First Defiance Financial Corp. Announces 2010 Third Quarter Earnings

Oct 25, 2010, 17:30 ET from First Defiance Financial Corp.

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. (Nasdaq: FDEF) 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 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 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 30,

December 31,

September 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)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands, except per share data)

2010

2009

% change

2010

2009

% change

Summary of Operations

Tax-equivalent interest income (1)

$24,373

$25,796

(5.5)%

$73,456

$76,293

(3.7)%

Interest expense

6,295

7,914

(20.5)

20,128

25,643

(21.5)

Tax-equivalent net interest income (1)

18,078

17,882

1.1

53,328

50,650

5.3

Provision for loan losses

5,196

8,051

(35.5)

17,525

14,762

18.7

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

12,882

9,831

31.0

35,803

35,888

(0.2)

Investment Securities gains (losses)

(190)

(840)

(77.4)

(325)

(2,262)

(85.6)

Non-interest income-excluding securities losses

7,669

6,396

19.9

20,361

22,981

(11.4)

Non-interest expense

17,102

14,786

15.7

46,978

45,915

2.3

Non-interest expense-excluding non-core charges

17,086

14,786

15.6

46,925

45,915

2.2

One time acquisition related charges

16

-

NM

53

-

NM

Income taxes

668

(37)

(1,905.4)

2,100

3,193

(34.2)

Net Income

2,275

329

591.5

5,841

6,638

(12.0)

Dividends Declared on Preferred Shares

(463)

(473)

(2.1)

(1,388)

(1,403)

(1.1)

Accretion on Preferred Shares

(43)

(40)

7.5

(125)

(118)

5.9

Net Income Applicable to Common Shares

1,769

(184)

(1,061.4)

4,328

5,117

(15.4)

Core operating earnings (2)

2,285

329

594.5

5,875

6,638

(11.5)

Tax equivalent adjustment (1)

316

309

2.3

920

861

6.9

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

2,051,770

2,014,238

1.9

Earning assets

1,823,954

1,826,400

(0.1)

1,833,710

1,812,230

1.2

Deposits and interest-bearing liabilities

1,790,022

1,778,223

0.7

1,799,125

1,764,667

2.0

Loans

1,545,421

1,613,529

(4.2)

1,552,408

1,600,878

(3.0)

Deposits

1,585,300

1,550,369

2.3

1,586,420

1,538,986

3.1

Stockholders’ equity

240,709

234,241

2.8

237,759

231,912

2.5

Stockholders’ equity / assets

11.77%

11.54%

2.0

11.59%

11.51%

0.6

Per Common Share Data

Net Income

    Basic

$        0.22

$      (0.02)

(1,200.0)

$        0.53

$        0.63

(15.9)

    Diluted

0.22

(0.02)

(1,200.0)

0.53

0.63

(15.9)

Core operating earnings (2)

    Basic

$        0.22

$      (0.02)

(1,066.8)

$        0.54

$        0.63

(14.8)

    Diluted

0.22

(0.02)

(1,066.8)

0.54

0.63

(14.5)

Dividends

-

0.04

(100.0)

-

0.30

(100.0)

Market Value:

    High

$      10.63

$      18.33

(42.0)

$      14.85

$      18.33

(19.0)

    Low

8.55

12.00

(28.8)

8.53

3.76

126.9

    Close

10.06

14.91

(32.5)

10.06

14.91

(32.5)

Book Value

25.10

24.32

3.2

25.10

24.32

3.2

Tangible Book Value

17.21

16.45

4.6

17.21

16.45

4.6

Shares outstanding, end of period (000)

8,118

8,118

-

8,118

8,118

-

Performance Ratios (annualized)

Tax-equivalent net interest margin (1)

3.94%

3.88%

1.5

3.89%

3.73%

4.3

Return on average assets - GAAP

0.44%

0.06%

586.1

0.38%

0.44%

(13.6)

Return on average equity - GAAP

3.75%

0.56%

572.9

3.28%

3.83%

(14.2)

Efficiency ratio (3) - GAAP

66.42%

60.90%

9.1

63.75%

62.36%

2.2

Effective tax rate

22.70%

-12.67%

(279.1)

26.45%

32.48%

(18.6)

Dividend payout ratio (basic)

0.00%

-200.00%

(100.0)

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 ended

Nine Months 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 ended

Nine Months 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

2009

Average

Yield

Average

Yield

Balance

Interest(1)

Rate(2)

Balance

Interest(1)

Rate(2)

Interest-earning assets:

  Loans receivable

$ 1,545,421

$  22,266

5.72%

$ 1,613,529

$  23,812

5.85%

  Securities

159,045

1,814

4.64%

130,673

1,685

5.08%

  Interest Bearing Deposits

98,112

68

0.27%

60,822

41

0.27%

  FHLB stock

21,376

225

4.18%

21,376

258

4.79%

  Total interest-earning assets

1,823,954

24,373

5.31%

1,826,400

25,796

5.60%

  Non-interest-earning assets

221,924

203,570

Total assets

$ 2,045,878

$ 2,029,970

Deposits and Interest-bearing liabilities:

  Interest bearing deposits

$ 1,385,093

$    4,667

1.34%

$ 1,374,441

$    6,163

1.78%

  FHLB advances and other

123,566

1,187

3.81%

146,941

1,267

3.42%

  Other Borrowings

44,927

109

0.96%

44,685

140

1.24%

  Subordinated debentures

36,229

332

3.64%

36,228

344

3.77%

  Total interest-bearing liabilities

1,589,815

6,295

1.57%

1,602,295

7,914

1.96%

  Non-interest bearing deposits

200,207

-

-

175,928

-

-

Total including non-interest-bearing demand deposits

1,790,022

6,295

1.40%

1,778,223

7,914

1.77%

Other non-interest-bearing liabilities

15,147

17,506

Total liabilities

1,805,169

1,795,729

  Stockholders' equity

240,709

234,241

Total liabilities and stockholders' equity

$ 2,045,878

$ 2,029,970

Net interest income; interest rate spread

$  18,078

3.74%

$  17,882

3.64%

Net interest margin (3)

3.94%

3.88%

Average interest-earning assets  to average interest bearing liabilities

115%

114%

Nine Months Ended September 30,

2010

2009

Average

Yield

Average

Yield

Balance

Interest(1)

Rate(2)

Balance

Interest(1)

Rate(2)

Interest-earning assets:

  Loans receivable

$ 1,552,408

$  67,216

5.79%

$ 1,600,878

$  70,333

5.87%

  Securities

152,318

5,364

4.79%

126,883

5,145

5.36%

  Interest Bearing Deposits

107,608

198

0.25%

63,093

89

0.19%

  FHLB stock

21,376

678

4.24%

21,376

726

4.54%

  Total interest-earning assets

1,833,710

73,456

5.36%

1,812,230

76,293

5.61%

  Non-interest-earning assets

218,060

202,008

Total assets

$ 2,051,770

$ 2,014,238

Deposits and Interest-bearing liabilities:

  Interest bearing deposits

$ 1,393,747

$  15,192

1.46%

$ 1,366,645

$  20,206

1.98%

  FHLB advances and other

130,745

3,625

3.71%

146,994

3,865

3.52%

  Other Borrowings

45,731

329

0.96%

42,446

433

1.36%

  Subordinated debentures

36,229

982

3.62%

36,241

1,139

4.20%

  Total interest-bearing liabilities

1,606,452

20,128

1.67%

1,592,326

25,643

2.15%

  Non-interest bearing deposits

192,673

-

-

172,341

-

-

Total including non-interest-bearing demand deposits

1,799,125

20,128

1.50%

1,764,667

25,643

1.94%

Other non-interest-bearing liabilities

14,886

17,659

Total liabilities

1,814,011

1,782,326

  Stockholders' equity

237,759

231,912

Total liabilities and stockholders' equity

$ 2,051,770

$ 2,014,238

Net interest income; interest rate spread

$  53,328

3.69%

$  50,650

3.46%

Net interest margin (3)

3.89%

3.73%

Average interest-earning assets  to average interest bearing liabilities

114%

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 data)

3rd Qtr 2010

2nd Qtr 2010

1st Qtr 2010

4th Qtr 2009

3rd Qtr 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, except per share data)

3rd Qtr 2010

2nd Qtr 2010

1st Qtr 2010

4th Qtr 2009

3rd Qtr 2009

Loan Portfolio Composition

One to four family residential real estate

$     213,574

$    217,603

$    222,099

$    227,592

$    233,958

Construction

31,722

43,333

46,369

48,625

53,605

Commercial real estate

776,972

790,521

797,449

806,890

802,434

Commercial

376,452

364,281

352,923

379,408

371,881

Consumer finance

27,060

28,961

31,718

34,105

36,416

Home equity and improvement

137,747

140,969

144,826

147,977

150,379

Total loans

1,563,527

1,585,668

1,595,384

1,644,597

1,648,673

Less:

  Loans in process

9,030

13,283

17,794

26,494

23,957

  Deferred loan origination fees

951

972

988

981

1,089

 Allowance for loan loss

41,343

38,852

38,980

36,547

31,248

Net Loans

$  1,512,203

$ 1,532,561

$ 1,537,622

$ 1,580,575

$ 1,592,379

Allowance for loan loss activity

Beginning allowance

38,852

38,980

36,547

$      31,248

$      25,840

Provision for loan losses

5,196

5,440

6,889

8,470

8,051

  Credit loss charge-offs:

    One to four family residential real estate

1,164

1,135

326

884

744

    Commercial real estate

688

1,243

3,191

1,912

1,152

    Commercial

842

3,153

735

354

658

    Consumer finance

28

16

25

75

39

    Home equity and improvement

148

156

399

134

196

Total charge-offs

2,870

5,703

4,676

3,359

2,789

Total recoveries

165

135

220

188

146

Net charge-offs (recoveries)

2,705

5,568

4,456

3,171

2,643

Ending allowance

$       41,343

$      38,852

$      38,980

$      36,547

$      31,248

Credit Quality

Non-accrual loans

$       37,377

$      31,804

$      33,567

$      41,191

$      35,490

Restructured loans, accruing

8,784

8,918

7,023

6,715

4,574

Total non-performing loans (1)

46,161

40,722

40,590

47,906

40,064

Real estate owned (REO)

11,127

12,735

12,768

13,527

9,352

Total non-performing assets (2)

$       57,288

$      53,457

$      53,358

$      61,433

$      49,416

Net charge-offs

2,705

5,568

4,456

3,171

2,643

Allowance for loan losses / loans

2.66%

2.47%

2.47%

2.26%

1.92%

Allowance for loan losses / non-performing assets

72.17%

72.68%

73.05%

59.49%

63.23%

Allowance for loan losses / non-performing loans

89.56%

95.41%

96.03%

76.29%

78.00%

Non-performing assets / loans plus REO

3.66%

3.37%

3.36%

3.77%

3.03%

Non-performing assets / total assets

2.80%

2.62%

2.59%

2.99%

2.45%

Net charge-offs / average loans (annualized)

0.70%

1.44%

1.14%

0.79%

0.66%

Deposit Balances

Non-interest-bearing demand deposits

$     213,414

$    190,140

$    187,231

$    189,132

$    174,145

Interest-bearing demand deposits and money market

543,539

517,170

525,311

499,575

477,566

Savings deposits

141,190

140,473

138,364

130,156

132,333

Retail time deposits less than $100,000

485,777

527,421

539,313

550,172

544,957

Retail time deposits greater than $100,000

161,413

158,069

161,071

163,838

166,787

National/Brokered time deposits

45,315

47,247

48,294

47,353

47,297

Total deposits

$  1,590,648

$ 1,580,520

$ 1,599,584

$ 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 thousands)

Total Balance

Current

30 to 89 days past due

Non Accrual Loans

Troubled Debt 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

SOURCE First Defiance Financial Corp.



RELATED LINKS

http://www.fdef.com