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 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." -- First Defiance Financial Corp.
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