DEFIANCE, Ohio, Oct. 25 /PRNewswire-FirstCall/ --
-- Net Income of $2.3 million for 2010 third quarter, up from $329,000 in the third quarter of 2009 -- Provision for Loan Losses of $5.2 million, down from $8.1 million in the third quarter of 2009 -- Charge of $527,000 on previously recorded Mortgage Servicing Rights Assets -- Net Interest Margin of 3.94%, up from 2009 second quarter of 3.88% -- Other-Than-Temporary Impairment of $190,000 recognized on certain investment securities
First Defiance Financial Corp. today announced that net income for its third quarter ended September 30, 2010 totaled $2.3 million or $0.22 per diluted common share, compared to $329,000 or ($0.02) per diluted common share for the quarter ended September 30, 2009.
For the nine month period ended September 30, 2010, First Defiance earned $5.8 million or $0.53 per diluted common share compared to $6.6 million or $0.63 per diluted common share for the nine month period ended September 30, 2009.
"The sluggish economic environment impacted our results for the third quarter," said William J. Small, Chairman, President, and Chief Executive Officer of First Defiance Financial Corp. "Most core operating metrics were again very solid, however, additional provision expense and additional expenses related to collections and Other Real Estate Owned had a negative effect on earnings. We are pleased with the strong mortgage banking results this quarter, bolstered by the low rate environment. And despite the challenges, we saw improvement in our quarterly income this year compared to the third quarter of 2009."
Credit Quality
The third quarter 2010 results include expense for provision for loan losses of $5.2 million, compared with $8.1 million in the same period in 2009 and $5.4 million in the second quarter of 2010. "In light of the continued uncertain economic environment, including high unemployment, slower economic growth activity and the ongoing instability of the commercial real estate market, we believe it is responsible to maintain higher general reserves at this time," said Small. The allowance for loan loss as a percentage of average total loans increased to 2.66% at September 30, 2010 from 2.47% at June 30, 2010 and 1.92% at September 30, 2009.
Non-performing loans totaled $46.2 million at September 30, 2010, up from $40.1 million at September 30, 2009. The September 30, 2010 balance included $37.4 million of loans that are on non-accrual or 90 days past due and another $8.8 million of loans considered non-performing because of changes in terms granted to borrowers, although the loans are still accruing interest. In addition, First Defiance had $11.1 million of Other Real Estate Owned at September 30, 2010. For the third quarter of 2010, First Defiance recorded net charge-offs of $2.7 million, which represented 0.70% of average loans outstanding (annualized) for the quarter, compared with 1.44% in the second quarter of 2010 and 0.66% in the third quarter of 2009.
"Asset quality continues to be a drag on earnings in this economy," Small said. "We devote significant resources to the monitoring and early recognition of any weaknesses in the portfolio. While we are not seeing new specific loan problems arise in the portfolio, more credits are moving through the credit process toward final disposition. We also saw a reduction in charge-offs in the linked quarters. However, the overall continuation of the reserve build was appropriate based on our view of the near term direction of the economy. "
Investment Portfolio
The Other-Than-Temporary Impairment (OTTI) charge recognized by First Defiance in the third quarter of 2010 totaled $190,000, compared with $994,000 in the third quarter of 2009. The 2010 third quarter OTTI charge related to two Trust Preferred Collateralized Debt Obligations (CDOs) with a remaining book value of $860,000, and FNMA and FHMC stock with a remaining book balance of $35,000.
First Defiance also has other Trust Preferred CDO investments with a total book value of $2.8 million and fair value of $1.1 million at September 30, 2010. Two of these investments with a book value of $2.0 million and a fair value of $934,000 continue to pay principal and interest in accordance with the contractual terms of the securities. The decline in value of those investments is primarily due to the overall lack of liquidity in the CDO market. Management has not deemed the impairment in value of these CDO investments to be Other-Than-Temporary and, therefore, has not recognized the reduction in value of those investments in earnings. The third investment with a book value of $899,000 and a fair value of $151,000 has been written down with OTTI charges in prior periods, but the third quarter of 2010 analysis did not result in additional OTTI for this investment.
Net Interest Margin
Net interest income increased to $17.8 million in the third quarter of 2010 compared to $17.6 million in the 2009 third quarter, and was up from $17.6 million for the second quarter of 2010. Net interest margin was 3.94% for the 2010 third quarter compared to 3.88% in the third quarter of 2009. Yield on interest earning assets declined by 29 basis points, to 5.31% in the third quarter of 2010 from 5.60% in the 2009 third quarter while the cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 37 basis points, to 1.40% from 1.77%.
"Our continued focus on managing the margin and adjusting our pricing strategy in this challenging rate environment resulted in the improvement in the net interest margin this quarter," said Small "We see an extended low rate environment as one of the challenges to the net interest margin for the remainder of this year and into 2011."
Non-Interest Income
Non-interest income for the 2010 third quarter increased to $7.5 million from $5.6 million in the third quarter of 2009. Loss on investment securities in the third quarter of 2010 was $190,000 related entirely to OTTI charges, compared with a third quarter 2009 net loss of $840,000, which was comprised of OTTI charges of $994,000 offset by security gains of $154,000.
Mortgage banking income increased to $2.3 million in the third quarter of 2010, from $980,000 for the same period in 2009. Gains from the sale of mortgage loans increased in the third quarter of 2010 to $2.9 million from $1.5 million in the third quarter of 2009. Mortgage loan servicing revenue increased slightly for the 2010 third quarter compared to 2009. The increases in gains and servicing revenue were partially offset by expense increases of $284,000 for the amortization of mortgage servicing rights.
First Defiance recorded a negative valuation allowance adjustment of $527,000 on mortgage servicing rights (MSR) in the third quarter of 2010 compared to a negative valuation adjustment of $772,000 in the third quarter of 2009. The MSR valuation adjustment is a reflection of the change in the fair value of certain sectors of First Defiance's portfolio of MSRs.
Insurance and investment sale income was $1.4 million in the third quarter of 2010, up from $1.1 million in the third quarter of 2009.
"Mortgage banking activity in the third quarter picked up dramatically from the second quarter," commented Small. "In the third quarter of 2010 we generated $130 million in loans compared to $67 million in the second quarter of 2010 and $90.5 million in loans in the third quarter of 2009. Due to the lower rate environment, we also recorded additional impairment on our previously recorded servicing rights."
Non-Interest Expenses
Total non-interest expense was $17.1 million for the quarter ended September 30, 2010, which included $16,000 of acquisition-related charges attributable to the purchase of an employee benefits business in northwestern Ohio by First Insurance and Investments, Inc., an increase from the $14.8 million of non-interest expense for the quarter ended September 30, 2009.
Compensation and benefits increased by $563,000 compared to the 2009 third quarter. The increase is primarily due to adjustments in performance based variable compensation. Occupancy expense in the third quarter of 2010 was $1.7 million, down from $1.9 million in the third quarter of 2009. FDIC insurance expense increased to $907,000 in the third quarter of 2010 from $649,000 in the same period of 2009 as a result of the FDIC rate increases and higher insured deposits. Other non-interest expense increased to $5.2 million in the third quarter of 2010 from $3.7 million in the third quarter of 2009. Credit, collection and OREO-related costs increased $1.5 million over the third quarter of 2009. These increases were partially offset by decreases in marketing and postage.
Year-To-Date Results
For the nine month period ended September 30, 2010, net interest income totaled $52.4 million, compared with $49.8 million in the first nine months of 2009. Average interest-earning assets increased to $1.83 billion for the nine months of 2010 compared to $1.81 billion for the first nine months of 2009. Net interest margin for the first nine months of 2010 was 3.89%, up 16 basis points from the 3.73% margin reported in the nine month period ended September 30, 2009.
The provision for loan losses for the first nine months of 2010 was $17.5 million, compared to $14.8 million recorded during the first nine months of 2009.
Non-interest income for the first nine months of 2010 was $20.0 million compared to $20.7 million during the same period of 2009. Most of the non-interest income decline was in mortgage banking, which declined to $5.1 million for the first nine months of 2010 compared to $7.7 million in the first nine months of 2009. In addition, service fees and other charges were $9.9 million for the first nine months of 2010 compared to $10 million during the first nine months of 2009. Non-interest income for the first nine month period of 2010 was reduced by $331,000 of OTTI charges recognized for impaired investment securities compared with $2.5 million during the first nine months of 2009.
Non-interest expense increased to $47.0 million for the first nine months of 2010 from $45.9 million in 2009. Excluding one-time acquisition-related charges of $53,000, non-interest expense was $46.9 million for the first nine months of 2010. For the nine months ending September 30, 2010 compared to the same period in 2009, occupancy costs declined $600,000, FDIC insurance expense increased by $168,000, and credit, collection and OREO-related costs have increased $2.3 million. Year to date 2010 non-interest expense included the $53,000 of charges associated with the acquisition of a group medical benefits book of business and $457,000 related to the core system conversion that will take place later this year.
"We believe that we will see stronger indications of improvement in the national and local economies in the near future, but we also realize many challenges remain for certain sectors," said Small. "We have positioned First Defiance to address these challenges as the economy slowly builds back to a healthier level of activity."
Total Assets at $2.05 Billion
Total assets at September 30, 2010 were $2.05 billion, compared to $2.02 billion at September 30, 2009. Net loans receivable (excluding loans held for sale) were $1.51 billion at September 30, 2010 compared to $1.59 billion at September 30, 2009. Total cash and cash equivalents were $148.7 million at September 30, 2010 compared with $77.3 million at September 30, 2009, an increase of $71.4 million. Total deposits at September 30, 2010 were $1.59 billion compared to $1.54 billion at September 30, 2009, an increase of $47.6 million. Non-interest bearing deposits at September 30, 2010 were $213.4 million compared to $174.1 million at September 30, 2009. Total stockholders' equity was $241.0 million at September 30, 2010 compared to $234.5 million at September 30, 2009. Also at September 30, 2010, goodwill and other intangible assets totaled $64.0 million compared to $63.8 million at September 30, 2009.
Conference Call
First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, October 26, 2010 to discuss the earnings results and business trends.
The conference call may be accessed by calling 1-800-860-2442. Internet access to the call is also available (in listen-only mode) at the following URL:
http://www.talkpoint.com/viewer/starthere.asp?Pres=132180.
Audio replay of the Internet Web cast will be available at http://www.fdef.com/ until Monday November 29th, 2010 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 & Investments. First Federal operates 33 full service branches and 45 ATM locations in northwest Ohio, southeast Michigan and Fort Wayne, Indiana. First Insurance & Investments specializes in property and casualty and group health and life insurance, with offices in Defiance, Bryan, Archbold and Bowling Green, Ohio.
For more information, visit the company's Web site at http://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 OREO 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, 2009. 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) September December September 30, 31, 30, (in thousands) 2010 2009 2009 -------------- ---- ---- ---- Assets Cash and cash equivalents Cash and amounts due from depository institutions $31,662 $29,613 $30,207 Interest-bearing deposits 117,000 91,503 47,109 ------- ------ ------ 148,662 121,116 77,316 Securities Available-for sale, carried at fair value 156,355 137,458 126,985 Held-to-maturity, carried at amortized cost 918 1,920 1,697 --- ----- ----- 157,273 139,378 128,682 Loans 1,553,546 1,617,122 1,623,627 Allowance for loan losses (41,343) (36,547) (31,248) ------- ------- ------- Loans, net 1,512,203 1,580,575 1,592,379 Loans held for sale 21,613 10,346 24,340 Mortgage servicing rights 8,289 8,958 8,350 Accrued interest receivable 7,248 6,851 8,110 Federal Home Loan Bank stock 21,376 21,376 21,376 Bank Owned Life Insurance 32,751 30,804 30,585 Office properties and equipment 42,276 43,597 46,372 Real estate and other assets held for sale 11,127 13,527 9,352 Goodwill 57,556 56,585 56,585 Core deposit and other intangibles 6,485 6,888 7,242 Deferred taxes 4,865 3,289 1,305 Other assets 14,384 14,233 6,604 ------ ------ ----- Total Assets $2,046,108 $2,057,523 $2,018,598 ========== ========== ========== Liabilities and Stockholders' Equity Non-interest-bearing deposits $213,414 $189,132 $174,145 Interest-bearing deposits 1,377,234 1,391,094 1,368,940 --------- --------- --------- Total deposits 1,590,648 1,580,226 1,543,085 Advances from Federal Home Loan Bank 116,896 146,927 146,937 Notes payable and other interest-bearing liabilities 41,923 48,398 43,280 Subordinated debentures 36,083 36,083 36,083 Advance payments by borrowers for tax and insurance 501 665 492 Other liabilities 19,028 11,138 14,192 ------ ------ ------ Total liabilities 1,805,079 1,823,437 1,784,069 Stockholders' Equity Preferred stock- including warrants and amortization of discount on preferred shares 36,418 36,293 36,252 Common stock, net 127 127 127 Common stock warrant 878 878 878 Additional paid-in-capital 140,808 140,677 140,622 Accumulated other comprehensive income (loss) 2,198 (158) 446 Retained earnings 133,228 128,900 128,835 Treasury stock, at cost (72,628) (72,631) (72,631) ------- ------- ------- Total stockholders' equity 241,029 234,086 234,529 Total liabilities and stockholders' equity $2,046,108 $2,057,523 $2,018,598 ========== ========== ========== 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) 2010 2009 2010 2009 --------------------- ---- ---- ---- ---- Interest Income: Loans $22,230 $23,766 $67,104 $70,229 Investment securities 1,534 1,422 4,556 4,388 Interest-bearing deposits 68 41 198 89 FHLB stock dividends 225 258 678 726 --- --- --- --- Total interest income 24,057 25,487 72,536 75,432 Interest Expense: Deposits 4,667 6,163 15,192 20,206 FHLB advances and other 1,187 1,267 3,625 3,865 Subordinated debentures 332 344 982 1,139 Notes Payable 109 140 329 433 --- --- --- --- Total interest expense 6,295 7,914 20,128 25,643 ----- ----- ------ ------ Net interest income 17,762 17,573 52,408 49,789 Provision for loan losses 5,196 8,051 17,525 14,762 ----- ----- ------ ------ Net interest income after provision for loan losses 12,566 9,522 34,883 35,027 Non-interest Income: Service fees and other charges 3,301 3,577 9,856 9,989 Mortgage banking income 2,322 980 5,114 7,677 Gain on sale of non- mortgage loans 10 151 97 251 Gain on securities - 154 6 279 Impairment on securities (190) (994) (331) (2,541) Insurance and investment sales commissions 1,421 1,129 3,838 3,945 Trust income 118 101 372 306 Income from Bank Owned Life Insurance 226 201 917 338 Other non-interest income 271 257 167 475 --- --- --- --- Total Non-interest Income 7,479 5,556 20,036 20,719 Non-interest Expense: Compensation and benefits 7,114 6,551 20,161 21,501 Occupancy 1,734 1,860 5,264 5,901 FDIC insurance premium 907 649 2,881 2,713 State franchise tax 542 571 1,621 1,668 Data processing 1,186 1,100 3,556 3,330 Amortization of intangibles 356 355 1,139 1,101 One time acquisition related charges 16 - 53 - Other non-interest expense 5,247 3,700 12,303 9,701 ----- ----- ------ ----- Total Non-interest Expense 17,102 14,786 46,978 45,915 ------ ------ ------ ------ Income before income taxes 2,943 292 7,941 9,831 Income taxes 668 (37) 2,100 3,193 --- --- ----- ----- Net Income $2,275 $329 $5,841 $6,638 ====== ==== ====== ====== Dividends Accrued on Preferred Shares (463) (473) (1,388) (1,403) Accretion on Preferred Shares (43) (40) (125) (118) === === ==== ==== Net Income (loss) Applicable to Common Shares $1,769 $(184) $4,328 $5,117 ====== ===== ====== ====== Earnings (loss) per common share: Basic $0.22 $(0.02) $0.53 $0.63 Diluted $0.22 $(0.02) $0.53 $0.63 Core operating earnings per common share*: Basic $0.22 $(0.02) $0.54 $0.63 Diluted $0.22 $(0.02) $0.54 $0.63 Average Shares Outstanding: Basic 8,118 8,117 8,118 8,117 Diluted 8,118 8,117 8,143 8,172 * - See Non-GAAP Disclosure Reconciliations Financial Summary and Comparison First Defiance Financial Corp. (Unaudited) Three Months Ended September 30, ------------- (dollars in thousands, except per % share data) 2010 2009 change --------------------------------- ---- ---- ------- Summary of Operations Tax-equivalent interest income (1) $24,373 $25,796 (5.5)% Interest expense 6,295 7,914 (20.5) Tax-equivalent net interest income (1) 18,078 17,882 1.1 Provision for loan losses 5,196 8,051 (35.5) Tax-equivalent NII after provision for loan loss (1) 12,882 9,831 31.0 Investment Securities gains (losses) (190) (840) (77.4) Non-interest income-excluding securities losses 7,669 6,396 19.9 Non-interest expense 17,102 14,786 15.7 Non-interest expense-excluding non-core charges 17,086 14,786 15.6 One time acquisition related charges 16 - NM Income taxes 668 (37) (1,905.4) Net Income 2,275 329 591.5 Dividends Declared on Preferred Shares (463) (473) (2.1) Accretion on Preferred Shares (43) (40) 7.5 Net Income Applicable to Common Shares 1,769 (184) (1,061.4) Core operating earnings (2) 2,285 329 594.5 Tax equivalent adjustment (1) 316 309 2.3 ----------------------------- --- --- --- At Period End Assets 2,046,108 2,018,598 1.4 Earning assets 1,870,808 1,845,134 1.4 Loans 1,553,546 1,623,627 (4.3) Allowance for loan losses 41,343 31,248 32.3 Deposits 1,590,648 1,543,085 3.1 Stockholders' equity 241,029 234,529 2.8 -------------------- ------- ------- --- Average Balances Assets 2,045,878 2,029,970 0.8 Earning assets 1,823,954 1,826,400 (0.1) Deposits and interest-bearing liabilities 1,790,022 1,778,223 0.7 Loans 1,545,421 1,613,529 (4.2) Deposits 1,585,300 1,550,369 2.3 Stockholders' equity 240,709 234,241 2.8 Stockholders' equity / assets 11.77% 11.54% 2.0 ----------------------------- ----- ----- --- Per Common Share Data Net Income Basic $0.22 $(0.02) (1,200.0) Diluted 0.22 (0.02) (1,200.0) Core operating earnings (2) Basic $0.22 $(0.02) (1,066.8) Diluted 0.22 (0.02) (1,066.8) Dividends - 0.04 (100.0) Market Value: High $10.63 $18.33 (42.0) Low 8.55 12.00 (28.8) Close 10.06 14.91 (32.5) Book Value 25.10 24.32 3.2 Tangible Book Value 17.21 16.45 4.6 Shares outstanding, end of period (000) 8,118 8,118 - --------------------------------- ----- ----- --- Performance Ratios (annualized) Tax-equivalent net interest margin (1) 3.94% 3.88% 1.5 Return on average assets - GAAP 0.44% 0.06% 586.1 Return on average equity - GAAP 3.75% 0.56% 572.9 Efficiency ratio (3) - GAAP 66.42% 60.90% 9.1 Effective tax rate 22.70% -12.67% (279.1) Dividend payout ratio (basic) 0.00% -200.00% (100.0) ----------------------------- ---- ------- ------ First Defiance Financial Corp. (Unaudited) Nine Months Ended September 30, ------------- (dollars in thousands, except per % share data) 2010 2009 change --------------------------------- ---- ---- ------- Summary of Operations Tax-equivalent interest income (1) $73,456 $76,293 (3.7)% Interest expense 20,128 25,643 (21.5) Tax-equivalent net interest income (1) 53,328 50,650 5.3 Provision for loan losses 17,525 14,762 18.7 Tax-equivalent NII after provision for loan loss (1) 35,803 35,888 (0.2) Investment Securities gains (losses) (325) (2,262) (85.6) Non-interest income-excluding securities losses 20,361 22,981 (11.4) Non-interest expense 46,978 45,915 2.3 Non-interest expense-excluding non- core charges 46,925 45,915 2.2 One time acquisition related charges 53 - NM Income taxes 2,100 3,193 (34.2) Net Income 5,841 6,638 (12.0) Dividends Declared on Preferred Shares (1,388) (1,403) (1.1) Accretion on Preferred Shares (125) (118) 5.9 Net Income Applicable to Common Shares 4,328 5,117 (15.4) Core operating earnings (2) 5,875 6,638 (11.5) Tax equivalent adjustment (1) 920 861 6.9 ----------------------------- --- --- --- At Period End Assets Earning assets Loans Allowance for loan losses Deposits Stockholders' equity -------------------- Average Balances Assets 2,051,770 2,014,238 1.9 Earning assets 1,833,710 1,812,230 1.2 Deposits and interest-bearing liabilities 1,799,125 1,764,667 2.0 Loans 1,552,408 1,600,878 (3.0) Deposits 1,586,420 1,538,986 3.1 Stockholders' equity 237,759 231,912 2.5 Stockholders' equity / assets 11.59% 11.51% 0.6 ----------------------------- ----- ----- --- Per Common Share Data Net Income Basic $0.53 $0.63 (15.9) Diluted 0.53 0.63 (15.9) Core operating earnings (2) Basic $0.54 $0.63 (14.8) Diluted 0.54 0.63 (14.5) Dividends - 0.30 (100.0) Market Value: High $14.85 $18.33 (19.0) Low 8.53 3.76 126.9 Close 10.06 14.91 (32.5) Book Value 25.10 24.32 3.2 Tangible Book Value 17.21 16.45 4.6 Shares outstanding, end of period (000) 8,118 8,118 - --------------------------------- ----- ----- --- Performance Ratios (annualized) Tax-equivalent net interest margin (1) 3.89% 3.73% 4.3 Return on average assets - GAAP 0.38% 0.44% (13.6) Return on average equity - GAAP 3.28% 3.83% (14.2) Efficiency ratio (3) - GAAP 63.75% 62.36% 2.2 Effective tax rate 26.45% 32.48% (18.6) Dividend payout ratio (basic) 0.00% 46.83% (100.0) ----------------------------- ---- ----- ------ (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 Non-GAAP Disclosure Reconciliations First Defiance Financial Corp. Management believes that the presentation of the non-GAAP financial measures in this release assists investors when comparing results period-to-period in a more meaningful and consistent manner and provides a better measure of results for First Defiance's ongoing operations. Core operating earnings are net income adjusted to exclude discontinued operations, merger, integration and restructuring expenses and the results of certain significant transactions not representative of ongoing operations. Three months Nine Months ended Ended Core Operating Earnings September 30, September 30, ------------- ------------- (dollars in thousands, except per share data) 2010 2009 2010 2009 --------------------------------------- ---- ---- ---- ---- Net Income $2,275 $329 $5,841 $6,638 Acquisition related charges 16 - 53 - Tax effect (6) - (19) - --- --- --- --- After-tax non-operating items 10 - 34 - --- --- --- --- Core operating earnings $2,285 $329 $5,875 $6,638 ====== ==== ====== ====== Acquisition related charges in 2010 reflect charges associated with the purchase of the group benefits business from Andres, O'Neil & Lowe. Core operating earnings is used as the numerator to calculate core operating return on average assets, core operating return on average equity and core operating earnings per share. Additionally, non- operating items are deducted from non-interest expense in the numerator and non-interest income in the denominator of the core operating efficiency ratio disclosed in the tables. Comparable information on a GAAP basis is also provided in the tables. Income from Mortgage Banking Revenue from sales and servicing of mortgage loans consisted of the following: Three months Nine Months ended Ended September 30, September 30, ------------- ------------- (dollars in thousands) 2010 2009 2010 2009 ---------------------- ---- ---- ---- ---- Gain from sale of mortgage loans $2,886 $1,541 $5,262 $7,276 Mortgage loan servicing revenue (expense): Mortgage loan servicing revenue 761 725 2,263 2,109 Amortization of mortgage servicing rights (798) (514) (1,634) (2,625) Mortgage servicing rights valuation adjustments (527) (772) (777) 917 ---- ---- --- (564) (561) (148) 401 ---- ---- ---- --- Total revenue from sale and servicing of mortgage loans $2,322 $980 $5,114 $7,677 ====== ==== ====== ====== Yield Analysis First Defiance Financial Corp. Three Months Ended September 30, (dollars in thousands) ---------------------- 2010 ---- Average Yield Balance Interest(1) Rate(2) Interest-earning assets: Loans receivable $1,545,421 $22,266 5.72% Securities 159,045 1,814 4.64% Interest Bearing Deposits 98,112 68 0.27% FHLB stock 21,376 225 4.18% ------ --- Total interest-earning assets 1,823,954 24,373 5.31% Non-interest-earning assets 221,924 Total assets $2,045,878 ========== Deposits and Interest- bearing liabilities: Interest bearing deposits $1,385,093 $4,667 1.34% FHLB advances and other 123,566 1,187 3.81% Other Borrowings 44,927 109 0.96% Subordinated debentures 36,229 332 3.64% ------ --- Total interest-bearing liabilities 1,589,815 6,295 1.57% Non-interest bearing deposits 200,207 - - ------- --- Total including non- interest-bearing demand deposits 1,790,022 6,295 1.40% Other non-interest-bearing liabilities 15,147 ------ Total liabilities 1,805,169 Stockholders' equity 240,709 Total liabilities and stockholders' equity $2,045,878 ========== Net interest income; interest rate spread $18,078 3.74% ======= ==== Net interest margin (3) 3.94% ==== Average interest-earning assets to average interest bearing liabilities 115% === First Defiance Financial Corp. Three Months Ended September 30, (dollars in thousands) ---------------------- 2009 ---- Average Yield Balance Interest(1) Rate(2) Interest-earning assets: Loans receivable $1,613,529 $23,812 5.85% Securities 130,673 1,685 5.08% Interest Bearing Deposits 60,822 41 0.27% FHLB stock 21,376 258 4.79% ------ --- Total interest-earning assets 1,826,400 25,796 5.60% Non-interest-earning assets 203,570 Total assets $2,029,970 ========== Deposits and Interest- bearing liabilities: Interest bearing deposits $1,374,441 $6,163 1.78% FHLB advances and other 146,941 1,267 3.42% Other Borrowings 44,685 140 1.24% Subordinated debentures 36,228 344 3.77% ------ --- Total interest-bearing liabilities 1,602,295 7,914 1.96% Non-interest bearing deposits 175,928 - - ------- --- Total including non- interest-bearing demand deposits 1,778,223 7,914 1.77% Other non-interest- bearing liabilities 17,506 ------ Total liabilities 1,795,729 Stockholders' equity 234,241 Total liabilities and stockholders' equity $2,029,970 ========== Net interest income; interest rate spread $17,882 3.64% ======= ==== Net interest margin (3) 3.88% ==== Average interest-earning assets to average interest bearing liabilities 114% === Nine Months Ended September 30, ------------------------------- 2010 ---- Average Yield Balance Interest(1) Rate(2) Interest-earning assets: Loans receivable $1,552,408 $67,216 5.79% Securities 152,318 5,364 4.79% Interest Bearing Deposits 107,608 198 0.25% FHLB stock 21,376 678 4.24% ------ --- Total interest-earning assets 1,833,710 73,456 5.36% Non-interest-earning assets 218,060 Total assets $2,051,770 ========== Deposits and Interest- bearing liabilities: Interest bearing deposits $1,393,747 $15,192 1.46% FHLB advances and other 130,745 3,625 3.71% Other Borrowings 45,731 329 0.96% Subordinated debentures 36,229 982 3.62% ------ --- Total interest-bearing liabilities 1,606,452 20,128 1.67% Non-interest bearing deposits 192,673 - - ------- --- Total including non- interest-bearing demand deposits 1,799,125 20,128 1.50% Other non-interest-bearing liabilities 14,886 ------ Total liabilities 1,814,011 Stockholders' equity 237,759 Total liabilities and stockholders' equity $2,051,770 ========== Net interest income; interest rate spread $53,328 3.69% ======= ==== Net interest margin (3) 3.89% ==== Average interest-earning assets to average interest bearing liabilities 114% === Nine Months Ended September 30, ------------------------------- 2009 ---- Average Yield Balance Interest(1) Rate(2) Interest-earning assets: Loans receivable $1,600,878 $70,333 5.87% Securities 126,883 5,145 5.36% Interest Bearing Deposits 63,093 89 0.19% FHLB stock 21,376 726 4.54% ------ --- Total interest-earning assets 1,812,230 76,293 5.61% Non-interest-earning assets 202,008 Total assets $2,014,238 ========== Deposits and Interest- bearing liabilities: Interest bearing deposits $1,366,645 $20,206 1.98% FHLB advances and other 146,994 3,865 3.52% Other Borrowings 42,446 433 1.36% Subordinated debentures 36,241 1,139 4.20% ------ ----- Total interest-bearing liabilities 1,592,326 25,643 2.15% Non-interest bearing deposits 172,341 - - ------- --- Total including non- interest-bearing demand deposits 1,764,667 25,643 1.94% Other non-interest-bearing liabilities 17,659 ------ Total liabilities 1,782,326 Stockholders' equity 231,912 Total liabilities and stockholders' equity $2,014,238 ========== Net interest income; interest rate spread $50,650 3.46% ======= ==== Net interest margin (3) 3.73% ==== Average interest-earning assets to average interest bearing liabilities 114% === (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 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr data) 2010 2010 2010 2009 2009 ----------- ------- ------- ------- ------- ------- Summary of Operations Tax- equivalent interest income (1) $24,373 $24,655 $24,427 $25,434 $25,796 Interest expense 6,295 6,788 7,044 7,614 7,914 Tax- equivalent net interest income (1) 18,078 17,867 17,383 17,820 17,882 Provision for loan losses 5,196 5,440 6,889 8,470 8,051 Tax- equivalent NII after provision for loan losses (1) 12,882 12,427 10,494 9,350 9,831 Investment securities gains (losses) (190) (71) (64) (1,394) (840) Non- interest income (excluding securities gains/ losses) 7,669 5,862 6,830 6,970 6,396 Non- interest expense 17,102 15,045 14,832 14,609 14,786 Income taxes 668 808 624 (525) (37) Net income 2,275 2,059 1,506 555 329 Dividends Declared on Preferred Shares (463) (462) (463) (447) (473) Accretion on Preferred Shares (43) (42) (40) (41) (40) Net Income (loss) Applicable to Common Shares 1,769 1,555 1,003 67 (184) Tax equivalent adjustment (1) 316 306 298 287 309 ----------- --- --- --- --- --- At Period End Total assets $2,046,108 $2,038,656 $2,058,775 $2,057,523 $2,018,598 Earning assets 1,870,808 1,858,300 1,884,650 1,879,725 1,845,134 Loans 1,553,546 1,571,413 1,576,602 1,617,122 1,623,627 Allowance for loan losses 41,343 38,852 38,980 36,547 31,248 Deposits 1,590,648 1,580,520 1,599,584 1,580,226 1,543,085 Stockholders' equity 241,029 238,438 235,655 234,086 234,529 Stockholders' equity / assets 11.78% 11.70% 11.45% 11.38% 11.62% Goodwill 57,556 57,556 56,585 56,585 56,585 -------- ------ ------ ------ ------ ------ Average Balances Total assets $2,045,878 $2,060,925 $2,048,506 $2,058,219 $2,029,970 Earning assets 1,823,954 1,845,306 1,831,867 1,852,401 1,826,400 Deposits and interest- bearing liabilities 1,790,022 1,808,944 1,798,408 1,805,090 1,778,223 Loans 1,545,421 1,551,396 1,560,405 1,600,265 1,613,529 Deposits 1,585,300 1,597,820 1,576,140 1,572,399 1,550,369 Stockholders' equity 240,709 237,076 235,492 235,152 234,241 Stockholders' equity / assets 11.77% 11.50% 11.50% 11.43% 11.54% ------------- ----- ----- ----- ----- ----- Per Common Share Data Net Income: Basic $0.22 $0.19 $0.12 $0.01 $(0.02) Diluted 0.22 0.19 0.12 0.01 (0.02) Dividends - - - - 0.04 Market Value: High $10.63 $14.85 $12.33 $18.93 $18.33 Low 8.55 8.53 9.20 10.06 12.00 Close 10.06 8.94 10.12 11.29 14.91 Book Value 25.10 24.78 24.45 24.26 24.32 Shares outstanding, end of period (in thousands) 8,118 8,118 8,117 8,118 8,118 ------------- ----- ----- ----- ----- ----- Performance Ratios (annualized) Tax- equivalent net interest margin (1) 3.94% 3.89% 3.85% 3.82% 3.88% Return on average assets 0.44% 0.40% 0.30% 0.11% 0.06% Return on average equity 3.75% 3.48% 2.59% 0.94% 0.56% Efficiency ratio (2) 66.42% 63.40% 61.26% 58.93% 60.90% Effective tax rate 22.70% 28.18% 29.30% -1750.00% -12.67% Common dividend payout ratio (basic) 0.00% 0.00% 0.00% 0.00% -200.00% --------- ---- ---- ---- ---- ------- (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, 3rd Qtr 2nd Qtr 1st Qtr except per share data) 2010 2010 2010 ---------------------- -------- -------- -------- Loan Portfolio Composition One to four family residential real estate $213,574 $217,603 $222,099 Construction 31,722 43,333 46,369 Commercial real estate 776,972 790,521 797,449 Commercial 376,452 364,281 352,923 Consumer finance 27,060 28,961 31,718 Home equity and improvement 137,747 140,969 144,826 ------- ------- ------- Total loans 1,563,527 1,585,668 1,595,384 Less: Loans in process 9,030 13,283 17,794 Deferred loan origination fees 951 972 988 Allowance for loan loss 41,343 38,852 38,980 Net Loans $1,512,203 $1,532,561 $1,537,622 ========== ========== ========== Allowance for loan loss activity Beginning allowance 38,852 38,980 36,547 Provision for loan losses 5,196 5,440 6,889 Credit loss charge-offs: One to four family residential real estate 1,164 1,135 326 Commercial real estate 688 1,243 3,191 Commercial 842 3,153 735 Consumer finance 28 16 25 Home equity and improvement 148 156 399 --- --- --- Total charge-offs 2,870 5,703 4,676 Total recoveries 165 135 220 --- --- --- Net charge-offs (recoveries) 2,705 5,568 4,456 Ending allowance $41,343 $38,852 $38,980 ======= ======= ======= Credit Quality Non-accrual loans $37,377 $31,804 $33,567 Restructured loans, accruing 8,784 8,918 7,023 ----- ----- ----- Total non-performing loans (1) 46,161 40,722 40,590 Real estate owned (REO) 11,127 12,735 12,768 Total non-performing assets (2) $57,288 $53,457 $53,358 ======= ======= ======= Net charge-offs 2,705 5,568 4,456 Allowance for loan losses / loans 2.66% 2.47% 2.47% Allowance for loan losses / non-performing assets 72.17% 72.68% 73.05% Allowance for loan losses / non-performing loans 89.56% 95.41% 96.03% Non-performing assets / loans plus REO 3.66% 3.37% 3.36% Non-performing assets / total assets 2.80% 2.62% 2.59% Net charge-offs /average loans (annualized) 0.70% 1.44% 1.14% Deposit Balances Non-interest-bearing demand deposits $213,414 $190,140 $187,231 Interest-bearing demand deposits and money market 543,539 517,170 525,311 Savings deposits 141,190 140,473 138,364 Retail time deposits less than $100,000 485,777 527,421 539,313 Retail time deposits greater than $100,000 161,413 158,069 161,071 National/Brokered time deposits 45,315 47,247 48,294 Total deposits $1,590,648 $1,580,520 $1,599,584 ========== ========== ========== (dollars in thousands, except per share 4th Qtr 3rd Qtr data) 2009 2009 --------------------------------------- -------- -------- Loan Portfolio Composition One to four family residential real estate $227,592 $233,958 Construction 48,625 53,605 Commercial real estate 806,890 802,434 Commercial 379,408 371,881 Consumer finance 34,105 36,416 Home equity and improvement 147,977 150,379 ------- ------- Total loans 1,644,597 1,648,673 Less: Loans in process 26,494 23,957 Deferred loan origination fees 981 1,089 Allowance for loan loss 36,547 31,248 Net Loans $1,580,575 $1,592,379 ========== ========== Allowance for loan loss activity Beginning allowance $31,248 $25,840 Provision for loan losses 8,470 8,051 Credit loss charge-offs: One to four family residential real estate 884 744 Commercial real estate 1,912 1,152 Commercial 354 658 Consumer finance 75 39 Home equity and improvement 134 196 --- --- Total charge-offs 3,359 2,789 Total recoveries 188 146 --- --- Net charge-offs (recoveries) 3,171 2,643 Ending allowance $36,547 $31,248 ======= ======= Credit Quality Non-accrual loans $41,191 $35,490 Restructured loans, accruing 6,715 4,574 ----- ----- Total non-performing loans (1) 47,906 40,064 Real estate owned (REO) 13,527 9,352 Total non-performing assets (2) $61,433 $49,416 ======= ======= Net charge-offs 3,171 2,643 Allowance for loan losses / loans 2.26% 1.92% Allowance for loan losses /non-performing assets 59.49% 63.23% Allowance for loan losses /non-performing loans 76.29% 78.00% Non-performing assets / loans plus REO 3.77% 3.03% Non-performing assets / total assets 2.99% 2.45% Net charge-offs / average loans (annualized) 0.79% 0.66% Deposit Balances Non-interest-bearing demand deposits $189,132 $174,145 Interest-bearing demand deposits and money market 499,575 477,566 Savings deposits 130,156 132,333 Retail time deposits less than $100,000 550,172 544,957 Retail time deposits greater than $100,000 163,838 166,787 National/Brokered time deposits 47,353 47,297 Total deposits $1,580,226 $1,543,085 ========== ========== (1) Non-performing loans consist of non-accrual loans that are contractually past due 90 days or more and loans that are deemed impaired. (2) Non-performing assets are non-performing loans plus real estate and other assets acquired by foreclosure or deed-in-lieu thereof. Loan Delinquency Information First Defiance Financial Corp. (dollars in Total 30 to 89 Non Troubled thousands) Balance Current days Accrual Debt ----------- ------- ------- past due Loans Restructuring -------- ----- ------------- September 30, 2010 ------------- One to four family residential real estate $213,574 $200,573 $2,483 $6,589 $3,929 Construction 31,722 31,553 - 169 - Commercial real estate 776,972 745,663 3,420 23,421 4,468 Commercial 376,452 368,827 318 6,955 352 Consumer finance 27,060 26,842 184 34 - Home equity and improvement 137,747 135,825 1,678 209 35 ------- ------- Total loans 1,563,527 $1,509,283 $8,083 $37,377 $8,784 ========= ========== ====== ======= ====== June 30, 2010 ------------- One to four family residential real estate $217,603 $202,472 $4,790 $6,457 $3,884 Construction 43,333 43,079 - 254 - Commercial real estate 790,521 763,913 4,057 17,912 4,639 Commercial 364,281 356,500 508 6,898 375 Consumer finance 28,961 28,767 177 17 - Home equity and improvement 140,969 139,219 1,464 266 20 ------- Total loans $1,585,668 $1,533,950 $10,996 $31,804 $8,918 ========== ========== ======= ======= ====== December 31, 2009 ------------ One to four family residential real estate $227,592 $215,209 $4,333 $5,349 $2,701 Construction 48,625 47,950 - 675 - Commercial real estate 809,890 775,604 3,280 24,042 3,964 Commercial 379,408 367,592 1,151 10,615 50 Consumer finance 34,105 33,669 377 59 - Home equity and improvement 147,977 145,481 2,045 451 - ------- ------- Total loans $1,647,597 $1,585,505 $11,186 $41,191 $6,715 ========== ========== ======= ======= ====== September 30, 2009 ------------- One to four family residential real estate $233,958 $221,077 $4,637 $5,839 $2,405 Construction 53,605 53,340 71 194 - Commercial real estate 802,434 765,469 11,570 23,279 2,116 Commercial 371,881 363,739 2,525 5,564 53 Consumer finance 36,416 35,913 454 49 - Home equity and improvement 150,379 147,031 2,783 565 - ------- Total loans $1,648,673 $1,586,569 $22,040 $35,490 $4,574 ========== ========== ======= ======= ======
First Defiance Financial Corp.
CONTACT: William J. Small, Chairman, President and CEO, +1-419-782-5015,
bsmall@first-fed.com
Web Site: http://www.fdef.com/
