First Defiance, Home Savings Parent, Releases Earnings
Updated: This story has been revised to correct the initial post.
DEFIANCE, Ohio – First Defiance Financial Corp., parent of Home Savings Bank, reports what it describes as 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.
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 company said.
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 30 cents per diluted common share. Excluding the impact of acquisition-related provision and charges, earnings for the first quarter owere $7.5 million, or 24 cents 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, CEO 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.”
On Jan. 31, First Defiance and United Community Financial Corp. 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.
At the closing , 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 Jan. 31. 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, the combined 77 branches will be brought together under the new name and brand of Premier Bank, the earnings release noted.
Net interest income of $45.5 million in the first quarter 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, 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 , 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 in the first quarter was $14.0 million compared with $10.8 million in prior-year quarter. Results for the first quarter included two months of income from UCFC compared to none in 2019.
Mortgage banking income decreased to $0.8 million ifrom $1.8 million in the first quarter of 2019. Gains from the sale of mortgage loans increased to $4.9 million from $1.3 million in 2019. Mortgage loan servicing revenue increased to $1.6 million in the first quarter from $0.9 million in the first quarter of 2019.
Amortization of mortgage servicing rights increased to $1.2 million in the first quarter 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 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 compared to a 28 basis point decline in prior-year quarter.
For the first quarter, 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. TIn the first quarter, 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, up from $523,000. Other non-interest income for the first quarter was $960,000 compared to $846,000 in 2019.
Total non-interest expense was $43.8 million in the first quarter, 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 included two months of expenses from UCFC compared to none in 2019.
Non-performing loans totaled $32.6 million at March 31, 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 [Other Real Estate Owned[ at March 31, compared to $0.9 million at March 31, 2019. Accruing troubled debt restructured loans were $7.5 million at March 31, compared with $11.9 million at March 31, 2019.
In connection with the UCFC merger, 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 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, 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.
Total assets at March 31 were $6.54 billion compared to $3.47 billion at Dec. 31, 2019, and $3.22 billion at March 31, 2019.
Total deposits were $4.99 billion compared with $2.87 billion at Dec. 31, 2019, and $2.69 billion at March 31, 2019.
SOURCE: First Defiance Financial Corp.
Copyright 2020 The Business Journal, Youngstown, Ohio.