Q2 2019 Earnings Call
[music] Good day and welcome to the first defiance second quarter 2019 earnings conference call and webcast all participants will be in listen only mode.
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After todays presentation, there will be an opportunity tax questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Tera Murphy with first Defiance Financial Corp. Please go ahead.
Thank you good morning, everyone and thank you for joining us for today's 2019 second quarter earnings Conference call. This call is also being webcast and the audio replay will be available at the first defiance website at <unk> D. E. F. Dotcom, providing commentary this morning will be Don Hileman, President and CEO of first defiance.
Paul Nungesser Executive Vice President and Chief Financial Officer, following their prepared comments on the company's strategy and performance they will be available to take your questions. Before we begin I'd like to remind you that during the conference call today, including during the question and answer period, you may hear forward looking statements related to the future financial results and business operations for first defiance financial Corp. actual results may differ materially from current management forecasts and projections as a result of factors over which the company has no control information on these risk factors and additional information on forward looking statements are included in the news release and in the company's reports on file with the Securities and Exchange Commission and now I'll turn the call over to Mr. hileman for his comments.
Thank you Tara.
Good morning, and welcome to the first defiance financial Corp. second quarter Conference call.
Last night, we issued our 2019 second quarter earnings release.
And I would like to discuss sales results and give you an outlook into the remainder of the year.
Joining me on the call. This morning to give more detail on the financial performance for the quarter as our CFO , Paul None jester.
At the conclusion of our remarks, Paul densely you see our bank President Brent Beard, our controller and Treasurer and I will answer any questions you might have.
[noise] overall, we had a strong quarter with sustained move back toward our strategic goals and a positive trend in our profitability.
The second quarter results reflect our expected operating performance.
Net income for the second quarter of 19 on a GAAP basis was $12.2 million or 61 cents per diluted common share compared to $11.1 million or 54 cents per diluted common share in the second quarter of 18, it's 13% increase in EPS.
Our overall core performance this quarter helped drive a solid return on average assets of 1.52 compared to 1.48 in the second quarter of 2018.
Loan growth rebounded in the second quarter, reflecting an annualized growth rate of 12%.
On a year to date basis, our loan growth rate is 6.6%, which is more in line with our full year expectations and year over year growth was that 10%.
We believe that upper single digit annual loan growth is still an achievable goal.
We did see an increase in loan yields of six basis points on a linked quarter basis, and 37 basis points compared with second quarter of 18.
Total deposits were up 8% year over year and down <unk>, 0.08% on a linked quarter annualized basis. We are also very pleased with our margin stability this quarter maintaining 4.03.
Percent, an increase of 80 basis points over the second quarter of 2018.
We expect to see very competitive rates select lending deals going forward with more request for longer term fixed rates in this environment.
We expect to see some margin compression in the second half the year due in part to downward pressure on asset yields and some re mixing of balances on the liability side.
As well as more limited downward pricing opportunities on the liabilities.
Improved credit quality metrics have been anticipated and this quarter's improvement was evident when compared to both the second quarter of 18 and on a linked quarter basis.
At the quarter end, we ended with zero balances in Oreo spent a long time since I can remember this ever being the case, Paul will provide details on the movement or nonperforming assets and nonperforming loans in a few minutes.
With this positive shift this quarter, we know we must continue to work hard to see 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 19 cents per share representing a 27% increase over the second quarter of 18, and an annual dividend yield of approximately 2.8%.
I'll ask Paul to provide additional financial details for the quarter before I conclude with an overview Paul Thank you Don and good morning, everyone.
I'm pleased to provide a deeper look into our second quarter 2019 financial results and outlook for the remainder of the year.
As Don noted net income for the quarter was 12.2 million up 10% from $11.1 million last year.
And earnings per share was 61 cents up 13% from 54 cents last year.
The year over year comparison, primarily reflects our continued strong core profitability growth as well as improved asset quality.
Beginning with the balance sheet loan growth for second quarter 2019 improved significantly from the first quarter as we expected.
After experiencing only $9 million net loan growth last quarter, we achieved impressive growth of approximately $75 million in the second quarter.
That translates the annualized loan growth of approximately 7% for the first half of the year.
Looking ahead, our loan pipeline remains robust and we do not currently expect significant payoffs in the second half of the year.
As a result, we still anticipate solid upper single digit loan growth for the year as we've previously stated.
Turning to deposits, we were essentially flat for the second quarter after a robust growth of $65 million in the first quarter.
A very competitive pricing environment has led to continued rate increases within our markets.
However, we are pleased to be up almost 8% in deposit balances from the prior year and we do expect a rebound in growth during the second half of the year.
Other balance sheet items to note for the second quarter included a $6.6 million fully premium purchase in May.
And $30 million of FHLB fixed rate advances in late June at an average cost of 2.05% to support our loan growth initiatives.
Overall growth has been consistent for the first half of the year and we're very pleased with the strength of our balance sheet.
Our strong earnings asset mix, coupled with rising, but manageable low cost deposit funding.
Continue to generate a very profitable margin and we anticipate solid balance sheet growth to continue in the second half of 2019.
Turning now to the income statement, our net interest income was 29 million for the second quarter of 2019 up from $28.3 million in the linked quarter and up 2.4 million or 9.2% from the 26 and a half million in the second quarter last year.
The increase over the prior year quarter is primarily driven by growth in earning assets as well as margin expansion from a year ago.
Our margin this quarter was 4.03% consistent with last quarter and up eight basis points from 3.95% in the second quarter last year.
On a linked quarter basis, our yield on earning assets was up seven basis points as our loan portfolio yield rose to 5.12%.
While our cost of interest bearing liabilities was up eight basis points to 1.14%.
However, despite the slightly narrowed spread our noninterest deposit mix.
Helped our overall funding costs and supported a solid margin again this quarter.
Our earning asset mix and funding mix have both performed well and we have maintained our consistently balanced exposure to interest rate changes.
As such we believe that our margin would continue to perform well. However, we do expect contraction beginning in the third quarter, primarily due to an expected fed fund rate cut.
The severity will depend on how deep they caught and whether they caught once or multiple times.
In addition, we have been fortunate to generate some healthy interest recoveries.
Such that our second quarter NIM would have been 3.98%, excluding those and that's not something we would rely on go forward.
Rather we are proactively addressing our funding costs, while maintaining our loan pricing discipline, focusing on cost containment and evaluating other revenue enhancement.
Total noninterest income was 10 and a half million in the second quarter Fynineteen down from $10.8 million in the linked quarter, primarily due to 920000 contingent interest commissions insurance commissions included in the first quarter, but up from $10.2 million in the second quarter of 2018.
The year over year increase is primarily attributable to both mortgage banking and insurance commissions.
Regarding mortgage banking revenues for the second quarter of 2019 were 2.1 million.
296000 from the linked quarter and up $124000 from the second quarter of 2018.
Second quarter 2019 mortgage originations were $85.5 million.
Seasonally up compared to $46 million last quarter, but also up from $80.5 million in the second quarter 2018.
Gain on sale income was $1.8 million in the second quarter of 2019.
Both from $1.3 million in the linked quarter and $1.4 million in the second quarter last year.
Offsetting these improvements was a negative MSR valuation allowance adjustment of 190000.
After a negative adjustment of 113000 last quarter.
And compared to a positive adjustment of 47000 in the prior year.
Aside from mortgage banking, we generated insurance commissions of $3.6 million up 123000, or 3.5% from last year.
In service charges of $3.3 million essentially flat from a year ago.
BOLI income increased 136000 from the linked quarter, but declined 39000 from the second quarter of 2018.
These fluctuations reflect both the 6.6 million premium purchase I mentioned earlier as well as a $93000 about death benefit received in the second quarter of 2019.
Compared to 168000 in the second quarter of 2018.
Overall, we are pleased with the performance of our core fee businesses in the second quarter.
Regarding noninterest expenses second quarter, 2019 totaled $24.2 million down from $24.9 million in the linked quarter, but up from $22.7 million for the second quarter of 2018.
As a reminder, the first quarter 2019 included 264000 in other expenses for Oreo write downs.
The expense increase compared to last year is primarily attributable to compensation and benefits, which rose point $3 million from last quarter and $1.5 million from last year.
This increase reflects cost for our continued metro market expansion efforts as well as higher medical benefit costs.
All of the above contributed to strong and improved operating profitability.
Pre tax pre provision income was $15.2 million for second quarter 2019.
An increase of 7% from $14.2 million in linked quarter, and 8% from $14.1 million in the second quarter of 2018.
Regarding asset quality.
Provision expense for the quarter was 282000 compared to last quarter's expense of 212000.
In the second quarter 2000, eighteens expense of 423000.
The provision this quarter was lower than anticipated, mostly due to net loan recoveries of 488000.
Versus net charge offs of 379000 last quarter and 369000 last year.
However, strong loan growth for the quarter drove an increase in the allowance overall.
Our allowance for loan loss at June 32019 was $28.9 million.
Up from $28.2 million at March 31.
And up from $27.3 million on June 30 of last year with the year over year change, mostly driven by the growth in loans.
The allowance to total loans ratio at June 32019 was 1.10% consistent with last quarter and down from 1.15% a year ago, which reflects reduced levels of nonperforming loans and improved asset quality metrics.
Nonperforming loans declined this quarter to $15.3 million from $17.6 million last quarter were down 16% from $18.3 million at June 32018.
Our Oreo balance also decreased this quarter to zero from zero point $9 million last quarter and $1.8 million in the second quarter last year.
As noted earlier, we did take an Oreo write down of 264000 in the first quarter of 2019, and we completed the disposition of that asset in the second quarter.
Our recurring troubled debt restructured loans. This quarter also declined to $10.3 million from $11.9 million last quarter and were down 35% from $15.8 million a year ago.
With the change in MPS days, the allowance coverage of nonperforming assets at quarter end improved to 189%.
Compared to 152% at March 31, and 136% a year ago.
Obviously, we are extremely pleased with our recent trends and improvement from a year ago, we remain confident in our overall portfolio strength and asset quality as we continue to pursue our growth strategies.
Looking at our capital position total quarter end stockholders equity was $407 million up from 387 million at June 32018.
As a reminder, during the first quarter. This year, we repurchased approximately 515000 shares for $15.1 million.
However, our capital position remains strong with quarter end tangible equity to assets ratio of 9.60% down only slightly from 9.65% last year.
Consolidated total risk based capital ratio was approximately 12.6% at quarter end June 32019.
So our healthy capital position supports our growth and shareholder value enhancement strategies.
In summary, our positive momentum continued in the second quarter with diluted EPS up 13% from a year ago return on assets of 1.52% versus 1.48% last year.
In return on equity of 12.28% versus 11.69% a year ago.
Our balance sheet remains strong.
Our operating profitability is high.
Our asset quality has improved and our capital position is solid.
While we have indicated an expectation of margin contraction over the remainder of the year. We feel these indicators and expense containment support our positive outlook for being in line with expectations for the second half of 2019.
That completes my financial review I will turn the call back over to Don Thank you Paul.
I'm very pleased with the results this quarter in the increase in our core earnings improvement in asset quality, a strong loan pipeline and our expected rebounded deposit growth give us confidence that our strong four of US will continue for the remainder of the year.
Collaborative efforts between leadership and team and the teams within all of our market areas support our focus on core balance sheet growth the specific attention to loan and deposit growth.
Expense control and improved asset quality.
Successful execution of our metro market.
Strategies is evident as we noted significantly greater contribution from Columbus, Ohio market during the second quarter.
The addition of lenders and Treasury management staff to this market will support future growth objectives and help continue this pace.
For Wayne, Indiana market noted a record month for total dollar amount in retail loans in June and this momentum is carrying forward into July .
As we work together to closely balance our exposure to interest rate changes, we constantly monitor and address deposit funding costs, while maintaining our disciplined loan pricing.
In addition, our focus on optimizing our digital channels leads our strategy to improve our.
Client experience as transactions move beyond the branch.
Over the next several years, we will implementing a new digital banking platform that will enhance digital banking capabilities for personnel.
Personal and business clients.
The same platform will create a uniform user experience for clients and employees that will allow us to deliver even greater levels of customer service.
Well, we are committed to providing our clients with smart solutions that fit their financial needs. We also know that supporting our communities is essential to living out our better together philosophy. This June marked the second consecutive year that our month long building better communities initiative in celebration of National Homeownership month generated a contribution of 500 plus hours of community service.
Through our employee involvement from part time to executive level, we were able to benefit homeowners and housing related community partners.
As Paul noted, we expect some narrowing of the margin over the remainder of the year, but feel we can compensate for this and anticipate performing at expected levels on a full year basis.
Our strong performance client focus values and engaged employees.
Consistently come together to deliver exceptional results for our shareholders.
First defiance will leverage these principles to keep moving forward and we anticipate the call. Appreciate the confidence you have placed on us as we work to make first defiance, a company known for providing smart solutions to our customers and communities.
Thank you for your interest in first defiance financial Corp. and we thank you for joining us this morning, well, what I'll be glad to answer your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on a touchtone phone.
Using a speaker phone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you will like to withdraw. Your question. Please press Star then to you at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Nick.
Could you rarely from Sandler O'neill and partners. Please go ahead.
Good morning, gentlemen.
Good morning, Nick.
So first I appreciate your commentary on the margin could you give us some color on deposit pricing in your markets have others eased up or is it still as competitive as ever.
I'd say, it's still competitive, but yes, we have thankfully not seen some easing in various markets. So depending on which ones were talking about we've had a competitors come in 10 25 basis points, depending on the time deposits and whatnot.
Okay.
And then secondly, just with respect to loan growth. It looks like the end of the second quarter was especially strong given the end of period compared to the average balances you mentioned the robust pipeline how does the pipeline compare to this time last quarter.
This is Vince the pipeline is pretty significant that quarter over quarter, we've got about $400 million in the commercial pipeline about 120 in the residential pipeline I think our lending results in the second quarter really reflect the team commitment and effort to focus on high quality loan originations and building and managing that pipeline very closely.
Okay, Great and then just on expenses there was a nice drop this quarter as anticipated do you expect that to 20.
The 24.2 million to be a good run rate going forward.
We hope to do better than that I think weve talked about 24.
As a bogey, but we look to obviously try and beat that and especially as the margin compressed. This year, we're focused on finding areas to contain.
To help with net earnings at the end of the day.
Great. Thanks for taking my questions.
Okay. Thanks, a lot Eric.
The next question comes from the Mylan Delmonte of KBW. Please go ahead.
Hey, good morning, guys hows it going today.
Good morning, David.
[laughter], so just a follow up on the on the margin.
Just want to make sure Paul that I understand this correctly. So you said, there's about five basis point benefit from interest recoveries. This quarter. So as we think about the downward trajectory here were kind of starting out like a 398 level is that fair exactly exactly yep correct, Okay and.
Have you are you would ask me roughly how much of an impact you know 25 basis point cut which would be.
Well you know.
Yes, [laughter] yeah.
We're looking we're looking for.
Yes, you know five or six basis points on decline then you know as we look to target the end of the year, that's that's more where we're focused.
On a quarterly basis.
So it's.
Maybe a couple of percent decline in margin over the course of the year.
Got it okay.
And obviously and yeah. It depends on how successful we can be on the deposit side.
What we can do on borrowings as needed and so on to help support that but.
Hi, Don if you just take a straight.
Fed fund rate cut you're looking at five to six right off the top there.
Got it okay.
And then with regards to the.
The deposits in the gathering effort that you guys have going on could you just give a little bit of an update as to what you're seeing in some of your newer markets.
Where you've opened up LP always have you started to try to gather some deposits in like Ann Arbor, and and whatnot.
Not not a significant basis I think I did cover mentioned, where we added us from Treasury management staff in our Columbus market.
That's been very recent really haven't seen any significant impact on that from a deposit side.
Expect to.
And we're a little slower in Ann Arbor. So I think we're we're focused more on some of the other metro markets, the four lanes and totally those as well.
But our core core deposit franchise is our legacy markets, you know and I think we can.
Still do little bit better there.
And.
We expect to we expect to.
Part of what we look at is the opportunity maybe for some mix change you know customers are looking to lock in.
On the loan side longer fixed rate stuff and then on the deposit side keep it short because they believe interest rates will go up at some point.
So taking advantage of a customer attitude right now and to lower cost of funds is I think where we're looking and see an opportunity.
Okay great.
And then.
I guess just lastly.
Can you help us think a little bit about the provision expense going forward I mean, obviously really strong quarter with MPC is going down and booking some net recoveries, but on a more normalized expected level, you know something in that maybe $1.2 million to $1.3 million range.
Maybe not quite that high but yes definitely I mean, if you just add back recoveries, there you're getting closer to a.
More normalized run rate, so 750 million in that area and.
Tracking up as growth.
Bill balances that would.
Track up with it yes, okay great.
Really an indicator on the growth factor, even if we get growth and that will be the number right.
Okay. Okay. That's helpful. That's all that I had for now thanks, a lot guys appreciate it.
Thanks, a lot there.
Our next question comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Hey, guys good morning.
Good morning, I wanted to drill I wanted to circle back on the loan receivable yield.
I presume if we take the 512 and we back five basis points off of that that would kind of be our base excluding that recoveries.
How does that compare with new business that you were able to do today and is that new business yields going to come under that five hi Fi or just over five level as this quarter plays out.
Yeah, I think that's our target is this there will be about five we did see some decline in that quarter over quarter.
New yield.
We have about 15 basis points. So I think when we start to look at that.
The the low fives is probably where we think it will come in.
No.
For the quarter on the new business on an average basis.
Okay.
So again that really does limit the pressure that you Havent you have some pressure as you talked about but it's not as it may not be as significant as some investors may worry about.
Yeah, I think there is some some some flexibility there, but I think the thing that we're really balancing Chris is there.
Yeah, the growth and the benefits we get from the additional balances.
And what rate is that coming on.
And with the decline.
And anticipated decline in their next weekend in market rates.
I think there'll be a little bit more pressure on our origination rates.
Going forward. So I think we're cautious about that impact and I think.
We're trying to really manage toward.
Toward that were.
Really focused customers are looking for longer.
Longer rate opportunities and they are variables and what the prime.
Plus kind of scenario now.
Compared to a five year fixed yeah, there's really not much spread there differential so.
I think a little bit more a challenge for us to maintain that new origination rate going forward, yes, I'd agree its not just the new originations almost a quarter of our loan book is variable. So we'll see some pressure coming from that pool. There and then we would expect as Don alluded to here that we'll get re Fi.
Requests that we'll have to evaluate.
And.
Look at those on a case by case basis, if it's worth keeping the balances at a lower yield versus letting it run off and having to.
Originate to cover it.
Okay.
But you'd mentioned beginning of the call that the pay off was not going to pay offs were not going to be a necessarily a problem for the back half of the year. So you have some visibility to what you expect to pay off right.
Yes, correct, yes.
I worried about payoffs I think it's when somebody is maybe got two years left in a.
Our loan.
Coming in and asking for a re fi opportunity and.
Yeah, the prepayment penalty is probably not going to be enough to offset having to do something.
For good clients so.
Okay.
Gotcha.
And then as you think about deposit resets youve been fortunate to have I think over this rate cycle make up less than 30% deposit beta cumulatively. It will behave that way on the way down I know every cycle is a little bit different so its might be are hard to predict that at this point, but just curious if that's.
Something like that was reasonable as next several quarters play out.
Yes, we believe so yes.
And then last question just has to do with Columbus.
And the success, you're having there to what extent do you have.
Any any difference in structure.
In terms of how those are those loans are down relative to the rest of the franchise.
No. We don't have any kind of a strategy to have a different structure I think we just have more of an opportunity for.
CRT and I see sorry down and Columbus than some other where we might be more saturated from a geographic concentration standpoint.
Well, we don't look we don't price differently, Chris or we don't.
I have a lot of different structure in the Columbus market compared to other markets.
Okay. That's helpful. Don Thank you for clarifying that.
Great. That's all my questions. Thank you guys.
Alright. Thank you appreciate it.
Again, if you have a question. Please press Star then one.
Uh huh.
[noise].
This concludes.
I'm sorry. This concludes our question and answer session I would like to turn the conference back over to Tera Murphy for any closing remarks.
Thank you for joining us today as we discussed our quarterly results. We appreciate your time and interest in first defiance financial Corp. have a great day.
[noise].
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.