Credit Quality

The fourth quarter 2012 results include provision for loan losses expense of $2.6 million, compared with $4.1 million in the same period in 2011. The allowance for loan loss as a percentage of total loans decreased to 1.75% at December 31, 2012 from 2.24% at December 31, 2011.

Non-performing assets totaled $36.4 million at December 31, 2012, down from $46.3 million at December 31, 2011. The December 31, 2012 balance included $32.6 million of loans that were non-accrual or 90 days past due. Additionally, First Defiance had $3.8 million of real estate owned at December 31, 2012 up from $3.6 million at December 31, 2011. Loans classified as Trouble Debt Restructured because of modification of terms granted to borrowers totaled $28.2 million at December 31, 2012 compared to $3.4 million for the same period in 2011. For the fourth quarter of 2012, First Defiance recorded net charge-offs of $2.2 million, which represented 0.59% of average loans outstanding (annualized) for the quarter, compared with 2.49% in the fourth quarter of 2011.

“Asset quality continued to show improvement this quarter, reflected by a 17% reduction in non-performing loans from the fourth quarter of 2011,” Small said. “We had a 75% decrease in net charge-offs in the 2012 fourth quarter compared with the fourth quarter of 2011, reflecting continuation of improvement in the credit profile of First Defiance.”

Net Interest Margin

Net interest income decreased to $17.4 million in the fourth quarter of 2012 compared to $17.5 million in the 2011 fourth quarter, and was up slightly from the third quarter of 2012, which was $17.2 million. Net interest margin was 3.92% for the 2012 fourth quarter compared to 3.80% in the third quarter of 2012 and 3.83% in the fourth quarter of 2011. Yield on interest earning assets declined by 23 basis points to 4.40% in the fourth quarter of 2012 from 4.63% in the 2011 fourth quarter, while the cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 34 basis points, to 0.50% from 0.84%. The net interest margin was positively impacted by the Company’s balance sheet restructuring strategy that was executed in the fourth quarter of 2012.

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