First Defiance Financial Corp. Announces 2012 Second Quarter Earnings

DEFIANCE, Ohio, July 23, 2012  /PRNewswire/ --

• Redemption of $36 million of preferred stock
• Diluted earnings per share for second quarter of $0.32
• Loan Growth of $27 million during second quarter
• Net Income of $3.9 million for 2012 second quarter, down from $4.8 million  in the second quarter of 2011
• Provision for Loan Losses of $4.1 million, up from $2.4 million in the second quarter of 2011
• Net Interest Margin of 3.75%, down from 2011 second quarter of 3.86%

First Defiance Financial Corp. (NASDAQ: FDEF) announced today that net income for its second quarter ended June 30, 2012 totaled $3.9 million, or $0.32 per diluted common share, compared to $4.8 million or $0.43 per diluted common share for the quarter ended June 30, 2011.            

"The second quarter saw progress in several of our strategic areas, even as the challenges of an uncertain economy continue," said William J. Small, Chairman, President, and Chief Executive Officer of First Defiance Financial Corp. "We are pleased to announce we were able to redeem our TARP investment along with making steady improvement in the levels of non-performing assets in the quarter.  The loan growth was another strategic focus that was a highlight for the quarter.  However, additional provision expense and margin compression impacted earnings performance in the period."

Credit Quality

The second quarter results include expense for provision for loan losses of $4.1 million, compared with $2.4 million for the same period in 2011 and $3.5 million in the first quarter of 2012.   

Non-performing loans totaled $45.3 million at June 30, 2012, a decrease of $3.9 million or 8% from $49.2 million at March 31, 2012. The June 30, 2012 balance included $41.7 million of loans that are on non-accrual and another $3.6 million of loans that are still accruing, but are considered non-performing because of changes in terms granted to borrowers. In addition, First Defiance had $3.5 million of real estate owned at June 30, 2012, basically flat with March 31, 2012 and down from $7.4 million at June 30, 2011. For the second quarter of 2012, First Defiance recorded net charge-offs of $6.5 million, which when annualized, represented 1.78% of average loans outstanding at June 30, 2012, down from the first quarter of 2012 level of 2.18%. The allowance for loan loss as a percentage of total loans decreased to 1.76% at June 30, 2012 from 2.24% at December 31, 2011 and 2.80% at June 30, 2011.

"We were disappointed with the level of charge offs during the quarter which was primarily driven by continuing to adapt to regulatory guidance in the treatment of loans deemed to now be collaterally dependent," Small said. "Lower appraisal values continue to result in additional charges against loans previously placed on the watch list, but no longer show verifiable cash flow. Some of these loans continue to remain current on payments, but are now considered collateral dependent requiring the write down."

Net Interest Margin down from 2011 Second Quarter

Net interest income was $17.2 million in the second quarter of 2012 compared to $17.5 million in the 2011 second quarter.  Net interest margin was 3.75% for the 2012 second quarter compared to 3.78% in the first quarter of 2012 and 3.86% in the second quarter of 2011. The cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 27 basis points, to 0.73% from 1.00%, but this was offset by a decline in the yield on interest earning assets of 39 basis points, to 4.44% in the second  quarter of 2012 from 4.83% in the 2011 second quarter.

"The challenges on the net interest margin in this low rate environment persist as we see continued competitive pressures on the asset yields," said Small. "As we noted last quarter, the ability to offset declining yields on the asset side with additional reductions on the deposit side are diminishing and this will remain a challenge for margin management."

Non-Interest Income

First Defiance's non-interest income for the 2012 second quarter was $8.0 million compared with $6.8 million in the second quarter of 2011. Service fees and other charges were $2.7 million in the second quarter of 2012, compared with $2.7 million in the second quarter of 2011. NSF income was $1.1 million in the second quarter of 2012, down $245,000 from the second quarter of 2011. Other non-interest income decreased to $54,000 in the second quarter of 2012 from $130,000 for the same period of 2011 primarily due to a decline in the value of the assets of the deferred compensation plan.  Mortgage banking income increased to $2.3 million in the second quarter of 2012 from $1.9 million in the second quarter of 2011. Gains from the sale of mortgage loans increased in the second quarter of 2012 to $2.5 million from $1.1 million in the second quarter of 2011. Mortgage loan servicing revenue remained basically flat at $832,000 in the 2012 second quarter compared with the second quarter of 2011.  

The second quarter saw a continuation of the low interest rate environment which led to a negative adjustment to previously recorded mortgage servicing rights ("MSR") impairment. First Defiance had a negative change in the valuation adjustment in mortgage servicing assets of $177,000 in the second quarter of 2012, compared with a positive valuation adjustment of $316,000 in the second quarter of 2011. The negative MSR valuation adjustment is a reflection of the decrease in the fair value of certain sectors of the Company's portfolio of MSRs for this period. The interest rate environment that gives rise to increased mortgage origination activity also typically causes increases in MSR amortization and impairment, creating a natural hedge in the mortgage banking line of business. 

Income from the sale of insurance and investment products increased to $2.2 million for the 2012 second quarter, from $1.4 million in the same period of 2011.

"We are pleased with the overall strength in non-interest income in 2012 compared to 2011," said Small. "We have been able to steadily increase our mortgage banking income along with increasing our insurance and investment sales revenues.  We did see some offset to these increases especially related to the MSR valuation allowance, but felt the core performance was solid."

Non-Interest Expenses

Total non-interest expense was $15.5 million for the second quarter of 2012, compared with $15.1 million in the second quarter of 2011.

Compensation and benefits expense was $8.0 million, compared to $7.5 million in the second quarter of 2011 and $8.5 million in the first quarter of 2012. The year over year increase in compensation and benefits expense is largely due to the insurance acquisition in July 2011 which added $389,000 in compensation and benefit expense to the second quarter of 2012.  Other non-interest expense decreased to $3.0 million in the second quarter of 2012 from $3.2 million in the second quarter of 2011. Credit, collection and real estate owned costs were $524,000 in the second quarter of 2012 compared to $894,000 in the same period of 2011 and secondary market buy-back losses were $73,000 in the second quarter of 2012 compared to $62,000 in the same period of 2011. 

TARP Investment Redemption

In June 2012, the U.S. Treasury sold its preferred stock of the Company through a public offering structured as a modified Dutch auction. The Company bid on its preferred stock in the auction after receiving approval from its regulators. The clearing price per share for the preferred shares was $962.66 (compared to a par value of $1,000.00 per share) and the Company was successful in repurchasing 16,560 of the 37,000 shares outstanding through the auction process. Included in the second quarter of 2012 operating results is $181,000 of costs incurred by the Company related to the offering. These costs are not tax-deductible. The Company had also successfully acquired an additional 19,440 shares in the secondary market prior to the end of the quarter.  The net balance sheet impact was a reduction to shareholders' equity of $35.4 million which is comprised of a decrease in preferred stock of $36.0 million and a $642,000 increase to retained earnings related to the discount on the shares repurchased. 36,000 shares of preferred stock were repurchased, none of which are held by the U.S. Treasury. In July, the Company acquired the remaining 1,000 shares to complete the entire repurchase of the 37,000 shares.

"We are very pleased to no longer be part of Treasury's TARP program and to have totally redeemed all of the preferred shares," said Small. "The repayment of TARP without the need for additional outside capital has been a strategic goal of the Company."

Year-To-Date Results           

For the six month period ended June 30, 2012, net interest income totaled $34.4 million, compared with $34.7 million in the first six months of 2011. Average interest-earning assets increased to $1.892 billion for the first half of 2012, compared to $1.844 billion for the first half of 2011. Net interest margin for the first six months of 2012 was 3.76%, down 13 basis points from the 3.89% margin reported in the six month period ended June 30, 2011.          

The provision for loan losses for the first half of 2012 was $7.6 million, compared to $5.2 million recorded during the first six months of 2011.

Non-interest income for the first half of 2012 was $16.4 million, compared to $12.8 million during the same period of 2011. Service fees and other charges were $5.4 million for the first half of 2012, flat compared to the first half of 2011. Mortgage banking income increased to $4.7 million in the first half of 2012, compared with $3.2 million in the first half of 2011. Insurance and investment sales revenues increased to $4.7 million for the first half of 2012, compared with $3.1 million during the first half of 2011. Non-interest income for the first half of 2012 included $425,000 of gain on the sale of securities compared with $49,000 in the first half of 2011.

Non-interest expense increased to $31.8 million for the first six months of 2012 from $31.7 million in the first half of 2011. Compensation and benefits expense increased $1.2 million in the first six months of 2012 compared to the first six months of 2011 mainly resulting from the insurance acquisition in July 2011 which added $796,000 in compensation and benefits expense in the first six months of 2012.  Credit, collection and real estate owned costs have decreased $649,000 in the first six months of 2012 from the first six months of 2011 and secondary market buy-back losses have declined $218,000 in the first six months of 2012 from the first six months of 2011.

"These continue to be very challenging times which are compounded by the financial debate taking place in Washington," said Small. "We are pleased in our ability to work with our regulators in exiting TARP ahead of our original schedule while maintaining capital above our internal target levels.  While the earnings for the quarter were impacted by provision expense and margin decline, we firmly believe in our basic operating strategy and core results. Right now, we want to stay the course as much as possible and be prepared to react to all economic and regulatory challenges that may come down the road."

Total Assets at $2.07 Billion

Total assets at June 30, 2012 were $2.07 billion, compared to $2.07 billion at December 31, 2011 and $2.5 billion at June 30, 2011. Net loans receivable (excluding loans held for sale) were $1.47 billion at June 30, 2012, compared to $1.45 billion at December 31, 2011 and $1.41 billion at June 30, 2011. Total cash and cash equivalents were $103.5 million at June 30, 2012, compared with $174.9 million at December 31, 2011 and $213.8 million at June 30, 2011. Also at June 30, 2012, goodwill and other intangible assets totaled $67.0 million, compared to $67.7 million at December 31, 2011 and $63.0 million at June 30, 2011.

Total deposits at June 30, 2012 were $1.61 billion compared with $1.60 billion at December 31, 2011 and $1.57 billion at June 30, 2011. Non-interest bearing deposits at June 30, 2012 were $261.2 million, compared to $245.9 million at December 31, 2011 and $225.9 million at June 30, 2011. Total stockholders' equity was $249.9 million at June 30, 2012, compared to $278.1 million at December 31, 2011 and $269.1 million at the June 30, 2011.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, July 24, 2012 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-877-317-6789. A live webcast may be accessed at http://services.choruscall.com/links/fdef120724.html .

Audio replay of the Internet Web cast will be available at www.fdef.com until July 24, 2013 at 9:00 a.m.

First Defiance Financial Corp.

First Defiance Financial Corp., headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the Midwest and First Insurance & Investments. First Federal operates 33 full service branches and 45 ATM locations in northwest Ohio, southeast Michigan and Fort Wayne, Indiana. First Insurance Group specializes in property and casualty and group health and life insurance, with six offices throughout northwest Ohio.

For more information, visit the company's Web site at www.fdef.com.

Financial Statements and Highlights Follow-

Safe Harbor Statement               

This news release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Act of 1934, as amended, which are intended to be safe harbors created thereby. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of First Defiance Financial Corp. and its management, and specifically include statements regarding: changes in economic conditions, the nature, extent and timing of governmental actions and reforms, future movements of interest rates, the production levels of mortgage loan generation, the ability to continue to grow loans and deposits, the ability to benefit from a changing interest rate environment, the ability to sustain credit quality ratios at current or improved levels, the ability to sell real estate owned properties, continued strength in the market area for First Federal Bank of the Midwest, and the ability of the Company to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including those inherent in general and local banking, insurance and mortgage conditions, competitive factors specific to markets in which the Company and its subsidiaries operate, future interest rate levels, legislative and regulatory decisions or capital market conditions and other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission (SEC) filings, including the Company's Annual Report on Form 10-K for the year ended December 31, 2011. One or more of these factors have affected or could in the future affect the Company's business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this news release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other persons, that the objectives and plans of the Company will be achieved. All forward-looking statements made in this news release are based on information presently available to the management of the Company. The Company assumes no obligation to update any forward-looking statements.

SOURCE First Defiance Financial Corp.