First Defiance Financial Corp. Announces 2013 Record Second Quarter Earnings

First Defiance Financial Corp. Announces 2013 Record Second Quarter Earnings

  • Net Income of $6.1 million for 2013 second quarter, up from $3.9 million in the 2012 second quarter

  • Average loans increased $20.5 million, or improving 1.4% from the 2013 first quarter

  • Provision for loan losses of $448,000, down from $4.1 million in the 2012 second quarter

  • Net Interest Margin of 3.82%, up from 3.75% for the second quarter of 2012

DEFIANCE, OHIO--(BUSINESS WIRE)-- First Defiance Financial Corp. (NAS: FDEF) announced today that net income for the second quarter ended June 30, 2013 totaled $6.1 million, or $0.60 per diluted common share, compared to $3.9 million or $0.38 per diluted common share for the quarter ended June 30, 2012.

"The momentum that we carried from the strong finish in 2012 has continued into the first half of this year and resulted in record earnings for the second consecutive quarter in 2013," said William J. Small, Chairman, President, and CEO of First Defiance Financial Corp. "We are still very cognizant of the challenges the banking industry faces, but we believe we are well positioned to deal with them."


Credit Quality

Asset quality continues to improve with non-performing loans decreasing 31% from June 30, 2012 and 19% decrease from the prior quarter. Non-performing loans totaled $28.7 million at June 30, 2013, a decrease from $41.7 million at June 30, 2012. In addition, First Defiance had $6.5 million of real estate owned at June 30, 2013 compared to $3.5 million at June 30, 2012. Accruing troubled debt restructured loans were $28.7 million at June 30, 2013 compared with $3.6 million at June 30, 2012. For the second quarter of 2013, First Defiance recorded net charge-offs of $637,000, down from $6.5 million in the second quarter of 2012 and relatively flat with the first quarter of 2013. The allowance for loan loss as a percentage of total loans was 1.68% at June 30, 2013 compared with 1.76% at June 30, 2012.

The second quarter results include expense for provision for loan losses of $448,000, compared with $4.1 million for the same period in 2012 and $425,000 in the first quarter of 2013.

"We are pleased with the significant improvement in asset quality during the quarter including significant declines in nonperforming loans, net charge-offs and classified loans. We also saw improvement in delinquency levels in all categories of our loan portfolio," said Small. "As a result of this progress, provision expense was well below the level recorded in the 2012 second quarter."

Net Interest Income down compared to second quarter 2012

Net interest income of $16.9 million in the second quarter of 2013 was down from $17.2 million in the second quarter of 2012. The net interest margin increased to 3.82% in the second quarter of 2013 compared with 3.75% in the second quarter of 2012 and 3.78% in the first quarter of 2013. Yield on interest earning assets declined by 22 basis points, to 4.22% in the second quarter of 2013 from 4.44% in the second quarter of 2012. The cost of interest-bearing liabilities decreased by 36 basis points in the second quarter of 2013 to 0.50% from 0.86% in the second quarter of 2012.

"We still face significant net interest income challenges, but are pleased with the improvement versus the linked quarter," said Small. "The increase in the net interest margin this quarter was driven by a boost in loan balances. The challenges on the net interest margin in this low rate environment persist and will continue as competitive pressures remain strong."

Non-Interest Income down slightly from second quarter 2012

First Defiance's non-interest income for the second quarter of 2013 was $7.8 million compared with $8.0 million in the second quarter of 2012. Mortgage banking income increased to $2.4 million in the second quarter of 2013, up from $2.3 million in the second quarter of 2012. Gains from the sale of mortgage loans decreased in the second quarter of 2013 to $1.9 million from $2.5 million in the second quarter of 2012. Mortgage loan servicing revenue was $875,000 in the second quarter of 2013, up slightly from $832,000 in the second quarter of 2012. Service fees and other charges were $2.5 million in the second quarter of 2013, down from $2.7 million in the second quarter of 2012.

The prolonged low rate environment helped contribute to solid second quarter of 2013 mortgage originations, although they were down slightly from the second quarter of 2012. The Company had a positive change in the valuation adjustment in mortgage servicing assets ("MSR") of $312,000 in the second quarter of 2013 compared with a negative adjustment of $177,000 in the second quarter of 2012. The MSR positive valuation adjustment is a reflection of the increase in fair value of certain sectors of the Company's portfolio of MSRs. The increase was driven by an increase in market rates in the quarter which also contributed to lower amortization of servicing rights.

Income from the sale of insurance and investment products increased to $2.3 million in the second quarter of 2013, from $2.2 million in the second quarter of 2012.

"We are satisfied with the ongoing strong mortgage banking contribution this quarter even though we experienced a decline in refinance business," continued Mr. Small. "The slower refinance activity has been partially offset by an increase in purchase business. We are hopeful the strengthening housing market will result in additional purchase activity throughout the second half of 2013."

Non-Interest Expenses

Total non-interest expense was $15.7 million in the second quarter of 2013, an increase from $15.5 million in the second quarter of 2012.

Compensation and benefits increased to $8.5 million in the second quarter of 2013 compared to $8.0 million in the second quarter of 2012. The Company accrued for incentive payments based on exceeding 2013 targeted performance in the first half of 2013. FDIC insurance costs decreased to $275,000 in the second quarter of 2013 from $672,000 in the second quarter of 2012 due to the improvement in the Company's risk category late in the first quarter of 2013. Data processing cost increased to $1.3 million in the second quarter of 2013 from $1.2 million in the second quarter of 2012. Other non-interest expense was $3.0 million in the second quarter of 2013, flat with the second quarter of 2012. Credit, collection and real estate owned costs were $474,000 in the second quarter of 2013 compared to $485,000 in the same period of 2012, and secondary market buy-back losses were $61,000 in the second quarter of 2013 compared to $73,000 in the same period of 2012.

Year-To-Date Results

For the six month period ended June 30, 2013, net interest income totaled $33.4 million, compared with $34.4 million in the first six months of 2012. Average interest-earning assets decreased to $1.824 billion in the first half of 2013, compared to $1.892 billion in the first half of 2012. Net interest margin for the first six months of 2013 was 3.78%, up 2 basis points from the 3.76% margin reported in the six month period ended June 30, 2012.

The provision for loan losses in the first half of 2013 was $873,000, compared to $7.6 million recorded during the first six months of 2012.

Non-interest income in the first half of 2013 was $16.8 million, compared to $16.4 million during the same period of 2012. Service fees and other charges were $4.9 million in the first half of 2013, down from $5.4 million in the first half of 2012. Mortgage banking income increased to $5.3 million in the first half of 2013, compared with $4.7 million in the first half of 2012. Insurance and investment sales revenues increased to $5.3 million in the first half of 2013, compared with $4.7 million during the first half of 2012. Non-interest income in the first half of 2013 included $97,000 of gain on the sale of securities compared with $425,000 in the first half of 2012.

Non-interest expense increased to $32.9 million in the first six months of 2013 from $31.8 million in the first half of 2012. Compensation and benefits expense was $17.3 million in the first half of 2013 compared with $16.5 million in the first half of 2012. Credit, collection and real estate owned costs have decreased $84,000 in the first six months of 2013 from the first six months of 2012 and secondary market buy-back losses have increased $569,000 in the first six months of 2013 from the first six months of 2012. An accrual of $581,000 was established in the first quarter of 2013 for estimated secondary market buy-back losses based on an estimated exposure of repurchase requests from notifications from Fannie Mae's post-foreclosure review process. As of June 30, 2013, the accrual for estimated buy-back losses is $567,000.

Total Assets at $2.07 Billion

Total assets at June 30, 2013 were $2.07 billion, compared to $2.05 billion at December 31, 2012. Net loans receivable (excluding loans held for sale) were $1.54 billion at June 30, 2013, compared to $1.50 billion at December 31, 2012. Total cash and cash equivalents were $127.7 million at June 30, 2013 compared with $136.8 million at December 31, 2012 and $103.5 million at June 30, 2012. Also, at June 30, 2013, goodwill and other intangible assets totaled $65.6 million compared to $66.3 million at December 31, 2012 and $67.0 million at June 30, 2012.

Total deposits at June 30, 2013 were $1.64 billion compared with $1.67 billion at December 31, 2012 and $1.61 billion at June 30, 2012. Non-interest bearing deposits at June 30, 2013 were $301.7 million compared to $315.1 million at December 31, 2012 and $261.2 million at June 30, 2012. Total stockholders' equity was $264.5 million at June 30, 2013 compared to $258.1 million at December 31, 2012 and $249.9 million at June 30, 2012.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, July 23, 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/fdef130723.html.

Audio replay of the Internet Webcast will be available at www.fdef.com until July 23, 2014 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 northeast 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, 2012. 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)

(Unaudited)

June 30,

December 31,

June 30,

(in thousands)

2013

2012

2012

Assets

Cash and cash equivalents

Cash and amounts due from depository institutions

$

39,743

$

45,832

$

31,517

Interest-bearing deposits

88,000

91,000

72,000

127,743

136,832

103,517

Securities

Available-for sale, carried at fair value

188,079

194,101

278,829

Held-to-maturity, carried at amortized cost

445

508

600

188,524

194,609

279,429

Loans

1,562,666

1,525,257

1,500,637

Allowance for loan losses

(26,270

)

(26,711

)

(26,409

)

Loans, net

1,536,396

1,498,546

1,474,228

Loans held for sale

14,808

22,064

13,125

Mortgage servicing rights

8,731

7,833

8,274

Accrued interest receivable

5,891

5,594

6,063

Federal Home Loan Bank stock

19,353

20,655

20,655

Bank Owned Life Insurance

42,292

41,832

41,347

Office properties and equipment

38,866

39,663

40,825

Real estate and other assets held for sale

6,546

3,805

3,538

Goodwill

61,525

61,525

61,525

Core deposit and other intangibles

4,090

4,738

5,427

Deferred taxes

2,291

78

-

Other assets

9,160

9,174

9,663

Total Assets

$

2,066,216

$

2,046,948

$

2,067,616

Liabilities and Stockholders' Equity

Non-interest-bearing deposits

$

301,742

$

315,132

$

261,211

Interest-bearing deposits

1,333,966

1,352,340

1,352,400

Total deposits

1,635,708

1,667,472

1,613,611

Advances from Federal Home Loan Bank

62,773

12,796

81,819

Notes payable and other interest-bearing liabilities

47,560

51,702

50,527

Subordinated debentures

36,083

36,083

36,083

Advance payments by borrowers for tax and insurance

1,844

1,473

989

Deferred taxes

-

-

1,376

Other liabilities

17,751

19,294

33,341

Total liabilities

1,801,719

1,788,820

1,817,746

Stockholders' Equity

Preferred stock, net of discount

-

-

992

Common stock, net

127

127

127

Common stock warrant

878

878

878

Additional paid-in-capital

136,111

136,046

136,025

Accumulated other comprehensive income

204

4,274

4,660

Retained earnings

173,679

164,103

154,500

Treasury stock, at cost

(46,502

)

(47,300

)

(47,312

)

Total stockholders' equity

264,497

258,128

249,870

Total Liabilities and Stockholders' Equity

$

2,066,216

$

2,046,948

$

2,067,616

Consolidated Statements of Income (Unaudited)

First Defiance Financial Corp.

Three Months Ended

Six Months Ended

June 30,

June 30,

(in thousands, except per share amounts)

2013

2012

2013

2012

Interest Income:

Loans

$

17,047

$

18,197

$

33,843

$

36,847

Investment securities

1,406

1,994

2,809

3,777

Interest-bearing deposits

72

114

130

206

FHLB stock dividends

207

214

426

443

Total interest income

18,732

20,519

37,208

41,273

Interest Expense:

Deposits

1,511

2,116

3,158

4,485

FHLB advances and other

92

750

182

1,501

Subordinated debentures

150

310

302

641

Notes Payable

61

97

121

201

Total interest expense

1,814

3,273

3,763

6,828

Net interest income

16,918

17,246

33,445

34,445

Provision for loan losses

448

4,097

873

7,600

Net interest income after provision for loan losses

16,470

13,149

32,572

26,845

Non-interest Income:

Service fees and other charges

2,549

2,687

4,934

5,358

Mortgage banking income

2,443

2,258

5,273

4,704

Gain on sale of non-mortgage loans

2

33

17

42

Gain on sale of securities

44

382

97

425

Insurance and investment sales commissions

2,277

2,192

5,313

4,727

Trust income

186

169

349

323

Income from Bank Owned Life Insurance

231

219

460

439

Other non-interest income

116

54