FIRST DEFIANCE ANNOUNCES 2008
FIRST QUARTER EARNINGS
DEFIANCE, OHIO (April 21, 2008) – First Defiance Financial Corp. (NASDAQ: FDEF) today announced that net income for its first quarter ended March 31, 2008 totaled $3.42 million, or $0.47 per diluted share, compared to $3.61 million or $0.50 per diluted share for the quarter ended March 31, 2007. The 2008 results included $750,000 of acquisition related charges associated with the March 14, 2008 acquisition of Pavilion Bancorp. of Adrian Michigan (“Pavilion”) and its subsidiary the Bank of Lenawee. Excluding the after tax impact of those charges, First Defiance had earnings of $3.91 million, or $0.54 per diluted share, for the quarter ended March 31, 2008. The 2008 quarterly results also included 17 days of operations of the eight banking centers acquired in the Pavilion acquisition.
First Defiance announced the agreement to acquire Pavilion on October 2, 2007. The purchase price was $37.50 cash plus 1.4209 shares of First Defiance stock for each share of Pavilion stock. The acquisition was valued at $55.2 million. Banking centers acquired include three in Adrian, two in Tecumseh and one each in Morenci, Hudson and Hillsdale, Michigan. At the closing date, Pavilion had $257.3 million in assets, $225.9 million in net loans and $208.3 million in deposits.
“We’re encouraged by the results of our 2008 first quarter, particularly the substantial improvement in our net interest margin in a very difficult rate environment,” said William J. Small, Chairman, President and Chief Executive Officer of First Defiance Financial Corp. “We also successfully completed the acquisition of Pavilion Bancorp. This was our largest acquisition yet and teams from throughout the combined organization worked extremely hard to make the transition as smooth as possible for our new customers.”
Net Interest Margin Increased by 24 Basis Points from 2007 Fourth Quarter
Net interest income increased to $13.6 million for the first three months of 2008, a 13.4% increase from the 2007 first quarter. Net interest margin improved to 3.76% for the 2008 first quarter, a 13 basis point improvement over last year’s first quarter margin of 3.63% and a 24 basis point improvement from the 2007 fourth quarter margin of 3.52%. Yield on interest earning assets declined by 45 basis points, to 6.77% from 7.22% in the 2007 first quarter while the cost of interest-bearing liabilities decreased by 59 basis points, to 3.37% from 3.96%. The margin also was favorably impacted by an increase in non-interest bearing deposits, which had an average balance of $124.6 million in the 2008 first quarter compared to $97.9 million in the same
period in 2007. The Pavilion acquisition had a favorable impact on the margin as Pavilion generally has historically operated at a higher margin than First Defiance. However, in the 2008 first quarter, the Pavilion results were included in only the last 17 of the 91 days.
“We reacted quickly to the Fed’s rate cuts in the first quarter because we knew the impact on our loan yields would be severe,” commented Mr. Small. “At the same time, we have been aggressively growing non-interest bearing deposit balances. As a result, we’ve improved the overall mix in our funding, which has been a long-term strategic goal.”
Provision for Loan Losses Increased, Credit Quality Impacted by Acquisition
The provision for loan losses more than doubled in the 2008 first quarter, to $1.1 million compared to $457,000 in the first quarter of 2007. The significant increase was due primarily to an increase in the loan loss reserve for one large impaired loan caused by a reduction in the appraised value of that loan’s real estate collateral. Excluding the specific allowance recorded for that one loan, the Company’s provision was very consistent with the level of provision expense recorded over the last several quarters.
“These are among the toughest credit times this industry has seen in my 30 years in the business,” said Mr. Small. “And although we’re not immune to these difficulties, I think our portfolio has held up well. While our non-performing assets increased to $16.9 million from $11.7 million at the end of December, $4.4 million in non-performing loans and $1.2 million in Other Real Estate Owned (OREO) came with the Pavilion acquisition. Non-performing loans originated by First Federal Bank actually decreased by $75,000 during the 2008 first quarter while OREO balances decreased by $246,000. Although we doubled our loan loss provision compared to last year’s first quarter, the impaired loan that caused most of the increase continues to pay as agreed, despite the weaknesses that caused us to consider the relationship impaired.”
“Net charge-offs of $491,000 for the quarter are higher than we like, but they represented only 0.15% of average loans outstanding calculated on an annual basis,” said Mr. Small. “Our expectation is that the ratio of net charge-offs to average assets will be higher for the balance of the year, both because of the acquisition and because of our market area’s overall economic condition. We’re seeing increases in delinquencies, and we are working harder to keep borrowers from falling past due. Our local economies remain generally healthy, though far from robust. The southern Michigan counties where our branches are located are probably struggling a little bit more than the communities where our Ohio branches are located, but it’s Well within the range of what we projected.”
“We are seeing a higher level of delinquencies in our mortgage and home equity portfolios than we are accustomed to,” added Mr. Small. “We likely will see an increase in charge-offs of this type of loan during the balance of 2008. While we don’t have subprime loans on our balance sheet, falling housing values in our market areas will have a negative impact on our asset quality. Overall however, I feel comfortable with our level of allowance for loan losses at March 31.”
Mortgage Banking, Insurance Sales Increases Highlight Non-Interest Income Growth
First Defiance’s non-interest income for the 2008 first quarter increased to $6.0 million from $5.6 million in the first quarter of 2007. Most of the increase was in mortgage banking income, which increased to $1.1 million in the 2008 first quarter from $782,000 in 2007. Gains from the sale of mortgage loans more than doubled to $1.1 million from $512,000 in the first quarter of 2007. Also, mortgage loan servicing revenue increased by $44,000 or 10.5% in the 2008 first quarter compared to 2007. The increases in gains and servicing revenue were partially offset by expense increases of $211,000 for the amortization of mortgage servicing rights and a $132,000 increase in expense associated with MSR valuation adjustments in the 2008 first quarter over the same period in 2007. The MSR valuation adjustment is a reflection of the declining fair value of certain sectors of the Company’s portfolio of mortgage servicing rights. 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 products increased to $1.9 million for the 2008 first quarter, from $1.7 million in the same period of 2007. The increase is attributable to a full quarter of revenue from the late February 2007 acquisition of the Huber Harger Welt and Smith Agency in Bowling Green, Ohio. First Defiance’s insurance subsidiary, First Insurance and Investments, typically recognizes contingent revenues during the first quarter. These revenues are bonuses paid by insurance carriers when the Company achieves certain loss ratios or growth targets. In 2008 First Insurance earned $784,000 of contingent income, compared to $754,000 recorded during the first quarter of 2007.
“We are pleased to report our third consecutive year of very strong contingent commissions at First Insurance,” continued Mr. Small. “This amount is a reflection of effective management of our relationships with our insurance companies. These contingent commissions are generally recorded on a cash basis when they are received in the first quarter.”
Non-Interest Expenses Up 14.5%, 8.1% Excluding Acquisition Charges
Total non-interest expense for First Defiance increased to $13.5 million for the quarter ended March 31, 2008, an increase of 14.5% from the $11.8 million of non-interest expense recognized in the 2007 first quarter. The 2008 amount includes $750,000 of acquisition related charges. If those costs are excluded, non-interest expense increased by 8.1%. Compensation and benefits increased by 8.7% between the 2007 and 2008 first quarters. The 2008 results included approximately $90,000 of compensation expense related to the 17 post-acquisition days of operating the former Bank of Lenawee offices. Compensation also increased because of year-over-year compensation increases, and a full three months of compensation associated with Huber Harger Welt and Smith, compared to just one month in 2007. Occupancy expense increased $266,000 because of the Pavilion and Huber Harger Welt and Smith acquisitions as well as the December 2007 opening of First Federal’s new operations center.
Acquisition related costs include the costs of terminating certain long-term contracts, stay bonuses, and other non-recurring costs associated with the completion of the acquisition and the transition of operations. Management had initially estimated that total acquisition related costs for the Pavilion acquisition would exceed $3.5 million. However, certain costs associated with
change in control agreements paid to former Pavilion officers were expensed by the seller prior to the closing date and the cost to terminate Bank of Lenawee’s participation in a multiple employer defined benefit pension plan will be approximately $900,000 less than initially anticipated. As a result of these changes, management believes that the balance of acquisition related costs, most of which will be incurred in the 2008 second quarter, will be between $1.0 million and $1.25 million.
Balance Sheet Amounts
As a result of the March 14 completion of the Pavilion acquisition, total assets at March 31, 2008 were $1.89 billion, compared to $1.61 billion at December 31, 2007. Net loans receivable (excluding loans held for sale) were $1.52 billion at March 31, 2008 compared to $1.28 billion at December 31, 2007. Total deposits at March 31, 2008 were $1.41 billion compared to $1.22 billion at December 31, 2007, which included non-interest bearing deposits at March 31, 2008 of $168.0 million compared to $121.6 million at December 31, 2007. Total stockholders’ equity increased to $194.8 million at March 31, 2008 compared to $166.0 million at the end of 2007, with the increase attributable to the 1,037,534 shares of First Defiance issued in the acquisition. Also at March 31, 2008, goodwill and other intangible assets totaled $67.2 million compared to $40.4 million at December 31, 2007. Many of the accounting adjustments recorded as of March 31, 2008 associated with the acquisition are preliminary and subject to adjustment as the accounting for the purchase price is further refined during the second quarter.
Conference Call
First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, April 22, 2008 to discuss the earnings results and business trends. The conference call may be accessed by calling 800-860-2442.
Internet access to the call is also available (in listen-only mode) at the following Web address: http://www.talkpoint.com/viewer/starthere.asp?Pres=121308 (Due to URL length, please copy and paste into browser.)
The audio replay of the Internet Web cast will be available at www.fdef.com until Wednesday, April 30, 2008 at 9 a.m.
Annual Meeting of Shareholders
First Defiance Financial Corp. will host its Annual Meeting of Shareholders at 1:00 p.m. on Tuesday, April 22, 2008 at the First Federal Bank operations center at 25600 Elliott Road in Defiance. Following the meeting, the audio replay, slide presentation and transcript will be available at the Company’s Web site at www.fdef.com.
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 36 full service branches and 45 ATM locations in northwest Ohio, southeast Michigan and Fort Wayne, Indiana. First Insurance & Investments specializes in property and casualty and group health and life insurance, with offices in Defiance and Bowling Green, 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: 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 OREO 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, 2007. 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.
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| Consolidated Balance Sheets | | | | | | |
| First Defiance Financial Corp. | | (Unaudited) | | | | |
| | | | | | | |
| | | March 31, | | | December 31, | |
| (in thousands) | | 2008 | | | 2007 | |
| | | | | | | |
| Assets | | | | | | |
| Cash and cash equivalents | | | | | | |
| Cash and amounts due from depository institutions | | $ | 40,030 | | | $ | 53,976 | |
| Interest-bearing deposits | | | 1,548 | | | | 11,577 | |
| | | | 41,578 | | | | 65,553 | |
| Securities | | | | | | | | |
| Available-for sale, carried at fair value | | | 123,566 | | | | 112,370 | |
| Held-to-maturity, carried at amortized cost | | | 1,081 | | | | 1,117 | |
| | | | 124,647 | | | | 113,487 | |
| | | | | | | | | |
| Loans | | | 1,535,354 | | | | 1,289,696 | |
| Allowance for loan losses | | | (18,556 | ) | | | (13,890 | ) |
| Loans, net | | | 1,516,798 | | | | 1,275,806 | |
| Loans held for sale | | | 7,400 | | | | 5,751 | |
| Mortgage servicing rights | | | 9,074 | | | | 5,973 | |
| Accrued interest receivable | | | 8,636 | | | | 6,755 | |
| Federal Home Loan Bank stock | | | 20,864 | | | | 18,586 | |
| Bank Owned Life Insurance | | | 28,696 | | | | 28,423 | |
| Office properties and equipment | | | 50,070 | | | | 40,545 | |
| Real estate and other assets held for sale | | | 3,448 | | | | 2,460 | |
| Goodwill | | | 57,315 | | | | 36,820 | |
| Core deposit and other intangibles | | | 9,915 | | | | 3,551 | |
| Other assets | | | 7,606 | | | | 5,694 | |
| Total Assets | | $ | 1,886,047 | | | $ | 1,609,404 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Non-interest-bearing deposits | | $ | 168,049 | | | $ | 121,563 | |
| Interest-bearing deposits | | | 1,245,652 | | | | 1,096,295 | |
| Total deposits | | | 1,413,701 | | | | 1,217,858 | |
| Advances from Federal Home Loan Bank | | | 163,966 | | | | 139,536 | |
| Notes payable and other interest-bearing liabilities | | | 51,361 | | | | 30,055 | |
| Subordinated debentures | | | 36,083 | | | | 36,083 | |
| Advance payments by borrowers for tax and insurance | | | 594 | | | | 762 | |
| Deferred taxes | | | 5,654 | | | | 1,306 | |
| Other liabilities | | | 19,908 | | | | 17,850 | |
| Total liabilities | | | 1,691,267 | | | | 1,443,450 | |
| Stockholders’ Equity | | | | | | | | |
| Preferred stock | | | - | | | | - | |
| Common stock, net | | | 127 | | | | 117 | |
| Additional paid-in-capital | | | 140,176 | | | | 112,651 | |
| Stock acquired by ESOP | | | - | | | | (202 | ) |
| Accumulated other comprehensive loss | | | (746 | ) | | | (415 | ) |
| Retained earnings | | | 127,923 | | | | 126,630 | |
| Treasury stock, at cost | | | (72,700 | ) | | | (72,827 | ) |
| Total stockholders’ equity | | | 194,780 | | | | 165,954 | |
| Total liabilities and stockholders’ equity | | $ | 1,886,047 | | | $ | 1,609,404 | |
