Premier Financial Corp (OHIO) (PFC) 2020 Q1 法說會逐字稿

Good morning, and welcome to the First Defiance First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

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

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 Defiance website at fdef.com. Following leadership's prepared comments on the company's strategy and performance, they will be available to take your questions.

Before we begin, I'd like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for First Defiance Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the company's reports on file with the Securities and Exchange Commission.

And now, I'll turn the call over to Mr. Hileman for his comments.

Thank you, Tera. And good morning, and welcome to the First Defiance Financial Corporation 2020 First Quarter Conference Call. Joining me on the call this morning to give more detail on our financial performance for the quarter is our CFO, Paul Nungester; as well as Gary Small, our Bank President; Matt Garrity, Chief Lending Officer; and Vince Liuzzi, our Chief Banking Officer.

Last night, we issued our 2020 first quarter earnings release as well as provided a slide deck with further data in our 8-K filing. And now I would like to discuss that release and give some insight into 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 try 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 concerns have shifted to servicing the immediate liquidity needs of our clients, ensuring 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 in executing the SBA Paycheck Protection Program, or PPP, enacted as part of the CARES Act stimulus legislation, assisting with payment forbearance as appropriate and other relief programs. We are pleased to participate in the JobsOhio program designed for our current small business clients to provide loan funds to those not participating 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 our strategic pandemic 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 branch drive-through lanes and communicating with them and encouraging our customers to use our free self-service tools, such as interactive teller machines and automatic teller machines, mobile services, online technology to actively promote physical distancing in all aspects of our everyday business.

It is also impossible 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. As noted, we had an active first quarter with the completion of our merger with United Community Financial Corporation, or UCFC, and the adoption of CECL, both impacting our performance.

I am pleased with the strong core performance we had in the first quarter and our position going into the rest of the year.

First quarter 2020 net income on a GAAP basis was a loss of $22.5 million or $0.71 per diluted common share compared to $11.5 million or $0.57 per diluted common share in the first quarter of 2019. On a core basis, net income for the first quarter was $7.5 million or $0.24 per diluted share.

Our overall capital planning is supported by our ongoing solid performance in capital levels at the end of March, and we have looked at the potential future impacts on capital levels of the environment 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 and an annual annualized dividend of approximately 6%.

At quarter end, we had 570,000 shares of common stock remaining for purchase under our share repurchase plan authorization. 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, Don, and good morning, everyone. As Don mentioned, this was an adventurous quarter for us, with the pandemic starting to impact the economy, rates dropping precipitously late in the quarter, the adoption of CECL and closing on a merger of equals. I will 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 31. Our closing price that day was $29.39, and we issued a little over 17.9 million shares for a total purchase price of approximately $527 million. Net loans acquired were $2.34 billion, including an $8.8 million positive rate mark and $34.9 million of credit marks, of which $7.7 million was for PCD loans recorded as allowance.

Intangible assets created were $33 million, including a $29.3 million core deposit intangible and $3.7 million for the insurance agency and trust, wealth management divisions acquired. On the liability side, deposits were $2.08 billion, including a $7.1 million time-based deposit rate mark. More details are provided in our press release, but the net of everything resulted in $217.5 million of goodwill.

Separate from the merger, we are pleased to have generated 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 a 5.3% annualized growth rate, with the growth primarily coming from Commercial, while residential was down due to payoffs in refinancing in the low-rate environment. For deposits, we added $41.2 million for a 5.7% annualized growth rate. Noninterest deposits represent about 21% of total deposits, and we do not have any brokered deposits.

Next, I'll explain the allowance. We did adopt CECL effective January 1, rather than delay in need to restate financials, including the merger later in the year. In connection with adoption, we recorded a $2.4 million increase to the allowance on 1/1, with an offset to retained earnings of $1.9 million and the remainder to deferred taxes.

In connection with the merger, we then added $33.6 million to the allowance. Of this, $7.7 million was for PCD loans recorded in purchase accounting, the other $25.9 million is for the acquired non-PCD loans. And under CECL, that is required to be recorded as a day 1 provision charge, popularly known as the double dip, since these loans also have a credit mark.

The last components to the allowance are net recoveries of $0.8 million and a core provision expense of $17.8 million. That's obviously a big number, and it's directly attributable to the fact that we have adopted CECL, which is a life of loan forward-looking estimate model, and this happened at the same time that the economy turned south, fast indeed. A key driver for our model is national unemployment, and that forecast is for 12.5% in 2Q versus the mid-3% we've been experiencing pre-pandemic.

At 3/31, our allowance coverage to loans was 1.68%, but for non-PCD loans, it was 1.55%. Prior to the economic downturn, we had estimated our allowance coverage under CECL could be 1.25%. So one can say that the pandemic added 30 basis points to our allowance, which translates to about $15.1 million of our provision charge. More details can be found in our slide presentation posted to the First Defiance website this morning.

To finish the balance sheet, I'll discuss capital, where we ended with $916 million of equity at March 31. The increase from year-end is primarily due to the $527 million added in connection with the merger.

Separately, we did recommence stock buybacks after the merger closed. We completed 430,000 shares for $10 million, before suspending buyback activity in mid-March. At March 31, our tangible equity ratio was 9.1%, and our total risk-based capital is estimated to be about 13.7%.

Next, I'll turn to the income statement. I would like to preface this with noting that year-over-year comparisons are obviously skewed by the fact that we have 2 months of operations including UCFC in first quarter 2020 compared to none in first quarter 2019.

Let's start with net interest income, which was 44 -- $45.5 million for the first quarter of 2020. This resulted in a net interest margin of 3.78%, which is down 2 basis points on a linked-quarter basis. This does include the benefit of accretion from purchased accounting marks, with $312,000 coming through interest income 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. Further, we do expect further contraction in 2Q since the rate drops happened in the back half of the first quarter. Non-interest income was $14 million for 1Q and represented approximately 23.5% of total revenues. I will focus my comments on a few key items impacting these results.

First, regarding insurance commissions, the first quarter is a period each year when we generate contingent commissions. This year, we earned $1.3 million compared to $0.9 million in the first quarter of 2019. Second, other noninterest income was $960,000, but it included a $1.1 million gain related to an earn-out that was not achieved for a prior acquisition. Excluding that, other income would be a negative $137,000, and that is attributable to a $0.7 million decrease in deferred compensation plan assets due to the stock market performance in the first quarter of 2020.

Lastly, for revenues, I'll discuss mortgage banking income, which was $848,000 for first quarter 2020 and down from $1.8 million for first quarter 2019. First, gains on sale of mortgage loans was $4.9 million, up from $1.3 million last year due to volumes. In the first quarter of 2019, we sold about $38 million in mortgage loans, where this year, we sold over $120 million. This is partly due to having 2 months of activity from UCFC this year but is also attributable to the down-rate environment that made mortgage activity very attractive during the quarter.

On the flip side, this down-rate environment led to a large increase in our valuation allowance to the tune of $4.5 million. To provide some color on that, the 10-year treasury declined from 1.92% at 12/31/19 to 1.51% at 1/31/20 when we acquired UCFC and all the way down to 0.7% at 3/31/20. Last year only saw a 28 basis point decline 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 $11.5 million in merger-related costs in the first quarter of 2020. Prior to closing, UCFC incurred $13.9 million in January, and on a combined basis, we had both incurred $2.8 million in 2019. So cumulatively, we have incurred $28.2 million against the original estimate of $30 million. We do expect to exceed that original estimate, however, most of that excess will involve enhanced synergies. And as a reminder, we expect the bulk of our synergies to begin materializing in the second half of the year after our core conversion is completed in mid-July.

Excluding merger costs, total expenses were $32.3 million compared to $24.9 million in the first quarter of 2019, with the increase generally due to 2 months of operating costs from UCFC in the current year. I'll note just a few items here.

Compensation represents the biggest component at $17.6 million of expenses, which is up $3.6 million from the prior year first quarter but was less than expected due to deferred costs on the strong mortgage volume activity.

Amortization of intangibles is up almost $1 million due to the core deposit and other intangibles recorded in connection with the UCFC merger. Other expenses had a $0.7 million benefit due to a decrease in deferred compensation plan liabilities, similar to the income item I noted earlier. And last, 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 pretax, pre-provision income was $27.2 million, which generated a strong 2.04% return on average assets.

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 CECL, so I will wrap up with a summary of net earnings.

On a GAAP basis, we reported a net loss of $22.5 million or $0.71 per share. However, this was most significantly impacted by onetime merger-specific items. Merger costs represented $9.5 million on an after-tax basis or $0.30 per share. And the onetime provision expense required under CECL for non-PCD acquired loans represented $20.5 million on an after-tax basis or $0.65 per share.

Excluding the impact of these items, core earnings were $7.5 million or $0.24 per share. Further, with the adoption of CECL, we estimate that approximately $15 million to $16 million of expense could be attributable to the impact of deteriorated economic forecasts. However, we have not excluded that for core earnings purposes.

In summary, we are off to a solid start to 2020 despite the economic headwinds we face. Our strong capital levels and operating profitability provide a good foundation in the current uncertain environment and allow us to support 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 on our community banking initiatives, including updates on the merger integration progress and our COVID-19 response. Gary?

Thank you, Paul, and good morning to all. As 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. We'll take that first.

First Fed's reactions to the COVID-19 challenge have been swift and effective. We had 650 nonbranch associates made remote-capable within the first 2 weeks of the incident, and that's resulted in us having about 500 associates working from home on any one given day over that period. Our branch lobbies remained open by -- with appointment-only traffic as folks are directed to mobile and online and through our drive-throughs. It's been very effective, and we continue to see new business booked through the period.

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 -- the challenges that were 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 our clients, in early March, we executed a substantial outreach program to our business client base. We listened, provided counsel and made some appropriate recommendations. We were 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.

In 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 gear 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 be adhering with the state's recommendations.

Onto the integration, the process for First Federal and Home Savings continues on plan, and our targeted integration date remains set for early July. It's been an outstanding effort and outcome to date, especially 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 million a year. The total one-time costs associated with the merger are also on track, and we should land within 5% to 10% of our $30 million pro forma 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 core earnings of Home Savings, and that the ongoing costs associated with sustaining 2 backrooms through the integration period are approximately a $1.5 million per quarter drag on our reported earnings.

While March 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. The job done there we expect will pay dividends down the road and strengthen our relationships going forward.

We, as an organization, are 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 Garrity, who heads up our lending and credit efforts.

Thanks, Gary. I'd like to provide an update on activities in our loan portfolio as we work with clients impacted by 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 million in loan volume. In addition to PPP, as Don noted, we are proud to be 1 of 2 banks selected to partner with the state agency, JobsOhio, to provide our small business customers with up to $200,000 in additional loans to support their capital needs during this time.

These loans come with a 90% guarantee from JobsOhio, with a total program commitment of $25 million. The 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 to clients, we have also been very proactive in 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 million. While in our residential mortgage portfolio, we have provided payment deferral for approximately $38 million of loans.

I'd now like to turn the call over to Don for closing comments. Don?

Thank you, Matt. To wrap 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, as noted, will be a major focus as we look to future growth in loan balances and see what stress has developed for our different portfolios 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 pandemic crisis. I also want to recognize the team effort in handling the challenges of the PPP initiative. I also want to express my gratitude to all those on the front lines of the pandemic, especially healthcare 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 and for your interest in First Defiance Financial Corp. We will be now glad to accept your questions.

Operator, we'll accept questions at this time.

(Operator Instructions) And our first question will come from Scott Siefers with Piper Sandler.

This is Jamie Benjamin on for Scott. First, can you guys run 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 Moody's forecast. So we elected here at adoption to go ahead and acquire subscription there. So going forward, we'll be relying on that. For 3/31, we are using the March baseline, with our final March baseline, which, at the end of the day, incorporated their estimated impacts of the COVID-19 outbreak, as well as the CARES Act that came out right at the end of March. So that's the background that we'll be using here for the quarter and for go forward.

In terms of some of the economics that are in there, key ones I mentioned on the call, national unemployment is a specific driver within our model. And prior to the pandemic, when you go back to adoption, the 12/31 baseline forecast was calling for about 3.6% unemployment during 2020. With all the impacts of the COVID outbreak and things like that, by the end of the day, the estimated unemployment rate was projected to jump to 12.5% -- a little over 12.5% for second quarter and then start to improve from there.

Similarly, on the GDP front, originally, they were projecting positive GDP for all of 2020. Roughly 2%, almost 2% for second quarter back at 12/31 estimates. And then by 3/31, that baseline was showing a significant recession, 18.3% recession or negative growth of GDP for the second quarter. And I think a lot of us probably saw this morning they've come out and announced that first quarter was, in fact, negative growth for real GDP. So that's -- those are some of the basics, I'd say, that are underlying that. Each quarter, we'll be updating in line with the new baseline forecasts and can provide some color on those as we progress.

Perfect. And then just one follow-up. Given the way the stock has behaved, I think there might be some confusion on what ongoing credit costs might look like. You guys are a little unique in that you were one of the few companies to have a merger close in the first quarter. You reported a roughly $44 million provision with $26 million of that due to merger accounting, then we layer on the reserve build due to COVID. While 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, this is the beginning of CECL. So we're all going to be learning as we go to some extent. However, conceptually, CECL is a forecast model. It's a forward-looking model. So the intent there is to bring forward potential future reserve builds to the current end-of-period accounting date, such that if things don't get worse or essentially, stay, call it, stable from that point forward, then the reserve should move kind of like it used to, which is up for volume, maybe 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 a forecast of X for unemployment, GDP, things like that, if that gets worse, the model will force additional reserves. If it gets better, we'll be able to take some of that back. But again, conceptually, as long as things essentially stay stable, you take your lumps upfront and then you move on. And it's all about volume and things like that, just like the old days.

And the next question is from Christopher Marinac with FIG Partners.

What is your sense about the deferrals? And would those possibly get larger from what you've already reported? And then do you think any of those would sort of be relatively quick to move off the books and then not threaten you to be a future classified or criticized assets?

Yes, Chris. I'll start out and then turn it over to Matt. Right now, we're feeling -- we have the deferral. I think it could go up a little bit, that balance that Matt disclosed. And we're probably a little on the longer end. A lot of those are going to be 6-month deferrals versus something shorter. So we're anticipating that you go through that 6-month process. Coming out the end of that tunnel, those loans will be the same quality rating as long as some business activity that supports those loans come back. But right now, our anticipation is that we'll be in a better position because of that deferral down the road.

Matt, do you want to give some more color on that one, if you would?

Sure, Don. I would agree with what you're saying there. I would expect as we look at credit risk rating and credit modifications going forward on those deferred loans, it's probably important to note out -- note that about 75% of the loans that we've identified is 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, the financial statements start to come in for those borrowers, we'll start to see some deterioration in risk rating. But from a pure credit cost perspective, I don't see a lot of that activity dropping into the 2020 performance.

Okay. So then basically, the reserve you have now is properly geared towards what you know. And then as you see things change positively and negatively, then you would kind of reexamine the reserve every quarter. Is that a correct way to think about it?

Yes. That's correct.

Yes, that is, Chris. As we look at that and like Paul said, a lot of that's going to be on the economic forecast, the unemployment rate and things like that. We have a baseline of that we've talked about. That moves around. So how I look at it? I think we're probably -- if everything stays stable, our provision will be well in line if -- lower than a lot of expectations because we've already taken it in the first quarter. But time will tell, and I don't have my crystal ball all ready, so -- but it will be modified. And we're going to try to, like Paul said, give a lot of clarity on the assumptions in that model on a quarterly basis to help you with your models and expectations.

Okay. Great. And then the $35 million or $36 million we see of the discounts that you footnoted, those -- that includes the CECL double count that you had talked about way back when the merger was announced.

Yes. So in those, there is a credit mark, yes. So there's a credit mark on the entire loan book. Out of that, $27 million non-PCD and the $7.7 million is the PCD mark. Now just to be clear, the mark in the PCD shows up in the allowance. So that was part of the allowance build there, it didn't hit the P&L though. The $27 million of non-PCD credit marks are 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 then comes in.

On top of that, we then have to run those balances through the model, and it kicked out a $26 million, roughly, provision charge at the date of acquisition to add to the allowance. So there's your double dip. You've got the credit market and then on top of that we booked in allowance. Now going forward, what we get to do is accrete in that credit mark then over the life of the loans.

And the credit mark being the $27 million, that is off, not part of that?

Correct.

Got it. Right. Yes. Perfect. Okay. So we could still think of the reserve being the $179 million and then add this credit mark on top of it? Which I just want to make sure I get the math straight.

Yes. Exactly. Yes. Yes. It's not in the reserve. But you're right, there is an inherent reserve in the loan balances for that, yes.

The next question is from Michael Perito with KBW.

Busy quarter for you guys, I guess, right? So a lot of my credit questions have been answered, so I wanted to ask a couple of other ones. I wanted to start -- and I apologize if I missed this, I got on the call a little late. But the -- on the expense side, I realize there's still another month, I believe, of the UCFC expenses to come over. But it still seemed like it was maybe a little ahead, at least of what I was expecting. I was curious if you could maybe provide just like an updated near-term thought on kind of the expense run rate. And remind us when do you expect to realize most of those synergies, which I believe is after the conversion in July. But just to get an update there would be helpful.

Good. Paul, can you handle that, please?

Sure. Yes. Yes, I did touch on it just a little bit in the script part of the call there, Mike. And you're right, expenses are better than probably expected, even accounting for the fact that we only have 2 months versus 3 months operating costs from UCFC. And the reason for that, for the most part, a key one is related to the mortgage activity that went on, and so 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 they were sold or portfolioed.

So roughly $1.5 million, $2 million maybe of costs related to that, that helped the quarter. We did have one unusual item, not very big, our deferred comp plan, which is effectively reliant on stock market activity. Because it was down there by the end of the quarter and pretty significantly. We had a hit to the revenue line which reduced that up in noninterest income. But we also got a benefit, and those essentially offset because they're matched. But that was $0.7 million through the other noninterest lines for both revenues and expenses.

Aside from that, it's really -- as you noted, starting next quarter, we'll have a full run rate of costs from UCFC. And then in terms of the 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 have had some. Once we closed there at the end of January, we were able to execute on some of our synergies day 1. So we've got a little bit of benefit starting out of the gate. But most of it will come later when we finish conversions and can eliminate a lot of duplicity, both in terms of data processing, personnel costs and such.

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

Yes. I would say probably the best thing to do would be to add back, call it, that $1.5 million to $2 million. It will 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 with the rate environment, and that has started to normalize here in the second quarter. So I wouldn't expect that necessarily to recur here in the second quarter.

Okay. And can you just remind us what would be -- sorry, go ahead.

Mike, this is -- Mike, this is Gary. A couple of other items that may help with the modeling. The residential mortgage book continues to run very well. For the last month, the origination activity was 3 times its normal volume. And with the rate environment where it's at, we still see refinancings coming in, and we continue to -- we 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 won't see as much going forward is the kind of reduction you saw this last quarter on the MSR valuation. We're really at the floor on MSR. The rates can only move down so much more and affect that valuation. So we would expect, net-net, a good second quarter of residential will give us great gain on sale, great cost deferral and less on MSR. And then on the point that I -- of my earlier comments, we still will have about $1.5 million in the second quarter of expenses that are relative to running both operations until we merged them in July. So on a go-forward run rate post integration, that's the number that you could add to the bottom line pretax pre-provision.

Got it. Helpful. And in terms of the merger, more of a bigger picture question here, a broader question here. But obviously, I'm sure there were many plans alongside revenue synergies and things of that nature, when you guys kind of put the deal together. And obviously, the economic environment kind of threw a curveball at all of us here. So I was just curious if you can provide us kind of any broader update on how some of the initiatives that you guys may be were looking to get going on right away. Have their timelines around them have changed or altered or anything of that nature given everything going on?

Great question, Mike. I think from the synergy side, a lot of that we didn't anticipate that to really happen until we had the core system converted. So in our thoughts and modeling, that would have been probably a post third quarter kind of look at the world at more geared at '21 to get things all kind of cleaned up and in place. We still have those conversations. We've not taken a backseat in any of our thoughts on that. Clearly, like you said, it's a bit 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 the core conversion.

Okay. Helpful. And then lastly, just I heard you guys on the residential side, I'm sorry if I missed it. But any thoughts, Matt, about the commercial pipeline and how that -- closings there could trend given everything going on? I mean is the second quarter likely to be pretty soft? But are the pipeline still fairly steady? Or what are your updated thoughts there?

Sure. I'll give you a couple of thoughts there, Mike. As you mentioned, the first quarter was really solid. We really hit the ground running in commercial banking, really good organic growth. Really for both sides of our businesses, both the -- our legacy First Federal side and legacy Home Savings side. Both had a really good quarter. Probably a little understated from what's reported simply because there was 1 month of activity missing from the UCFC side. So all in all, really good growth there.

Second quarter, still -- we have enough good activity in the pipeline in the queue to close, where we should see a good growth quarter on the Commercial business. I think where our math gets a little fuzzier or where Don had mentioned the crystal ball comment, it gets a little tougher for us as we think Q3, Q4. Just not enough visibility to really give a whole lot of good guidance there yet.

(Operator Instructions) The next question is a follow-up from Scott Siefers with Piper Sandler.

This is Jamie again. Just a couple of more questions here. Do you have a sense for how much purchase accounting adjustments 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 core margin further?

Okay. I'll let you start, Paul, and then I might give some color on the margin after you you're done. So go ahead, Paul.

Sure. No problem. Yes. No problem. Jamie, can you clarify your question on the marks? Are you asking if things will change from here? Or what's your question exactly on that, just to clarify?

Just the level of accretion running through the margin for the rest of the year, in dollars or basis points, whatever.

Yes, yes, yes. So because that closed at the end of January, we've only got 2 months of accretion here in the first quarter. So if you gross that 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 that's tied to maturities. That will be gone within -- definitely within 2 years, if not sooner as that book turns over. So we had -- what did I say, $1.3 million for the quarter for 2 months. If you were to gross that up, that's a better estimate on a quarterly run rate.

And then in terms of -- yes, so that did represent about 10 bps of benefit for the margin. At the end of the day, that's about what we expected. We were projecting 9 to 10 bps. So that should come in maybe a little bit more with a full quarter's worth here starting in the second quarter, but still a similar pickup there on the reported NIM side. And then on the core side, as we noted in the script part of the call, we do expect more contraction here in the second quarter.

So 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 quarter. But prior to all this, we had been generally talking about a 3.5% to 3.6% core margin at the end of the day when rates started turning in that. So we're definitely in the low end of that. And so could it be 3.5%, a little under, down into the higher 3.4s? Yes, we can see that. But again, depending on how much we end up getting done with PPP and if that can help a little bit. Plus, we are still seeing some activity, as Matt was saying, on the commercial side and whatnot, that will help as well.

Yes. I think a couple of things to think about that. Like Paul said, we get the PPP, that's a lower effective rate, but that will help the provision because it's guaranteed. So 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 we're doing, JobsOhio, et cetera, is a prime-based product, so that will be a little lower rate than some of the commercial stuff.

All that blend in, I think we're going to be fairly consistent. But it's going to be a challenge to work through that. But I think from the way we look at it, it's a benefit on the capital side, and then some of that ties into the provision. Hopefully, we're expecting a lower provision because of the guarantees.

Great. And just 1 more question. Do you guys have a sense for what stress losses through the cycle could look like for the combined company? And I'll preface that by saying, and I know you guys don't run through DFAST -- a DFAST model, but I was wondering if you have done any internal stress-testing and sort of how does the combined company come through, if at all.

Yes, we have. Nothing we're prepared to disclose. Our projections, on a more moderate to severe stress test, show us still well capitalized levels.

Ladies and gentlemen, 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.