way for the full year of nineteen was 1.5% compared to 1.52% for 8:15. Our fourth-quarter results reflect strong profitability within our way of 1.45% compared to 1.53% for the fourth quarter of 18 with both quarter and full-year reflecting merger-related cost net charge-offs for the quarter were 1% or $91,000 compared to a net recoveries of $220,000 for the fog.

quarter of 2008

Team and 2019 we had 7,000 of net recoveries compared to 472 and 2018 are allowance for loan loss and Thursday here at a strong 1.12% And we also well prepared for the adoption of Cecil in 2020. We are pleased with the continued positive momentum and lower non-performing asset loans to asset 2.39% a year income down compared with both a link order and the year-end 2018 as we look into this year's and the merger with UCF see our continued ability to grow our loan portfolio will be a key focus of our strategic plan. We are very satisfied to see an increase in loans across in the fourth quarter driven by our Metro markets even in the face of strong competitive market pressures relating to lower rates and somewhat uncertain economic conditions while we look dead.

to our Legacy markets for consistent growth

Are Metro markets contributed to growth an accelerated Pace? The total new loans originated in the fourth quarter were put on at a weighted average rate of 4.55% compared to 5.8 to 8 in the fourth quarter of 2018 and 4.82% in the third quarter of 2019 the overall yield on loans and the fourth quarter of 2019 was 4.7% compared to 4.83% at the end of 2018. Our Core Business strategies contributed to both growth and our net interest income and solid performance of our non-interest income revenues on a quarterly basis. This is reflected in our solid increase in our net interest income this year of 13.1% over last year. An interesting couple is 1.56% on a quarter basis.

We are particularly satisfied with the consistency of our margin concerning the very competitive operating and rate environments and Industry smartest for the full year was 3.93% compared with 3.98% for 2018. We did experience a decline of 86 points in the fourth quarter for quarterly. Margin of 3.80. Plus we are especially pleased with the resiliency of our margin expect. Our margin Trend will moderate reflecting your balance and pricing discipline with growth the credit quality metrics. She continued Improvement this quarter from last quarter and we're an improvement over a year and 2018 our non-performing assets to Total our non-performing loans. Total assets were three 9% this quarter compared with point six four and fourth quarter of 2018. And for for last quarter or overall Capital planning is support wage.

I'm going solid performance and cap.

We have very pleased to announce an increase in our 2020 first quarter dividend to twenty two cents a share representing a 16% increase from a year ago and an annual dividend yield off approximately 2.82% a year end. We had five hundred thousand shares of common stock in any under our authorization for repurchase and when I'll ask Paul to provide additional Financial details for the quarter before I conclude with an overview. Well, thank you. Good morning everyone. I'm pleased to report our fourth-quarter and full-year 2019 Financial results didn't come back order was 12 and 1/2 million up 3.5% from 12.1 Million last year in earnings per share with $0.63 up 7% from $0.59 last year, There are a couple items impacting those comparisons for the current quarter's results include merger-related costs, which reduced earnings by 697000 or 3 cents per share.

It's like the fourth quarter 2018.

Included a positive after tax adjustment of 636000 or 3 cents per share for an accounting correction to our Deferred Compensation Plan excluding those items EPS would have been crazy 18% to 67 66 cents and $14.19 from $0.56 in for 2:18, but with or without those adjustments the year-over-year comparison reflects our normal strong calling profitability growth.

Looking at the balance sheet loan growth for fourth quarter 2019 was a robot 112 million which represented approximately 17% annualized growth full growth was 237.5 million or 9.35% grow. This did come predominantly from our commercial portfolio and we were pleased to get growth and all of our markets. I'm turning through deposits 110 million of growth or an annualized rate of 16% represented in another area of strong performance in the fourth quarter for the full-year deposit back up 249 million or nine and half percent growth.

Overall, we are very pleased with.

These results and we remain comfortable with the strength of our balance sheet as we move forward into the 2020.

Transitioning to the income statement our net interest income was $29 million for the fourth quarter of 2019 up $607,000 from the prior quarter and up 1 million or three and a half percent of 28 and 1/2 million in the fourth quarter last year the increase over the prior year was primarily driven by growth and earning assets.

Our margin this quarter was 3.80 down eight basis points from the third quarter as noted on our October earnings call. We did expect additional contraction this quarter first. Are you interested in assets declined 12 basis points on a linked quarter basis and this is primarily attributable to our loan portfolio where we continue to experience some compression from the down rate environment took over our cost of interest bearing liabilities was down for basis points after a five basis point increase last quarter mainly due to a decrease in our cost of interest-bearing deposit. This is a reflection of our successful efforts to regain a deposit cost in concert with fed fund rate cuts.

however improvements

Here are slower to realize as we turn over the CD portfolio compared to our loan yields. This pattern should further improve as we continue to work through our CD portfolio and Loan yield compression settles down. So we do expect further contraction the first quarter but less than we saw this quarter.

Separately, we continue to deliver again and Cost Containment and revenue enhancements as evidenced by this quarter's results total non-interest income was 11.8 million in the fourth quarter of 2019 consisting of linked quarter and up from eight point four million in the fourth quarter of 2018. Approximately 1 million of that increase is due to the Deferred Compensation Plan which experienced a negative 690018 do the stock market performance compared to a positive 320 4419 an additional 1.2 million increase derived from Mortgage Banking, which was often driven from origination of 106.5 million and four Q1 9 compared to sixty 1 million in 4 Q1 8.

aside from mortgage

Banking we generated service charges of 3.7 million up $355,000 or 11% from last year and insurance commission's a three point 1 million essentially flat from a year ago.

Trust income increased $235,000 from the linked quarter and $243,000 from the fourth quarter of 2018 primarily due to the acquisition. We completed on September 30th 2019 in stock market performance.

Overall, we were pleased with the performance of our core fee businesses in the fourth quarter.

Regarding on interest expenses fourth quarter 2019 total 24.8 million up from 23.2 million in the linked quarter and up from twenty one point two million from the fourth quarter of 2018. The expense fluctuations for both are generally attributable to compensation FDIC premiums and merger-related costs with other expenses also impacting over your comparison compensation and benefits Rose 1.1 million from last year and $571,000 from last quarter generally reflecting our continued Metro Market expect effort inside of a medical benefits. The FDIC premiums were a credit of $255,000 in the third quarter of 2019 compared to a $208,000 a month for this quarter. And this is due to the small Bank assessment credits being applied in September from the deposit Insurance Fund Reserve ratio, we discussed last quarter.

Lastly we did right?

Can I use $882,000 merger-related costs in the fourth quarter of 2019 compared to $539,000 last quarter and none in the prior-year?

Other non-interest expense was four point two million in the fourth quarter of 2019 compared to two million in the fourth quarter of 2018.

This comparison includes a onetime $806,000 reduction in expenses from the accounting correction to the company's Deferred Compensation Plan in the fourth quarter of 2018 Chef results for the fourth quarter of 2018 included a 1.1 million dollar benefit from a decrease in Deferred Compensation Plan liabilities compared to a $321,000 increase for the same period in 2019 due to the relative stock market performance.

Excluding the impact of these items other non-interest expense for fourth quarter 2019 would be three point nine million compared to three point nine million in the fourth quarter of 2018.

The net impact of all the above drove strong and improved operating profitability pre-tax provision income with 16.5 million for fourth quarter 2019 and increase of 6% from 15.7 million a quarter of 2018.

Guardian asset-quality provision expense for the quarter was 1.1 million compared to last quarter's expensive one point three million in the fourth quarter 2018 s expense of 0.5 million off the provision. This quarter was as expected primarily due to loan growth offset partly by some improved qualitative factors.

Our allowance for loan loss at December Thirty One 2019 was 31.2 Million up from 30.3 million at September Thirty and up from 28.3 million on December Thirty One Last year off with the year-over-year change mostly driven by loan growth the allowance to Total loans ratio at December Thirty One 2019 was 1.12% consistent with last year and down from 1.13% off a quarter the linked quarter decreased reflex lower qualitative factors. Do it on meaningful decrease in delinquencies and improve non-performing asset levels non-performing loans declined again, this month or two thirteen and a half million fourteen point seven million last quarter, and we're down 29% from 19 million at December Thirty One 2018.

Are Oreo balance increase?

Lightly to 100,000 this quarter from zero last quarter, but was down 1.1 million from fourth quarter 2018.

Are accruing troubled that restriction loans this quarter decreased the eight point four million from 10.3 Million last quarter, and we're down 27% from 11.6 million a year ago.

The allowance coverage of non-performing assets at quarter-end increase the 230% compared to 206% at September Thirty in 100 40% a year ago. We remain pleased with them were all recent Trends and improvements from last year and are still confident in our asset quality as we continue to pursue our growth strategies.

Looking at our Capital position photo quarter and stockholders Equity with 426 million up from 431 2018 as a reminder during the first quarter of 2019. We repurchased approximately 515000 shares for 15.1 million our Capital position remains strong with quarter-end tangible Equity to assets ratio of 9.58% down very minimally from 9.63% last year and consolidate a total risk-based Capital ratio of approximately 12.7%

Capital position continues to support our ongoing growth and shareholder value enhancement strategies

Regarding full-year results net income was a record 49.4 million or $2.48 to $2.48 per diluted share for 2019 up from net income of 14.2 million or $2.26 per diluted share for the year 2018. It's a 7% increase overall.

However, 2019 was impacted by 1.1 million or five cents per share after-tax acquisition costs for our pending merger while 2018 had the Deferred Compensation one-time adjustment which increase their earning $636,000 or $0.03 per share. So our quarter earnings per share would be calculated is up 13.5 per cent in 2019 / 2018 excluding those items.

In conclusion or positive momentum continued yet again in the fourth quarter with strong earnings and operating profitability while our Capital position remains solid we believe we are well-positioned as we begin 2025 to complete our merger at the end of the month that completes my financial review and I'll turn the call back over to Don. Hey, thank you Paul. I can easily say that I'm very pleased that 2019 marks are several of year of record earnings for first to finance and as the Community Bank our definition of success goes well beyond the numbers of our financial statements are employees have consistently risen to the challenge of finding a smart solution where a client's communities and shareholders the synergies between our employees and both internally and within the communities we serve have taken us to higher levels of performance and elevated our customer experience 2019 Mark successful execution of our Metro Market strategies significantly greater contributions from our Columbus, Ohio market where a bath

the addition of lenders and treasure

Management sales staff in this market will support future growth objectives, including our expansion plans and the Dublin's Bridge Park area early in 2020. These would be our first office wage signed with our branch of the future models developed in 2018 are rapidly increasing commercial and personal client base have been very encouraging. We look forward to continuing success wage to match Columbus, This is overall economic Road strong collaboration between leadership and sales teams and the Fort Wayne Indiana Market is older than a record level of depraved a record level of commercial loans outstanding during this year several back-to-back record months for total dollar amount in retail loans also marked the notable achievements page Wayne Market in 2019. When you pair these accomplishment with our community engagement our momentum provides a positive outlook for 2020 wage.

corporate communities remain essential to living

Are Better Together philosophy throughout the year we were able to successfully exceed our goal of contributing 500 hours of home-related community service during our second annual a building better communities initiatives in the celebration of national homeowner homeownership in addition, we achieve record-breaking engagement with our annual pay it forward campaign in November . We invested $10,000 in the non-profit organizations that are employees are most passionate about as part of the celebration and surpassed 3500 random acts of kindness perform since the campaign was established in 2014. These types of initiatives keep us focused on the communities we serve in are the foundation of a Community Bank. I'm very pleased with the progress to date of our strategic merger with UCF. See integration teams composed of experienced employees from both organizations have shown tremendous dedication.

in an effort and identify

In addressing key issues concerning people processes and Technology. We are confident we will build Upon Our Collective strengths and minimize employee and customer impact. It could be happy with the progress as we work toward full system conversion early in the third quarter of 2020 this momentum we have built in the past twelve months will carry us into 2026 strongly in addition to court system conversions related to the merger. We will also 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 at the Quality that will improve our non-performing loans to total assets beyond what we experience and 2019. Well lending and while the only thing environment makes very competitive we feel we can utilize on the combined basis with UCF. See both are Metro and Legolas.

markets to achieve High single

Loan growth without making significant concessions on rate and other terms through a strong process of relationship building and Quality client-focused Service Thursday. We're very concentrated on deposit growth initiatives develop a sustainable growth engine that will provide long-term organic deposit growth and a correlated Pace with our loan growth may also continue to focus on growth in our insurance and wealth management revenues areas as part of our strategic Plan Building off an extensive internal education campaign for wealth management. We are in excellent position to share our Wealth Management Solutions with our customers across the expanded footprint heightened focus on our digital strategy will help us further enhance the customer experience in person to digital channels and within our internal operations a customer's expectation, especially pertaining to digital delivery. Methods are changing.

Accelerated pace and we are committed to providing our client quality products and services.

Within our an environment they prefer we will rely on our employees to help us identify ways to improve our customer experience and be part of implementing innovative solutions to reduce fraction.

As announced last night. We are pleased to have received all necessary shareholder approvals in the December and now have the have received all required approvals from the regulatory authorities Thursday. We are progressing his plant and we anticipate to close the transaction at the end of January . We are excited to bring together two organizations as a Premier Community Bank with enhanced products services and Technology while honoring our commitment to Superior customer service personalized Financial Solutions and unwavering community support. We appreciate you trust you have a place to us wage and want to thank you for joining us today and your interest in first Defiance Financial Corporation will now be glad to answer any of your questions.

We will now begin the question-and-answer session to ask a question. You can press * then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys if that any of your question has been addressed and you would like to withdraw your question, please press star then to our first question will come from Damon DelMonte with KBW.

Hey, good morning.

Guys, how's it going today? Good morning. David. Good good. Good good to hear. All right. So first question just regarding loan growth and kind of the Outlook as you go into twenty-twenty, you know home based on year this year. I think you're like 9% for the full year, you know based on what you're seeing in your pipe lines and the traction you're gaining and and the Columbus Market in Fort Wayne. What do you want to project for a full year growth in in 2020? Yeah. We're still looking at something in the you know mid to Upper single-digits. They're probably not as strongest. Obviously Thursday. We ended the quarter with that strong double-digit growth, but I think we're still projecting to have mid single-digits to Upper single-digits loan growth with a consistent strategy of the metro and Legacy markets and events together. I'm sure not sure I would just add that. You know while our Metro markets kind of led the way from a low-growth standpoint. We also had some pretty good job.

Tractable growth and Healthy Growth in our court community.

The markets greater Defiance in Southern Michigan as well. So it was across-the-board. The story for 2019 was across-the-board loan growth was certainly a big big production out of Columbus, but all of the markets contributing and the court Community Markets as well. So Outlook is pretty good for next year feeling good about a Repeat Performance.

Great, and and with respect to Columbus. How big is that right now as far as loan outstanding, Arkansas 385 million right now up $120 over a hundred thousand a year.

Okay, great. And then, you know with respect to the the margin, you know, can you give a little perspective on what the combined company margin would look like? I know you said, you know for the for the court margin you probably can see a little bit more compression in 1 q and things hopefully settle out after that but you know UCSD currently has a lower margin than you guys. So how do we kind of took the combined company? Margin? Yeah. Sure. So obviously excluding the impact of whatever the final purchases County might might do to those numbers on a core basis combined. We're just looking in the 3 and 1/2 to 3.6 Blended range for that that we had originally projected.

All right, great. And then one more here on on Cecil can just give a little you know updated expectation on the impact from Cecil when you adopt that. Sure. Yeah. Wow with a 2019 call it old Gap now in the books. We're turning our attention to that. We've run some preliminary estimates and we think it's going to come out in the 2 and 1/2 to 4 and 1/2 million dollar range.

We'll be finalizing that over the next you know month or so to get Auditors through it and everything. So they'll be the disclosure in the 10K eventually, but that's our current estimate you mean two and half and half million of an increase in your loan loss Reserve. Correct? Correct? Yep. Okay. Yep. It just and we're obviously that's up to have Standalone the impact for the one one adoption would have to account for the acquisition under sea salt which we've talked about that before as well.

Got it. Okay, and then just lastly I think if the time of the merger you guys had indicated that you probably have a new name for the combined company. Have you guys settled on that yet. We have not we're working diligently on trying to come up with that that so we're looking in a couple of months out before we get that all finalized them in but you've got it. Okay, that's all for now. Thank you very much.

Thank you.

Next question comes from Christopher.

Janney Montgomery Scott

Yeah. Hey, thanks. Good morning. Just wanted to continue on the Cecil topic real quick. So how does day to work for you? Is it any different than what you originally outlined in September kind of pro forma with the merger dead? No, no still consistent with that. So if you're talking about the acquisition there Chris same thing we will have you know, what they what they're calling the double dip here. We're first off have to mark the loans being required to the transaction for fair value both on rates and and credit. So we'll take a credit mark on that portfolio page and then we will have to take a provision charge through the income statement to put up an allowance against the Performing portfolio there. So still consistent with those original estimates. Obviously it'll depend on Final balances at closing and then going through that analysis in terms of the

credit, um

Mark's and qualitative factors things like that, but still consistent with what we had originally thought. Okay, and then if we took the 2 and 1/2 to 4 and 1/2 million range, you just mentioned here. It just has a percentage increase could we kind of apply that to kind of your ongoing provision for just normal new loans to come in or is that not a a proper way to interpret that? I am not entirely. I mean it will be different under Cecil because it's more of a it's it is a forward-looking forecast model versus a in the rearview kind of gentle. Generally. That's that's not a bad way to think of it, but it won't be perfectly correlated quite like that. So really it's bumping it up the one time and then going forward assuming you don't have significant changes in external factors, like if unemployment, you know took a a major turn off.

in a short time frame things like that it

Couldn't move too much, but that's where some volatility will come into play. You know, as we now have to look forward vs. Backwards. We'll see some of that but it you know, it's it's somewhat consistent but for those factors,

Got it. Okay, that's helpful. Thanks for the background. I appreciate that and then just moving on the when you look at the mortgage business and the the big success you had in in 2019. How does that build the this this next year or could this year sort of be more of a flat year of maggots? What would be your outlook at this juncture UR?

Well, you know, we posted a pretty terrific performance in Q3, but it was matched in Q4. And so we've seen a pretty significant pipeline that we've been working a screw in mortgage. We have our pipeline set for q1, which is pretty pretty solid for the right now, but we're leading into the year with the wind at our back. So to speak from a program standpoint. We expect pretty similar performance through the year and I would look forward to good off your mortgage. Yeah, maybe I'd add to that that you know, one of the benefits of this transaction that we had pointed out was on the loan side. They bring more money to the table on the Residential Mortgage perspective. So as we bring those teams and processes and systems together, we're expecting some no enhancements. It'll take some time.

Gotta get that going and Bill.

But that would be the the long-term perspective. They're okay. Great. Thanks for that. And is the final question on deposits? What what's your thought about deposits in 2012 there, you know still core growth in your footprint and which particular as you combine the the two companies together with there be a different deposit opportunity in the Eastern, Ohio versus your your legacy first to finance markets.

Well, I would start with the answer that we do expect some, you know deposit growth. That's one of the focus areas, you know, so we start to look enhance the products and services maybe through treasury management some of the month ended wealth would help Drive some deposit growth or as well, and then it expanded commercial, you know opportunity on the loan side. We expect to generate some deposits from that as well. So I think you know from an overall standpoint. We're expecting to be in a position. Like I said to try to match the the loan growth and the deposit growth more naturally as we go forward here from a percentage standpoint. Anyway, press got it sounds good on thanks very much for all the feedback this morning. Thank you. Appreciate it.

again, if you'd like to ask

a question, you can press * then 1

as I'm showing no further questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Karen 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 is now concluded. Thank you for attending a presentation. You may now disconnect.