First Defiance Announces 2009 Third Quarter Earnings
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- First Defiance Financial (FDEF) Slashes Dividend in Half
DEFIANCE, Ohio, Oct. 19 /PRNewswire-FirstCall/ -- First Defiance Financial Corp. (Nasdaq: FDEF) today announced that net income for its third quarter ended September 30, 2009 totaled $329,000, or ($0.02) per diluted common share, compared to $322,000 or $0.04 per diluted common share for the quarter ended September 30, 2008.
For the nine month period ended September 30, 2009, First Defiance earned $6.6 million or $0.63 per diluted common share compared to $6.5 million or $0.83 per diluted common share for the nine month period ended September 30, 2008. Excluding the after-tax cost of $700,000 of acquisition-related charges from the 2008 results, First Defiance earned $7.1 million or $0.91 per diluted common share for the first nine months of 2008.
"The impact of the economic environment continues to be reflected in 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, higher provision expense and additional expenses related to collections and OREO had a negative effect on earnings. Through all of this, net income remained flat with the third quarter 2008 due primarily to better net interest margin and a larger loan base this year compared to September 30, 2008."
Credit Quality
The third quarter 2009 results include expense for provision for loan losses of $8.1 million, compared with $4.9 million in the same period in 2008 and $4.0 million in the second quarter of 2009. "In light of the continued environment of high unemployment, as well as the continued uncertainty of the commercial real estate market, we believe it is prudent to build general reserves," said Small. "This decision drove the provision expense increase in the third quarter." The allowance for loan loss as a percentage of average total loans increased to 1.92% at September 30, 2009 from 1.60% at June 30, 2009 and 1.47% at September 30, 2008.
Non-performing loans totaled $40.1 million at September 30, 2009, down slightly from $40.4 million at June 30, 2009. The September 30, 2009 balance included $35.5 million of loans that are on non-accrual or 90 days past due and another $4.6 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 $9.4 million of Real Estate Owned at September 30, 2009. For the third quarter of 2009, First Defiance recorded net charge-offs of $2.6 million, which represented 0.66% of average loans outstanding (annualized) for the quarter, down from 0.96% in the second quarter of 2009.
"Asset quality continues to be a drag on earnings in this economy," Small said. "However, our delinquency numbers improved in the third quarter over the second quarter results and we hope this indicates a positive trend. We also saw a reduction 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 specific loan problems arise in the portfolio, we are focused on the overall economic environment we are operating in. The overall reserve build was appropriate based on our general view regarding 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 2009 totaled $994,000. The OTTI charge for the quarter related to one security with a book value of $163,000 at June 30, 2009, which was written down to zero in the third quarter, and four other Trust Preferred Collateralized Debt Obligations (CDOs) with a remaining book value of $2.2 million. First Defiance also has another CDO investment that had an OTTI charge in the first quarter of 2009, which has a remaining book value of $243,000 and market value of $170,000 at September 30, 2009, which has seen positive upward movement in its discounted cash flows and resulted in no additional OTTI charge for the current and previous quarter. OTTI charges are due to the deterioration of the underlying collateral and relate to the credit component of the security.
First Defiance also has other Trust Preferred CDO investments with a total book value of $2.9 million and market value of $1.2 million at September 30, 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 $17.6 million in the third quarter of 2009 compared to $16.4 million in the 2008 third quarter, and was up from $16.2 million for the second quarter of 2009. Net interest margin was 3.88% for the 2009 third quarter compared to 3.61% in the second quarter of 2009 and 3.81% in the third quarter of 2008. Yield on interest earning assets declined by 58 basis points, to 5.60% in the third quarter of 2009 from 6.18% in the 2008 third quarter while the cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 62 basis points, to 1.77% from 2.39%.
"Our disciplined pricing strategy resulted in the improved net interest margin," said Small. "We will continue to focus on managing the margin and adjusting our pricing strategy in this challenging rate environment."
Non-Interest Income
Non-interest income for the 2009 third quarter increased to $5.6 million from $4.1 million in the third quarter of 2008. Loss on investment securities, net of gains of $154,000, for the third quarter of 2009 was $840,000, which included $994,000 of OTTI charges compared with a loss of $2.1 million in the third quarter of 2008 related to OTTI charges. Mortgage banking income decreased to $980,000 in the third quarter of 2009, from $1.0 million for the same period in 2008. Gains from the sale of mortgage loans increased in the third quarter of 2009 to $1.5 million from $624,000 in the third quarter of 2008. Mortgage loan servicing revenue increased slightly for the 2009 third quarter compared to 2008. The increases in gains and servicing revenue were offset by expense increases of $246,000 for the amortization of mortgage servicing rights and increases of $736,000 for valuation adjustments.
First Defiance recorded a charge of $772,000 on mortgage servicing rights (MSR) valuation adjustment in the third quarter of 2009 compared with a charge of $36,000 in the third quarter of 2008. The MSR valuation adjustment is a reflection of the decrease in the fair value of certain sectors of the Company's portfolio of mortgage servicing rights.
"Other Than Temporary Impairment charges and the adjustment to the valuation of the mortgage servicing rights more than offset the large increase in the gain on sale of mortgages this quarter, but we increased non-interest income $1.5 million over the third quarter 2008," commented Small. "We did see a reduction in mortgage originations compared to the first two quarters of 2009, a trend we expect to continue, but originations are still ahead of the 2008 pace."
Non-Interest Expenses
Total non-interest expense was $14.8 million for the quarter ended September 30, 2009, a decrease from the $15.2 million of non-interest expense, which included $20,000 of acquisition related charges recognized in the 2008 third quarter.
Compensation and benefits decreased by $1.4 million or 18%, compared to 2008 third quarter. The decrease is primarily due to adjustments in performance based variable compensation. FDIC insurance expense increased to $649,000 in the third quarter of 2009 from $327,000 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 third quarter of 2009 from $2.8 million in the third quarter of 2008. Credit, collection and OREO-related costs increased $777,000 over the third quarter of 2008. Deferred compensation expense increased $462,000 from the third quarter of 2008. These increases were partially offset by decreases in marketing, credit card servicing charges and miscellaneous other operating expenses.
Year-To-Date Results
For the nine month period ended September 30, 2009, net interest income totaled $49.8 million, compared with $46.2 million in the first nine months of 2008. Average interest-earning assets increased to $1.81 billion for the nine months of 2009 compared to $1.63 billion for the first nine months of 2008. Net interest margin for the first nine months of 2009 was 3.73%, down 10 basis points from the 3.83% margin reported in the nine month period ended September 30, 2008.
The provision for loan losses for the nine months of 2009 was $14.8 million, compared to $8.8 million recorded during the first nine months of 2008.
Non-interest income for the first nine months of 2009 was $20.7 million compared to $16.3 million during the same period of 2008. Most of the non-interest income increase was in mortgage banking, which increased 112% to $7.7 million for the first nine months of 2009 compared to $3.6 million in the first nine months of 2008. In addition, service fees and other charges were $10.0 million for the first nine months of 2009 compared to $9.8 million during the first nine months of 2008. Non-interest income for the first nine month period of 2009 was reduced by $2.5 million of OTTI charges recognized for impaired investment securities.
Non-interest expense increased to $45.9 million for the first nine months of 2009 from $44.2 million in 2008. Excluding one-time acquisition-related charges of $1.0 million, non-interest expense was $43.2 million for the first nine months of 2008. For the nine months ending September 30, 2009 compared to the same period in 2008, FDIC insurance expense increased by $1.9 million due to increases in the assessment rates, a 2009 special assessment of $900,000 recorded in the second quarter and full utilization early in the 2008 first quarter of credits issued by the FDIC. Credit, collection and OREO-related costs have increased $1.9 million. Year to date 2008 non-interest expense included the $752,000 of expense associated with losses related to a former investment advisor.
"We are proceeding cautiously in this tentative environment," said Small. "We believe that we will see indications of improvement in the national and local economies, but we realize there are still many challenges out there for certain sectors. We also are monitoring the Washington scene for new regulatory initiatives and potential FDIC premium increases and additional assessments."
Total Assets at $2.02 Billion
Total assets at September 30, 2009 were $2.02 billion, compared to $1.96 billion at December 31, 2008. Net loans receivable (excluding loans held for sale) were $1.59 billion at September 30, 2009 compared to $1.59 billion at December 31, 2008. Total cash and cash equivalents were $77.3 million at September 30, 2009 compared with $46.1 million at December 31, 2008, an increase of $31.1 million. Total deposits at September 30, 2009 were $1.54 billion compared to $1.47 billion at December 31, 2008, an increase of $73.2 million. Non-interest bearing deposits at September 30, 2009 were $174.1 million compared to $176.1 million at December 31, 2008. Total stockholders' equity was $234.5 million at September 30, 2009 compared to $229.2 million at the December 31, 2008. Also at September 30, 2009, goodwill and other intangible assets totaled $63.8 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. (EDT) on Tuesday, October 20th 2009 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=127665.
Audio replay of the Internet Web cast will be available at www.fdef.com until Wednesday November 4th, 2009 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 Annual Report on Form 10-K for the year ended December 31, 2008. 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)
Sept. 30, Dec. 31, Sept. 30,
(in thousands) 2009 2008 2008
-----------------------------------------------------------------------
Assets
Cash and cash equivalents
Cash and amounts due from
depository institutions $30,207 $40,980 $34,230
Interest-bearing deposits 47,109 5,172 358
------ ----------------------
77,316 46,152 34,588
Securities
Available-for sale, carried
at fair value 126,985 117,575 113,036
Held-to-maturity, carried
at amortized cost 1,697 886 978
----- ----------------------
128,682 118,461 114,014
Loans 1,623,627 1,617,235 1,596,327
Allowance for loan losses (31,248) (24,592) (23,445)
------- ----------------------
Loans, net 1,592,379 1,592,643 1,572,882
Loans held for sale 24,340 10,960 9,363
Mortgage servicing rights 8,350 6,611 9,335
Accrued interest receivable 8,110 7,293 8,672
Federal Home Loan Bank stock 21,376 21,376 21,376
Bank Owned Life Insurance 30,585 28,747 29,174
Office properties and equipment 46,372 47,756 47,379
Real estate and other assets
held for sale 9,352 7,000 4,776
Goodwill 56,585 56,585 56,830
Core deposit and other
intangibles 7,242 8,344 8,771
Deferred taxes 1,305 336 -
Other assets 6,604 5,136 4,866
----- ----------------------
Total Assets $2,018,598 $1,957,400 $1,922,026
========== ======================
Liabilities and Stockholders'
Equity
Non-interest-bearing deposits $174,145 $176,063 $158,139
Interest-bearing deposits 1,368,940 1,293,849 1,277,665
--------- ----------------------
Total deposits 1,543,085 1,469,912 1,435,804
Advances from Federal Home Loan
Bank 146,937 156,067 173,581
Notes payable and other
interest-bearing liabilities 43,280 49,454 70,238
Subordinated debentures 36,083 36,083 36,083
Advance payments by borrowers
for tax and insurance 492 652 496
Deferred taxes - - 1,469
Other liabilities 14,192 16,073 14,679
------ ----------------------
Total liabilities 1,784,069 1,728,241 1,732,350
Stockholders' Equity
Preferred stock-
including warrants and
amortization of discount
on preferred shares 37,000 37,000 -
Preferred stock discount (748) (867) -
Common stock, net 127 127 127
Common stock warrant 878 878 -
Additional paid-in-
capital 140,622 140,449 140,360
Accumulated other
comprehensive income (loss) 446 (1,904) (4,933)
Retained earnings 128,835 126,114 126,760
Treasury stock, at cost (72,631) (72,638) (72,638)
------- ----------------------
Total stockholders' equity 234,529 229,159 189,676
------- ----------------------
Total liabilities and
stockholders' equity $2,018,598 $1,957,400 $1,922,026
========== ======================
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) 2009 2008 2009 2008
------------------------------------------------------------------------
Interest Income:
Loans $23,766 $24,902 $70,229 $72,220
Investment securities 1,422 1,435 4,388 4,382
Interest-bearing deposits 41 5 89 119
FHLB stock dividends 258 301 726 797
--- --- --- ---
Total interest income 25,487 26,643 75,432 77,518
Interest Expense:
Deposits 6,163 7,658 20,206 23,851
FHLB advances and other 1,267 1,603 3,865 4,803
Subordinated debentures 344 461 1,139 1,445
Notes Payable 140 555 433 1,217
--- --- --- -----
Total interest expense 7,914 10,277 25,643 31,316
----- ------ ------ ------
Net interest income 17,573 16,366 49,789 46,202
Provision for loan losses 8,051 4,907 14,762 8,761
----- ----- ------ -----
Net interest income after
provision for loan losses 9,522 11,459 35,027 37,441
Non-interest Income:
Service fees and other charges 3,577 3,717 9,989 9,756
Mortgage banking income 980 1,011 7,677 3,627
Gain on sale of non-mortgage
loans 151 134 251 177
Loss on securities (840) (2,051) (2,262) (2,564)
Insurance and investment sales
commissions 1,129 1,179 3,945 4,381
Trust income 101 114 306 343
Income from Bank Owned Life
Insurance 201 224 338 751
Other non-interest income 257 (188) 475 (166)
--- ---- --- ----
Total Non-interest Income 5,556 4,140 20,719 16,305
Non-interest Expense:
Compensation and benefits 6,551 7,980 21,501 22,421
Occupancy 1,860 1,949 5,901 5,562
FDIC insurance premium 649 327 2,713 792
State franchise tax 571 533 1,668 1,540
Acquisition related charges - 20 - 1,032
Data processing 1,100 1,221 3,330 3,384
Amortization of intangibles 355 424 1,101 1,035
Other non-interest expense 3,700 2,779 9,701 8,458
----- ----- ----- -----
Total Non-interest Expense 14,786 15,233 45,915 44,224
------ ------ ------ ------
Income before income taxes 292 366 9,831 9,522
Income taxes (37) 44 3,193 3,046
--- -- ----- -----
Net Income $329 $322 $6,638 $6,476
==== ==== ====== ======
---- -- ------ --
Dividends Accrued on Preferred
Shares (473) - (1,403) -
Accretion on Preferred Shares (40) - (118) -
=== == ==== ==
----- ---- ------ ------
Net Income Applicable to Common
Shares $(184) $322 $5,117 $6,476
===== ==== ====== ======
Earnings per common share:
Basic $(0.02) $0.04 $0.63 $0.83
Diluted $(0.02) $0.04 $0.63 $0.83
Core operating earnings per common
share*:
Basic $(0.02) $0.04 $0.63 $0.91
Diluted $(0.02) $0.04 $0.63 $0.91
Average Shares Outstanding:
Basic 8,117 8,113 8,117 7,813
Diluted 8,117 8,123 8,172 7,842
* - See Non-GAAP Disclosure Reconciliations
Financial Summary and Comparison
First Defiance Financial Corp.
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
(dollars in September 30, September 30,
thousands, except ------------- -------------
per share data)
2009 2008 % change 2009 2008 % change
-------------------------------------------------------------------------
Summary of
Operations
Tax-
equivalent
interest
income (1) 25,796 26,876 (4.0) 76,293 78,171 (2.4)
Interest
expense 7,914 10,277 (23.0) 25,643 31,316 (18.1)
Tax-equivalent
net interest
income (1) 17,882 16,599 7.7 50,650 46,855 8.1
Provision for
loan losses 8,051 4,907 64.1 14,762 8,761 68.5
Tax-equivalent
NII after
provision
for loan
loss (1) 9,831 11,692 (15.9) 35,888 38,094 (5.8)
Securities
losses (840) (2,051) (59.0) (2,262) (2,564) (11.8)
Non-interest
income-
excluding
securities
losses 6,396 6,191 3.3 22,981 18,869 21.8
Non-interest
expense 14,786 15,233 (2.9) 45,915 44,224 3.8
Non-interest
expense-
excluding
non-core
charges 14,786 15,213 (2.8) 45,915 43,192 6.3
One time
acquisition
related
charges - 20 NM - 1,032 NM
Income taxes (37) 44 (184.1) 3,193 3,046 4.8
Net Income 329 322 2.2 6,638 6,476 2.5
Dividends
Declared on
Preferred
Shares (473) - NM (1,403) - NM
Accretion on
Preferred
Shares (40) - NM (118) - NM
Net Income
Applicable
to Common
Shares (184) 322 (157.1) 5,117 6,476 (21.0)
Core operating
earnings (2) 329 335 (1.8) 6,638 7,147 (7.1)
Tax equivalent
adjustment (1) 309 233 32.6 861 653 31.9
-------------------------------------------------------------------------
At Period End
Assets 2,018,598 1,922,026 5.0
Earning
assets 1,845,134 1,741,438 6.0
Loans 1,623,627 1,596,327 1.7
Allowance for
loan losses 31,248 23,445 33.3
Deposits 1,543,085 1,435,804 7.5
Stockholders'
equity 234,529 189,676 23.6
-------------------------------------------------------------------------
Average
Balances
Assets 2,029,970 1,928,987 5.2 2,014,238 1,824,197 10.4
Earning
assets 1,826,400 1,727,343 5.7 1,812,230 1,630,873 11.1
Deposits and
interest-
bearing
liabilities 1,778,223 1,712,212 3.9 1,764,667 1,611,785 9.5
Loans 1,613,529 1,585,489 1.8 1,600,878 1,485,455 7.8
Deposits 1,550,369 1,437,273 7.9 1,538,986 1,365,631 12.7
Stockholders'
equity 234,241 194,452 20.5 231,912 187,330 23.8
Stockholders'
equity /
assets 11.54% 10.08% 14.5 11.51% 10.27% 12.1
-------------------------------------------------------------------------
Per Common
Share Data
Net Income
Basic $(0.02) $0.04 (150.0) $0.63 $0.83 (24.1)
Diluted (0.02) 0.04 (150.0) 0.63 0.83 (24.1)
Core operating
earnings (2)
Basic $(0.02) $0.04 (154.9) $0.63 $0.91 (31.1)
Diluted (0.02) 0.04 (155.0) 0.63 0.91 (31.3)
Dividends 0.04 0.26 (84.6) 0.295 0.78 (62.2)
Market Value:
High $18.33 $17.66 3.8 $18.33 $22.51 (18.6)
Low 12.00 10.00 20.0 3.76 10.00 (62.4)
Close 14.91 11.01 35.4 14.91 11.01 35.4
Book Value 24.32 23.37 4.1 24.32 23.37 4.1
Tangible Book
Value 16.45 15.29 7.6 16.45 15.29 7.6
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) 3.88% 3.81% 1.8 3.73% 3.83% (2.6)
Return on
average
assets -GAAP 0.06% 0.07% (3.2) 0.44% 0.47% (7.1)
Return on
average
assets -Core
Operating 0.06% 0.07% (6.9) 0.44% 0.52% (15.8)
Return on
average
equity- GAAP 0.56% 0.66% (15.4) 3.83% 4.62% (17.1)
Return on
average
equity-Core
Operating 0.56% 0.69% (18.7) 3.83% 5.10% (24.9)
Efficiency
ratio (3) -
GAAP 60.90% 66.84% (8.9) 62.36% 67.29% (7.3)
Efficiency
ratio (3) -
Core
Operating 60.90% 66.75% (8.8) 62.36% 65.72% (5.1)
Effective tax
rate -12.67% 12.02% (205.4) 32.48% 31.99% 1.5
Dividend
payout ratio
(basic) -200.00% 650.00% (130.8) 46.83% 93.98% (50.2)
-------------------------------------------------------------------------
(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 Nine Months
Ended Ended
Core Operating Earnings September 30, September 30,
(dollars in thousands, except per share ------------ -------------
data) 2009 2008 2009 2008
--------------------------------------------------------------------------
Net Income $329 $322 $6,638 $6,476
Acquisition related charges - 20 - 1,032
Tax effect - (7) - (361)
------------ ---------------
After-tax non-operating items - 13 - 671
------------ ---------------
Core operating earnings $329 $335 $6,638 $7,147
============ ===============
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 Nine Months
Ended Ended
September 30, September 30,
------------- -------------
(dollars in thousands) 2009 2008 2009 2008
--------------------------------------------------------------------------
Gain from sale of mortgage loans $1,541 $624 $7,276 $2,808
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue 725 691 2,109 1,839
Amortization of mortgage servicing
rights (514) (268) (2,625) (1,008)
Mortgage servicing rights valuation
adjustments (772) (36) 917 (12)
-------------- --------------
(561) 387 401 819
-------------- --------------
Total revenue from sale and servicing of
mortgage loans $980 $1,011 $7,677 $3,627
============== ==============
Yield Analysis
First Defiance Financial Corp.
Three Months Ended September 30,
---------------------------------------------------------
2009 2008
---------------------------- ----------------------------
Average Interest Yield Average Interest Yield
Balance (1) Rate(2) Balance (1) Rate(2)
Interest-earning
assets:
Loans
receivable $1,613,529 $23,812 5.85% $1,585,489 $24,934 6.26%
Securities 130,673 1,685 5.08% 118,502 1,636 5.31%
Interest
Bearing
Deposits 60,822 41 0.27% 2,231 5 0.89%
FHLB stock 21,376 258 4.79% 21,121 301 5.67%
---------- ------- ---------- -------
Total
interest-
earning
assets 1,826,400 25,796 5.60% 1,727,343 26,876 6.18%
Non-
interest-
earning
assets 203,570 201,644
---------- ----------
Total
assets $2,029,970 $1,928,987
========== ==========
Deposits and
Interest-
bearing
liabilities:
Interest
bearing
deposits $1,374,441 $6,163 1.78% $1,268,016 $7,658 2.40%
FHLB
advances
and other 146,941 1,267 3.42% 174,343 1,603 3.66%
Other
Borrowings 44,685 140 1.24% 64,368 555 3.43%
Subordinated
debentures 36,228 344 3.77% 36,228 461 5.06%
---------- ------- ---------- -------
Total
interest-
bearing
liabilities 1,602,295 7,914 1.96% 1,542,955 10,277 2.65%
Non-interest
bearing
deposits 175,928 - - 169,257 - -
---------- ------- ---------- -------
Total
including
non-interest-
bearing
demand
deposits 1,778,223 7,914 1.77% 1,712,212 10,277 2.39%
Other non-
interest-
bearing
liabilities 17,506 22,323
---------- ----------
Total
liabilities 1,795,729 1,734,535
Stockholders'
equity 234,241 194,452
---------- ----------
Total
liabilities
and
stockholders'
equity $2,029,970 $1,928,987
========== ------- ========== -------
Net interest
income;
interest
rate spread $17,882 3.64% $16,599 3.53%
======= ===== ======= =====
Net interest
margin (3) 3.88% 3.81%
===== =====
Average
interest-
earning
assets to
average
interest
bearing
liabilities 114% 112%
==== ====
Nine Months Ended September 30,
---------------------------------------------------------
2009 2008
---------------------------- ----------------------------
Average Interest Yield Average Interest Yield
Balance (1) Rate(2) Balance (1) Rate(2)
Interest-earning
assets:
Loans
receivable $1,600,878 $70,333 5.87% $1,485,455 $72,297 6.50%
Securities 126,883 5,145 5.36% 118,908 4,959 5.50%
Interest
Bearing
Deposits 63,093 89 0.19% 6,311 119 2.52%
FHLB stock 21,376 726 4.54% 20,199 797 5.27%
---------- ------- ---------- -------
Total
interest-
earning
assets 1,812,230 76,293 5.61% 1,630,873 78,172 6.40%
Non-
interest-
earning
assets 202,008 193,324
---------- ----------
Total assets $2,014,238 $1,824,197
========== ==========
Deposits and
Interest-
bearing
liabilities:
Interest
bearing
deposits $1,366,645 $20,206 1.98% $1,210,631 $23,851 2.63%
FHLB
advances
and other 146,994 3,865 3.52% 161,891 4,803 3.96%
Other
Borrowings 42,446 433 1.36% 48,018 1,217 3.39%
Subordinated
debentures 36,241 1,139 4.19% 36,245 1,445 5.33%
---------- ------- ---------- -------
Total
interest-
bearing
liabilities 1,592,326 25,643 2.15% 1,456,785 31,316 2.87%
Non-interest
bearing
deposits 172,341 - - 155,000 - -
---------- ------- ---------- -------
Total including
non-interest-
bearing demand
deposits 1,764,667 25,643 1.94% 1,611,785 31,316 2.60%
Other non-
interest-bearing
liabilities 17,659 25,082
---------- ----------
Total
liabilities 1,782,326 1,636,867
Stockholders'
equity 231,912 187,330
---------- ----------
Total liabilities
and stockholders'
equity $2,014,238 $1,824,197
========== ==========
Net interest
income; interest
rate spread $50,650 3.46% $46,856 3.53%
======= ===== ======= =====
Net interest
margin (3) 3.73% 3.83%
===== =====
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 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
share data) 2009 2009 2009 2008 2008
--------------------------------------------------------------------------
Summary of
Operations
Tax-equivalent
interest
income (1) $25,796 $25,117 $25,379 $26,188 $26,876
Interest
expense 7,914 8,643 9,085 9,952 10,277
Tax-equivalent
net interest
income (1) 17,882 16,474 16,294 16,236 16,599
Provision
for loan
losses 8,051 3,965 2,746 3,824 4,907
Tax-equivalent
NII after
provision for
loan losses
(1) 9,831 12,509 13,548 12,412 11,692
Investment
securities
gains
(losses) (840) (750) (672) (596) (2,051)
Non-interest
income
(excluding
securities
gains/losses) 6,396 9,109 7,476 3,360 6,191
Non-interest
expense 14,786 16,133 14,996 13,571 15,233
Acquisition
and
other on-time
charges - - - 85 20
Income taxes (37) 1,539 1,691 482 44
Net income 329 2,901 3,408 880 322
Dividends
Declared on
Preferred
Shares (473) (468) (463) (134) -
Accretion on
Preferred
Shares (40) (40) (38) (11) -
Net Income
Applicable to
Common Shares (184) 2,393 2,907 735 322
Core operating
earnings (2) 329 2,901 3,408 935 335
Tax equivalent
adjustment
(1) 309 295 257 243 233
--------------------------------------------------------------------------
At Period End
Total assets $2,018,598 $2,023,563 $2,010,662 $1,957,400 $1,922,026
Earning
assets 1,845,134 1,846,689 1,838,397 1,773,204 1,741,438
Loans 1,623,627 1,610,460 1,585,897 1,617,235 1,596,327
Allowance
for loan
losses 31,248 25,840 25,694 24,592 23,445
Deposits 1,543,085 1,553,144 1,540,235 1,469,912 1,435,804
Stockholders'
equity 234,529 232,683 230,608 229,159 189,676
Stockholders'
equity /
assets 11.62% 11.50% 11.47% 11.71% 9.87%
Goodwill 56,585 56,585 56,585 56,585 56,830
--------------------------------------------------------------------------
Average
Balances
Total assets $2,029,970 $2,027,760 $1,984,985 $1,938,461 $1,928,987
Earning
assets 1,826,400 1,828,272 1,782,019 1,730,284 1,727,343
Deposits
and
interest-
bearing
liabilities 1,778,223 1,778,848 1,736,933 1,718,315 1,712,212
Loans 1,613,529 1,592,513 1,596,592 1,591,144 1,585,489
Deposits 1,550,369 1,552,533 1,514,059 1,466,366 1,437,273
Stockholders'
equity 234,241 231,397 230,099 201,499 194,452
Stockholders'
equity /
assets 11.54% 11.41% 11.59% 10.39% 10.08%
--------------------------------------------------------------------------
Per Common
Share Data
Net Income:
Basic $(0.02) $0.29 $0.36 $0.09 $0.04
Diluted (0.02) 0.29 0.36 0.09 0.04
Core operating
earnings (2)
Basic (0.02) 0.29 0.36 0.10 0.04
Diluted (0.02) 0.29 0.36 0.10 0.04
Dividends 0.04 0.085 0.17 0.17 0.26
Market
Value:
High $18.33 $14.25 $8.95 $14.50 $17.66
Low 12.00 6.10 3.76 6.00 10.00
Close 14.91 13.00 6.08 7.73 11.01
Book Value 24.32 24.10 23.85 23.67 23.37
Shares
outstanding,
end of period
(in
thousands) 8,118 8,118 8,117 8,117 8,117
--------------------------------------------------------------------------
Performance
Ratios
(annualized)
Tax-equivalent
net interest
margin (1) 3.88% 3.61% 3.71% 3.72% 3.81%
Return on
average
assets -
GAAP 0.06% 0.57% 0.70% 0.18% 0.07%
Return on
average
assets -
Core
Operating 0.06% 0.57% 0.70% 0.19% 0.07%
Return on
average
equity-GAAP 0.56% 5.03% 6.02% 1.74% 0.66%
Return on
average
equity-
Core
Operating 0.56% 5.03% 6.02% 1.85% 0.69%
Efficiency
ratio (3) -
GAAP 60.90% 63.06% 63.09% 69.25% 66.84%
Efficiency
ratio (3) -
Core
Operating 60.90% 63.06% 63.09% 68.82% 66.75%
Effective
tax rate -12.67% 34.66% 33.16% 35.39% 12.02%
Common
dividend
payout ratio
(basic) -200.00% 29.31% 47.22% 188.89% 650.00%
--------------------------------------------------------------------------
(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) 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, net and asset sales gains, net.
Selected Quarterly Information
First Defiance Financial Corp.
(dollars in
thousands, except
per share data) 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
2009 2009 2009 2008 2008
-------------------------------------------------------------------------
Loan Portfolio
Composition
One to four family
residential real
estate $233,958 $238,000 $241,119 $251,807 $250,244
Construction 53,605 44,670 50,534 72,938 75,822
Commercial real
estate 802,434 768,636 764,841 755,740 746,676
Commercial 371,881 382,434 350,070 356,574 353,453
Consumer finance 36,416 38,074 38,676 41,012 41,964
Home equity and
improvement 150,379 151,213 156,668 161,106 158,992
---------- ---------- --------------------------------
Total loans 1,648,673 1,623,027 1,601,908 1,639,177 1,627,151
Less:
Loans in process 23,957 11,602 14,954 20,892 29,794
Deferred loan
origination fees 1,089 965 1,057 1,050 1,030
Allowance for
loan loss 31,248 25,840 25,694 24,592 23,445
---------- ---------- --------------------------------
Net Loans $1,592,379 $1,584,620 $1,560,203 $1,592,643 $1,572,882
========== ========== ================================
-------------------------------------------------------------------------
Allowance for loan
loss activity
Beginning allowance 25,840 25,694 24,592 $23,445 $20,578
Provision for loan
losses 8,051 3,965 2,746 3,824 4,907
Reserve from
acquisitions - - - - 121
Credit loss
charge-offs:
One to four
family
residential
real estate 744 505 148 369 478
Commercial real
estate 1,152 2,066 669 1,480 1,495
Commercial 658 950 702 593 -
Consumer finance 39 83 123 224 73
Home equity and
improvement 196 301 130 57 216
---------- ---------- --------------------------------
Total charge-offs 2,789 3,905 1,772 2,723 2,262
Total recoveries 146 86 128 46 101
---------- ---------- --------------------------------
Net charge-offs
(recoveries) 2,643 3,819 1,644 2,677 2,161
---------- ---------- --------------------------------
Ending allowance $31,248 $25,840 $25,694 $24,592 $23,445
========== ========== ================================
-------------------------------------------------------------------------
Credit Quality
Non-accrual loans $35,490 $35,528 $29,473 $28,017 $24,630
Restructured loans,
accruing 4,574 4,845 7,199 6,250 905
---------- ---------- --------------------------------
Total non-
performing
loans (1) 40,064 40,373 36,672 34,267 25,535
Real estate owned
(REO) 9,352 8,567 7,839 7,000 4,776
---------- ---------- --------------------------------
Total non-
performing
assets (2) $49,416 $48,940 $44,511 $41,267 $30,311
========== ========== ================================
Net charge-offs 2,643 3,819 1,644 2,677 2,161
Allowance for loan
losses / loans 1.92% 1.60% 1.62% 1.52% 1.47%
Allowance for loan
losses / non-
performing assets 63.23% 52.80% 57.73% 59.59% 77.35%
Allowance for loan
losses / non-
performing loans 78.00% 64.00% 70.06% 71.77% 91.82%
Non-performing assets
/ loans plus REO 3.03% 3.02% 2.79% 2.54% 1.89%
Non-performing assets
/ total assets 2.45% 2.42% 2.21% 2.11% 1.58%
Net charge-offs /
average loans
(annualized) 0.66% 0.96% 0.41% 0.67% 0.55%
-------------------------------------------------------------------------
Deposit Balances
Non-interest-bearing
demand deposits $174,145 $180,035 $163,855 $176,063 $158,139
Interest-bearing
demand deposits and
money market 477,566 456,177 413,104 374,488 365,251
Savings deposits 132,333 135,821 132,590 132,145 145,019
Retail time deposits
less than $100,000 544,957 568,595 608,811 578,245 557,643
Retail time deposits
greater than
$100,000 166,787 165,401 171,588 170,485 177,848
National/Brokered
time deposits 47,297 47,115 50,287 38,486 31,904
---------- ---------- --------------------------------
Total deposits $1,543,085 $1,553,144 $1,540,235 $1,469,912 $1,435,804
========== ========== ================================
(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.
Troubled
30 to 89 Non Debt
Total days Accrual Restru-
(dollars in thousands) Balance Current past due Loans cturing
--------------------------------------------------------------------------
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
===================================================
June 30, 2009
--------------------------------------------------------------------------
One to four family
residential real
estate $238,000 $223,846 $5,594 $5,541 $3,019
Construction 44,670 44,416 194 60 -
Commercial real
estate 768,636 727,983 13,212 25,672 1,769
Commercial 382,434 375,007 3,781 3,589 57
Consumer finance 38,074 37,595 440 39 -
Home equity and
improvement 151,213 147,975 2,611 627 -
---------------------------------------------------
Total loans $1,623,027 $1,556,822 $25,832 $35,528 $4,845
===================================================
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
===================================================
September 30, 2008
--------------------------------------------------------------------------
One to four family
residential real
estate $250,244 $239,889 $4,053 $5,400 $902
Construction 75,822 74,232 101 1,489 -
Commercial real
estate 746,676 726,013 6,914 13,749 -
Commercial 353,453 348,504 1,371 3,575 3
Consumer finance 41,964 41,341 473 150 -
Home equity and
improvement 158,992 156,645 2,080 267 -
---------------------------------------------------
Total loans $1,627,151 $1,586,624 $14,992 $24,630 $905
===================================================
SOURCE First Defiance Financial Corp.
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