First Defiance Financial Corp. Reports $5.2 Million of Net Income for the 2012 Fourth Quarter, up 27

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First Defiance Financial Corp. Reports $5.2 Million of Net Income for the 2012 Fourth Quarter, up 27% from Fourth Quarter 2011, and Record Full Year Earnings of $18.7 Million, up 20% from Full Year 2011

  • Net Income of $5.2 million for 2012 fourth quarter, up from $4.1 million in the fourth quarter of 2011
  • Diluted earnings per share for fourth quarter of $0.52, up from $0.36 in the fourth quarter of 2011
  • Provision for Loan Losses of $2.6 million, down from $4.1 million in the fourth quarter of 2011
  • Net Interest Margin of 3.92%, up from 3.83% in the fourth quarter of 2011
  • Steady loan growth the last three quarters of 2012

DEFIANCE, Ohio--(BUSINESS WIRE)-- First Defiance Financial Corp. (NAS: FDEF) announced today record net income for the fiscal year ended December 31, 2012 totaled $18.7 million, or $1.81 per diluted common share compared to $15.5 million or $1.42 per diluted common share for the year ended December 31, 2011. For the fourth quarter ended December 31, 2012, First Defiance earned $5.2 million or $0.52 per diluted common share compared to $4.1 million or $0.36 per diluted common share for the fourth quarter of 2011. The fourth quarter of 2012 included $2.0 million in prepayment fees from the early payment of FHLB advances, offset by $1.6 million of gains on the sale of securities associated with a balance sheet structuring strategy.

"I am pleased with the record net income in the full year of 2012 and overall performance for the fourth quarter as the country continues to rebound from the economic challenges of the last several years," said William J. Small, Chairman, President, and Chief Executive Officer of First Defiance Financial Corp. "We are pleased with the strong mortgage banking results this quarter and throughout the full year, as well as the steady improvement in credit quality."


In the fourth quarter of 2012, the Company executed a balance sheet restructuring strategy to enhance the Company's current and future profitability while increasing its capital ratios and protecting the balance sheet against rising rates. The strategy required taking an after tax loss of approximately $260,000 through selling $60 million in securities for a gain of $1.6 million and paying off $62 million in FHLB advances with a prepayment penalty of $2.0 million. The anticipated positive effects of this strategy include: 1) increases in the net interest margin and net interest income, 2) improvement in all capital ratios, and 3) increases in return on average assets and return on average equity.

Credit Quality

The fourth quarter 2012 results include provision for loan losses expense of $2.6 million, compared with $4.1 million in the same period in 2011. The allowance for loan loss as a percentage of total loans decreased to 1.75% at December 31, 2012 from 2.24% at December 31, 2011.

Non-performing assets totaled $36.4 million at December 31, 2012, down from $46.3 million at December 31, 2011. The December 31, 2012 balance included $32.6 million of loans that were non-accrual or 90 days past due. Additionally, First Defiance had $3.8 million of real estate owned at December 31, 2012 up from $3.6 million at December 31, 2011. Loans classified as Trouble Debt Restructured because of modification of terms granted to borrowers totaled $28.2 million at December 31, 2012 compared to $3.4 million for the same period in 2011. For the fourth quarter of 2012, First Defiance recorded net charge-offs of $2.2 million, which represented 0.59% of average loans outstanding (annualized) for the quarter, compared with 2.49% in the fourth quarter of 2011.

"Asset quality continued to show improvement this quarter, reflected by a 17% reduction in non-performing loans from the fourth quarter of 2011," Small said. "We had a 75% decrease in net charge-offs in the 2012 fourth quarter compared with the fourth quarter of 2011, reflecting continuation of improvement in the credit profile of First Defiance."

Net Interest Margin

Net interest income decreased to $17.4 million in the fourth quarter of 2012 compared to $17.5 million in the 2011 fourth quarter, and was up slightly from the third quarter of 2012, which was $17.2 million. Net interest margin was 3.92% for the 2012 fourth quarter compared to 3.80% in the third quarter of 2012 and 3.83% in the fourth quarter of 2011. Yield on interest earning assets declined by 23 basis points to 4.40% in the fourth quarter of 2012 from 4.63% in the 2011 fourth quarter, while the cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 34 basis points, to 0.50% from 0.84%. The net interest margin was positively impacted by the Company's balance sheet restructuring strategy that was executed in the fourth quarter of 2012.

"We are pleased with the increase in our net interest margin for the quarter and the stability seen throughout this economic cycle," said Small. "The balance sheet restructuring we did in the fourth quarter was an important move as we anticipate that an extended low rate environment and continued pricing pressures will put pressure on the margin."

Non-Interest Income

Non-interest income for the 2012 fourth quarter increased to $10.2 million from $7.9 million in the fourth quarter of 2011. Gain on investment securities was $1.6 million for the fourth quarter of 2012, compared to $169,000 in the fourth quarter of 2011. All of the gains from the sale of securities in the fourth quarter of 2012 were due to the executed balance sheet restructure. Income from the sale of insurance and investment products remained stable at $2.0 million in the fourth quarter of 2012, flat with $2.0 million in the same period of 2011. Mortgage banking income increased to $2.7 million in the fourth quarter of 2012, compared with $1.9 million in the same period in 2011. Gains from the sale of mortgage loans increased in the fourth quarter of 2012 to $2.7 million from $1.7 million in the fourth quarter of 2011. Mortgage loan servicing revenue increased slightly in the fourth quarter 2012 to $888,000 from $874,000 in the fourth quarter of 2011.

First Defiance recorded a positive valuation adjustment of $96,000 on mortgage servicing rights ("MSR") in the fourth quarter of 2012, compared with a positive adjustment of $181,000 in the fourth quarter of 2011. The MSR valuation adjustment is a reflection of the increase in the fair value of certain sectors of the Company's portfolio of MSRs.

"Non-interest income increased, driven by mortgage banking and solid fee income, which are part of our core operating strategy. Gain on sale of mortgage loans was higher this quarter compared to the 2011 fourth quarter driven by higher loan activity," stated Small. "The mortgage originations for the bank in 2012 represented a record for the highest dollar level of production in a year."

Non-Interest Expenses

Total non-interest expense was $17.5 million for the quarter ended December 31, 2012, an increase of $1.9 million from $15.6 million in the fourth quarter of 2011. The fourth quarter of 2012 included $2.0 million of prepayment fees associated with the repayment of FHLB debt.

Compensation and benefits decreased by $290,000 in the fourth quarter of 2012 compared to the fourth quarter of 2011. The year over year decrease in compensation and benefits expense is largely due to increased mortgage and commercial loan volume that results in deferred compensation costs associated with that volume. Other non-interest expenses increased $1.7 million in the fourth quarter of 2012 as a result of recording $2.0 million in FHLB prepayment fees as part of the executed balance sheet restructure. The increase in other non-interest expense was slightly offset by a decrease in credit related expenses, which consists of secondary market buy-back losses, real estate owned expenses and credit and collection expenses, of $553,000 in the fourth quarter of 2012 from the fourth quarter of 2011.

Annual Results

On an annual basis, earnings for 2012 were $18.7 million compared with $15.5 million in 2011. Net interest income for 2012 totaled $69.0 million, a decrease of $875,000 or 1.25% from 2011. Average interest-earning assets increased to $1.862 billion for 2012 compared to $1.848 billion in 2011. Net interest margin for 2012 was 3.81%, compared with 3.88% for 2011.

The provision for loan losses for 2012 was $10.9 million, which was down from $12.4 million in 2011.

Non-interest income for the twelve month period ended December 31, 2012 was $34.4 million compared to $27.5 million during the same period of 2011. The 2012 results include securities gains of $2.1 million, slightly offset by $5,000 related to other-than-temporary impairment ("OTTI") charges recognized for one impaired investment security. The 2011 securities gains of $216,000 consisted of $218,000 related to gain on sale of available for sale securities slightly offset by $2,000 related to OTTI charges recognized for one impaired investment security. Service fees and other charges were $10.8 million for the year ended 2012 compared to $11.4 million during 2011. Mortgage banking income for 2012 was $9.7 million, up from $6.4 million in 2011. Insurance and investment sales revenues increased to $8.7 million in 2012, compared to $7.1 million in 2011. The insurance and investments increase is primarily due to the Payak-Dubbs Insurance Agency, Inc. acquisition that was completed on July 1, 2011. Other non-interest income was $1.5 million for the year ended 2012 compared to $478,000 for the same period in 2011 mainly due to receiving $618,000 from an insurance settlement in 2012.

Non-interest expense increased to $65.8 million for the full year of 2012 from $62.8 million in 2011. The full year of 2012 includes $2.0 million of prepayment fees associated with the repayment of FHLB debt which is included in other non-interest expense. Compensation and benefits expense increased $1.0 million for the year ended 2012 compared to 2011 mainly resulting from the insurance acquisition in July 2011 which added $1.6 million in compensation and benefits expense in 2012 compared to $797,000 for the same period in 2011.

Other non-interest expense was $14.4 million for the year ended 2012 compared to $13.2 million for the same period in 2011. The main contributor to the increase was the previously mentioned $2.0 million prepayment expense on FHLB debt. Other non-interest expense also includes $2.2 million of credit, collection and real estate owned costs compared with $3.6 million in 2011.

Total Assets at $2.05 Billion

Total assets at December 31, 2012 were $2.05 billion, compared to $2.07 billion at December 31, 2011. Net loans receivable (excluding loans held for sale) were $1.50 billion at December 31, 2012 compared to $1.45 billion at December 31, 2011. Total cash and cash equivalents were $136.8 million at December 31, 2012 compared with $174.9 million at December 31, 2011. Total deposits at December 31, 2012 were $1.67 billion compared to $1.60 billion at December 31, 2011. Non-interest bearing deposits at December 31, 2012 were $315.1 million compared to $245.9 million at December 31, 2011. Total stockholders' equity was $258.1 million at December 31, 2012 compared to $278.1 million at the December 31, 2011. Also at December 31, 2012, goodwill and other intangible assets totaled $66.3 million compared to $67.7 million at December 31, 2011. The Company paid $37.0 million to repurchase its outstanding preferred stock related to TARP during 2012, which effectively lowered capital levels.

Succession Plan

Also at today's Board meeting, Mr. Small informed the Board of Directors of First Defiance that he plans to retire from his management role at First Defiance effective December 31, 2013. With this announcement, the Board approved the initiation of its management transition plan. As a result, effective January 1, 2014, Donald P. Hileman, currently Executive Vice President and Chief Financial Officer, will assume the role of President and CEO of First Defiance. Jim Rohrs will remain in his position as President and CEO of First Federal Bank. Mr. Small, currently Chairman, President, and CEO of First Defiance and Chairman of the Bank, will retire as an active employee of the Company, but will remain as Chairman of both the holding company and the Bank.

"This is a part of our succession plan that has been discussed over the last several years," stated Lead Independent Director Steve Boomer. "With improving performance trends we remain focused on the long term success of the Company, including management succession. Implementing the plan now allows us to better facilitate the transition."

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EST) on Tuesday, January 29, 2013 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-888-317-6016. A live webcast may be accessed at http://services.choruscall.com/links/fdef130122.html

Audio replay of the Internet Web cast will be available at www.fdef.com until April 1, 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 Group. First Federal operates 33 full service branches and 42 ATM locations in northwest Ohio, southeast Michigan and Fort Wayne, Indiana. First Insurance Group is a full service insurance agency 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.

    
Consolidated Balance Sheets
First Defiance Financial Corp.(Unaudited)
December 31,December 31,
(in thousands) 2012   2011
 
Assets
Cash and cash equivalents
Cash and amounts due from depository institutions$45,832$31,931
Interest-bearing deposits 91,000  143,000 
136,832174,931
Securities
Available-for sale, carried at fair value194,101232,919
Held-to-maturity, carried at amortized cost 508  661 
194,609233,580
 
Loans1,525,2571,487,076
Allowance for loan losses (26,711) (33,254)
Loans, net1,498,5461,453,822
Loans held for sale22,06413,841
Mortgage servicing rights7,8338,690
Accrued interest receivable5,5946,142
Federal Home Loan Bank stock20,65520,655
Bank Owned Life Insurance41,83235,908
Office properties and equipment39,66340,045
Real estate and other assets held for sale3,8053,628
Goodwill61,52561,525
Core deposit and other intangibles4,7386,151
Deferred taxes78629
Other assets 9,174  8,643 
Total Assets$2,046,948 $2,068,190 
 
Liabilities and Stockholders' Equity
Non-interest-bearing deposits$315,132$245,927
Interest-bearing deposits 1,352,340  1,350,314 
Total deposits1,667,4721,596,241
Advances from Federal Home Loan Bank12,79681,841
Notes payable and other interest-bearing liabilities51,70260,386
Subordinated debentures36,08336,083
Advance payments by borrowers for tax and insurance1,4731,402
Other liabilities 19,294  14,110 
Total liabilities1,788,8201,790,063
Stockholders' Equity
Preferred stock, net of discount-36,640
Common stock, net127127
Common stock warrant878878
Additional paid-in-capital136,046135,825
Accumulated other comprehensive income4,2743,997
Retained earnings164,103148,011
Treasury stock, at cost (47,300) (47,351)
Total stockholders' equity 258,128  278,127 
Total Liabilities and Stockholders' Equity$2,046,948 $2,068,190 
 
    
Consolidated Statements of Income (Unaudited)
First Defiance Financial Corp.
Three Months EndedTwelve Months Ended
December 31,December 31,
(in thousands, except per share amounts) 2012 20112012 2011
Interest Income:
Loans$17,774$19,095$72,621$78,648
Investment securities1,5041,8557,1237,086
Interest-bearing deposits51115300466
FHLB stock dividends 243  205  899  867 
Total interest income19,57221,27080,94387,067
Interest Expense:
Deposits1,7752,5278,16912,175
FHLB advances and other1647612,4243,203
Subordinated debentures1583339711,278
Notes Payable 89  133  373  530 
Total interest expense 2,186  3,754  11,937  17,186 
Net interest income17,38617,51669,00669,881
Provision for loan losses 2,618  4,099  10,924  12,434 
Net interest income after provision for loan losses14,76813,41758,08257,447
Non-interest Income:
Service fees and other charges2,6312,95210,77911,387
Mortgage banking income2,7411,8889,6656,437
Gain on sale of non-mortgage loans201070361
Gain on sale of securities1,6111692,139218
Impairment on securities(5)-(5)(2)
Insurance and investment sales commissions1,9971,9638,6767,109
Trust income146134616599
Income from Bank Owned Life Insurance241226924929
Other non-interest income 798  534  1,510  478 
Total Non-interest Income10,1807,87634,37427,516
Non-interest Expense:
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