First Defiance Financial Corp. Announces 2013 Third Quarter Earnings

First Defiance Financial Corp. (NASDAQ: FDEF) announced today that net income for the third quarter ended September 30, 2013 totaled $5.5 million, or $0.54 per diluted common share, compared to $5.4 million or $0.54 per diluted common share for the quarter ended September 30, 2012.

“We are very pleased to report another quarter of solid earnings results, especially considering the significant reduction in mortgage banking activity due to higher mortgage rates during the quarter,” said William J. Small, Chairman, President and CEO of First Defiance Financial Corp. “Our core lines of business are performing steadily as we face many challenges within our industry and a tentative economy.”

Credit Quality

Non-performing loans totaled $30.5 million at September 30, 2013, a decrease from $37.8 million at September 30, 2012. In addition, First Defiance had $5.5 million of real estate owned at September 30, 2013 compared to $2.8 million at September 30, 2012. Accruing troubled debt restructured loans were $28.0 million at September 30, 2013 compared with $4.3 million at September 30, 2012. For the third quarter of 2013, First Defiance recorded net charge-offs of $782,000, down from $804,000 in the third quarter of 2012 and up slightly from $637,000 in the second quarter of 2013. The allowance for loan loss as a percentage of total loans was 1.66% at September 30, 2013 compared with 1.74% at September 30, 2012.

The third quarter results include expense for provision for loan losses of $476,000, compared with $705,000 for the same period in 2012 and $448,000 in the second quarter of 2013.

“Credit quality remained stable during the quarter, reflecting the progress we achieved a year ago,” said Small. “Our provision expense has benefitted from the sustained improvement.”

Net Interest Income

Net interest income of $17.2 million in the third quarter of 2013 was flat with the third quarter of 2012. The net interest margin increased to 3.84% in the third quarter of 2013 compared with 3.80% in the third quarter of 2012 and 3.82% in the second quarter of 2013. Yield on interest earning assets declined by 24 basis points, to 4.20% in the third quarter of 2013 from 4.44% in the third quarter of 2012. The cost of interest-bearing liabilities decreased by 31 basis points in the third quarter of 2013 to 0.46% from 0.77% in the third quarter of 2012.

“We are pleased with the stability we have seen in our net interest margin in this very challenging rate environment,” said Small. “We are focused on our pricing strategy throughout this persistent low rate environment.”

Non-Interest Income

First Defiance’s non-interest income for the third quarter of 2013 was $7.3 million compared with $7.8 million in the third quarter of 2012. Mortgage banking income decreased to $1.8 million in the third quarter of 2013, down from $2.2 million in the third quarter of 2012. Gains from the sale of mortgage loans decreased in the third quarter of 2013 to $894,000 from $2.9 million in the third quarter of 2012. Mortgage loan servicing revenue was $901,000 in the third quarter of 2013, up from $824,000 in the third quarter of 2012. The Company had a positive change in the valuation adjustment in mortgage servicing assets (“MSR”) of $480,000 in the third quarter of 2013 compared with a negative adjustment of $600,000 in the third 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.

Service fees and other charges were $2.6 million in the third quarter of 2013, down from $2.8 million in the third quarter of 2012.

Income from the sale of insurance and investment products increased to $2.2 million in the third quarter of 2013, from $2.0 million in the third quarter of 2012.

“We saw a reduction in the overall mortgage banking activity during the quarter driven by a steady decline in refinance activity,” continued Mr. Small. “We expect mortgage volume to be moderate to soft due to the volatility in the rate environment and the uncertain economic climate. It is encouraging to see purchase activity increase as a percentage of the overall housing market and we hope this momentum continues but that will not be enough to offset the decline in the refinance activity.”

Non-Interest Expenses

Total non-interest expense was $16.0 million in the third quarter of 2013, a decrease from $16.5 million in the third quarter of 2012.

Compensation and benefits increased to $8.7 million in the third quarter of 2013 compared to $8.2 million in the third quarter of 2012. The increase in compensation and benefits is mainly related to merit increases from a year ago and increase in medical insurance costs. FDIC insurance costs decreased to $326,000 in the third quarter of 2013 from $691,000 in the third 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 third quarter of 2013 from $1.1 million in the third quarter of 2012. Credit, collection and real estate owned costs were $579,000 in the third quarter of 2013 compared to $452,000 in the same period of 2012. Other non-interest expense was $3.1 million in the third quarter of 2013, a decrease of $170,000 with the third quarter of 2012. The third quarter of 2013 included a net reversal of accrued secondary market buy-back losses of $95,000 compared to $115,000 in losses recorded in the third quarter 2012.

Year-To-Date Results

For the nine month period ended September 30, 2013, net interest income totaled $50.6 million, compared with $51.6 million in the first nine months of 2012. Average interest-earning assets decreased to $1.821 billion in the first nine months of 2013, compared to $1.878 billion in the first nine months of 2012. Net interest margin for the first nine months of 2013 was 3.82%, up 4 basis points from the 3.78% margin reported in the nine month period ended September 30, 2012.

The provision for loan losses in the first nine months of 2013 was $1.3 million, compared to $8.3 million recorded during the first nine months of 2012.

Non-interest income for the first nine months of 2013 was $24.1 million, compared to $24.2 million during the same period of 2012. Service fees and other charges were $7.5 million for the first nine months of 2013, down from $8.1 million during the same period of 2012. Mortgage banking income increased to $7.1 million for the first nine months of 2013, compared with $6.9 million during the same period of 2012. Insurance and investment sales revenues increased to $7.5 million for the first nine months of 2013, compared with $6.7 million during the same period of 2012 mainly due to increases in contingent commission of $436,000 in 2013. Non-interest income for the first nine months of 2013 included $97,000 of gain on the sale of securities compared with $528,000 during the same period of 2012.

Non-interest expense increased to $48.9 million for the first nine months of 2013 from $48.2 million during the same period of 2012. Compensation and benefits expense was $26.0 million for the first nine months of 2013 compared with $24.8 million during the same period of 2012 primarily due to merit increases from a year ago, higher incentive expenses and an increase in medical insurance costs. Credit, collection and real estate owned costs have increased $44,000 for the first nine months of 2013 compared to the same period of 2012 and secondary market buy-back losses have increased $359,000 for the first nine months of 2013 from the same period of 2012.

Total Assets at $2.06 Billion

Total assets at September 30, 2013 were $2.06 billion, compared to $2.05 billion at December 31, 2012 and $2.06 billion at September 30, 2012. Net loans receivable (excluding loans held for sale) were $1.54 billion at September 30, 2013, compared to $1.50 billion at December 31, 2012 and $1.49 billion at September 30, 2012. Total cash and cash equivalents were $127.6 million at September 30, 2013 compared with $136.8 million at December 31, 2012 and $92.4 million at September 30, 2012. Also, at September 30, 2013, goodwill and other intangible assets totaled $65.3 million compared to $66.3 million at December 31, 2012 and $66.6 million at September 30, 2012.

Total deposits at September 30, 2013 were $1.66 billion compared with $1.67 billion at December 31, 2012 and $1.61 billion at September 30, 2012. Non-interest bearing deposits at September 30, 2013 were $300.9 million compared to $315.1 million at December 31, 2012 and $271.3 million at September 30, 2012. Total stockholders’ equity was $269.4 million at September 30, 2013 compared to $258.1 million at December 31, 2012 and $255.1 million at September 30, 2012.

Dividend to be Paid November 18

The Board of Directors declared a quarterly cash dividend of $0.10 per common share payable November 18, 2013 to shareholders of record at the close of business on November 11, 2013. The dividend represents an annual dividend of 1.52 percent based on First Defiance common stock closing price on October 25, 2013. First Defiance has approximately 9,784,737 common shares outstanding.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, October 29, 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/fdef131029.html.

Audio replay of the Internet Webcast will be available at www.fdef.com until January 28, 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 32 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.

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 (Unaudited)
First Defiance Financial Corp.
 
September 30, December 31, September 30,
(in thousands)         2013   2012   2012
 
Assets
Cash and cash equivalents
Cash and amounts due from depository institutions $ 42,629 $ 45,832 $ 32,406
Interest-bearing deposits   85,000     91,000     60,000  
127,629 136,832 92,406
Securities
Available-for sale, carried at fair value 184,119 194,101 269,098
Held-to-maturity, carried at amortized cost   407     508     585  
184,526 194,609 269,683
 
Loans 1,561,279 1,525,257 1,512,132
Allowance for loan losses   (25,964 )   (26,711 )   (26,310 )
Loans, net 1,535,315 1,498,546 1,485,822
Loans held for sale 13,391 22,064 12,201
Mortgage servicing rights 9,182 7,833 7,752
Accrued interest receivable 6,425 5,594 6,819
Federal Home Loan Bank stock 19,350 20,655 20,655
Bank Owned Life Insurance 42,504 41,832 41,591
Office properties and equipment 39,066 39,663 40,324
Real estate and other assets held for sale 5,518 3,805 2,843
Goodwill 61,525 61,525 61,525
Core deposit and other intangibles 3,793 4,738 5,083
Deferred taxes 2,253 78 -
Other assets   7,953     9,174     8,968  
Total Assets $ 2,058,430   $ 2,046,948   $ 2,055,672  
 
Liabilities and Stockholders’ Equity
Non-interest-bearing deposits $ 300,891 $ 315,132 $ 271,305
Interest-bearing deposits   1,357,601     1,352,340     1,338,045  
Total deposits 1,658,492 1,667,472 1,609,350
Advances from Federal Home Loan Bank 22,761 12,796 81,807
Notes payable and other interest-bearing liabilities 50,822 51,702 51,991
Subordinated debentures 36,083 36,083 36,083
Advance payments by borrowers for tax and insurance 1,752 1,473 971
Deferred taxes - - 1,479
Other liabilities   19,161     19,294     18,855  
Total liabilities 1,789,071 1,788,820 1,800,536
Stockholders’ Equity
Preferred stock - - -
Common stock, net 127 127 127
Common stock warrant 878 878 878
Additional paid-in-capital 136,257 136,046 136,138
Accumulated other comprehensive income 282 4,274 5,863
Retained earnings 178,181 164,103 159,433
Treasury stock, at cost   (46,366 )   (47,300 )   (47,303 )
Total stockholders’ equity   269,359     258,128     255,136  
Total Liabilities and Stockholders’ Equity $ 2,058,430   $ 2,046,948   $ 2,055,672  
 
               
                         
 
Consolidated Statements of Income (Unaudited)
First Defiance Financial Corp.
 
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts)         2013   2012 2013   2012
Interest Income:
Loans $ 17,197 $ 18,000 $ 51,040 $ 54,847
Investment securities 1,390 1,842 4,199 5,619
Interest-bearing deposits 44 43 174 249
FHLB stock dividends   205   213     631   656  
Total interest income 18,836 20,098 56,044 61,371
Interest Expense:
Deposits 1,356 1,909 4,514 6,394
FHLB advances and other 116 759 298 2,260
Subordinated debentures 150 172 452 813
Notes Payable   58   83     178   284  
Total interest expense   1,680   2,923     5,442   9,751  
Net interest income 17,156 17,175 50,602 51,620
Provision for loan losses   476   705     1,349   8,306  
Net interest income after provision for loan losses 16,680 16,470 49,253 43,314
Non-interest Income:
Service fees and other charges 2,605 2,790 7,539 8,148
Mortgage banking income 1,846 2,220 7,119 6,924
Gain on sale of non-mortgage loans 35 8 52 50
Gain on sale of securities - 103 97 528
Insurance and investment sales commissions 2,225 1,952 7,538 6,679
Trust income 196 147 545 470
Income from Bank Owned Life Insurance 212 244 672 683
Other non-interest income   170   316     535   712  
Total Non-interest Income 7,289 7,780 24,097 24,194
Non-interest Expense:
Compensation and benefits 8,718 8,245 25,991 24,760
Occupancy 1,739 2,170 5,087 5,718
FDIC insurance premium 326 691 1,257 2,031
State franchise tax 580 623 1,837 1,649
Data processing 1,318 1,140 3,812 3,477
Amortization of intangibles 296 344 945 1,068
Other non-interest expense   3,068   3,237     9,987   9,538  
Total Non-interest Expense   16,045   16,450     48,916   48,241  
Income before income taxes 7,924 7,800 24,434 19,267
Income taxes   2,445   2,366     7,286     5,759  
Net Income $ 5,479 $ 5,434   $ 17,148   $ 13,508  
 
Dividends Accrued on Preferred Shares - (3 ) - (900 )
Accretion on Preferred Shares - (8 ) - (359 )
Redemption of Preferred Shares   -   -     -   642  
 
Net Income Applicable to Common Shares $ 5,479 $ 5,423   $ 17,148 $ 12,891  
 
Earnings per common share:
Basic $ 0.56 $ 0.56 $ 1.76 $ 1.33
Diluted $ 0.54 $ 0.54 $ 1.69 $ 1.29
 
Average Shares Outstanding:
Basic 9,780 9,729 9,763 9,728
Diluted 10,212 10,000 10,160 9,993
 
                   
                                 
 
Financial Summary and Comparison

First Defiance Financial Corp.
 

 
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended

September 30,

September 30,
(dollars in thousands, except per share data)         2013   2012   % change     2013   2012   % change
Summary of Operations
Tax-equivalent interest income (1) $ 19,242 $ 20,525 (6.3 )% $ 57,270 $ 62,605 (8.5 )%
Interest expense 1,680 2,923 (42.5 ) 5,442 9,751 (44.2 )
Tax-equivalent net interest income (1) 17,562 17,602 (0.2 ) 51,828 52,854 (1.9 )
Provision for loan losses 476 705 (32.5 ) 1,349 8,306 (83.8 )
Tax-equivalent NII after provision for loan loss (1) 17,086 16,897 1.1 50,479 44,548 13.3
Investment Securities gains - 103 (100.0 ) 97 528 (81.6 )
Impairment losses on securities - - - - - -
Non-interest income (excluding securities gains/losses) 7,289 7,677 (5.1 ) 24,000 23,666 1.4
Non-interest expense 16,045 16,450 (2.5 ) 48,916 48,241 1.4
Income taxes 2,445 2,366 3.3 7,286 5,759 26.5
Net Income 5,479 5,434 0.8 17,148 13,508 26.9
Dividends Declared on Preferred Shares - (3 ) (100.0 ) - (900 ) (100.0 )
Accretion on Preferred Shares - (8 ) (100.0 ) - (359 ) (100.0 )
Redemption on Preferred Shares - - - - 642 NM
Net Income Applicable to Common Shares 5,479 5,423 1.0 17,148 12,891 33.0
Tax equivalent adjustment (1)           406       427     (4.9 )       1,226       1,234     (0.6 )
At Period End
Assets 2,058,430 2,055,672 0.1
Earning assets 1,863,546 1,874,671 (0.6 )
Loans 1,561,279 1,512,132 3.3
Allowance for loan losses 25,964 26,310 (1.3 )
Deposits 1,658,492 1,609,350 3.1
Stockholders’ equity           269,359       255,136     5.6                
Average Balances
Assets 2,026,277 2,047,139 (1.0 ) 2,028,297 2,076,772 (2.3 )
Earning assets 1,816,626 1,849,715 (1.8 ) 1,820,565 1,878,032 (3.1 )
Loans 1,548,718 1,481,995 4.5 1,523,216 1,467,038 3.8
Deposits and interest-bearing liabilities 1,741,850 1,774,312 (1.8 ) 1,744,342 1,785,353 (2.3 )
Deposits 1,632,712 1,605,749 1.7 1,642,754 1,615,039 1.7
Stockholders’ equity 265,488 251,592 5.5 263,135 270,824 (2.8 )
Stockholders’ equity / assets           13.10 %     12.29 %   6.6         12.97 %     13.04 %   (0.5 )
Per Common Share Data
Net Income
Basic $ 0.56 $ 0.56 - $ 1.76 $ 1.33 32.3
Diluted 0.54 0.54 - 1.69 1.29 31.0
Dividends 0.10 0.05 100.0 0.30 0.15 100.0
Market Value:
High $ 28.46 $ 18.06 57.6 $ 28.46 $ 18.06 57.6
Low 22.49 15.80 42.3 18.42 14.41 27.8
Close 23.39 17.26 35.5 23.39 17.26 35.5
Common Book Value 27.44 26.13 5.0 27.44 26.13 5.0
Tangible Common Book Value 20.76 19.29 7.6 20.76 19.29 7.6
Shares outstanding, end of period (000)           9,785       9,729     0.6         9,776       9,729     0.5  
Performance Ratios (annualized)
Tax-equivalent net interest margin (1) 3.84 % 3.80 % 0.8 3.82 % 3.78 % 1.1
Return on average assets 1.07 % 1.06 % 1.6 1.13 % 0.87 % 30.1
Return on average equity 8.19 % 8.59 % (4.7 ) 8.71 % 6.66 % 30.8
Efficiency ratio (2) 64.56 % 65.07 % (0.8 ) 64.51 % 63.04 % 2.3
Effective tax rate 30.86 % 30.33 % 1.7 29.82 % 29.89 % (0.2 )
Dividend payout ratio (basic)           17.86 %     8.93 %   100.0         17.05 %     11.28 %   51.1  

(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 Nine Months Ended
September 30, September 30,
(dollars in thousands)         2013   2012     2013   2012
 
Gain from sale of mortgage loans $ 894 $ 2,888 $ 4,960 $ 7,890
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue 901 824 2,646 2,499
Amortization of mortgage servicing rights (429 ) (892 ) (1,752 ) (2,610 )
Mortgage servicing rights valuation adjustments   480     (600 )   1,265     (855 )
  952     (668 )   2,159     (966 )
Total revenue from sale and servicing of mortgage loans $ 1,846   $ 2,220   $ 7,119   $ 6,924  
 
                   
                                 
 
Yield Analysis
First Defiance Financial Corp.
 
Three Months Ended September 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 $ 1,548,718 $ 17,214 4.41 % $ 1,481,995 $ 18,024 4.84 %
Securities 184,413 1,779 3.83 % 274,327 2,245 3.37 %
Interest Bearing Deposits 64,142 44 0.27 % 72,738 43 0.24 %
FHLB stock   19,353   205 4.20 %   20,655   213 4.10 %
Total interest-earning assets 1,816,626 19,242 4.20 % 1,849,715 20,525 4.44 %
Non-interest-earning assets   209,651   197,424
Total assets $ 2,026,277 $ 2,047,139
Deposits and Interest-bearing liabilities:
Interest bearing deposits $ 1,330,467 $ 1,356 0.40 % $ 1,339,333 $ 1,909 0.57 %
FHLB advances and other 21,003 116 2.19 % 81,812 759 3.69 %
Subordinated debentures 36,130 150 1.65 % 36,141 172 1.89 %
Notes payable   52,005   58 0.44 %   50,610   83 0.65 %
Total interest-bearing liabilities 1,439,605 1,680 0.46 % 1,507,896 2,923 0.77 %
Non-interest bearing deposits   302,245   - -   266,416   - -
Total including non-interest-bearing demand deposits 1,741,850 1,680 0.38 % 1,774,312 2,923 0.66 %
Other non-interest-bearing liabilities   18,939   21,235
Total liabilities 1,760,789 1,795,547
Stockholders' equity   265,488   251,592
Total liabilities and stockholders' equity $ 2,026,277   $ 2,047,139  
Net interest income; interest rate spread $ 17,562 3.74 % $ 17,602 3.67 %
Net interest margin (3) 3.84 % 3.80 %
Average interest-earning assets to average interest bearing liabilities 126 % 123 %
 
 
Nine Months Ended September 30,
2013 2012
Average Yield Average Yield
Balance Interest(1) Rate Balance Interest(1) Rate
Interest-earning assets:
Loans receivable $ 1,523,216 $ 51,092 4.48 % $ 1,467,038 $ 54,925 5.00 %
Securities 192,309 5,373 3.74 % 261,628 6,775 3.58 %
Interest Bearing Deposits 85,483 174 0.27 % 128,711 249 0.26 %
FHLB stock   19,557   631 4.31 %   20,655   656 4.24 %
Total interest-earning assets 1,820,565 57,270 4.21 % 1,878,032 62,605 4.45 %
Non-interest-earning assets   207,732   198,740
Total assets $ 2,028,297 $ 2,076,772
Deposits and Interest-bearing liabilities:
Interest bearing deposits $ 1,343,564 $ 4,514 0.45 % $ 1,357,499 $ 6,394 0.63 %
FHLB advances and other 16,078 298 2.48 % 81,823 2,260 3.69 %
Subordinated debentures 36,134 452 1.67 % 36,179 813 3.00 %
Notes payable   49,376   178 0.48 %   52,312   284 0.73 %
Total interest-bearing liabilities 1,445,152 5,442 0.50 % 1,527,813 9,751 0.85 %
Non-interest bearing deposits   299,190   - -   257,540   - -
Total including non-interest-bearing demand deposits 1,744,342 5,442 0.42 % 1,785,353 9,751 0.73 %
Other non-interest-bearing liabilities   20,820   20,595
Total liabilities 1,765,162 1,805,948
Stockholders' equity   263,135   270,824
Total liabilities and stockholders' equity $ 2,028,297   $ 2,076,772  
Net interest income; interest rate spread $ 51,828 3.70 % $ 52,854 3.60 %
Net interest margin (3) 3.82 % 3.78 %
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)         3rd Qtr 2013   2nd Qtr 2013   1st Qtr 2013   4th Qtr 2012   3rd Qtr 2012
Summary of Operations
Tax-equivalent interest income (1) $ 19,242 $ 19,143 $ 18,885 $ 19,993 $ 20,525
Interest expense 1,680 1,814 1,949 2,186 2,923
Tax-equivalent net interest income (1) 17,562 17,329 16,936 17,807 17,602
Provision for loan losses 476 448 425 2,618 705
Tax-equivalent NII after provision for loan losses (1) 17,086 16,881 16,511 15,189 16,897
Investment securities gains, net of impairment - 44 53 1,606 103
Non-interest income (excluding securities gains/losses) 7,289 7,804 8,909 8,574 7,677
Non-interest expense 16,045 15,674 17,199 17,538 16,450
Income taxes 2,445 2,535 2,306 2,253 2,366
Net income 5,479 6,109 5,559 5,157 5,434
Dividends Declared on Preferred Shares - - - - (3 )
Accretion on Preferred Shares - - - - (8 )
Redemption on Preferred Shares - - - - -
Net Income Applicable to Common Shares 5,479 6,109 5,559 5,157 5,423
Tax equivalent adjustment (1)           406       411       409       421       427  
At Period End
Total assets $ 2,058,430 $ 2,066,216 $ 2,039,411 $ 2,046,948 $ 2,055,672
Earning assets 1,863,546 1,873,351 1,858,747 1,853,585 1,874,671
Loans 1,561,279 1,562,666 1,507,008 1,525,257 1,512,132
Allowance for loan losses 25,964 26,270 26,459 26,711 26,310
Deposits 1,658,492 1,635,708 1,656,348 1,667,472 1,609,350
Stockholders’ equity 269,359 264,497 262,643 258,128 255,136
Stockholders’ equity / assets 13.09 % 12.80 % 12.88 % 12.61 % 12.41 %
Goodwill           61,525       61,525       61,525       61,525       61,525  
Average Balances
Total assets $ 2,026,277 $ 2,030,707 $ 2,027,906 $ 2,023,890 $ 2,047,139
Earning assets 1,816,626 1,825,730 1,823,089 1,815,263 1,849,715
Loans 1,548,718 1,520,708 1,500,222 1,509,611 1,481,995
Deposits and interest-bearing liabilities 1,741,850 1,745,084 1,746,092 1,744,274 1,774,312
Deposits 1,632,712 1,644,777 1,650,772 1,633,432 1,605,749
Stockholders’ equity 265,488 264,293 259,625 256,304 251,592
Stockholders’ equity / assets           13.10 %     13.01 %     12.80 %     12.66 %     12.29 %
Per Common Share Data
Net Income:
Basic $ 0.56 $ 0.63 $ 0.57 $ 0.53 $ 0.56
Diluted 0.54 0.60 0.55 0.52 0.54
Dividends 0.10 0.10 0.10 0.05 0.05
Market Value:
High $ 28.46 $ 23.75 $ 23.75 $ 19.38 $ 18.06
Low 22.49 20.80 18.42 15.75 15.80
Close 23.39 22.55 23.32 19.19 17.26
Common Book Value 27.44 26.97 26.80 26.44 26.13
Shares outstanding, end of period (in thousands)           9,785       9,776       9,766       9,729       9,729  
Performance Ratios (annualized)
Tax-equivalent net interest margin (1) 3.84 % 3.82 % 3.78 % 3.92 % 3.80 %
Return on average assets 1.07 % 1.21 % 1.11 % 1.01 % 1.06 %
Return on average equity 8.19 % 9.27 % 8.68 % 8.00 % 8.59 %
Efficiency ratio (2) 64.56 % 62.36 % 66.55 % 66.48 % 65.07 %
Effective tax rate 30.86 % 29.33 % 29.32 % 30.40 % 30.33 %
Common dividend payout ratio (basic)           17.86 %     15.87 %     17.54 %     9.43 %     8.93 %

(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)         3rd Qtr 2013   2nd Qtr 2013   1st Qtr 2013   4th Qtr 2012   3rd Qtr 2012
Loan Portfolio Composition
One to four family residential real estate $ 191,984 $ 196,802 $ 197,675 $ 200,826 $ 210,053
Construction 59,567 41,519 33,398 37,788 31,428
Commercial real estate 821,115 820,412 802,098 797,385 792,351
Commercial 386,160 396,158 365,551 383,817 365,510
Consumer finance 16,659 16,817 15,549 15,936 16,785
Home equity and improvement   105,727       106,570       106,524       108,718       111,563  
Total loans 1,581,212 1,578,278 1,520,795 1,544,470 1,527,690
Less:
Loans in process 19,189 14,876 13,084 18,478 14,831
Deferred loan origination fees 744 736 703 735 727
Allowance for loan loss   25,964       26,270       26,459       26,711       26,310  
Net Loans $ 1,535,315     $ 1,536,396     $ 1,480,549     $ 1,498,546     $ 1,485,822  
                           
Allowance for loan loss activity
Beginning allowance $ 26,270 $ 26,459 $ 26,711 $ 26,310 $ 26,409
Provision for loan losses 476 448 425 2,618 705
Credit loss charge-offs:
One to four family residential real estate 78 184 206 976 217
Commercial real estate 829 283 266 593 780
Commercial 39 316 205 541 355
Consumer finance 33 8 46 59 19
Home equity and improvement   170       170       272       497       203  
Total charge-offs 1,149 961 995 2,666 1,574
Total recoveries   367       324       318       449       770  
Net charge-offs (recoveries)   782       637       677       2,217       804  
Ending allowance $ 25,964     $ 26,270     $ 26,459     $ 26,711     $ 26,310  
                           
Credit Quality
Total non-performing loans (1) $ 30,512 $ 28,650 $ 35,283 $ 32,570 $ 37,803
Real estate owned (REO)   5,518       6,546       4,313       3,805       2,843  
Total non-performing assets (2) $ 36,030     $ 35,196     $ 39,596     $ 36,375     $ 40,646  
Net charge-offs 782 637 677 2,217 804
 
Restructured loans, accruing (3) 28,010 28,732 27,981 28,203 4,305
 
Allowance for loan losses / loans 1.66 % 1.68 % 1.76 % 1.75 % 1.74 %
Allowance for loan losses / non-performing assets 72.06 % 74.64 % 66.82 % 73.43 % 64.73 %
Allowance for loan losses / non-performing loans 85.09 % 91.69 % 74.99 % 82.01 % 69.60 %
Non-performing assets / loans plus REO 2.30 % 2.24 % 2.62 % 2.38 % 2.68 %
Non-performing assets / total assets 1.75 % 1.70 % 1.94 % 1.78 % 1.98 %
Net charge-offs / average loans (annualized) 0.20 % 0.17 % 0.18 % 0.59 % 0.22 %
                           
Deposit Balances
Non-interest-bearing demand deposits $ 300,891 $ 301,742 $ 291,765 $ 315,132 $ 271,305
Interest-bearing demand deposits and money market 681,987 659,249 681,061 664,857 636,510
Savings deposits 182,271 182,784 177,336 166,945 166,155
Retail time deposits less than $100,000 318,317 321,422 330,870 342,472 356,369
Retail time deposits greater than $100,000 175,026 168,573 173,379 176,029 176,725
National/Brokered time deposits   -       1,938       1,937       2,037       2,286  
Total deposits $ 1,658,492     $ 1,635,708     $ 1,656,348     $ 1,667,472     $ 1,609,350  

(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 days past due
   

Non Accrual Loans
 
September 30, 2013                            
One to four family residential real estate $ 191,984 $ 188,065 $ 760 $ 3,159
Construction 59,567 59,567 -
Commercial real estate 821,115 802,115 574 18,426
Commercial 386,160 377,116 295 8,749
Consumer finance 16,659 16,616 43
Home equity and improvement   105,727       103,997       1,552       178
Total loans $ 1,581,212     $ 1,547,476     $ 3,224     $ 30,512
 
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
 
September 30, 2012                            
One to four family residential real estate $ 210,053 $ 202,073 $ 2,196 $ 5,784
Construction 31,428 31,428 - -
Commercial real estate 792,351 765,611 1,749 24,991
Commercial 365,510 358,452 388 6,670
Consumer finance 16,785 16,653 117 15
Home equity and improvement   111,563       109,556       1,664       343
Total loans $ 1,527,690     $ 1,483,773     $ 6,114     $ 37,803
 

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