First Defiance Financial Corp. Announces 2013 Record Second Quarter Earnings

First Defiance Financial Corp. (NASDAQ: FDEF) announced today that net income for the second quarter ended June 30, 2013 totaled $6.1 million, or $0.60 per diluted common share, compared to $3.9 million or $0.38 per diluted common share for the quarter ended June 30, 2012.

“The momentum that we carried from the strong finish in 2012 has continued into the first half of this year and resulted in record earnings for the second consecutive quarter in 2013,” said William J. Small, Chairman, President, and CEO of First Defiance Financial Corp. “We are still very cognizant of the challenges the banking industry faces, but we believe we are well positioned to deal with them.”

Credit Quality

Asset quality continues to improve with non-performing loans decreasing 31% from June 30, 2012 and 19% decrease from the prior quarter. Non-performing loans totaled $28.7 million at June 30, 2013, a decrease from $41.7 million at June 30, 2012. In addition, First Defiance had $6.5 million of real estate owned at June 30, 2013 compared to $3.5 million at June 30, 2012. Accruing troubled debt restructured loans were $28.7 million at June 30, 2013 compared with $3.6 million at June 30, 2012. For the second quarter of 2013, First Defiance recorded net charge-offs of $637,000, down from $6.5 million in the second quarter of 2012 and relatively flat with the first quarter of 2013. The allowance for loan loss as a percentage of total loans was 1.68% at June 30, 2013 compared with 1.76% at June 30, 2012.

The second quarter results include expense for provision for loan losses of $448,000, compared with $4.1 million for the same period in 2012 and $425,000 in the first quarter of 2013.

“We are pleased with the significant improvement in asset quality during the quarter including significant declines in nonperforming loans, net charge-offs and classified loans. We also saw improvement in delinquency levels in all categories of our loan portfolio,” said Small. “As a result of this progress, provision expense was well below the level recorded in the 2012 second quarter.”

Net Interest Income down compared to second quarter 2012

Net interest income of $16.9 million in the second quarter of 2013 was down from $17.2 million in the second quarter of 2012. The net interest margin increased to 3.82% in the second quarter of 2013 compared with 3.75% in the second quarter of 2012 and 3.78% in the first quarter of 2013. Yield on interest earning assets declined by 22 basis points, to 4.22% in the second quarter of 2013 from 4.44% in the second quarter of 2012. The cost of interest-bearing liabilities decreased by 36 basis points in the second quarter of 2013 to 0.50% from 0.86% in the second quarter of 2012.

“We still face significant net interest income challenges, but are pleased with the improvement versus the linked quarter,” said Small. “The increase in the net interest margin this quarter was driven by a boost in loan balances. The challenges on the net interest margin in this low rate environment persist and will continue as competitive pressures remain strong.”

Non-Interest Income down slightly from second quarter 2012

First Defiance’s non-interest income for the second quarter of 2013 was $7.8 million compared with $8.0 million in the second quarter of 2012. Mortgage banking income increased to $2.4 million in the second quarter of 2013, up from $2.3 million in the second quarter of 2012. Gains from the sale of mortgage loans decreased in the second quarter of 2013 to $1.9 million from $2.5 million in the second quarter of 2012. Mortgage loan servicing revenue was $875,000 in the second quarter of 2013, up slightly from $832,000 in the second quarter of 2012. Service fees and other charges were $2.5 million in the second quarter of 2013, down from $2.7 million in the second quarter of 2012.

The prolonged low rate environment helped contribute to solid second quarter of 2013 mortgage originations, although they were down slightly from the second quarter of 2012. The Company had a positive change in the valuation adjustment in mortgage servicing assets (“MSR”) of $312,000 in the second quarter of 2013 compared with a negative adjustment of $177,000 in the second quarter of 2012. The MSR positive valuation adjustment is a reflection of the increase in fair value of certain sectors of the Company’s portfolio of MSRs. The increase was driven by an increase in market rates in the quarter which also contributed to lower amortization of servicing rights.

Income from the sale of insurance and investment products increased to $2.3 million in the second quarter of 2013, from $2.2 million in the second quarter of 2012.

“We are satisfied with the ongoing strong mortgage banking contribution this quarter even though we experienced a decline in refinance business,” continued Mr. Small. “The slower refinance activity has been partially offset by an increase in purchase business. We are hopeful the strengthening housing market will result in additional purchase activity throughout the second half of 2013.”

Non-Interest Expenses

Total non-interest expense was $15.7 million in the second quarter of 2013, an increase from $15.5 million in the second quarter of 2012.

Compensation and benefits increased to $8.5 million in the second quarter of 2013 compared to $8.0 million in the second quarter of 2012. The Company accrued for incentive payments based on exceeding 2013 targeted performance in the first half of 2013. FDIC insurance costs decreased to $275,000 in the second quarter of 2013 from $672,000 in the second quarter of 2012 due to the improvement in the Company’s risk category late in the first quarter of 2013. Data processing cost increased to $1.3 million in the second quarter of 2013 from $1.2 million in the second quarter of 2012. Other non-interest expense was $3.0 million in the second quarter of 2013, flat with the second quarter of 2012. Credit, collection and real estate owned costs were $474,000 in the second quarter of 2013 compared to $485,000 in the same period of 2012, and secondary market buy-back losses were $61,000 in the second quarter of 2013 compared to $73,000 in the same period of 2012.

Year-To-Date Results

For the six month period ended June 30, 2013, net interest income totaled $33.4 million, compared with $34.4 million in the first six months of 2012. Average interest-earning assets decreased to $1.824 billion in the first half of 2013, compared to $1.892 billion in the first half of 2012. Net interest margin for the first six months of 2013 was 3.78%, up 2 basis points from the 3.76% margin reported in the six month period ended June 30, 2012.

The provision for loan losses in the first half of 2013 was $873,000, compared to $7.6 million recorded during the first six months of 2012.

Non-interest income in the first half of 2013 was $16.8 million, compared to $16.4 million during the same period of 2012. Service fees and other charges were $4.9 million in the first half of 2013, down from $5.4 million in the first half of 2012. Mortgage banking income increased to $5.3 million in the first half of 2013, compared with $4.7 million in the first half of 2012. Insurance and investment sales revenues increased to $5.3 million in the first half of 2013, compared with $4.7 million during the first half of 2012. Non-interest income in the first half of 2013 included $97,000 of gain on the sale of securities compared with $425,000 in the first half of 2012.

Non-interest expense increased to $32.9 million in the first six months of 2013 from $31.8 million in the first half of 2012. Compensation and benefits expense was $17.3 million in the first half of 2013 compared with $16.5 million in the first half of 2012. Credit, collection and real estate owned costs have decreased $84,000 in the first six months of 2013 from the first six months of 2012 and secondary market buy-back losses have increased $569,000 in the first six months of 2013 from the first six months of 2012. An accrual of $581,000 was established in the first quarter of 2013 for estimated secondary market buy-back losses based on an estimated exposure of repurchase requests from notifications from Fannie Mae’s post-foreclosure review process. As of June 30, 2013, the accrual for estimated buy-back losses is $567,000.

Total Assets at $2.07 Billion

Total assets at June 30, 2013 were $2.07 billion, compared to $2.05 billion at December 31, 2012. Net loans receivable (excluding loans held for sale) were $1.54 billion at June 30, 2013, compared to $1.50 billion at December 31, 2012. Total cash and cash equivalents were $127.7 million at June 30, 2013 compared with $136.8 million at December 31, 2012 and $103.5 million at June 30, 2012. Also, at June 30, 2013, goodwill and other intangible assets totaled $65.6 million compared to $66.3 million at December 31, 2012 and $67.0 million at June 30, 2012.

Total deposits at June 30, 2013 were $1.64 billion compared with $1.67 billion at December 31, 2012 and $1.61 billion at June 30, 2012. Non-interest bearing deposits at June 30, 2013 were $301.7 million compared to $315.1 million at December 31, 2012 and $261.2 million at June 30, 2012. Total stockholders’ equity was $264.5 million at June 30, 2013 compared to $258.1 million at December 31, 2012 and $249.9 million at June 30, 2012.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, July 23, 2013 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-888-317-6016. A live webcast may be accessed at  http://services.choruscall.com/links/fdef130723.html.

Audio replay of the Internet Webcast will be available at www.fdef.com until July 23, 2014 at 9:00 a.m.

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 Group. First Federal operates 33 full service branches and 42 ATM locations in northwest Ohio, southeast Michigan and northeast Indiana. First Insurance Group is a full-service insurance agency with six offices throughout northwest 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: changes in economic conditions, the nature, extent and timing of governmental actions and reforms, 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 real estate owned 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, 2012. 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.
Consolidated Balance Sheets      
First Defiance Financial Corp. (Unaudited) (Unaudited)
 
June 30, December 31, June 30,
(in thousands)   2013   2012   2012
 
Assets
Cash and cash equivalents
Cash and amounts due from depository institutions $ 39,743 $ 45,832 $ 31,517
Interest-bearing deposits   88,000     91,000     72,000  
127,743 136,832 103,517
Securities
Available-for sale, carried at fair value 188,079 194,101 278,829
Held-to-maturity, carried at amortized cost   445     508     600  
188,524 194,609 279,429
 
Loans 1,562,666 1,525,257 1,500,637
Allowance for loan losses   (26,270 )   (26,711 )   (26,409 )
Loans, net 1,536,396 1,498,546 1,474,228
Loans held for sale 14,808 22,064 13,125
Mortgage servicing rights 8,731 7,833 8,274
Accrued interest receivable 5,891 5,594 6,063
Federal Home Loan Bank stock 19,353 20,655 20,655
Bank Owned Life Insurance 42,292 41,832 41,347
Office properties and equipment 38,866 39,663 40,825
Real estate and other assets held for sale 6,546 3,805 3,538
Goodwill 61,525 61,525 61,525
Core deposit and other intangibles 4,090 4,738 5,427
Deferred taxes 2,291 78 -
Other assets   9,160     9,174     9,663  
Total Assets $ 2,066,216   $ 2,046,948   $ 2,067,616  
 
Liabilities and Stockholders’ Equity
Non-interest-bearing deposits $ 301,742 $ 315,132 $ 261,211
Interest-bearing deposits   1,333,966     1,352,340     1,352,400  
Total deposits 1,635,708 1,667,472 1,613,611
Advances from Federal Home Loan Bank 62,773 12,796 81,819
Notes payable and other interest-bearing liabilities 47,560 51,702 50,527
Subordinated debentures 36,083 36,083 36,083
Advance payments by borrowers for tax and insurance 1,844 1,473 989
Deferred taxes - - 1,376
Other liabilities   17,751     19,294     33,341  
Total liabilities 1,801,719 1,788,820 1,817,746
Stockholders’ Equity
Preferred stock, net of discount - - 992
Common stock, net 127 127 127
Common stock warrant 878 878 878
Additional paid-in-capital 136,111 136,046 136,025
Accumulated other comprehensive income 204 4,274 4,660
Retained earnings 173,679 164,103 154,500
Treasury stock, at cost   (46,502 )   (47,300 )   (47,312 )
Total stockholders’ equity   264,497     258,128     249,870  
Total Liabilities and Stockholders’ Equity $ 2,066,216   $ 2,046,948   $ 2,067,616  
 
Consolidated Statements of Income (Unaudited)        
First Defiance Financial Corp.
Three Months Ended Six Months Ended

June 30,

June 30,
(in thousands, except per share amounts)   2013   2012 2013   2012
Interest Income:
Loans $ 17,047 $ 18,197 $ 33,843 $ 36,847
Investment securities 1,406 1,994 2,809 3,777
Interest-bearing deposits 72 114 130 206
FHLB stock dividends   207   214     426   443  
Total interest income 18,732 20,519 37,208 41,273
Interest Expense:
Deposits 1,511 2,116 3,158 4,485
FHLB advances and other 92 750 182 1,501
Subordinated debentures 150 310 302 641
Notes Payable   61   97     121   201  
Total interest expense   1,814   3,273     3,763   6,828  
Net interest income 16,918 17,246 33,445 34,445
Provision for loan losses   448   4,097     873   7,600  
Net interest income after provision for loan losses 16,470 13,149 32,572 26,845
Non-interest Income:
Service fees and other charges 2,549 2,687 4,934 5,358
Mortgage banking income 2,443 2,258 5,273 4,704
Gain on sale of non-mortgage loans 2 33 17 42
Gain on sale of securities 44 382 97 425
Insurance and investment sales commissions 2,277 2,192 5,313 4,727
Trust income 186 169 349 323
Income from Bank Owned Life Insurance 231 219 460 439
Other non-interest income   116   54     367   396  
Total Non-interest Income 7,848 7,994 16,810 16,414
Non-interest Expense:
Compensation and benefits 8,475 8,049 17,273 16,514
Occupancy 1,694 1,760 3,348 3,548
FDIC insurance premium 275 672 931 1,341
State franchise tax 627 512 1,256 1,026
Data processing 1,313 1,169 2,494 2,337
Amortization of intangibles 312 349 648 724
Other non-interest expense   2,978   3,021     6,923   6,302  
Total Non-interest Expense   15,674   15,532     32,873   31,792  
Income before income taxes 8,644 5,611 16,509 11,467
Income taxes   2,535   1,690     4,841   3,393  
Net Income $ 6,109 $ 3,921   $ 11,668 $ 8,074  
 
Dividends Accrued on Preferred Shares - (435 ) - (897 )
Accretion on Preferred Shares - (305 ) - (351 )
Redemption of Preferred Shares   -   642     -   642  
 
Net Income Applicable to Common Shares $ 6,109 $ 3,823   $ 11,668 $ 7,468  
 
Earnings per common share:
Basic $ 0.63 $ 0.39 $ 1.20 $ 0.77
Diluted $ 0.60 $ 0.38 $ 1.15 $ 0.75
 
Average Shares Outstanding:
Basic 9,774 9,729 9,755 9,728
Diluted 10,156 9,985 10,130 9,980
 
Financial Summary and Comparison            
First Defiance Financial Corp. (Unaudited) (Unaudited)
Three Months Ended Six Months Ended

June 30,

June 30,
(dollars in thousands, except per share data)   2013   2012   % change   2013   2012   % change
Summary of Operations
 
Tax-equivalent interest income (1) $ 19,143 $ 20,935 (8.6 )% $ 38,028 $ 42,080 (9.6 )%
Interest expense 1,814 3,273 (44.6 ) 3,763 6,828 (44.9 )
Tax-equivalent net interest income (1) 17,329 17,662 (1.9 ) 34,265 35,252 (2.8 )
Provision for loan losses 448 4,097 (89.1 ) 873 7,600 (88.5 )
Tax-equivalent NII after provision for loan loss (1) 16,881 13,565 24.4 33,392 27,652 20.8
Investment Securities gains 44 382 (88.5 ) 97 425 (77.2 )
Impairment losses on securities - - - - - -
Non-interest income (excluding securities gains/losses) 7,804 7,612 2.5 16,713 15,989 4.5
Non-interest expense 15,674 15,532 0.9 32,873 31,792 3.4
Income taxes 2,535 1,690 50.0 4,841 3,393 42.7
Net Income 6,109 3,921 55.8 11,668 8,074 44.5
Dividends Declared on Preferred Shares - (435 ) (100.0 ) - (897 ) (100.0 )
Accretion on Preferred Shares - (305 ) (100.0 ) - (351 ) (100.0 )
Redemption on Preferred Shares - 642 NM - 642 NM
Net Income Applicable to Common Shares 6,109 3,823 59.8 11,668 7,468 56.2
Tax equivalent adjustment (1)     411       416     (1.2 )     820       807     1.6  
At Period End
Assets 2,066,216 2,067,616 (0.1 )
Earning assets 1,873,351 1,885,846 (0.7 )
Loans 1,562,666 1,500,637 4.1
Allowance for loan losses 26,270 26,409 (0.5 )
Deposits 1,635,708 1,613,611 1.4
Stockholders’ equity     264,497       249,870     5.9              
Average Balances
Assets 2,030,707 2,102,675 (3.4 ) 2,029,307 2,091,589 (3.0 )
Earning assets 1,825,730 1,903,714 (4.1 ) 1,824,105 1,892,190 (3.6 )
Loans 1,520,708

1,462,312

4.0

 
1,510,465

1,459,559

3.5

 
Deposits and interest-bearing liabilities 1,745,084

1,800,036

(3.1

)
1,745,588

1,790,873

(2.5

)
Deposits 1,644,777 1,629,094 1.0 1,647,774 1,619,685 1.7
Stockholders’ equity 264,293 281,031 (6.0 ) 261,959 280,440 (6.6 )
Stockholders’ equity / assets     13.01 %     13.37 %   (2.6 )     12.91 %     13.41 %   (3.7 )
Per Common Share Data
Net Income
Basic $ 0.63 $ 0.39 61.5 $ 1.20 $ 0.77 55.8
Diluted 0.60 0.38 57.9 1.15 0.75 53.3
Dividends 0.10 0.05 100.0 0.20 0.10 100.0
Market Value:
High $ 23.75 $ 17.46 36.0 $ 23.75 $ 17.76 33.7
Low 20.80 15.23 36.6 18.42 14.41 27.8
Close 22.55 17.12 31.7 22.55 17.12 31.7
Common Book Value 26.97 25.49 5.8 26.97 25.49 5.8
Tangible Common Book Value 20.25 18.61 8.8 20.25 18.61 8.8
Shares outstanding, end of period (000)     9,776       9,729     0.5       9,776       9,729     0.5  
Performance Ratios (annualized)
Tax-equivalent net interest margin (1) 3.82 % 3.75 % 2.0 3.78 % 3.76 % 0.5
Return on average assets 1.21 % 0.75 % 60.9 1.16 % 0.77 % 49.4
Return on average equity 9.27 % 5.61 % 65.2 8.96 % 5.77 % 55.1
Efficiency ratio (2) 62.36 % 61.45 % 1.5 64.48 % 62.04 % 3.9
Effective tax rate 29.33 % 30.12 % (2.6 ) 29.32 % 29.59 % (0.9 )
Dividend payout ratio (basic)     15.87 %     12.82 %   23.8       16.67 %     12.99 %   NM  
 

(1)
 

Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%

(2)

Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains or losses, net.

NM

Percentage change not meaningful
 
Income from Mortgage Banking
       
Revenue from sales and servicing of mortgage loans consisted of the following:
 
Three Months Ended Six Months Ended

June 30,

June 30,
(dollars in thousands)   2013   2012   2013   2012
 
Gain from sale of mortgage loans $ 1,890 $ 2,458 $ 4,066 $ 5,002
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue 875 832 1,745 1,675
Amortization of mortgage servicing rights (634 ) (855 ) (1,323 ) (1,718 )
Mortgage servicing rights valuation adjustments   312       (177 )   785       (255 )
  553       (200 )   1,207       (298 )
Total revenue from sale and servicing of mortgage loans $ 2,443     $ 2,258   $ 5,273     $ 4,704  
 
Yield Analysis            
First Defiance Financial Corp.
Three Months Ended June 30,
(dollars in thousands)
2013 2012
Average Yield Average Yield
Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
Interest-earning assets:
Loans receivable $ 1,520,708 $ 17,064 4.50 % $ 1,462,312 $ 18,223 5.01 %
Securities 195,942 1,800 3.82 % 273,017 2,384 3.62 %
Interest Bearing Deposits 89,116 72 0.32 % 147,730 114 0.31 %
FHLB stock   19,964   207 4.16 %   20,655   214 4.17 %
Total interest-earning assets 1,825,730 19,143 4.22 % 1,903,714 20,935 4.44 %
Non-interest-earning assets   204,977   198,961
Total assets $ 2,030,707 $ 2,102,675
Deposits and Interest-bearing liabilities:
Interest bearing deposits $ 1,343,678 $ 1,511 0.45 % $ 1,368,144 $ 2,116 0.62 %
FHLB advances and other 14,443 92 2.55 % 81,823 750 3.69 %
Notes payable 49,728 61 0.49 % 52,921 97 0.74 %
Subordinated debentures   36,136   150 1.66 %   36,198   310 3.44 %
Total interest-bearing liabilities 1,443,985 1,814 0.50 % 1,539,086 3,273 0.86 %
Non-interest bearing deposits   301,099   - -   260,950   - -
Total including non-interest-bearing demand deposits 1,745,084 1,814 0.42 % 1,800,036 3,273 0.73 %
Other non-interest-bearing liabilities   21,330   21,608
Total liabilities 1,766,414 1,821,644
Stockholders' equity   264,293   281,031
Total liabilities and stockholders' equity $ 2,030,707   $ 2,102,675  
Net interest income; interest rate spread $ 17,329 3.72 % $ 17,662 3.58 %
Net interest margin (3) 3.82 % 3.75 %
Average interest-earning assets to average interest bearing liabilities 126 % 124 %
 
  Six Months Ended June 30,
2013   2012
Average     Yield Average     Yield
Balance Interest(1) Rate Balance Interest(1) Rate
Interest-earning assets:
Loans receivable $ 1,510,465 $ 33,878 4.50 % $ 1,459,559 $ 36,902 5.08 %
Securities 196,257 3,594 3.81 % 255,279 4,529 3.68 %
Interest Bearing Deposits 97,724 130 0.27 % 156,697 206 0.26 %
FHLB stock   19,659   426 4.35 %   20,655   443 4.31 %
Total interest-earning assets 1,824,105 38,028 4.18 % 1,892,190 42,080 4.47 %
Non-interest-earning assets   205,202   199,399
Total assets $ 2,029,307 $ 2,091,589
Deposits and Interest-bearing liabilities:
Interest bearing deposits $ 1,350,112 $ 3,158 0.47 % $ 1,366,583 $ 4,485 0.66 %
FHLB advances and other 13,616 182 2.68 % 81,828 1,501 3.69 %
Notes payable 48,062 121 0.50 % 53,162 201 0.76 %
Subordinated debentures   36,136   302   1.68 %   36,198   641 3.56 %
Total interest-bearing liabilities 1,447,926 3,763 0.52 % 1,537,771 6,828 0.89 %
Non-interest bearing deposits   297,662   - -   253,102   - -
Total including non-interest-bearing demand deposits 1,745,588 3,763 0.43 % 1,790,873 6,828 0.77 %
Other non-interest-bearing liabilities   21,760   20,276
Total liabilities 1,767,348 1,811,149
Stockholders' equity   261,959   280,440
Total liabilities and stockholders' equity $ 2,029,307   $ 2,091,589  
Net interest income; interest rate spread $ 34,265 3.66 % $ 35,252 3.58 %
Net interest margin (3) 3.78 % 3.76 %
Average interest-earning assets to average interest bearing liabilities 126 % 123 %

(1)
 

Interest on certain tax exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 35%.

(2)

Annualized

(3)

Net interest margin is net interest income divided by average interest-earning assets.
 
Selected Quarterly Information  
First Defiance Financial Corp.
 
(dollars in thousands, except per share data)   2nd Qtr 2013   1st Qtr 2013   4th Qtr 2012   3rd Qtr 2012   2nd Qtr 2012
Summary of Operations
Tax-equivalent interest income (1) $ 19,143 $ 18,885 $ 19,993 $ 20,525 $ 20,935
Interest expense 1,814 1,949 2,186 2,923 3,273
Tax-equivalent net interest income (1) 17,329 16,936 17,807 17,602 17,662
Provision for loan losses 448 425 2,618 705 4,097
Tax-equivalent NII after provision for loan losses (1) 16,881 16,511 15,189 16,897 13,565
Investment securities gains, net of impairment 44 53 1,606 103 382
Non-interest income (excluding securities gains/losses) 7,804 8,909 8,574 7,677 7,612
Non-interest expense 15,674 17,199 17,538 16,450 15,532
Income taxes 2,535 2,306 2,253 2,366 1,690
Net income 6,109 5,559 5,157 5,434 3,921
Dividends Declared on Preferred Shares - - - (3 ) (435 )
Accretion on Preferred Shares - - - (8 ) (305 )
Redemption on Preferred Shares - - - - 642
Net Income Applicable to Common Shares 6,109 5,559 5,157 5,423 3,823
Tax equivalent adjustment (1)     411     409     421     427     416  
At Period End
Total assets $ 2,066,216 $ 2,039,411 $ 2,046,948 $ 2,055,672 $ 2,067,616
Earning assets 1,873,351 1,858,747 1,853,585 1,874,671 1,885,846
Loans 1,562,666 1,507,008 1,525,257 1,512,132 1,500,637
Allowance for loan losses 26,270 26,459 26,711 26,310 26,409
Deposits 1,635,708 1,656,348 1,667,472 1,609,350 1,613,611
Stockholders’ equity 264,497 262,643 258,128 255,136 249,870
Stockholders’ equity / assets 12.80 % 12.88 % 12.61 % 12.41 % 12.08 %
Goodwill     61,525     61,525     61,525     61,525     61,525  
Average Balances
Total assets $ 2,030,707 $ 2,027,906 $ 2,023,890 $ 2,047,139 $ 2,102,675
Earning assets 1,825,730 1,823,089 1,815,263 1,849,715 1,903,714
Loans 1,520,708 1,500,222 1,509,611 1,481,995 1,462,312
Deposits and interest-bearing liabilities 1,745,084 1,746,092 1,744,274 1,774,312 1,800,036
Deposits 1,644,777 1,650,772 1,633,432 1,605,749 1,629,094
Stockholders’ equity 264,293 259,625 256,304 251,592 281,031
Stockholders’ equity / assets     13.01 %   12.80 %   12.66 %   12.29 %   13.37 %
Per Common Share Data
Net Income:
Basic $ 0.63 $ 0.57 $ 0.53 $ 0.56 $ 0.39
Diluted 0.60 0.55 0.52 0.54 0.38
Dividends 0.10 0.10 0.05 0.05 0.05
Market Value:
High $ 23.75 $ 23.75 $ 19.38 $ 18.06 $ 17.46
Low 20.80 18.42 15.75 15.80 15.23
Close 22.55 23.32 19.19 17.26 17.12
Common Book Value 26.97 26.80 26.44 26.13 25.49
Shares outstanding, end of period (in thousands)     9,776     9,766     9,729     9,729     9,729  
Performance Ratios (annualized)
Tax-equivalent net interest margin (1) 3.82 % 3.78 % 3.92 % 3.80 % 3.75 %
Return on average assets 1.21 % 1.11 % 1.01 % 1.06 % 0.75 %
Return on average equity 9.27 % 8.68 % 8.00 % 8.59 % 5.61 %
Efficiency ratio (2) 62.36 % 66.55 % 66.48 % 65.07 % 61.45 %
Effective tax rate 29.33 % 29.32 % 30.40 % 30.33 % 30.12 %
Common dividend payout ratio (basic)     15.87 %   17.54 %   9.43 %   8.93 %   12.82 %
 

(1)
 

Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%

(2)

Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains, net.
 
Selected Quarterly Information          
First Defiance Financial Corp.
 
(dollars in thousands, except per share data)   2nd Qtr 2013   1st Qtr 2013   4th Qtr 2012   3rd Qtr 2012   2nd Qtr 2012
Loan Portfolio Composition
One to four family residential real estate $ 196,802 $ 197,675 $ 200,826 $ 210,053 $ 210,520
Construction 41,519 33,398 37,788 31,428 22,923
Commercial real estate 820,412 802,098 797,385 792,351 775,526
Commercial 396,158 365,551 383,817 365,510 372,266
Consumer finance 16,817 15,549 15,936 16,785 17,127
Home equity and improvement   106,570       106,524       108,718       111,563       112,427  
Total loans 1,578,278 1,520,795 1,544,470 1,527,690 1,510,789
Less:
Loans in process 14,876 13,084 18,478 14,831 9,439
Deferred loan origination fees 736 703 735 727 713
Allowance for loan loss   26,270       26,459       26,711       26,310       26,409  
Net Loans $ 1,536,396     $ 1,480,549     $ 1,498,546     $ 1,485,822     $ 1,474,228  
                     
Allowance for loan loss activity
Beginning allowance 26,459 26,711 26,310 26,409 $ 28,833
Provision for loan losses 448 425 2,618 705 4,097
Credit loss charge-offs:
One to four family residential real estate 184 206 976 217 584
Commercial real estate 283 266 593 780 5,448
Commercial 316 205 541 355 486
Consumer finance 8 46 59 19 14
Home equity and improvement   170       272       497       203       254  
Total charge-offs 961 995 2,666 1,574 6,786
Total recoveries   324       318       449       770       265  
Net charge-offs (recoveries)   637       677       2,217       804       6,521  
Ending allowance $ 26,270     $ 26,459     $ 26,711     $ 26,310     $ 26,409  
                     
Credit Quality
Total non-performing loans (1) $ 28,650 $ 35,283 $ 32,570 $ 37,803 $ 41,702
Real estate owned (REO)   6,546       4,313       3,805       2,843       3,538  
Total non-performing assets (2) $ 35,196     $ 39,596     $ 36,375     $ 40,646     $ 45,240  
Net charge-offs 637 677 2,217 804 6,521
 
Restructured loans, accruing (3) 28,732 27,981 28,203 4,305 3,581
 
Allowance for loan losses / loans 1.68 % 1.76 % 1.75 % 1.74 % 1.76 %
Allowance for loan losses / non-performing assets 74.64 % 66.82 % 73.43 % 64.73 % 58.38 %
Allowance for loan losses / non-performing loans 91.69 % 74.99 % 82.01 % 69.60 % 63.33 %
Non-performing assets / loans plus REO 2.24 % 2.62 % 2.38 % 2.68 % 3.01 %
Non-performing assets / total assets 1.70 % 1.94 % 1.78 % 1.98 % 2.19 %
Net charge-offs / average loans (annualized) 0.17 % 0.18 % 0.59 % 0.22 % 1.78 %
                     
Deposit Balances
Non-interest-bearing demand deposits $ 301,742 $ 291,765 $ 315,132 $ 271,305 $ 261,211
Interest-bearing demand deposits and money market 659,249 681,061 664,857 636,510 628,760
Savings deposits 182,784 177,336 166,945 166,155 165,699
Retail time deposits less than $100,000 321,422 330,870 342,472 356,369 370,443
Retail time deposits greater than $100,000 168,573 173,379 176,029 176,725 180,594
National/Brokered time deposits   1,938       1,937       2,037       2,286       6,904  
Total deposits $ 1,635,708     $ 1,656,348     $ 1,667,472     $ 1,609,350     $ 1,613,611  
 

(1)
 

Non-performing loans consist of non-accrual loans.

(2)

Non-performing assets are non-performing loans plus real estate and other assets acquired by foreclosure or deed-in-lieu thereof.

(3)

Accruing restructured loans are loans with known credit problems that are not contractually past due and therefore are not included in non-performing loans.
 
Loan Delinquency Information        
First Defiance Financial Corp.
 
 
(dollars in thousands)   Total Balance   Current  

30 to 89 dayspast due
 

Non AccrualLoans
 
June 30, 2013                
One to four family residential real estate $ 196,802 $ 192,257 $ 1,480 $ 3,065
Construction 41,519 41,519 - -
Commercial real estate 820,412 799,070 1,348 19,994
Commercial 396,158 390,510 258 5,390
Consumer finance 16,817 16,628 189 -
Home equity and improvement   106,570     105,163     1,206     201
Total loans $ 1,578,278   $ 1,545,147   $ 4,481   $ 28,650
 
December 31, 2012                
One to four family residential real estate $ 200,826 $ 195,188 $ 2,036 $ 3,602
Construction 37,788 37,788 - -
Commercial real estate 797,385 773,170 1,125 23,090
Commercial 383,817 376,548 1,608 5,661
Consumer finance 15,936 15,701 235 -
Home equity and improvement   108,718     106,002     2,499     217
Total loans $ 1,544,470   $ 1,504,397   $ 7,503   $ 32,570
 
June 30, 2012                
One to four family residential real estate $ 210,520 $ 200,839 $ 1,578 $ 5,352
Construction 22,923 22,923 - -
Commercial real estate 775,526 744,657 1,234 29,000
Commercial 372,266 364,164 1,043 6,900
Consumer finance 17,127 16,906 217 4
Home equity and improvement   112,427     110,977     968     446
Total loans $ 1,510,789   $ 1,460,466   $ 5,040   $ 41,702
 

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