First Defiance Financial Corp. Announces 2009 Fourth Quarter and Full Year Earnings

-- Net Income of $1.6 million for 2009 fourth quarter, compared with $880,000 in the fourth quarter of 2008

-- Provision for Loan Losses of $7.0 million for the fourth quarter

-- Other-Than-Temporary Impairment of $1.4 million recognized on certain investment securities

-- Recapture of $397,000 valuation allowance on Mortgage Servicing Rights

-- Deposit growth of $37.1 million in the fourth quarter

Jan 18, 2010, 18:24 ET from First Defiance Financial Corp.

DEFIANCE, Ohio, Jan. 18 /PRNewswire-FirstCall/ -- First Defiance Financial Corp. (Nasdaq: FDEF) today announced that net income for the fiscal year ended December 31, 2009 totaled $8.3 million, or $.76 per diluted common share compared to $7.4 million or $.91 per diluted common  share for the year ended December 31, 2008. The 2008 twelve month results included $1.1 million of acquisition-related charges associated with the March 14, 2008 acquisition of Pavilion Bancorp of Adrian, Michigan (Pavilion) and its subsidiary the Bank of Lenawee. Excluding the after-tax impact of those charges, First Defiance had earnings of $8.1 million, or $1.00 per diluted common share for the twelve months ended December 31, 2008. For the fourth quarter ended December 31, 2009, First Defiance earned $1.6 million or $0.14 per diluted common share compared to $880,000 or $0.09 per diluted common share for the fourth quarter of 2008.

"Despite the very difficult operating environment in 2009, the company remained profitable for the quarter and the full year of 2009," said William J. Small, Chairman, President, and Chief Executive Officer of First Defiance Financial Corp. "Our fundamental operating metrics were again very solid; however the persistent weakness in the economy and the resulting impact on asset quality is reflected in our results for the fourth quarter. Higher provision expense and additional expenses related to collections and OREO as well as charges relating to the closure of two branch office facilities had a negative effect on earnings for the quarter."  

Credit Quality

The fourth quarter 2009 results include expense for provision for loan losses of $7.0 million, compared with $3.8 million in the same period in 2008 and $8.1 million in the third quarter of 2009. "In light of the high unemployment environment, as well as the uncertainty of the commercial real estate market, we believe it is prudent to continue to build general reserves," said Small. "This decision drove the provision expense increase in the fourth quarter."  The allowance for loan loss as a percentage of average total loans increased to 2.17% at December 31, 2009 from 1.92% at September 30, 2009 and 1.52% at December 31, 2008.  

Non-performing loans totaled $47.9 million at December 31, 2009, up from $40.1 million at September 30, 2009. The December 31, 2009 balance included $41.2 million of loans that are on non-accrual or 90 days past due and another $6.7 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 $13.5 million of Real Estate Owned at December 31, 2009. For the fourth quarter of 2009, First Defiance recorded net charge-offs of $3.2 million, which represented 0.79% of average loans outstanding (annualized) for the quarter, compared with 0.66% in the third quarter of 2009 and 0.67% in the fourth quarter of 2008.

"Asset quality continues to have an impact on earnings in this economy," Small said.  "However, our delinquency numbers improved in the fourth quarter over the third quarter results and with two consecutive quarters of improvement we hope this indicates a positive trend.  We also saw a slight increase in charge-offs in the linked quarters.  We continue to devote significant resources to the monitoring and early recognition of any weaknesses in the portfolio. While we are not seeing new categories of loan problems arise in the portfolio, we are focused on the wider economic environment in which we operate. The overall reserve build was appropriate based on our general view regarding the near term direction of the local, regional and national economy."

Investment Portfolio

The Other-Than-Temporary Impairment (OTTI) charge recognized by First Defiance in the fourth quarter of 2009 totaled $1.4 million. The OTTI charge for the quarter related to three securities which were written down to a total fair value of $25,000 in the fourth quarter, and one other Trust Preferred Collateralized Debt Obligation (CDO) with a remaining book value of $243,000 and a market value of $141,000 at December 31, 2009.  The company also has one CDO that has had prior OTTI but did not have additional charges in the fourth quarter with a book value of $751,000 and a market value of $284,000 at December 31, 2009.

First Defiance has other Trust Preferred CDO investments that have not had OTTI charges with a total book value of $2.9 million and market value of $1.1 million at December 31, 2009.  The decline in value of those investments is primarily due to the overall lack of liquidity in the CDO market. These investments continue to pay principal and interest payments in accordance with the contractual terms of the securities. 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.

Net Interest Margin  

Net interest income increased to $17.5 million in the fourth quarter of 2009 compared to $16.0 million in the 2008 fourth quarter, and was basically flat with the third quarter of 2009 which was $17.6 million. Net interest margin was 3.82% for the 2009 fourth quarter compared to 3.88% in the third quarter of 2009 and 3.72% in the fourth quarter of 2008. Yield on interest earning assets declined by 55 basis points, to 5.45% in the fourth quarter of 2009 from 6.00% in the 2008 fourth quarter, while the cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 63 basis points, to 1.67% from 2.30%.

"We have a very disciplined pricing strategy that resulted in the stable net interest margin for the quarter," said Small.  "We will continue to focus on managing the margin and will adjust our pricing strategy as needed."

Non-Interest Income

Non-interest income for the 2009 fourth quarter increased to $5.6 million from $2.8 million in the fourth quarter of 2008. Loss on investment securities, net of gains of $5,000, for the fourth quarter of 2009, was $1.4 million, compared with a loss of $596,000 in the fourth quarter of 2008. Mortgage banking income increased to $2.1 million in the fourth quarter of 2009, from a loss of $636,000 for the same period in 2008. Gains from the sale of mortgage loans decreased slightly in the fourth quarter of 2009 to $1.5 million from $1.6 million in the fourth quarter of 2008. Mortgage loan servicing revenue increased $2.8 million over the fourth quarter of 2008.

First Defiance recorded a recapture of $397,000 on mortgage servicing rights (MSR) valuation adjustment in the fourth quarter of 2009, compared with a charge of $2.7 million in the fourth quarter of 2008. The MSR valuation adjustment is a reflection of the increase in the fair value of certain sectors of the Company's portfolio of mortgage servicing rights.

"The large increase in mortgage banking income this quarter compared to the fourth quarter of 2008 more than offset the increase in the Other Than Temporary Impairment charges this quarter," commented Small.  "We did see a reduction in mortgage originations compared to the first three quarters of 2009, a trend we expect to continue, but originations still out paced 2008."

Non-Interest Expenses

Total non-interest expense was $14.5 million for the quarter ended December 31, 2009, an increase from the $13.6 million of non-interest expense, which included $85,000 of acquisition-related charges recognized in the 2008 fourth quarter.

Compensation and benefits decreased by $150,000 compared to the 2008 fourth quarter. FDIC insurance expense increased to $637,000 in the fourth quarter of 2009 from $290,000 in the same period of 2008 as a result of the FDIC rate increases and higher insured deposits. Other non-interest expense increased to $3.7 million in the fourth quarter of 2009 from $2.8 million in the fourth quarter of 2008. The fourth quarter of 2009 included approximately $652,000 of write- downs and charges for two branch office facilities that are in process of closing and one branch relocation. Credit, collection and OREO-related costs were $651,000 in the quarter, a $235,000 increase over the fourth quarter of 2008. Legal, consulting and other professional service fees were $575,000 in the quarter, an increase of $234,000 over the fourth quarter of 2008. Deferred compensation expense increased $331,000 from the fourth quarter of 2008. These increases were partially offset by a recovery of $175,000 on a previously recorded loss relating to an investment advisor and decreases in marketing, credit card servicing charges and miscellaneous other operating expenses.

Annual Results

On an annual basis, earnings for 2009 were $8.3 million, an increase of $902,000 from $7.4 million in 2008. Net interest income for 2009 totaled $67.3 million, a $5.1 million or 8.2% increase over 2008. Average interest-earning assets increased to $1.8 billion for 2009 compared to $1.7 billion in 2008. Net interest margin for 2009 was 3.76%, compared with 3.80% for 2008.

The provision for loan losses for 2009 was $21.7 million, compared to $12.6 million in 2008.

Non-interest income for the twelve month period ended December 31, 2009 was $26.3 million compared to $19.1 million during the same period of 2008. The 2009 results include securities losses of $3.7 million recognized, of which $3.9 million relate to OTTI charges recognized for impaired investment securities partially offset by $284,000 of gains on the sale of securities compared with losses of $3.2 million in 2008 related to OTTI. Service fees and other charges were $13.5 million for the year compared to $13.3 million during 2008. Mortgage banking income for 2009 was $9.7 million, an increase of $6.8 million over 2008 primarily due to an increase of $4.4 million from gain on sale and $4 million due to the impact of positive valuation adjustment in 2009 on Mortgage Servicing Rights.

Non-interest expense increased to $60.4 million for the full year of 2009 from $57.8 million in 2008. Excluding the acquisition-related charges in 2008 of $1.1 million, non-interest expense increased by 6.5%. FDIC insurance expense increased by $2.3 million in large part due to the FDIC special assessment and increased assessments based on higher balances of insured deposits.

Non-interest expense also includes $3.4 million of credit, collection and OREO-related costs compared with $1.3 million in 2008.  Costs associated with the branch facilities closure and relocation were $652,000 in 2009. The year over year change in expense relating to deferred compensation was $1.05 million.  During 2009 the company recovered $190,000 associated with losses related to a former investment advisor compared with an expense of $727,000 in 2008.

Dividends

The Board of Directors has decided not to declare a cash dividend for the fourth quarter of 2009. "We expect elevated levels of nonperforming loans and loan loss provisions for the near term as well as other challenges posed by the current economic and regulatory environment," said Small.  "Therefore, we believe that this is a time to conserve capital. We believe that the fundamentals of the Company remain sound, but it will take some time to work through the problem credits precipitated by the recession and current real estate downturn. As we get these troubled assets worked through the system we expect to return to levels of profitability more consistent with the past."  

Total Assets at $2.06 Billion

Total assets at December 31, 2009 were $2.06 billion, compared to $1.96 billion at December 31, 2008. Net loans receivable (excluding loans held for sale) were $1.58 billion at December 31, 2009 compared to $1.59 billion at December 31, 2008. Total cash and cash equivalents were $121.1 million at December 31, 2009 compared with $46.1 million at December 31, 2008, an increase of $75.0 million. Total deposits at December 31, 2009 were $1.58 billion compared to $1.47 billion at December 31, 2008, an increase of $110.3 million. Non-interest bearing deposits at December 31, 2009 were $189.1 million compared to $176.1 million at December 31, 2008. Total stockholders' equity was $235.2 million at December 31, 2009 compared to $229.2 million at the December 31, 2008. Also at December 31, 2009, goodwill and other intangible assets totaled $63.5 million compared to $64.9 million at December 31, 2008.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EST) on Tuesday, January 19, 2010 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-800-860-2442. A live webcast may be accessed at http://www.talkpoint.com/viewer/starthere.asp?Pres=128810.

Audio replay of the Internet Web cast will be available at www.fdef.com until January 27, 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 35 full service branches and 47 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 and Bowling Green, 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 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 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)








December 31,


December 31,

(in thousands)

2009


2008





Assets




Cash and cash equivalents




    Cash and amounts due from depository institutions

$                      29,613 


$                      40,980 

    Interest-bearing deposits

91,503 


5,172 


121,116 


46,152 

Securities




    Available-for sale, carried at fair value

137,458 


117,575 

    Held-to-maturity, carried at amortized cost

1,920 


886 


139,378 


118,461 





Loans

1,617,122 


1,617,235 

Allowance for loan losses

(35,047)


(24,592)

Loans, net

1,582,075 


1,592,643 

Loans held for sale

10,346 


10,960 

Mortgage servicing rights

8,958 


6,611 

Accrued interest receivable

6,851 


7,293 

Federal Home Loan Bank stock

21,376 


21,376 

Bank Owned Life Insurance

30,804 


28,747 

Office properties and equipment

43,597 


47,756 

Real estate and other assets held for sale

13,527 


7,000 

Goodwill

56,585 


56,585 

Core deposit and other intangibles

6,887 


8,344 

Deferred taxes

1,630 


336 

Other assets

14,234 


5,136 

    Total Assets

$                 2,057,364 


$                 1,957,400 





Liabilities and Stockholders’ Equity




Non-interest-bearing deposits

$                    189,132 


$                    176,063 

Interest-bearing deposits

1,391,094 


1,293,849 

     Total deposits

1,580,226 


1,469,912 

Advances from Federal Home Loan Bank

146,927 


156,067 

Notes payable and other interest-bearing liabilities

48,398 


49,454 

Subordinated debentures

36,083 


36,083 

Advance payments by borrowers for tax and insurance

665 


652 

Other liabilities

9,914 


16,073 

     Total liabilities

1,822,213 


1,728,241 

Stockholders’ Equity




     Preferred stock, net of discount

36,293 


36,133 

     Common stock, net

127 


127 

     Common stock warrant

878 


878 

     Additional paid-in-capital

140,675 


140,449 

     Accumulated other comprehensive income (loss)

(158)


(1,904)

     Retained earnings

129,967 


126,114 

     Treasury stock, at cost

(72,631)


(72,638)

     Total stockholders’ equity

235,151 


229,159 

     Total Liabilities and Stockholders’ Equity

$                 2,057,364 


$                 1,957,400 










Consolidated Statements of Income (Unaudited)








First Defiance Financial Corp.









Three Months Ended


Twelve Months Ended


December 31,


December 31,

(in thousands, except per share amounts)

2009


2008


2009


2008

Interest Income:








    Loans

$        23,473 


$          24,301 


$       93,702 


$        96,522 

    Investment securities

1,385 


1,375 


5,773 


5,756 

    Interest-bearing deposits

60 



149 


123 

    FHLB stock dividends

229 


265 


955 


1,062 

Total interest income

25,147 


25,945 


100,579 


103,463 

Interest Expense:








    Deposits

5,896 


7,503 


26,102 


31,354 

    FHLB advances and other

1,249 


1,572 


5,114 


6,375 

    Subordinated debentures

332 


462 


1,471 


1,907 

    Notes Payable

137 


415 


570 


1,632 

Total interest expense

7,614 


9,952 


33,257 


41,268 

Net interest income

17,533 


15,993 


67,322 


62,195 

Provision for loan losses

6,970 


3,824 


21,732 


12,585 

Net interest income after provision for loan losses

10,563 


12,169 


45,590 


49,610 

Non-interest Income:








    Service fees and other charges

3,514 


3,512 


13,503 


13,268 

    Mortgage banking income

2,070 


(636)


9,747 


2,990 

    Gain on sale of non-mortgage loans

13 



264 


180 

    Gain on sale or call of securities



284 


22 

    Impairment on securities

(1,399)


(599)


(3,940)


(3,182)

    Insurance and investment sales commissions

1,076 


1,115 


5,021 


5,496 

    Trust income

109 


104 


415 


448 

    Income from Bank Owned Life Insurance

219 


(428)


557 


323 

    Other non-interest income

(31)


(310)


444 


(476)

Total Non-interest Income

5,576 


2,764 


26,295 


19,069 

Non-interest Expense:








    Compensation and benefits

6,258 


6,408 


27,759 


28,829 

    Occupancy

1,951 


1,922 


7,852 


7,484 

    FDIC insurance premium

637 


290 


3,350 


1,082 

    State franchise tax

326 


411 


1,994 


1,951 

    Acquisition related charges


85 



1,117 

    Data processing

1,211 


1,274 


4,541 


4,658 

    Amortization of intangibles

355 


424 


1,456 


1,459 

    Other non-interest expense

3,732 


2,757 


13,433 


11,214 

Total Non-interest Expense

14,470 


13,571 


60,385 


57,794 

Income before income taxes

1,669 


1,362 


11,500 


10,885 

Income taxes

49 


482 


3,241 


3,528 

Net Income

$          1,620 


$               880 


$         8,259 


$          7,357 









Dividends Declared on Preferred Shares

(447)


(134)


(1,850)


(134)

Accretion on Preferred Shares

(42)


(11)


(160)


(11)









Net Income Applicable to Common Shares

$          1,131 


$               735 


$         6,249 


$          7,212 









Earnings per common share:








   Basic

$            0.14 


$              0.09 


$           0.77 


$            0.91 

   Diluted

$            0.14 


$              0.09 


$           0.76 


$            0.91 









Core operating earnings per common share*:








    Basic

$            0.14 


$              0.10 


$           0.77 


$            1.01 

    Diluted

$            0.14 


$              0.10 


$           0.76 


$            1.00 









Average Shares Outstanding:








    Basic

8,117 


8,117 


8,117 


7,889 

    Diluted

8,265 


8,117 


8,196 


7,919 









* - See Non-GAAP Disclosure Reconciliations


Financial Summary and Comparison







First Defiance Financial Corp.

(Unaudited)

(Unaudited)


Three Months Ended

Twelve Months Ended


December 31,

December 31,

(dollars in thousands, except per share data)

2009

2008

% change

2009

2008

% change

Summary of Operations














Tax-equivalent interest income (1)

25,434   

26,188   

(2.9)  

101,727   

104,360   

(2.5)  

Interest expense

7,614   

9,952   

(23.5)  

33,257   

41,268   

(19.4)  

Tax-equivalent net interest income (1)

17,820   

16,236   

9.8   

68,470   

63,092   

8.5   

Provision for loan losses

6,970   

3,824   

82.3   

21,732   

12,585   

72.7   

Tax-equivalent NII after provision for loan loss (1)

10,850   

12,412   

(12.6)  

46,738   

50,507   

(7.5)  

Gain on sale or call of securities

5   

3   

66.7   

284   

22   

1,190.9   

Impairment losses on securities                                                

(1,399)  

(599)  

133.6   

(3,940)  

(3,160)  

24.7   

Non-interest income-excluding securities losses

6,970   

3,360   

107.4   

29,951   

22,207   

34.9   

Non-interest expense

14,470   

13,571   

6.6   

60,385   

57,794   

4.5   

Non-interest expense-excluding non-core charges

14,470   

13,486   

7.3   

60,385   

56,677   

6.5   

Acquisition related charges

-   

85   

NM

-   

1,117   

NM

Income taxes

49   

482   

(89.8)  

3,241   

3,528   

(8.1)  

Net Income

1,620   

880   

84.1   

8,259   

7,357   

12.3   

Dividends Declared on Preferred Shares

(447)  

(134)  

233.6   

(1,850)  

(134)  

1,280.6   

Accretion on Preferred Shares

(42)  

(11)  

281.8   

(160)  

(11)  

1,354.5   

Net Income Applicable to Common Shares

1,131   

735   

53.9   

6,249   

7,212   

(13.4)  

Core operating earnings (2)

1,620   

935   

73.3   

8,259   

8,083   

2.2   

Tax equivalent adjustment (1)

287   

243   

18.1   

1,148   

897   

28.0   

At Period End







Assets

2,057,364   

1,957,400   

5.1   




Earning assets

1,879,725   

1,773,204   

6.0   




Loans

1,617,122   

1,617,235   

(0.0)  




Allowance for loan losses

35,047   

24,592   

42.5   




Deposits

1,580,226   

1,469,912   

7.5   




Stockholders’ equity

235,151   

229,159   

2.6   




Average Balances







Assets

2,058,218   

1,938,461   

6.2   

2,025,233   

1,852,345   

9.3   

Earning assets

1,852,418   

1,730,284   

7.1   

1,822,277   

1,655,725   

10.1   

Deposits and interest-bearing liabilities

1,805,090   

1,718,315   

5.1   

1,774,772   

1,638,426   

8.3   

Loans

1,600,281   

1,591,144   

0.6   

1,600,729   

1,511,877   

5.9   

Deposits

1,572,399   

1,466,366   

7.2   

1,547,339   

1,390,815   

11.3   

Stockholders’ equity

235,164   

201,499   

16.7   

232,722   

190,872   

21.9   

Stockholders’ equity / assets

11.43%

10.39%

10.0   

11.49%

10.30%

11.6   

Per Common Share Data







Net Income







    Basic

$              0.14   

$              0.09   

55.6   

$               0.77   

$              0.91   

(15.4)  

    Diluted

0.14   

0.09   

55.6   

0.76   

0.91   

(16.5)  

Core operating earnings (2)







    Basic

$              0.14   

$              0.10   

43.2   

$               0.77   

$              1.01   

(23.5)  

    Diluted

0.14   

0.10   

40.6   

0.76   

1.00   

(23.9)  

Dividends

-   

0.17   

NM

0.295   

0.95   

(68.9)  

Market Value:







    High

$            18.93   

$            14.50   

30.6   

$             18.93   

$            22.51   

(15.9)  

    Low

10.06   

6.00   

67.7   

3.76   

6.00   

(37.3)  

    Close

11.29   

7.73   

46.1   

11.29   

7.73   

46.1   

Book Value

24.39   

23.67   

3.0   

24.39   

23.67   

3.0   

Tangible Book Value

16.57   

15.67   

5.7   

16.57   

15.67   

5.7   

Shares outstanding, end of period (000)

8,118   

8,117   

0.0   

8,118   

8,117   

0.0   

Performance Ratios (annualized)







Tax-equivalent net interest margin (1)

3.82%

3.72%

2.7   

3.76%

3.80%

(1.3)  

Return on average assets -GAAP

0.31%

0.18%

72.9   

0.41%

0.40%

2.7   

Return on average assets -Core Operating

0.31%

0.19%

62.7   

0.41%

0.44%

(6.5)  

Return on average equity- GAAP

2.73%

1.74%

57.3   

3.55%

3.85%

(7.9)  

Return on average equity- Core Operating

2.73%

1.85%

48.1   

3.55%

4.23%

(16.2)  

Efficiency ratio (3) -GAAP

58.37%

69.25%

(15.7)  

61.35%

67.75%

(9.4)  

Efficiency ratio (3) -Core Operating

58.37%

68.82%

(15.2)  

61.35%

66.45%

(7.7)  

Effective tax rate

2.94%

35.39%

(91.7)  

28.18%

32.41%

(13.0)  

Dividend payout ratio (basic)

0.00%

188.89%

NM

38.31%

104.40%

(63.3)  








(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) Core operating earnings = Net income plus after tax effect of acquisition related and other one-time charges.  See Non-GAAP Disclosure Reconciliation.

(3) 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 ended


Twelve Months Ended

Core Operating Earnings

December 31,


December 31,

(dollars in thousands, except per share data)

2009

2008


2009

2008

Net Income

$               1,620

$               880


$            8,259

$            7,357







 Acquisition related charges

                        -

                   85


                      -

              1,117

 Tax effect

                        -

                  (30)


                      -

                (391)

After-tax non-operating items

                        -

                   55


                      -

                 726

Core operating earnings

$               1,620

$               935


$            8,259

$            8,083








Acquisition related charges in 2008 reflect charges associated with the acquisition of Pavilion Bancorp.

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 ended


Twelve Months Ended


December 31,


December 31,

(dollars in thousands)

2009

2008


2009

2008







Gain from sale of mortgage loans

$               1,468 

$            1,587 


$            8,744 

$            4,395 

Mortgage loan servicing revenue (expense):






 Mortgage loan servicing revenue

751 

698 


$            2,860 

2,537 

 Amortization of mortgage servicing rights

(546)

(258)


$           (3,171)

(1,266)

 Mortgage servicing rights valuation adjustments

397 

(2,663)


$            1,314 

(2,676)


602 

(2,223)


1,003 

(1,405)

Total revenue from sale and servicing of mortgage loans

$               2,070 

$              (636)


$            9,747 

$            2,990 


Yield Analysis












First Defiance Financial Corp.













Three Months Ended December 31,


2009


2008


Average




Yield


Average




Yield


Balance


Interest(1)


Rate(2)


Balance


Interest(1)


Rate(2)

Interest-earning assets:












  Loans receivable

$                 1,600,281   


$             23,517   


5.83%


$        1,591,144   


$             24,329   


6.08%

  Securities

134,576   


1,628   


4.82%


115,165   


1,590   


5.20%

  Interest Bearing Deposits

96,185   


60   


0.25%


2,599   


4   


0.61%

  FHLB stock

21,376   


229   


4.25%


21,376   


265   


4.93%

  Total interest-earning assets

1,852,418   


25,434   


5.45%


1,730,284   


26,188   


6.00%

  Non-interest-earning assets

205,800   






208,177   





Total assets

$                 2,058,218   






$        1,938,461   





Deposits and Interest-bearing liabilities:












  Interest bearing deposits

$                 1,383,370   


$               5,896   


1.69%


$        1,293,560   


$               7,503   


2.31%

  FHLB advances and other

146,930   


1,249   


3.37%


155,954   


1,572   


4.01%

  Other Borrowings

49,649   


137   


1.09%


59,760   


415   


2.76%

  Subordinated debentures

36,112   


332   


3.65%


36,235   


462   


5.07%

  Total interest-bearing liabilities

1,616,061   


7,614   


1.87%


1,545,509   


9,952   


2.56%

  Non-interest bearing deposits

189,029   


-   


-   


172,806   


-   


-   

Total including non-interest-bearing demand deposits

1,805,090   


7,614   


1.67%


1,718,315   


9,952   


2.30%

Other non-interest-bearing liabilities

17,964   






18,647   





Total liabilities

1,823,054   






1,736,962   





  Stockholders' equity

235,164   






201,499   





Total liabilities and stockholders' equity

$                 2,058,218   






$        1,938,461   





Net interest income; interest rate spread



$             17,820   


3.58%




$             16,236   


3.44%

Net interest margin (3)





3.82%






3.72%

Average interest-earning assets  to average interest bearing liabilities





115%






112%



Twelve Months Ended December 31,


2009


2008


Average




Yield


Average




Yield


Balance


Interest(1)


Rate(2)


Balance


Interest(1)


Rate(2)

Interest-earning assets:












  Loans receivable

$                 1,600,729   


$             93,850   


5.86%


$        1,511,877   


$             96,627   


6.39%

  Securities

128,806   


6,773   


5.23%


117,972   


6,548   


5.43%

  Interest Bearing Deposits

71,366   


149   


0.21%


5,383   


123   


2.28%

  FHLB stock

21,376   


955   


4.47%


20,493   


1,062   


5.18%

  Total interest-earning assets

1,822,277   


101,727   


5.58%


1,655,725   


104,360   


6.30%

  Non-interest-earning assets

202,956   






196,620   





Total assets

$                 2,025,233   






$        1,852,345   





Deposits and Interest-bearing liabilities:












  Interest bearing deposits

$                 1,370,826   


$             26,102   


1.90%


$        1,231,363   


$             31,354   


2.55%

  FHLB advances and other

146,978   


5,114   


3.48%


160,407   


6,375   


3.97%

  Other Borrowings

44,247   


570   


1.29%


50,962   


1,632   


3.20%

  Subordinated debentures

36,208   


1,471   


4.06%


36,242   


1,907   


5.26%

  Total interest-bearing liabilities

1,598,259   


33,257   


2.08%


1,478,974   


41,268   


2.79%

  Non-interest bearing deposits

176,513   


-   


-   


159,452   


-   


-   

Total including non-interest-bearing demand deposits

1,774,772   


33,257   


1.87%


1,638,426   


41,268   


2.52%

Other non-interest-bearing liabilities

17,739   






23,047   





Total liabilities

1,792,511   






1,661,473   





  Stockholders' equity

232,722   






190,872   





Total liabilities and stockholders' equity

$                 2,025,233   






$        1,852,345   





Net interest income; interest rate spread



$             68,470   


3.50%




$             63,092   


3.51%

Net interest margin (3)





3.76%






3.80%

Average interest-earning assets  to average interest bearing liabilities





114%






112%

























(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)

4th Qtr 2009

3rd Qtr 2009

2nd Qtr 2009

1st Qtr 2009

4th Qtr 2008

Summary of Operations






Tax-equivalent interest income (1)

$               25,434   

$               25,796   

$               25,117   

$               25,379   

$               26,188   

Interest expense

7,614   

7,914   

8,643   

9,085   

9,952   

Tax-equivalent net interest income (1)

17,820   

17,882   

16,474   

16,294   

16,236   

Provision for loan losses

6,970   

8,051   

3,965   

2,746   

3,824   

Tax-equivalent NII after provision for loan losses (1)

10,850   

9,831   

12,509   

13,548   

12,412   

Investment securities gains (losses), including impairment

(1,394)  

(840)  

(750)  

(672)  

(596)  

Non-interest income (excluding securities gains/losses)

6,970   

6,396   

9,109   

7,476   

3,360   

Non-interest expense

14,470   

14,786   

16,133   

14,996   

13,571   

Acquisition related charges

-   

-   

-   

-   

85   

Income taxes

49   

(37)  

1,539   

1,691   

482   

Net income

1,620   

329   

2,901   

3,408   

880   

Dividends Declared on Preferred Shares

(447)  

(473)  

(468)  

(463)  

(134)  

Accretion on Preferred Shares

(42)  

(40)  

(40)  

(38)  

(11)  

Net Income Applicable to Common Shares

1,131   

(184)  

2,393   

2,907   

735   

Core operating earnings (2)

1,620   

329   

2,901   

3,408   

935   

Tax equivalent adjustment (1)

287   

309   

295   

257   

243   

At Period End






Total assets

$          2,057,364   

$          2,018,598   

$          2,023,563   

$          2,010,662   

$          1,957,400   

Earning assets

1,879,725   

1,845,134   

1,846,689   

1,838,397   

1,773,204   

Loans

1,617,122   

1,623,627   

1,610,460   

1,585,897   

1,617,235   

Allowance for loan losses

35,047   

31,248   

25,840   

25,694   

24,592   

Deposits

1,580,226   

1,543,085   

1,553,144   

1,540,235   

1,469,912   

Stockholders’ equity

235,151   

234,529   

232,683   

230,608   

229,159   

Stockholders’ equity / assets

11.43%

11.62%

11.50%

11.47%

11.71%

Goodwill

56,585   

56,585   

56,585   

56,585   

56,585   

Average Balances






Total assets

$          2,058,218   

$          2,029,970   

$          2,027,760   

$          1,984,985   

$          1,938,461   

Earning assets

1,852,418   

1,826,400   

1,828,272   

1,782,019   

1,730,284   

Deposits and interest-bearing liabilities

1,805,090   

1,778,223   

1,778,848   

1,736,933   

1,718,315   

Loans

1,600,281   

1,613,529   

1,592,513   

1,596,592   

1,591,144   

Deposits

1,572,399   

1,550,369   

1,552,533   

1,514,059   

1,466,366   

Stockholders’ equity

235,164   

234,241   

231,397   

230,099   

201,499   

Stockholders’ equity / assets

11.43%

11.54%

11.41%

11.59%

10.39%

Per Common Share Data






Net Income:






Basic

$                   0.14   

$                 (0.02)  

$                   0.29   

$                   0.36   

$                   0.09   

Diluted

0.14   

(0.02)  

0.29   

0.36   

0.09   

Core operating earnings (2)






Basic

0.14   

(0.02)  

0.29   

0.36   

0.10   

Diluted

0.14   

(0.02)  

0.29   

0.36   

0.10   

Dividends

0.00   

0.04   

0.085   

0.17   

0.17   

Market Value:






High

$                 18.93   

$                 18.33   

$                 14.25   

$                   8.95   

$                 14.50   

Low

10.06   

12.00   

6.10   

3.76   

6.00   

Close

11.29   

14.91   

13.00   

6.08   

7.73   

Book Value

24.39   

24.32   

24.10   

23.85   

23.67   

Shares outstanding, end of period (in thousands)

8,118   

8,118   

8,118   

8,117   

8,117   

Performance Ratios (annualized)






Tax-equivalent net interest margin (1)

3.82%

3.88%

3.61%

3.71%

3.72%

Return on average assets -GAAP

0.31%

0.06%

0.57%

0.70%

0.18%

Return on average assets -Core Operating

0.31%

0.06%

0.57%

0.70%

0.19%

Return on average equity- GAAP

2.73%

0.56%

5.03%

6.02%

1.74%

Return on average equity- Core Operating

2.73%

0.56%

5.03%

6.02%

1.85%

Efficiency ratio (3) -GAAP

58.37%

60.90%

63.06%

63.09%

69.25%

Efficiency ratio (3) -Core Operating

58.37%

60.90%

63.06%

63.09%

68.82%

Effective tax rate

2.94%

-12.67%

34.66%

33.16%

35.39%

Common dividend payout ratio (basic)

0.00%

-200.00%

29.31%

47.22%

188.89%

(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) See Non-GAAP Disclosure Reconciliation

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


Selected Quarterly Information










First Defiance Financial Corp.




















(dollars in thousands, except per share data)

4th Qtr 2009


3rd Qtr 2009


2nd Qtr 2009


1st Qtr 2009


4th Qtr 2008

Loan Portfolio Composition










One to four family residential real estate

$             227,592   


$             233,958   


$             238,000   


$             241,119   


$             251,807   

Construction

48,626   


53,605   


44,670   


50,534   


72,938   

Commercial real estate

806,889   


802,434   


768,636   


764,841   


755,740   

Commercial

379,408   


371,881   


382,434   


350,070   


356,574   

Consumer finance

34,105   


36,416   


38,074   


38,676   


41,012   

Home equity and improvement

147,977   


150,379   


151,213   


156,668   


161,106   

Total loans

1,644,597   


1,648,673   


1,623,027   


1,601,908   


1,639,177   

Less:










  Loans in process

26,494   


23,957   


11,602   


14,954   


20,892   

  Deferred loan origination fees

981   


1,089   


965   


1,057   


1,050   

 Allowance for loan loss

35,047   


31,248   


25,840   


25,694   


24,592   

Net Loans

$          1,582,075   


$          1,592,379   


$          1,584,620   


$          1,560,203   


$          1,592,643   











Allowance for loan loss activity










Beginning allowance

31,248   


25,840   


25,694   


24,592   


$               23,445   

Provision for loan losses

6,970   


8,051   


3,965   


2,746   


3,824   

  Credit loss charge-offs:










    One to four family residential real estate

884   


744   


505   


148   


369   

    Commercial real estate

1,912   


1,152   


2,066   


669   


1,480   

    Commercial

354   


658   


950   


702   


593   

    Consumer finance

75   


39   


83   


123   


224   

    Home equity and improvement

134   


196   


301   


130   


57   

Total charge-offs

3,359   


2,789   


3,905   


1,772   


2,723   

Total recoveries

188   


146   


86   


128   


46   

Net charge-offs (recoveries)

3,171   


2,643   


3,819   


1,644   


2,677   

Ending allowance

$               35,047   


$               31,248   


$               25,840   


$               25,694   


$               24,592   











Credit Quality










Non-accrual loans

$               41,191   


$               35,490   


$               35,528   


$               29,473   


$               28,017   

Restructured loans, accruing

6,715   


4,574   


4,845   


7,199   


6,250   

Total non-performing loans (1)

47,906   


40,064   


40,373   


36,672   


34,267   

Real estate owned (REO)

13,527   


9,352   


8,567   


7,839   


7,000   

Total non-performing assets (2)

$               61,433   


$               49,416   


$               48,940   


$               44,511   


$               41,267   

Net charge-offs

3,171   


2,643   


3,819   


1,644   


2,677   











Allowance for loan losses / loans

2.17%


1.92%


1.60%


1.62%


1.52%

Allowance for loan losses / non-performing assets

57.05%


63.23%


52.80%


57.73%


59.59%

Allowance for loan losses / non-performing loans

73.16%


78.00%


64.00%


70.06%


71.77%

Non-performing assets / loans plus REO

3.77%


3.03%


3.02%


2.79%


2.54%

Non-performing assets / total assets

2.99%


2.45%


2.42%


2.21%


2.11%

Net charge-offs / average loans (annualized)

0.79%


0.66%


0.96%


0.41%


0.67%











Deposit Balances










Non-interest-bearing demand deposits

$             189,132   


$             174,145   


$             180,035   


$             163,855   


$             176,063   

Interest-bearing demand deposits and money market

499,575   


477,566   


456,177   


413,104   


374,488   

Savings deposits

130,156   


132,333   


135,821   


132,590   


132,145   

Retail time deposits less than $100,000

550,172   


544,957   


568,595   


608,811   


578,245   

Retail time deposits greater than $100,000

163,838   


166,787   


165,401   


171,588   


170,485   

National/Brokered time deposits

47,353   


47,297   


47,115   


50,287   


38,486   

Total deposits

$          1,580,226   


$          1,543,085   


$          1,553,144   


$          1,540,235   


$          1,469,912   











(1)  Non-performing loans consist of non-accrual loans that are contractually past due 90 days or more and loans that are deemed impaired under the criteria of FASB Statement No. 114.

(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 thousands)

Total
Balance

Current

30 to 89
days
past due

Non
Accrual
Loans

Troubled
Debt
Restructuring







December 31, 2009






One to four family residential real estate

$                  227,592

$           215,211

$                4,331

$               5,349

$                    2,701

Construction

48,626

47,951

-

675

-

Commercial real estate

806,889

775,603

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

$               1,644,597

$        1,585,507

$              11,184

$             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







December 31, 2008






One to four family residential real estate

$                  251,807

$           241,446

$                4,676

$               4,584

$                    1,101

Construction

72,938

72,814

52

72

-

Commercial real estate

755,740

728,150

5,406

19,979

2,205

Commercial

356,574

349,078

1,671

2,881

2,944

Consumer finance

41,012

40,428

515

69

-

Home equity and improvement

161,106

155,650

5,024

432

-

Total loans

$               1,639,177

$        1,587,566

$              17,344

$             28,017

$                    6,250


SOURCE First Defiance Financial Corp.



RELATED LINKS

http://www.fdef.com