First Defiance Financial Corp. Announces Solid 2020 First Quarter Results

First Defiance Financial Corp. (NASDAQ: FDEF) (“First Defiance”) announced today a solid first quarter including the completion of its strategic merger with UCFC, solid core profitability and a 15.8% increase in its year-over-year dividend. On a GAAP basis, net earnings for the first quarter of 2020 were a loss of $22.5 million, or $0.71 per diluted common share, compared to income of $11.5 million, or $0.57 per diluted common share, for the first quarter of 2019. The year-over-year comparison is substantially impacted by the current year’s loan loss provision expense of $43.8 million, which included an expected $25.9 million related to acquisition accounting for an after-tax cost of $20.5 million, or $0.65 per diluted common share. The first quarter of 2019 included a provision for loan losses expense of $212,000, which had an after-tax cost of $168,000, or $0.01 per diluted common share, and no acquisition impact. Additionally, the current year’s results include the impact of $11.5 million of acquisition-related charges, which had an after-tax cost of $9.5 million, or $0.30 per diluted common share. Excluding the impact of acquisition-related provision and charges, earnings for the first quarter of 2020 were $7.5 million, or $0.24 per diluted common share.

“The great momentum we had through most of the first quarter started to slow with the effects of COVID-19,” said Donald P. Hileman, Chief Executive Officer of First Defiance. “The pandemic has caused a severe disruption on the global and regional economic outlooks as well as the markets in which we operate. We have shifted focus to servicing the immediate needs of our clients and the health and well-being of our employees while supporting the communities we serve. We have been working extremely hard to assist clients by executing the Small Business Administration Paycheck Protection Program enacted as part of the CARES Act stimulus plan, and by helping them navigate additional relief programs.”

UCFC Merger

On January 31, 2020, First Defiance and United Community Financial Corp. (“UCFC”) completed the previously announced merger under which UCFC merged into First Defiance in a stock-for-stock transaction. Under the terms of the merger agreement, shareholders of UCFC received 0.3715 First Defiance common shares for each UCFC common share. The merger combined two complementary banking companies, and First Defiance and UCFC consider this partnership an ideal strategic, financial and operational fit, particularly given their individual strong and consistent performance over time. The combined company leverages the respective strengths of each institution in commercial banking, residential lending, retail banking, insurance and wealth management, and better positions the combined company to serve the geographies of Ohio, Michigan, Indiana, Pennsylvania and West Virginia with increased scale and expanded product offerings.

At the closing of the merger, First Defiance issued 17.9 million common shares, which represented a transaction value of approximately $527 million based on its closing stock price of $29.39 on January 31, 2020. The transaction value has been preliminarily allocated to assets acquired and liabilities assumed including $2.3 billion in net loans, $459 million in other tangible assets, $2.1 billion in deposits, $441 million in other liabilities, and $250 million in goodwill and other intangible assets. Prior to closing, UCFC incurred $13.9 million of merger-related costs. The year-over-year comparison of First Defiance results is impacted by the UCFC merger, with 2020 including two months of operations from UCFC compared to none in the prior year.

Coinciding with the upcoming integration of the First Federal Bank and Home Savings Bank systems scheduled for July, our combined 77 branches will be brought together under the new name and brand of Premier Bank. The Premier Bank name represents and honors the commitment both banks have made to our customers and communities by providing the best in financial partnerships for over a decade. This name change will bring additional consistency throughout our footprint and an elevated promise to deliver a community banking experience that sets us apart.

“We are very pleased to have completed the merger of our two companies in the quarter and to have recently announced the new name Premier Bank for our banking franchise,” said Gary M. Small, President of First Defiance. “The Premier Bank name and brand are reflections of our commitment to helping customers, employees and our communities achieve their best.”

Net interest income up compared to first quarter 2019

Net interest income of $45.5 million in the first quarter of 2020 was up from $28.3 million in the first quarter of 2019. The increase over the prior year’s first quarter was attributable to organic growth and two months of income from UCFC compared to none in 2019. Net interest margin was 3.78% for the first quarter of 2020, down from 3.80% in the fourth quarter of 2019, and down from 4.03% in the first quarter of 2019. Yield on interest earning assets decreased to 4.54% in the first quarter of 2020, down 13 basis points from 4.67% in the fourth quarter of 2019. The cost of interest-bearing liabilities decreased 14 basis points in the first quarter of 2020 to 1.01% from 1.15% in the fourth quarter of 2019. The first quarter 2020 results include the impact of acquisition marks and related accretion. Interest income includes $312,000 of accretion and interest expense includes $1,025,000 of accretion, which combined added 10 basis points of net interest margin. Excluding these amounts, net interest margin would be 3.68% for first quarter of 2020.

“We are satisfied with our net interest margin, which contracted less than expected quarter over quarter,” said Hileman. “We are proud of the efforts of our teams that were able to generate organic growth of over 5% annualized for both loans and deposits in the first quarter despite the economic headwinds.”

Non-interest income up from first quarter 2019

First Defiance’s non-interest income in the first quarter of 2020 was $14.0 million compared with $10.8 million in the first quarter of 2019. Results for the first quarter 2020 included two months of income from UCFC compared to none in 2019.

Mortgage banking income decreased to $0.8 million in the first quarter of 2020 from $1.8 million in the first quarter of 2019. Gains from the sale of mortgage loans increased to $4.9 million in the first quarter of 2020 from $1.3 million in the first quarter of 2019. Mortgage loan servicing revenue increased to $1.6 million in the first quarter of 2020 from $0.9 million in the first quarter of 2019. Amortization of mortgage servicing rights increased to $1.2 million in the first quarter 2020 from $286,000 in the first quarter 2019. First Defiance had a negative change in the valuation adjustment in mortgage servicing assets of $4.5 million in the first quarter of 2020 compared with a negative adjustment of $113,000 in the first quarter of 2019. The year-over-year change is primarily due to the significant decline in rates with the 10-year treasury declining 122 basis points during the first quarter of 2020 compared to a 28 basis point decline in the first quarter of 2019.

For the first quarter 2020, service fees and other charges were $5.2 million, up from $3.0 million in the first quarter of 2019. Commissions from the sale of insurance products were $5.2 million, up from $4.1 million in the first quarter of 2019. The first quarter typically includes contingent revenues, bonuses paid by insurance carriers when the Company achieves certain loss ratios or growth targets. In the first quarter of 2020, First Defiance’s insurance subsidiary, First Insurance Group, earned $1.3 million of contingent income, compared to $0.9 million during the first quarter of 2019. Trust income was $838,000 in the first quarter of 2020, up from $523,000 in the first quarter of 2019. Other non-interest income for the first quarter was $960,000 compared to $846,000 in 2019. Other non-interest income for the first quarter 2020 includes $1.1 million for reversal of an earnout accrual that was not achieved related to a prior acquisition.

“This was a quarter that highlighted the importance of diverse revenue sources as non-interest income represented over 23% of total revenues despite the significant hit to mortgage servicing rights valuation,” said Hileman. “Non-interest income remains an important element to our earnings growth goals and we continue to seek ways to improve these revenue streams.”

Non-interest expenses up from first quarter 2019

Total non-interest expense was $43.8 million in the first quarter of 2020, or $32.3 million excluding $11.5 million of acquisition related charges, up from $24.9 million in the first quarter of 2019. Results for the first quarter 2020 included two months of expenses from UCFC compared to none in 2019. Compensation and benefits increased to $17.6 million in the first quarter of 2020, compared to $14.1 million in the first quarter of 2019. Occupancy expense was $3.7 million in the first quarter of 2020, up from $2.2 million in the first quarter of 2019. Data processing cost was $3.0 million in the first quarter of 2020, up from $2.3 million in the first quarter of 2019. Amortization of intangibles was $1.2 million in the first quarter of 2020, up from $299,000 in the first quarter of 2019. Other non-interest expense was $5.4 million in the first quarter of 2020, up from $5.1 million in the first quarter of 2019.

Credit quality

Non-performing loans totaled $32.6 million at March 31, 2020, an increase from $13.5 million at December 31, 2019, and an increase from $17.6 million at March 31, 2019, due to the UCFC merger. In addition, First Defiance had $0.5 million of OREO at March 31, 2020, compared to $0.9 million at March 31, 2019. Accruing troubled debt restructured loans were $7.5 million at March 31, 2020, compared with $11.9 million at March 31, 2019.

On January 1, 2020, First Defiance adopted the Current Expected Credit Loss (“CECL”) model of accounting for credit losses. This new GAAP model, which replaces the former incurred loss model, requires entities to estimate credit losses over the life of an asset or off-balance sheet exposure. At adoption, First Defiance recorded a $2.4 million increase to its allowance for loan losses and a $0.9 million increase to its reserve for off-balance sheet commitments for a combined $3.2 million, of which $2.6 million was recorded as a reduction to retained earnings with remainder to deferred taxes. In connection with the UCFC merger on January 31, 2020, First Defiance recorded a $33.6 million increase to its allowance for loan losses, which was comprised of $25.9 million required to be recorded as a provision for loan losses related to non-purchased credit deteriorated loans and $7.7 million required to be recorded as a reduction of loan balances for purchased credit deteriorated loans.

Excluding the merger impact noted above, the first quarter 2020 results include net recoveries of $778,000 and a provision expense for loan losses of $17.8 million compared with net charge-offs of $379,000 and a provision expense of $212,000 for the same period in 2019. The allowance for loan loss as a percentage of total loans was 1.68% at March 31, 2020, compared with 1.10% at March 31, 2019. The increase in the provision expense and allowance percentage is primarily attributable to the impact of the economic deterioration that began in the first quarter 2020 as a result of the COVID-19 pandemic.

“While the adoption of CECL in a period of economic downturn dramatically increased our provision, we believe our enhanced allowance will serve us well as we support our customers during this challenging time,” said Paul D. Nungester, Chief Financial Officer of First Defiance. “Our strong capital levels and allowance coverage ratios provide a solid base in the current uncertain environment.”

Total assets at $6.54 billion

Total assets at March 31, 2020, were $6.54 billion compared to $3.47 billion at December 31, 2019, and $3.22 billion at March 31, 2019. Gross loans receivable (excluding loans held for sale) were $5.11 billion at March 31, 2020, compared to $2.78 billion at December 31, 2019, and $2.55 billion at March 31, 2019. At March 31, 2020, gross loans receivable grew $2.56 billion, or 101% from a year ago, including $2.30 billion from the UCFC merger and $277.0 million organically. Also, at March 31, 2020, goodwill and other intangible assets totaled $353.1 million compared to $103.8 million at December 31, 2019, and $102.7 million at March 31, 2019, with the increase attributable to the UCFC merger.

Total deposits at March 31, 2020, were $4.99 billion compared with $2.87 billion at December 31, 2019, and $2.69 billion at March 31, 2019. At March 31, 2020, total deposits grew $2.31 billion, or 86% from a year ago, including $2.08 billion from the UCFC merger and $225.8 million organically.

Total stockholders’ equity was $916.4 million at March 31, 2020, compared to $426.2 million at December 31, 2019, and $395.8 million at March 31, 2019. The increase in stockholders’ equity from year-end 2019 was due to the UCFC merger, offset partially by the company’s repurchase of 430,000 common shares for $10.1 million during the first quarter of 2020. At March 31, 2020, 570,000 common shares remained available for repurchase under its existing authorization.

Dividend to be paid May 22

The Board of Directors declared a quarterly cash dividend of $0.22 per common share payable May 22, 2020, to shareholders of record at the close of business on May 15, 2020. The dividend represents an annual dividend of 5.97 percent based on the First Defiance common stock closing price on April 24, 2020. First Defiance has approximately 37,285,730 common shares outstanding.

Business Client Support Efforts

As a part of the CARES Act, the Payment Protection Program (“PPP”) was created as a loan program at the Small Business Administration (“SBA”) designed to provide a direct incentive for small businesses to keep their workers on the payroll. First Federal Bank is actively participating in the PPP program for clients and, through April 27, 2020, it has approved and the SBA has authorized approximately 2,200 loan requests for approximately $400 million under this program. First Federal Bank has also been approved to participate in the Federal Reserve Board’s Payment Protection Program Liquidity Facility and intends to utilize that to fund PPP loans. Separately, First Federal Bank has partnered with JobsOhio on a loan program designed to support existing Ohio small business clients with maintaining operations and payroll during the COVID-19 pandemic. The partnership enables First Federal Bank to provide additional financing on favorable terms for local Ohio business customers in good standing that would otherwise not be able to access this credit on such terms due to the COVID-19 crisis.

Conference call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. ET on Wednesday, April 29, 2020, to discuss the earnings results and business trends. The conference call may be accessed by calling 1-877-444-1726. In addition, a live webcast may be accessed at https://services.choruscall.com/links/fdef200429.html. The replay of the conference call will be available at www.fdef.com until April 28, 2021, at 9:00 a.m. ET.

First Defiance Financial Corp.

First Defiance Financial Corp. (Nasdaq: FDEF), headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the Midwest and First Insurance Group. United Community Financial Corp. merged with First Defiance Financial Corp. on January 31, 2020. The combined organization operates 77 branches, 12 loan offices and 3 wealth offices in Ohio, Michigan, Indiana, Pennsylvania, and West Virginia. Currently, 33 branches, 3 wealth offices and 11 loan production offices continue to operate as Home Savings Bank. First Insurance Group is a full-service insurance agency with ten offices in Ohio including James & Sons Insurance in Youngstown, Ohio.

For more information, visit the company’s website 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 Exchange Act of 1934, as amended. 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 ability to benefit from a changing interest rate environment; the production levels of mortgage loan generation; the ability to continue to grow loans and deposits; the ability to sustain credit quality ratios at current or improved levels; continued strength in the market area for First Federal Bank of the Midwest; the ability to sell real estate owned properties; and the ability to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including: impacts from the novel coronavirus (COVID-19) pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis; the effects of various governmental responses to the COVID-19 pandemic; those inherent in general and local banking, insurance and mortgage conditions; competitive factors specific to markets in which First Defiance 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 our Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the year ended December 31, 2019. One or more of these factors have affected or could in the future affect First Defiance’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 First Defiance or any other persons, that our objectives and plans will be achieved. All forward-looking statements made in this news release are based on information presently available to the management of First Defiance and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. As required by U.S. GAAP, First Defiance will evaluate the impact of subsequent events through the issuance date of its December 31, 2019, consolidated financial statements as part of its Annual Report on Form 10-K to be filed with the SEC. Accordingly, subsequent events could occur that may cause First Defiance to update its critical accounting estimates and to revise its financial information from that which is contained in this news release.

Non-GAAP Reporting Measures

We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider core net income and core pre-tax pre-provision income to be useful supplemental measures of our operating performance. We define core net income as net income excluding the after-tax impact of acquisition related charges. We define core pre-tax pre-provision income as pre-tax pre-provision income excluding the pre-tax impact of acquisition related charges. We believe that these metrics are useful supplemental measures of operating performance because investors and equity analysts may use these measures to compare the operating performance of the Company between periods or as compared to other financial institutions or other companies on a consistent basis without having to account for one-time acquisition related charges. Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and ratings agencies in the valuation, comparison, rating and investment recommendations of companies. Our management uses these financial measures to facilitate internal and external comparisons to historical operating results and in making operating decisions. Additionally, they are utilized by the Board of Directors to evaluate management. The supplemental reporting measures do not represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental reporting measures, as defined by us, may not be comparable to similarly entitled items reported by other financial institutions or other companies. Please see the exhibits for reconciliations of our supplemental reporting measures.