Q1 2020 Earnings Call

I am good morning, and welcome to the first Defiance first quarter 2020 earnings. All participants will be in a listen-only mode. Should you need assistance, please signal or conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press the star then one on your telephone keypad to withdraw your question, please press * then two.

Please note this event is being recorded.

I would not like to turn the conference over to Tara Murphy with first Defiance Financial Corp, please go ahead.

Thank you. Good morning, everyone and thank you for joining us for today's 2020 first quarter earnings conference call. This call is also being webcast and the audio replay will be available at the first of the month site at ftes following leaderships 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 he's during the conference call today including during the question-and-answer. 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 Thursday. We're 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 mister heilman for his comments.

Thank you, Tara.

And good morning and welcome to the first Defiance Financial Corporation 2020 first quarter conference call joining me on the call this morning to get more detail on our financial performance for the quarter of CFL Paul none gesture as well as Gary Small our bank president Matt Garrity Chief lending officer and Vince were our chief banking officer last night our 2020 first quarter earnings release as well as provided a slide Deck with further data in our 8K filing and that would like to discuss that release and give some insight into the the remainder of 2020 at the conclusion of our remarks. We will answer any questions you might have these are truly challenging times as we tried to navigate through the health and economic ramifications. We are all facing related to covid-19. The pandemic has caused severe interruptions in the global and Regional economies and the markets in which we operate our primary job.

Concerns have shifted to servicing the immediate liquidity needs of our clients and sharing the health and well-being of our employees and supporting the communities in which we live and serve. Our teams have been working diligently to assist clients and executing the SBA paycheck Protection Program or PPP. It actually this part of the cares act stimulus legislation assisting with payment off as appropriate.

And other relief programs we are pleased to participate in the jobsohio program designed for a current small business clients to provide loan funds to those not participate in the PPP program these and other initiatives have been the main focus of our management team and the staff as we look to the coming weeks and months ahead. We have executed odd thing demek plan, which included implementing remote work arrangements to the fullest extent possible separating individual departments operating a majority of our Branch lobbies by appointment only fully Staffing All Brands drive-through lanes and communicating with an encouraging. Our customers is use our free self-service tools such as interactive teller machines and automatic machines mobile services online technology to actively promote physical distancing in all aspects of our everyday business. It is also also in, Georgia

Possible for us to anticipate our future Financial Performance Based on the uncertainty of the economic environment related to the covid-19 and the variables outside of our control is not a home. We had an active first quarter with a completion of our merger with United Community Financial Corporation or ucfc and the adoption of Cecil both impacting our performance. I am pleased with the strong performance. We had in the first quarter and our position going into the rest of the year first quarter 2029 income on a gaap basis was a loss of 22.5 million or 71 cents per diluted, sure compared to eleven point five million or $57 per diluted comments during the first quarter of 2019 on a core basis and that income for the first quarter was 7.5 million or $0.24 per diluted share. Our overall Capital planning is supported by Iran going solid performance and capital levels at the end of March and we have looked at the potential future impacts. Yep.

Capital levels of the

We are in we are also very pleased to announce our 2020 second quarter dividend of $0.22 per share representing a 16% increase from a year ago off and and analyze dividend of approximately 6% at quarter end. We had five hundred and seventy thousand shares of common stock remaining for purchased under our share repurchase plan authorization back during these uncertain times. We have suspended any buyback activity. I will now ask Paul to provide more in-depth Financial details for the quarter Paul.

Thank you, Dan. Good morning. Everyone. Mention. This was an adventurous quarter for us with a pandemic starting to impact the economy rates dropping precipitously late in the quarter the adoption faithful and closing on a merger of equals.

I'll summarize our first quarter results and hopefully shed some light on these impact areas.

First let's start with the balance sheet. Obviously the most impactful item here is the merger that closed on January 31st our closing price. That day was $29.39 and we issued a little 17.9 million shares for a total purchase price of approximately $527.

Netloan required for 2.34 billion including an eight point eight million dollar positive rate Mark and 34.9 million of credit marks of which 7.7 million month CD loans recorded as allowance.

Intangible assets created for 33 million including a 29.3 million core deposit intangible and 3.7 million for the insurance agency and Trust wealth management division required.

On the liability side deposits were 2.08 billion including a 7.1 million time based deposit remark more details are provided in our press release, but the net of every month resulted in two hundred Seventeen point five million of Goodwill.

Separate from the merger. We are pleased to generate a good organic growth in the quarter despite the economic downturn that commenced for loans. We added 36.6 million or a 5.3 million or 5.6% annualized growth rate with the girls primarily coming from commercial while residential was down due to pay off and refinancing in the low-rate environment.

For deposits. We had a 41.2 million for a 5.7% annualized growth rate.

Non-interest deposits represent about 21% of total deposit and we do not have any broker deposits.

Next I'll explain the allowance. We did adopt seasonal affective January 1st rather than delay in need to restate Financial including the merger later in the air.

In connection with adoption. We recorded a 2.4 million dollar increase to the allowance on one one with an offset to retained earnings of 1.9 million and the remainder to deferred taxes in connection with the merger. We then added thirty three point six million. So the allowance of the 7.7 million was for PCD loans recorded in purchase accounting. The other twenty five point nine million is for the acquired non-pc deal own and under Cecil that is required to be recorded in the day one provision charge popularly known as the double dip since these loans also have a credit app.

Last components to the allowance Arnett recoveries of 0.8 million and 1/4 provision expense of 17.8 million. That's obviously a big number and it's directly attributable to the fact that we have a Dodge diesel which is the life of loan forward-looking estimate model and this happened at the same time that the economy turns out fast indeed.

A key driver for our model is national unemployment and that forecast is for twelve and half percent into cue versus the mid 3% We've been experiencing pandemic.

At 3:31 or allowance coverage. The loan was 1.68% but for non-pc deal own it was 1.55%

Prior to the economic downturn we had estimated our allowance coverage under Seafood could be 1.25% So one could say that the pandemic added Thirty basis points to our allowance which translates to about fifteen point five million of our provision charge.

For details can be found in a slide presentation posted the first Defiance website this morning.

Finish the balance sheet. I'll discuss Capital where we ended with $960 of equity at March Thirty One. The increase in your end is primarily due to the $527 billion added in connection with the merger off separately. We did recommend stock BuyBacks after the merger closed. We completed four hundred thirty thousand shares for $10 before suspending buyback activity in mid-march.

At March Thirty One are tangible equity ratio was 9.1% and our total risk-based capital is estimated to be about 13.7%

Next alternate income statement. I would like to preface this with noting that your rear comparison are obviously skewed by the fact that we have two months of operations including UCSD in June of 2020 compared to none in first quarter 2019.

Let's start with that interest income which was $4,445 and half million dollars for the first quarter of 2020 this resulted in a net interest margin of 3.78% which is down to basic wage a linked quarter basis.

This does include the benefit of accretion from purchase accounting marks with 312,000 coming through interesting, and 1 million coming through interest expense.

Excluding the impact of those items our net interest margin would be 3.68% This contraction was not unexpected given the precipitous drop in the external rate and yield environment that occurred during the quarter off further. We do expect further contraction in 2 Q since the rate drops happen in the back half of the first quarter.

Other non-interest income was $960,000, but it included a one point 1 million dollar gain related to an ER know that was not achieved for a prior acquisition excluding that off other income would be a negative 137,000 and that is attributable to a zero point seven million decrease in Deferred Compensation Plan assets due to the stock market perform in the first quarter of 2020.

Lastly for revenues. I'll discuss Mortgage Banking income which was $848,000 for first-quarter twenty-twenty and down from 1.8 million for first quarter 2019. First gains on Salem Road loans, what's 4.9 million up from 1.3 million last year due to volumes and the first quarter of 2019. We sold about 38 million in mortgage loans for this year. We sold over a hundred and fifty million. This is partly due to having two months of activity from UCSD this year, but has also attributable for the down rate environment that made mortgage activity very attractive during the quarter and a flip side just downright environment led to a large increase in our valuation allowance to the tune of 4 and 1/2 million dollars.

Right the color on that the 10-year treasury declined from 1.92% at 12 3119 a 1.51% 131 twenty when we acquired UCSC wage and all the way down to 0.7% at 3:31 twenty.

Last year only saw Twenty Eight Days of declined in the first quarter.

As rates improve in the future. We will be able to recover against that valuation allowance.

Next I'll discuss expenses first. We incurred 11 and 1/2 million dollars in merger-related costs in the first quarter of 2020.

Prior to closing you. See I've seen. 13.9 million in January and on a combined basis. We had both incurred 2.8 million and 2019. So cumulatively we have incurred 58.2 million against the original estimate of 30 million.

We do expect to see that original estimate. However, most of that access will involve enhanced energy.

As a reminder, we expect the bulk of our energy to begin materializing in the second half of the year after our core conversion is completed in mid-july.

Excluding merger cost total expenses were 32.3 million compared to twenty four point nine million in the first quarter of 2019 with the increased generally do to two months of operating cost from UCF to agent Year. I'll know just a few items here compensation represents. The biggest component is 17.6 million of expenses, which is a three point six million from the prior-year first quarter off but was less than expected due to the third caught on the Strong Mortgage volume activity.

Not interesting, was $14 for one key and represented approximately 23.5% of total revenues. I will focus my comments on a few key items impacting these results.

Amortization of intangibles is up almost 1 million uses a core deposit and other intangibles recorded in connection with the UCSD merger.

First regarding insurance commission. The first quarter is the. Each year when we generate contingent commission this year. We learned 1.3 million compared to 0.9 million in the first quarter of 2019.

Other expenses had a zero point seven million dollar benefit due to a decrease in Deferred Compensation Plan liabilities similar to the income item. I noted earlier.

And we estimate that we incurred approximately 210,000 of costs in the first quarter related to the covid-19 outbreak.

So excluding the merger costs. We generated a core efficiency ratio of 54.06% which compares favorably to 57.49% last quarter and 63.22% in the 2019 first quarter additionally our core pre-tax pre-provision income was 27.2 Million which generated a strong 2.04% return on average asset. Needless to say. We are very pleased with our first quarter operating profitability as we start 2020 as a combined organization with ucfc.

I already covered provision expense in my earlier discussion of people. So I will wrap up with the summary of my journey on a gaap basis. We reported a net loss of 22 and 1/2 million or 71 cents per share month. However, this was most significantly impacted by one-time merger specific items.

Merge accounts represented nine and half million on an after-tax basis for thirty cents per share in the one-time provision expense required under Cecil for non-pc D acquired loans represented twenty point five million on an after-tax basis or 65 cents per share, excluding the impact of these items quarter earnings 47.5 million or 20% per share.

Further with the adoption of sea salt we estimate that approximately 15 to 16 million of expense could be attributable to the impact of deteriorated economic forecasts. How may we have not excluded that reporter means purposes.

In summary, we're off to a solid start to twenty-twenty despite the economic headwinds buffet restaurant Capital levels and operating profitability provide a good foundation in the current uncertain environment and allow us to Port our customers while we work together during this challenging time that completes my financial review and I'll now turn the call over to Gary for highlights and our community bank and initiatives including updates on the merger engine of progress in our covid-19. Response, Gary.

Thank you Paul and good morning to all this Paul mentioned. I'm going to give you a few comments on our merger integration process and the actions and activities around the organization in response to covid-19 would take that first first feds reactions to the covid-19 challenge have been Swift and effective. It's 659 Branch Associates made remote capable within the first two weeks of the incident and that's resulted in us having about five hundred Associates working from home on any one given day over that. Our branch has remained open by with the appointment only traffic as folks are directed to mobile and online and through our drive-thrus. It's been very effective and we continue to see new business booked through the. We did Institute what we call depreciation pay to assist our branch and operations and support teams who are continuing to head into the office while navigating the challenges of home and presenting wage.

the challenges that work

Presented by this unique environment. We've made adjustments to our PTO practices and generally have taken steps to support the team at every turn.

For a client in early March we executed a substantial outreach program to our business client base. We listened provided counsel and made some appropriate recommendations. We are also very responsive to the needs of our consumer clients. And our team in the field is absolutely empowered to do what makes sense for those clients given their situation and keeping with our community approach to doing business. We've contributed over $100,000 across the communities we serve to assist Elders in need during this uncertain time and have contributed in-house stock of PPE give birth to our local Medical Response organizations. We are all in this together.

Here in Ohio. We do expect to begin to return to work in a phased-in approach over the next few weeks. Our governor outlined the return-to-work approach earlier this week and we will generally being adhering within a state recommendations.

Under the integration the process for First Federal and Home Savings continues on plan and are targeted integration date remains set for early July. It's been an outstanding effort and outcome today. I'm actually considering the additional challenges. We've all faced over the past couple of months our annual cost-saving expectations continue to be on track with the pro forma expectation of $17 a year off the total one-time costs associated with the merger or also on track. We should land within 5 to 10% of our Thirty million dollar performance expectations the increase coming to the benefit of improved run rate going forward.

Relative to our q1 results. It's worth reiterating that our results exclude January quarter earnings of Home Savings and that the ongoing costs associated with sustaining two back rooms through the integration. Or approximately a 1.5 million dollar per quarter drag on a reported earnings.

Well, Mark, certainly saw a natural slowing down of business. We did have a good quarter of commercial and consumer activity. Obviously Residential Mortgage business was strong in every market and continues to be and we are very focused on the payroll Protection Program and meeting the needs of our clients. But the job done there we expect will pay dividends down the road and strengthen our relationships going forward.

We as an organization or very focused and prepared to address the opportunities and challenges ahead facing our clients and for us as an organization with that. I'm going to turn it over to Matt Gary you heads up our lending? Oh, thanks Gary. I'd like to provide an update on activities in our loan portfolio as we work with clients impact covid-19 on the lending side. We've been very active in the paycheck Protection Program with our clients and have received and gotten authorization for over 2,300 PPP loan requests representing over $415 in loan volume.

in addition to

BP is downloaded. We are proud to be one of two Banks selected to partner with the state agency jobs, Ohio to provide our small business customers with up to $200,000 in additional to support their Capital needs during this time. These loans come with a 90% guarantee from jobs, Ohio with a total program commitment of twenty-five million dollars loss program was just launched late last week and we have received a lot of interest from our client base early on in addition to the significant amount of additional Capital. We are providing the club. We have also been very proactive and working with our customers impacted by the pandemic to provide modification of payment terms consistent with regulatory guidance. We currently have approved payment modifications for loans in our commercial portfolio, totaling approximately $922 while in our Residential Mortgage portfolio, we have provide wage.

payment deferral for approximately 38 million dollars of loans

I now like to turn the call over to Don for closing comments done. Thank you, Matt. Correct things up. We are pleased with our balance sheet and capital position as we move into the second quarter and a period of more challenges credit has noted we'll be a major Focus as we look through future growth and Loan balances and see what stress is developed for are different from those due to the covid-19 environment in summary. I would like to express my sincere appreciation to each of our employees for their efforts and dedication to serve our customers during this month, crisis. I also want to recognize the team effort and handling the challenges of the PPP initiative. I also want to express my gratitude to all those and the front lines of the pandemic wage, especially health care workers and First Responders who are there to help us all

We will get through this difficult time together, and I believe that we as a company will emerge from the crisis stronger than ever. We appreciate the trust you have placed in us and thank you for joining us off your interest in first Defiance Financial Corp week now glad to accept your questions operator will accept questions at this time. Sure. Thank you, sir. We will now begin a question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star into at this time. We'll pause momentarily to assemble our roster.

And our first question will come from Scott siefers with Piper Sandler. Just go ahead. Hey, good morning. This is Jamie Benjamin on for Scott. Thanks for taking my questions. Good morning. Jerry. Can you guys put us through some of the macroeconomic assumptions you used to arrive at your reserve level?

Paul

I'll let you handle that question. Sure. No problem first just for reference. We do use the booties forecast. So we elected not added option to go ahead and acquire a subscription there. So going forward will be relying on that for 3:31. We are using the wage base line with our final marks Baseline which at the end of the day Incorporated their estimated impact of the covid-19 outbreak as well. As the tears act they came right at the end of March. So that's the that's the the background that will be using here for the quarter in for go forward in terms of some of the the economic that are in them key ones. I mentioned on the call national unemployment is a specific driver within our model and you know prior to the pandemic when you go back to adoption dead.

At 1231 Baseline forecast was calling for about 3.6% unemployment during 2020 with all the impacts of the covid-19 and things like that by the end of the day, the estimate of unemployment rate is was projected to jump to 12 and half percent a little over twelve and a half percent per second quarter and then start to improve from there similarly on the GDP front originally, they're projecting positive GDP for about 20 20 roughly 2% off 2% for second quarter back at 12:31 estimate and then it in by 3:31 that Baseline was shown, uh, a significant recession 18.3 per month and recession or negative growth of GDP for the second quarter. And as I think a lot of us probably saw this morning, they've come out and announce. The first quarter was in fact negative girls wage.

So that's the that's those are some of the basics I'd say that are underlying that um, each quarter will be updating in line with the the new Baseline forecast and can provide some color in those as we progress.

Perfect. Thanks so much for the color and then just one follow-up. Give him the way to the stock is behaved. I think there might be some confusion on what ongoing credit cost might look like you guys are a little unique and not one of the few companies to have a merger close in the first quarter. I reported to roughly $44 billion dollar provision with 26 million of that due to merger accounting then we layer on the reserve build see mm. Well, there's so much uncertainty sort of what is the best way for us to think about ongoing provisioning.

That is a very good question. So obviously, you know, this is the beginning of Cecil. So we're all going to be learning as we go to some extent. However, conceptually, you know, this is a forecast model. It's a forward-looking model. So the intent there is to bring Forward Dental future Reserve bills to the current, you know, end of month accounting date such that if things don't get worse or essentially say call it a stable from that point forward and the reserves to move kind of like it used to which is you know up for volume may be some adjustments for qualitative factors things like that.

where the volatility will come into play obviously

As those forecasts change. So while at 3:31 it had it for cast of expert unemployment GDP things like that. If that gets worse off the model will force additional Reserve if it gets better, we'll be able to take some of that back but again conceptually as long as they essentially safe able to take it off or lumps upfront and then you move on and it's all about volume and things like that just like just like the old days.

Great. Thank you. That's all for me. Thanks Jani. The next question is from Christopher Mamaroneck with big Partners. Let's go ahead. Hey, good morning. Thanks for all the information last night. And today we appreciated. What is your sense about the deferrals? And you know, would those possibly get larger from what you've already reported wage? And do you think any of those would sort of be relatively quick to move off the books and then, you know, not threaten you to be a a future classified or criticize asset.

Yeah, Chris, I'll start out and then turn it over to Matt. You know right now we're feeling you know, we have the deferral. I think it could go up a little bit that balance in that disclose and not you know, we're probably a little on the longer end. A lot of those are going to be 6 months deferrals versus something shorter. So we're anticipating that you go through that six-month process, you know coming out the end of that tunnel those loans will be you know, the same quality rating as long as some business activity that supports those loans come back. But right now our anticipation is that will will be in a better position because of that deferral down the road mat. Do you want to give some more color on that one if you would

Sure Dawn, I would agree with what you're saying there. I would expect as we look at credit, you know the credit risk rating and credit modifications going forward on those loans probably important too. No doubt note that about 75% of the loans that we've identified as at-risk in. The investor deck have had some form of payment modification already approved to them. I think as we see the year go on as the numbers of financial statements start to come in for those borrowers will start to see some deterioration and risk rating page from a pure credit cost perspective. I don't see a lot of that activity dropping into the into the 20/20 into the 2020 performance.

Okay, so then basically the reserve you have now is is properly geared towards what you know, and then as you see things change possibly a negative and make it deleted you would kind of re-examine the reserve every quarter. Is that a correct way of thinking about it? Yes. Yes. That is Chris as we look at that and you know, like Paul said a lot of thoughts to be on the the economic forecast, you know, the unemployment rate and things like that. We have a baseline of that. We've we talked about that moves around you know, how I look at it. I think you know, we're probably if everything stays stable are provisional be well in line or the lower lot of than expectations because we've already taken in the first quarter month, but you know time will tell and I don't have my crystal ball already. So but it'll be it'll be modified and we're going to try it. I saw said give a lot of clarity on the assumptions log.

That model on the quarterly basis to help helpful you with your models and expect.

Patients. Okay, great and then the 35 or 36 million dollars. We see of the discounts that you footnoted those that includes the Cecil double count that, you know talk about way back when the merger was announced.

Yeah, so in those there is a credit Mark. Yes. So there's a credit mark on the entire loan book out of that 27 month CD and 7.7 is the PCD Mark now just to be clear the the mark and the PCD shows up in the alignment. So that was part of the month and build their didn't hit the p&l doubt. The $27 million on PC Credit marks are average. Sorry a reduction of the loan balance on the face of the balance sheet. That number did not go straight into the allowance instead. That's where the double dip that comes in on top of that. We then have to run but balances through the model and it kicked out a twenty six million dollars right lady provision charge at the date of acquisition to add to the allowance. So there's your double dare if you've got the credit market and then on top of that we booked in allowance.

I'm going forward what we get to do is it is a treat in that credit Mark then over the life of the loans.

And and the credit marketing the 27th that is off around part of that. Correct. Got it, right? Yes. Yep, perfect. Okay, so we can still think of the reserve being the 179 and then add this took a mark on top of it. Which just just want to make sure I got that match straight. Yeah. Okay. Exactly. Yep. Yep. It's not in the reserve but you're right. There is a an inherent Reserve in the loan balances for that. Yep. I'm great. Just want to clarify. Thanks for walking us through it. No problem.

The next question is from Michael perada with KBW, please go ahead.

Hey, good morning. Glad to hear everyone is doing well. Thanks for taking my question. Sure like to see you on the phone for you guys, I guess right so often, you know, a lot of my my credit questions have been answered. So I wanted to ask a couple a couple of other ones I wanted to start and I apologize if I missed the site again, I'll call over the wait would be on the expense side. You know, I realize they're still took a month. I believe of the UCF see expenses to come over but it still seemed like it was maybe a little ahead at least what I was expecting was curious. If you could maybe provide just like an updated near-term thoughts kind of the expense run rate and remind us, you know, when you expect to to to realize most of those synergies, which I I believe is after the conversion in July, but just to to get an update there would be helpful Paul. Do you handle that, please?

Sure. Yeah. Yeah, I did touch on it just a little bit in the in the script part of the call there Mike and you're right expenses are better than probably expected even account for the fact that we only have two months versus three months operating costs from UCF C. And the the reason for that for the most part my key one is related to them activity that went on and so um, you know deferred costs that relate to that volume activity and that ends up kicking out through gain on sale or amortizing over time depending on whether Thursday folder or or portfolio. So roughly, uh one and half two million maybe of costs related to that that helped the quarter we did have one unusual items not very big are deferred comp plan, which is effectively reliant on stock market activity because it was down there by the end of the quarter. Yep.

Pretty significantly. We had a hit to the revenue line, which reduced that.

Add up and not interesting, but we also got a benefit and they'll essentially offset because they're matched but it was point seven million through the other non-interest lines for both lunch and expenses aside from that. You know, it it's really um, as you noted, you know start next quarter will have a full run-rate of cost from UCF 6 and then in terms of timing of the synergies, yes for the most part the vast majority of those will start to hit in the second half of the year. Once we get the conversion in mid-july. We had she had some you know, once we close there at the end of January we're able to execute on some of our synergies day one. So we've got a little bit of benefit starting out of the month, but most of it will come later when we finish conversions and can eliminate a lot of duplicity both in terms of data processing person.

awesome such

Thanks Paul. So a couple moving pieces there. I mean, are you guys willing to kind of provide a ballpark before you think the second quarter expense number, you know might be within the ranges. I know there's a lot of uncertainty out there, but it would seem like there's some control actions within the expense side. I mean, it's any thoughts.

Yeah, I would say probably the the best thing to do would be to add back call it, you know that million and half or two million it'll depend on mortgage activity primarily here in the second quarter, which is starting to we got a lot of it in the first quarter based on what happened to the rate environment and that has started to normalize hear the second quarter. So I wouldn't expect that took Sara Lee to recur here in second-quarter.

Okay, I can you would be sorry. Go ahead a couple other items that may help with the modeling the Residential Mortgage book continues to run off very well for the last month. The origination activity was three times its normal volume and with the rate environment where it's at we still see refinancings coming in and we continue to expect that to carry into the second quarter. So some of the good that you see on the expense side relative to that will continue to be good and the gain on sale income will be reflective of that what you off speaker as much going forward is the kind of reduction you solve this last quarter on the MSR valuation. We're really at the floor on MSR the brakes can only move down so much money affect that valuation, so we would expect that net a good second quarter of residential will give us Great Gate on sale great cost deferral and less on MSRP.

And then on the point that I of my earlier comments we still will have about a million and half dollars in the second quarter of expenses that are relative to running both.

Operations and so we merged them in in July. So on a go-forward run-rate post integration, that's the number that that you can add add to the bottom line price tax provision.

Helpful, thank you guys. And in terms of the merger, you know bigger picture question your broader question here, but you know, obviously the the up sure there were many, you know plans alongside revenue synergies and things of that nature, you know, when you guys kind of put the deal together and you know, obviously the economic environment is kind of threw a curve ball at all of us here. So just curious if you can provide us kind of like any broader update on how some of the you know initiatives that you guys, you know, maybe we're looking to get going on right away their time lines around them have changed or altered or anything of that nature has given everything going on.

A great question like I think from the Synergy side a lot of that we didn't anticipate that to to really happen until we had the court system converted to log in our thoughts and modeling that would have been a probably a post post third-quarter kind of, you know, look at the world and more more geared at 21 to get things all cleaned up and and in place, you know, we still have those conversations. We've not taken a backseat in any of our thoughts on that clearly. Like you said, it's been more challenging to try to think about how we get things done. But we're generally still on schedule for most of the things that we wanted to accomplish kind of bundled in with her conversion.

Okay, helpful. Thank you. And then lastly just you know, I heard you guys on the residential side and sorry if I missed it, but any thoughts mad about the commercial Pipeline and off and how that you know closing there could Trend given everything going on. I mean, it's a second quarter likely to be pretty soft. But you know are the pipeline still fairly steady or or what are your updated thoughts. They're sure I'll get a couple of thoughts there might as you mentioned. The first quarter was really solid. We really hit the ground running and Commercial Banking really good organic growth really for both sides of her business off both the the our our Legacy First Federal side and Legacy Home Savings site. Both had a really good quarter. I'm probably a little understated from what's reported simply because there was one month of activity missing from the side. So all-in-all really good growth their second quarter still, you know, we we had we have enough good activity in the pipeline.

In the cuter clothes where we should see a good growth quarter on the commercial business. I think we're our math gets a little fuzzier or we're done at mentioned the crystal ball, It gets a little tougher for us as we think Q3 to Q4. Just not enough visibility to really give the whole lot of good guidance there yet.

Okay, really appreciate it guys that go to the comments all the extra disclosures are helpful. So thanks for including and then stay well. Thanks Mike. You too. Thank you. God. Once again. If you have a question, please press star and one and a question is a follow-up from Scott siefers with Piper Sandler, please go ahead. Hey guys. Thanks for the follow up. This is Jacob again. Just a couple more questions here. Do you have a sense for how much purchase accounting address since we should expect for the rest of the year and then relatedly, I know you mentioned there should be additional pressure on the margin, but any thoughts on the court margin further

Okay, I'll let you start Paul and I might do some color on the margin after you're done. So go ahead. No problem. Yep. No problem, Jimmy. Can you clarify your question on the on the mark? So you asking if things will change from here or or what's your question exactly on that? Just the the level of accretion running through the margin for the past year in dollars are basically off whatever yeah. Yeah. Yeah. So because I close the end of January we've only got two months of accretion here in the first quarter. So if you're all set up for a full quarter, that would be a better estimate and then part of that is some of them will burn down faster like the CD Mark it's tied to maturity that you know, that will be gone with definitely within two years if that sooner is that is that book turns over so we had

What did I say? One point one point three million for the quarter for two months worth grow setup. That's a better estimate on a quarterly run rate.

And then in terms of yep, so that that did represent about ten bits benefits for the margin, you know at the end of the day that's that's about what we expected. We were projecting 9 to 10 bibs. So that should come in maybe a little bit more with a full quarter's work out here starting in second quarter, but still similar pick up their thoughts on the reported them side and then on the court side as I as we noted in the script part of the call, we do expect more construction here in the second quarter so long, you know, that's a little hard to predict with exactly how PPP ends up in terms of the volumes and how that will start to flow into second course, but, you know prior to all this we had been generally talking about a 3 and 1/2 3 6 core margin at the end of the day when dead

You know race started turning and so we're definitely in the low end of that. And so could it be you know, 3-5 a little under got a into the higher wage Wars. Yes, we can see that but again, you know, depending on how much we end up getting done with PPP and if that can help a little bit plus we are you still seeing some some activity, you know, Matt was saying on the commercial side and whatnot that will help as well.

Yes, I think great.

A couple of things to think about that, you know like Paul said we get the PPP that's a lower lower effective rate, but that'll help the provision cuz it's guaranteed you look at some of the trade-offs as we do on the margin versus the guarantee which is worth quite a bit and then the funding source of that will be lower on a net basis. A lot of the programs were doing both jobs, Ohio et cetera is a prime based product. So that'll be a little lower rate than some of the commercials stuff all that blend in. I think we're going to be fairly consistent. But you know, it's it's going to be a challenge to to work through that but I think from way we look at it. It's a benefit on the the capital side and then type some of that ties in through the provision.

Hopefully a little expected in the lower provision because of the guarantees.

Great. Thank you so much. And just one more question. Do you guys have a sense for what stress losses do the cycle could look like for the combined company and I'll preface that by saying, you know, you guys don't run that fast model, but I was wondering if you have done any internal stress testing and sort of how does the combined company come through if it will? Yes, we have nothing. We're prepared to disclose our projections on a a more moderate to severe stress test show is still well-capitalized levels.

Great. Thank you. That's all for me. Thanks guys. All right. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back up with Sarah Birkin 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.

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