10-Q 1 v422753_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Quarterly Period Ended September 30, 2015

 

OR

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition Period from ___________to__________

 

Commission file number 0-26850

 

  First Defiance Financial Corp.  
  (Exact name of registrant as specified in its charter)  

 

Ohio   34-1803915
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

601 Clinton Street, Defiance, Ohio   43512
(Address of principal executive office)   (Zip Code)

 

Registrant's telephone number, including area code: (419) 782-5015

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer ¨ Accelerated filer x  
  Non-accelerated filer ¨ Smaller reporting company ¨  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 9,172,657 shares outstanding at October 30, 2015.

 

 

 

 

FIRST DEFIANCE FINANCIAL CORP.

 

INDEX

    Page Number
PART I.-FINANCIAL INFORMATION  
     
Item 1. Consolidated Condensed Financial Statements (Unaudited):  
  Consolidated Condensed Statements of Financial Condition – September 30, 2015 and December 31, 2014 2
     
  Consolidated Condensed Statements of Income - Three and nine months ended September 30, 2015 and 2014 4
     
  Consolidated Condensed Statements of Comprehensive Income – Three and nine months ended September 30, 2015 and 2014 5
     
  Consolidated Condensed Statements of Changes in   Stockholders’ Equity – Nine months ended September 30, 2015 and 2014 6
     
  Consolidated Condensed Statements of Cash Flows  - Nine months ended September 30, 2015 and 2014 7
     
  Notes to Consolidated Condensed Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 49
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 73
     
Item 4. Controls and Procedures 74
     
PART II-OTHER INFORMATION:  
     
Item 1. Legal Proceedings 76
     
Item 1A. Risk Factors 76
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 76
     
Item 3. Defaults upon Senior Securities 76
     
Item 4. Mine Safety Disclosures 76
     
Item 5. Other Information 77
     
Item 6. Exhibits 77
     
  Signatures 78

 

 1 

 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FIRST DEFIANCE FINANCIAL CORP.

 

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

 

 

 

  

September 30,

2015

   December 31,
2014
 
     
Assets          
Cash and cash equivalents:          
Cash and amounts due from depository institutions  $34,308   $41,936 
Federal funds sold   39,000    71,000 
    73,308    112,936 
Securities:          
Available-for-sale, carried at fair value   236,926    239,321 
Held-to-maturity, carried at amortized cost (fair value $253 and $308 at September 30, 2015 and December 31, 2014, respectively)   251    313 
    237,177    239,634 
Loans held for sale   6,701    4,535 
Loans receivable, net of allowance of $25,209 at September 30, 2015 and $24,766 at December 31, 2014, respectively   1,708,329    1,622,020 
Accrued interest receivable   7,142    6,037 
Federal Home Loan Bank stock   13,802    13,802 
Bank owned life insurance   51,671    47,013 
Premises and equipment   38,993    40,496 
Real estate and other assets held for sale   4,936    6,181 
Goodwill   61,798    61,525 
Core deposit and other intangibles   2,034    2,395 
Mortgage servicing rights   9,194    9,012 
Other assets   13,196    13,366 
Total assets  $2,228,281   $2,178,952 

 

(continued)

 

 2 

 

 

FIRST DEFIANCE FINANCIAL CORP.

 

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

 

 

 

  

September 30,

2015

   December 31,
2014
 
     
Liabilities and stockholders’ equity          
Liabilities:          
Deposits  $1,793,053   $1,760,813 
Advances from the Federal Home Loan Bank   40,801    21,544 
Subordinated debentures   36,083    36,083 
Securities sold under repurchase agreements   53,838    54,759 
Advance payments by borrowers   1,864    2,309 
Deferred taxes   978    1,176 
Other liabilities   23,108    22,763 
Total liabilities   1,949,725    1,899,447 
           
Stockholders’ equity:          
Preferred stock, $.01 par value per share:          
5,000,000 shares authorized; no shares issued        
Common stock, $.01 par value per share:          
25,000,000 shares authorized; 12,722,469 and 12,735,313  shares issued and 9,171,948 and 9,234,534 shares outstanding, respectively   127    127 
Common stock warrant   -    878 
Additional paid-in capital   125,615    136,266 
Accumulated other comprehensive income, net of tax of $2,106 and $2,214, respectively   3,909    4,114 
Retained earnings   215,007    200,600 
Treasury stock, at cost, 3,550,521 and 3,500,779 shares respectively   (66,102)   (62,480)
Total stockholders’ equity   278,556    279,505 
           
Total liabilities and stockholders’ equity  $2,228,281   $2,178,952 

 

See accompanying notes

 

 3 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

 

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Interest Income                    
Loans  $18,419   $17,365   $54,445   $50,894 
Investment securities:                    
Taxable   880    933    2,712    2,560 
Non-taxable   796    787    2,377    2,295 
Interest-bearing deposits   33    64    113    283 
FHLB stock dividends   138    137    413    502 
Total interest income   20,266    19,286    60,060    56,534 
Interest Expense                    
Deposits   1,363    1,304    3,947    3,989 
FHLB advances and other   178    131    461    397 
Subordinated debentures   154    147    451    439 
Notes payable   38    41    113    121 
Total interest expense   1,733    1,623    4,972    4,946 
Net interest income   18,533    17,663    55,088    51,588 
Provision for loan losses   (27)   406    93    955 
Net interest income after provision for loan losses   18,560    17,257    54,995    50,633 
Non-interest Income                    
Service fees and other charges   2,799    2,660    8,018    7,492 
Insurance commissions   2,310    2,366    7,793    7,640 
Mortgage banking income   1,680    1,545    5,248    4,332 
Gain on sale of non-mortgage loans   543    40    776    79 
Gain on sale or call of securities   -    460    -    931 
Trust income   370    315    1,095    895 
Income from Bank Owned Life Insurance   238    1,130    658    1,584 
Other non-interest income   42    840    485    1,346 
Total non-interest income   7,982    9,356    24,073    24,299 
Non-interest Expense                    
Compensation and benefits   9,791    9,287    27,896    26,468 
Occupancy   1,788    1,613    5,361    4,905 
FDIC insurance premium   329    350    999    1,088 
Financial institutions tax   447    515    1,340    1,524 
Data processing   1,531    1,489    4,652    4,333 
Amortization of intangibles   157    269    536    832 
Other non-interest expense   2,805    3,248    9,758    10,639 
Total non-interest expense   16,848    16,771    50,542    49,789 
Income before income taxes   9,694    9,842    28,526    25,143 
Federal income taxes   2,998    2,773    8,666    7,206 
Net Income  $6,696   $7,069   $19,860   $17,937 
                     
Earnings per common share (Note 6)                    
Basic  $0.72   $0.75   $2.15   $1.87 
Diluted  $0.72   $0.71   $2.11   $1.79 
Dividends declared per share (Note 5)  $0.20   $0.15   $0.575   $0.45 
Average common shares outstanding (Note 6)                    
Basic   9,238    9,445    9,247    9,577 
Diluted   9,322    9,903    9,430    10,031 

 

See accompanying notes

 

 4 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

 

 

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Net Income  $6,696   $7,069   $19,860   $17,937 
                     
Other comprehensive income (loss):                    
Unrealized gains (losses) on securities available for sale   2,024    707    (313)   5,172 
Reclassification adjustment for security gains (losses)                    
included in net income(1)   -    (460)   -    (931)
Income tax benefit (expense)   (709)   (87)   108    (1,485)
Other comprehensive income (loss)   1,315    160    (205)   2,756 
                     
Comprehensive income  $8,011   $7,229   $19,655   $20,693 

 

(1) Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2015 and 2014 was $0 and $138, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2015 and 2014 was $0 and $279, respectively.

 

 5 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statement of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands, except share data)

 

                   Accumulated             
           Common   Additional   Other           Total 
   Preferred   Common   Stock   Paid-In   Comprehensive   Retained   Treasury   Stockholders’ 
   Stock   Stock   Warrant   Capital   Income   Earnings   Stock   Equity 
                                 
Balance at January 1, 2015  $-   $127   $878   $136,266   $4,114   $200,600   $(62,480)  $279,505 
Net income                            19,860         19,860 
Other comprehensive loss                       (205)             (205)
Stock option expense                  103                   103 
Warrant repurchase             (878)   (11,101)                  (11,979)
67,460 shares issued under stock option plan, with $151 income tax benefit, net of 14,340 repurchased and/or retired                  443         (313)   1,429    1,559 
Restricted share activity, including 15,506 shares issued                  (121)        185    270    334 
1,487 shares issued from direct purchases                  25              27    52 
147,039 shares repurchased                                 (5,348)   (5,348)
Common stock dividends declared                            (5,325)        (5,325)
Balance at September 30, 2015  $-   $127   $-   $125,615   $3,909   $215,007   $(66,102)  $278,556 
                                         
Balance at January 1, 2014  $-   $127   $878   $136,403   $545   $182,290   $(48,096)  $272,147 
Net income                            17,937         17,937 
Other comprehensive income                       2,756              2,756 
Stock option expense                  60                   60 
35,450 shares issued under stock option plan with $67 income tax benefit, net of repurchases                  15         (46)   569    538 
Restricted share activity under Stock Incentive Plans including 13,087 shares issued                  (313)             212    (101)
2,678 shares issued from direct purchases                  29              44    73 
399,288 shares repurchased                                 (10,873)   (10,873)
Common stock dividends declared                            (4,304)        (4,304)
Balance at September 30, 2014  $-   $127   $878   $136,194   $3,301   $195,877   $(58,144)  $278,233 

 

 6 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

 

 

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Operating Activities          
Net income  $19,860   $17,937 
Items not requiring (providing) cash          
Provision for loan losses   93    955 
Depreciation   2,439    2,189 
Amortization of mortgage servicing rights, net of impairment recoveries   1,073    921 
Amortization of core deposit and other intangible assets   536    832 
Net amortization of premiums and discounts on loans and deposits   333    422 
Amortization of premiums and discounts on securities   551    300 
Loss on write-downs of property, plant and equipment   428    - 
Change in deferred taxes   (90)   (43)
Proceeds from the sale of loans held for sale   167,687    115,877 
Originations of loans held for sale   (167,380)   (111,940)
Gain from sale of loans   (4,504)   (2,680)
Gain from sale or call of securities   -    (931)
(Gain)/Loss on sale or write-down of real estate and other assets held for sale   281    (167)
Stock option expense   103    60 
Restricted stock expense (benefit)   334    (101)
Income from bank owned life insurance   (658)   (1,584)
Changes in:          
Accrued interest receivable   (1,105)   (1,125)
Other assets   170    (4,579)
Other liabilities   194    3,888 
Net cash provided by (used in) operating activities   20,345    20,231 
           
Investing Activities          
Proceeds from maturities of held-to-maturity securities   62    63 
Proceeds from maturities, calls and pay-downs of available-for-sale securities   22,215    15,293 
Proceeds from sale of real estate and other assets held for sale   2,103    2,071 
Proceeds from the sale of available-for-sale securities   -    14,520 
Proceeds from sale of non-mortgage loans   16,178    15,556 
Purchases of available-for-sale securities   (20,684)   (64,678)
Proceeds from Federal Home Loan Bank stock redemption   -    5,548 
Purchase of bank-owned life insurance   (4,000)   (4,000)
Net cash paid in Insurance acquisition   (297)   - 
Proceeds from cash surrender value of bank-owned life insurance   -    594 
Proceeds from bank-owned life insurance death benefit   -    910 
Purchases of portfolio mortgage loans   -    (16,594)
Purchases of premises and equipment, net   (1,631)   (3,580)
Net increase in loans receivable   (103,009)   (56,654)
Net cash used in investing activities   (89,063)   (90,951)
           
Financing Activities          
Net increase (decrease) in deposits and advance payments by borrowers   31,795    (4,818)
Repayment of Federal Home Loan Bank advances   (7,743)   (730)
Increase in Federal Home Loan Bank advances   27,000    - 
Increase (decrease) in securities sold under repurchase agreements   (921)   8,170 
Repayment of warrants   (11,979)   - 
Proceeds from exercise of stock options   1,559    538 
Proceeds from treasury stock sales   52    73 
Cash dividends paid on common stock   (5,325)   (4,304)
Net cash paid for repurchase of common stock   (5,348)   (10,873)
Net cash provided by (used in) financing activities   29,090    (11,944)
Increase (decrease) in cash and cash equivalents   (39,628)   (82,664)
Cash and cash equivalents at beginning of period   112,936   $179,318 
Cash and cash equivalents at end of period  $73,308   $96,654 
           
Supplemental cash flow information:          
Interest paid  $4,939   $4,920 
Income taxes paid  $7,300   $6,050 
Transfers from loans to real estate and other assets held for sale  $872   $1,371 
Transfers from property and equipment to real estate and other  assets held for sale  $267   $- 
Transfers from loans held-for-sale to loans  $-   $1,178 

 

See accompanying notes.

 

 7 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

September 30, 2015 and 2014

 

 

 

1.Basis of Presentation

 

First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (“First Defiance Risk Management”). All significant intercompany transactions and balances are eliminated in consolidation.

 

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services. First Insurance is an insurance agency that does business in the Defiance, Bryan, Bowling Green, Maumee, Oregon and Lima, Ohio areas, offering property and casualty, group health and life insurance products. On September 1, 2015, First Insurance acquired a group medical benefits business from Buckeye Insurance Consultants, Inc. located in Lima, Ohio for a cash purchase price of $495,000 of which $198,000 is set aside for contingent payments to be paid in cash in 2016, 2017 and 2018 if certain conditions regarding future revenue are met. As of September 30, 2015, management had determined there was goodwill of $273,000 and identifiable intangible assets of $175,000 consisting of a customer relationship intangible of $64,000 and a non-compete intangible of $111,000 related to the acquisition. Disclosure of pro forma results of this acquisition are not material to the Company’s consolidated financial statements. First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company to insure the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

 

The consolidated condensed statement of financial condition at December 31, 2014 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K.

 

The accompanying consolidated condensed financial statements as of September 30, 2015 and for the three and nine month periods ended September 30, 2015 and 2014 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2014 Annual Report on Form 10-K for the year ended December 31, 2014. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the entire year.

 

 8 

 

 

2.Significant Accounting Policies

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Allowance for Loan Losses

 

Beginning June 30, 2015, the Company refined the methodology to its allowance for loan loss calculation pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of the component for reserves on impaired loans. Within the general reserve, the determination of the historical loss component was modified from using a three-year average annual loss rate to a loss migration measurement. The loss migration measurement implemented June 30, 2015, utilizes an average of four (4) four-year loss migration periods for each loan portfolio segment with differentiation between loan risk grades. This approach provides for a more precise reflection of probable incurred losses by risk grade within each loan portfolio segment over an average loan life cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio, thereby requiring less weight to the subjective components of the allowance for loan losses. Prior to June 30, 2015, the approach to this component quantified the historical loss by calculating a rolling twelve quarter average annual loss rate for each portfolio segment, without differentiation between loan risk grades. This modification resulted in a change of the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses.

 

Earnings Per Common Share

 

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, warrants, restricted stock awards and stock grants.

 

Newly Issued Accounting Standards

 

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for the Company on January 1, 2017; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date" which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. The Company is currently evaluating the potential impact of ASU 2014-09 on its Consolidated Financial Statements.

 

 9 

 

 

In June 2014, the FASB issued ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The Company adopted the amendments in this ASU effective January 1, 2015. In addition, the expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings were effective for the Company’s reporting period ending June 30, 2015. All of the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 did not have a material impact on the Company's Consolidated Financial Statements.

 

In January 2014, the FASB issued ASU No. 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." ASU 2014-01 applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities. The pronouncement permits reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. The pronouncement also requires disclosure that enables users of its financial statements to understand the nature of these investments. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The pronouncement should be applied retrospectively for all periods presented, effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption was permitted. The Company early adopted ASU 2014-01 in January 2014 and such adoption did not have a material impact on the Company’s Consolidated Financial Statements.

 

 10 

 

 

In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in ASU 2014-04 to Topic 310, “Receivables - Troubled Debt Restructurings by Creditors,” is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption was permitted. The Company adopted ASU 2014-04 on January 1, 2015 and such adoption did not have a material impact on the Company’s Consolidated Financial Statements.

 

3.Fair Value

 

FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

 

FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

·Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

·Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means.

 

 11 

 

 

·Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

Available for sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 1 include federal agency preferred stock securities and one corporate bond. Securities in Level 2 include U.S. Government agencies, mortgage-backed securities, corporate bonds and municipal securities.

 

Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure.  Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach.  The cost method bases value on the cost to replace the current property.  Value of market comparison approach evaluates the sales price of similar properties in the same market area.  The income approach considers net operating income generated by the property and an investors required return.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell.  Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

Real Estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then reviewed monthly by members of the asset review committee for valuation changes and are accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which may utilize a single valuation approach or a combination of approaches including cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal.  Appraisal values are generally discounted from 0% to 30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include:  discounts for collection issues and/or changes in market conditions.

 

 12 

 

 

Mortgage servicing rights – On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and are validated against available market data (Level 2).

 

Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date (Level 2).

 

The following table summarizes the financial assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Assets and Liabilities Measured on a Recurring Basis

 

September 30, 2015  Level 1
Inputs 
   Level 2 
Inputs
   Level 3
 Inputs
   Total Fair
Value
 
   (In Thousands) 
Available for sale securities:                    
                     
Obligations of U.S. government corporations and agencies  $-   $3,003   $-   $3,003 
Mortgage-backed - residential   -    62,051    -    62,051 
REMICs   -    1,682    -    1,682 
Collateralized mortgage obligations   -    73,790    -    73,790 
Preferred stock   1    -    -    1 
Corporate bonds   1,989    3,993    -    5,982 
Obligations of state and political subdivisions   -    90,417    -    90,417 
Mortgage banking derivative - asset   -    738    -    738 
Mortgage banking derivative - liability   -    100    -    100 

 

 13 

 

 

December 31, 2014  Level 1
Inputs 
   Level 2
 Inputs
   Level 3
 Inputs
   Total Fair
Value
 
   (In Thousands) 
Available for sale securities:                    
                     
Obligations of U.S. Government corporations and agencies  $-   $980   $-   $980 
Mortgage-backed - residential   -    59,856    -    59,856 
REMICs   -    1,839    -    1,839 
Collateralized mortgage obligations   -    81,121    -    81,121 
Preferred stock   1    -    -    1 
Corporate bonds   1,989    5,003    -    6,992 
Obligations of state and political subdivisions   -    88,532    -    88,532 
Mortgage banking derivative - asset   -    351    -    351 
Mortgage banking derivative - liability   -    24    -    24 

 

There were no assets measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2015.

 

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014:

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

(In Thousands)

Beginning balance, January 1, 2014  $582 
Total gains or (losses) (realized/unrealized)     
Included in earnings (realized)   (329)
Included in other comprehensive income (presented gross of taxes)   993 
Amortization   - 
Sales   (1,246)
Transfers in and/or out of Level 3   - 
Ending balance, September 30, 2014  $- 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

(In Thousands)

Beginning balance, July 1, 2014  $- 
Total gains or (losses) (realized/unrealized)     
Included in earnings (realized)   - 
Included in other comprehensive income (presented gross of taxes)   - 
Amortization   - 
Sales   - 
Transfers in and/or out of Level 3   - 
Ending balance, September 30, 2014  $- 

 

 14 

 

 

The following table summarizes the financial assets measured at fair value on a non-recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Assets and Liabilities Measured on a Non-Recurring Basis

 

September 30, 2015  Level 1
Inputs
   Level 2
Inputs
   Level 3
Inputs
   Total Fair
Value
 
   (In Thousands) 
Impaired loans                    
1-4 Family Residential Real Estate  $-   $-   $278   $278 
Multi Family Residential   -    -    102    102 
Commercial Real Estate   -    -    4,726    4,726 
Commercial loans   -    -    -    - 
Home Equity and Improvement   -    -    94    94 
Total Impaired loans   -    -    5,200    5,200 
Mortgage servicing rights   -    874    -    874 
Real estate held for sale                    
Residential   -    -    66    66 
CRE   -    -    285    285 
Total real estate held for sale   -    -    351    351 

 

December 31, 2014  Level 1
Inputs
   Level 2
Inputs
  

Level 3

Inputs

   Total Fair
Value
 
   (In Thousands) 
Impaired loans                    
1-4 Family Residential Real Estate  $-   $-   $419   $419 
Multi Family Residential   -    -    269    269 
Commercial Real Estate   -    -    6,665    6,665 
Commercial   -    -    340    340 
Home Equity and Improvement   -    -    98    98 
Total impaired loans   -    -    7,791    7,791 
Mortgage servicing rights   -    1,034    -    1,034 
Real estate held for sale                    
Residential   -    -    -    - 
CRE   -    -    739    739 
Total real estate held for sale   -    -    739    739 

 

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

 

 15 

 

 

   Fair 
Value 
   Valuation Technique  Unobservable Inputs  Range of 
Inputs
  Weighted
Average
 
       (Dollars in Thousands)
                  
Impaired Loans- Applies to all loan classes  $5,200   Appraisals which utilize sales comparison, net income and cost approach  Discounts for collection issues and changes in market conditions  10-30%   11%
                    
Real estate held for sale – Applies to all classes  $351   Appraisals which utilize sales comparison, net income and cost approach  Discounts for changes in market conditions  20-30%   28%

 

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

 

   Fair 
Value 
   Valuation Technique  Unobservable Inputs  Range of
Inputs
  Weighted
Average
 
       (Dollars in Thousands)
                  
Impaired Loans- Applies to all loan classes  $7,791   Appraisals which utilize sales comparison, net income and cost approach  Discounts for collection issues and changes in market conditions  10-30%   11%
                    
Real estate held for sale – Applies to all classes  $739   Appraisals which utilize sales comparison, net income and cost approach  Discounts for changes in market conditions  20-40%   28%

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $5.2 million, with a $13,000 valuation allowance and a fair value of $7.8 million, with a $19,000 valuation allowance at September 30, 2015 and December 31, 2014, respectively. A provision expense of $59,000 and a provision recovery of $659,000 for the three months and nine months ended September 30, 2015 and a provision expense of $1.4 million and $2.9 million for the three and nine months ended September 30, 2014 was included in earnings.

 

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $874,000 with a valuation allowance of $720,000 and a fair value of $1.0 million with a valuation allowance of $911,000 at September 30, 2015 and December 31, 2014, respectively. A recovery of $24,000 and $191,000 for the three and nine months ended September 30, 2015 and a recovery of $68,000 and $105,000 for the three and nine months ended September 30, 2014, respectively, were included in earnings.

 

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The change in fair value of real estate held for sale and fixed assets transferred to real estate held for sale was $19,000 and $724,000 for the three and nine months ended September 30, 2015, which was recorded directly as an adjustment to current earnings through non-interest expense. The change in fair value of real estate held for sale was $53,000 and $126,000 for the three and nine months ended September 30, 2014.

 

 16 

 

 

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of September 30, 2015 and December 31, 2014. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

 

Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable, depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.

 

The carrying amount of cash and cash equivalents, term notes payable and advance payments by borrowers for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

 

It was not practicable to determine the fair value of Federal Home Loan Bank (“FHLB”) stock due to restrictions placed on its transferability.

 

The fair value of loans that reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on discounted cash flow analysis, using interest rates currently being offered for loans with similar terms, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost of fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based on binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

The fair value of accrued interest receivable is equal to the carrying amounts resulting in a Level 2 or Level 3 classification which is consistent with its underlying value.

 

The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e. carrying value) and are classified as Level 1. The fair value of savings, NOW and certain money market accounts are equal to their carrying amounts and are a Level 2 classification. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 2 classification. The carrying value of subordinated debentures and deposits with fixed maturities is estimated based on discounted cash flow analyses based on interest rates currently being offered on instruments with similar characteristics and maturities resulting in a Level 3 classification.

 

 17 

 

 

FHLB advances with maturities greater than 90 days are valued based on discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at September 30, 2015.

 

       Fair Value Measurements at September 30, 2015
(In Thousands)
 
   Carrying
Value
   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and cash equivalents  $73,308   $73,308   $73,308   $-   $- 
Investment securities   237,177    237,179    1,990    235,189    - 
Federal Home Loan Bank Stock   13,802    N/A    N/A    N/A    N/A 
Loans, net, including loans held for sale   1,715,030    1,730,554    -    7,245    1,723,309 
Accrued interest receivable   7,142    7,142    -    1,368    5,774 
                          
Financial Liabilities:                         
Deposits  $1,793,053   $1,796,922   $392,103   $1,404,819   $- 
Advances from Federal Home Loan Bank   40,801    41,155    -    41,155    - 
Securities sold under repurchase agreements   53,838    53,838    -    53,838    - 
Subordinated debentures   36,083    35,307    -    -    35,307 

 

       Fair Value Measurements at December 31, 2014
(In Thousands)
 
   Carrying
Value
   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and cash equivalents  $112,936   $112,936   $112,936   $-   $- 
Investment securities   239,634    239,629    1,990    237,639    - 
Federal Home Loan Bank Stock   13,802    N/A    N/A    N/A    N/A 
Loans, net, including loans held for sale   1,626,555    1,632,507    -    4,741    1,627,766 
Accrued interest receivable   6,037    6,037    3    846    5,188 
                          
Financial Liabilities:                         
Deposits  $1,760,813   $1,762,733   $379,552   $1,383,181   $- 
Advances from Federal Home Loan Bank   21,544    21,772    -    21,772    - 
Securities sold under repurchase agreements   54,759    54,759    -    54,759    - 
Subordinated debentures   36,083    35,307    -    -    35,307 

 

4.Stock Compensation Plans

 

First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaced all pre-existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

 

 18 

 

 

As of September 30, 2015, 93,070 options are outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

 

In 2014, the Company approved a 2014 Short-Term (“STIP”) Equity Incentive Plan and a 2014 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

 

Under the 2014 STIP, the participants may earn up to 30% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the 2014 STIP were determined as of December 31, 2014 and paid out in cash in the first quarter of 2015. The participants are required to be employed on the day of payout in order to receive such payment.

 

Under the 2014 LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 30,538 RSU’s to the participants in the 2014 LTIP effective January 1, 2014, which represents the maximum target award. The amount of benefit under the 2014 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2016. The awards will vest at the end of the performance period ending December 31, 2016. The benefits earned under the 2014 LTIP will be paid out in equity in the first quarter of 2017. The participants are required to be employed on the day of payout in order to receive such payment.

 

In 2015, the Company approved a 2015 STIP and a 2015 LTIP for selected members of management.

 

Under the 2015 STIP, the participants may earn up to 30% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the 2015 STIP will be determined as of December 31, 2015 and will be paid out in cash in the first quarter of 2016. The participants are required to be employed on the day of payout in order to receive such payment.

 

Under the 2015 LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 24,757 RSU’s to the participants in the 2015 LTIP effective January 1, 2015, which represents the maximum target award. The amount of benefit under the 2015 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2017. The awards will vest at the end of the performance period ending December 31, 2017. The benefits earned under the 2015 LTIP will be paid out in equity in the first quarter of 2018. The participants are required to be employed on the day of payout in order to receive such payment.

 

 19 

 

 

In the nine months ended September 30, 2015, the Company granted 2,660 restricted shares. 2,160 shares were issued to directors and have a one-year vesting period. 500 shares were issued to an employee with a 3 year vesting period.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

 

The fair value of stock options granted during the nine months ended September 30, 2015 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

 

   Nine Months ended 
  

September 30,

2015

  

September 30,

2014

 
Expected average risk-free rate   2.04%   1.51%
Expected average life   10.00 years    7.44 years 
Expected volatility   42.00%   44.62%
Expected dividend yield   2.10%   2.22%

 

The weighted-average fair value of options granted was $13.13 for the nine months ended September 30, 2015 and $10.79 for the nine months ended September 30, 2014.

 

Following is activity under the plans during the nine months ended September 30, 2015:

 

Stock options  Options
Outstanding
   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term (in years)
   Aggregate
Intrinsic
Value 
(in 000’s)
 
Options outstanding, January 1, 2015   173,720   $20.80           
Forfeited or cancelled   (5,100)   25.36           
Exercised   (81,800)   22.00           
Granted   6,250    32.94           
Options outstanding, September 30, 2015   93,070   $20.32    3.54   $1,512 
Vested or expected to vest at September 30, 2015   93,070   $20.32    3.54   $1,512 
Exercisable at September 30, 2015   78,420   $18.60    2.56   $1,409 

 

As of September 30, 2015, there was $147,000 of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 3.81 years.

 

 20 

 

 

At September 30, 2015, 74,545 RSU’s and 8,427 stock grants were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established with the plan documents. A total expense of $730,000 was recorded during the nine months ended September 30, 2015 compared to an expense of $389,000 for the same period in 2014. The lower expense in the first nine months of 2014 was due to accrual reversals primarily from the 2013 LTIP adjusting for the actual payout in year one and two as well as adjusting the estimated payout in year three. There was approximately $318,000 included within other liabilities at September 30, 2015 related to the STIP.

 

   Restricted Stock Units   Stock Grants 
       Weighted-Average       Weighted-Average 
       Grant Date       Grant Date 
Unvested Shares  Shares   Fair Value   Shares   Fair Value 
                 
Unvested at January 1, 2015   91,812   $21.00    5,767   $25.97 
Granted   24,757    32.30    15,506    19.91 
Vested   (12,846)   17.20    (12,846)   17.20 
Forfeited   (29,178)   19.48    -    - 
Unvested at September 30, 2015   74,545   $25.86    8,427   $28.19 

 

The maximum amount of compensation expense that may be recorded for the 2015 STIP and the 2013, 2014 and 2015 LTIPs at September 30, 2015 is approximately $2.7 million. However, the estimated expense expected to be recorded as of September 30, 2015 based on the performance measures in the plan, is $1.7 million of which $740,000 is unrecognized at September 30, 2015 and will be recognized over the remaining performance periods.

 

5.Dividends on Common Stock

 

First Defiance declared and paid a $0.175 common stock dividend in the first quarter and a $0.20 per common stock dividend in the second and third quarters of 2015. First Defiance declared and paid a $0.15 per common stock dividend in the first, second and third quarters of 2014.

 

6.Earnings Per Common Share

 

The following table sets forth the computation of basic and diluted earnings per common share:

 

  

Three months ended

September 30,

  

Nine months ended

September 30,

 
   2015   2014   2015   2014 
Numerator for basic and diluted earnings per common share – Net income  $6,696   $7,069   $19,860   $17,937 
Denominator:                    
Denominator for basic earnings per common share – weighted average common shares, including participating securities   9,238    9,445    9,247    9,577 
Effect of warrants   -    350    99    347 
Effect of employee stock options and restricted share activity   84    108    84    107 
                     
Denominator for diluted earnings per common share   9,322    9,903    9,430    10,031 
Basic earnings per common share  $0.72   $0.75   $2.15   $1.87 
                     
Diluted earnings per common share  $0.72   $0.71   $2.11   $1.79 

 

 21 

 

 

There were 6,250 and 16,750 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and nine months ended September 30, 2015, respectively. There were 10,500 and 43,000 shares under options granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and nine months ended September 30, 2014, respectively.

 

7.Investment Securities

 

The following is a summary of available-for-sale and held-to-maturity securities:

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
   (In Thousands) 
At September 30, 2015                    
Available-for-Sale Securities:                    
Obligations of U.S. government corporations and agencies  $3,000   $3   $-   $3,003 
Mortgage-backed securities – residential   60,713    1,338    -    62,051 
REMICs   1,638    44    -    1,682 
Collateralized mortgage obligations   72,391    1,561    (162)   73,790 
Trust preferred securities and preferred stock   -    1    -    1 
Corporate bonds   5,947    51    (16)   5,982 
Obligations of state and political subdivisions   86,326    4,134    (43)   90,417 
Totals  $230,015   $7,132   $(221)  $236,926 

 

   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair Value 
   (In Thousands) 
Held-to-Maturity Securities*:                    
FHLMC certificates  $15   $-   $-   $15 
FNMA certificates   79    2    (1)   80 
GNMA certificates   33    1    -    34 
Obligations of state and political subdivisions   124    -    -    124 
Totals  $251   $3   $(1)  $253 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In Thousands) 
At December 31, 2014                    
Available-for-sale                    
Obligations of U.S. government corporations and agencies  $1,000   $-   $(20)  $980 
Mortgage-backed securities - residential   58,380    1,476    -    59,856 
REMICs   1,820    19    -    1,839 
Collateralized mortgage obligations   80,252    1,280    (411)   81,121 
Trust preferred stock and preferred stock   -    1    -    1 
Corporate bonds   6,913    85    (6)   6,992 
Obligations of state and political subdivisions   83,732    4,827    (27)   88,532 
Total Available-for-Sale  $232,097   $7,688   $(464)  $239,321 

 

 22 

 

 

   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair Value 
   (In Thousands) 
Held-to-Maturity*:                    
FHLMC certificates  $26   $-   $(8)  $18 
FNMA certificates   93    2    -    95 
GNMA certificates   39    1    -    40 
Obligations of states and political subdivisions   155    -    -    155 
Total Held-to-Maturity  $313   $3   $(8)  $308 

* FHLMC, FNMA, and GNMA certificates are residential mortgage-backed securities.

 

The amortized cost and fair value of the investment securities portfolio at September 30, 2015 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

 

   Available-for-Sale   Held-to-Maturity 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (In Thousands) 
Due in one year or less  $1,250   $1,254   $-   $- 
Due after one year through five years   15,188    15,501    124    124 
Due after five years through ten years   35,329    37,188    -    - 
Due after ten years   43,506    45,460    -    - 
MBS/CMO   134,742    137,523    127    129 
   $230,015   $236,926   $251   $253 

 

Investment securities with a carrying amount of $134.3 million at September 30, 2015 were pledged as collateral on public deposits, securities sold under repurchase agreements and Federal Reserve discount window.

 

As of September 30, 2015, the Company’s investment portfolio consisted of 367 securities, 28 of which were in an unrealized loss position.

 

 23 

 

 

The following tables summarize First Defiance’s securities that were in an unrealized loss position at September 30, 2015 and December 31, 2014:

 

   Duration of Unrealized Loss Position     
   Less than 12 Months   12 Months or Longer   Total 
       Gross       Gross         
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loses 
   (In Thousands) 
At September 30, 2015                              
Available-for-sale securities:                              
Obligations of U.S. government corporations and agencies  $-   $-   $-   $-   $-   $- 
Collateralized mortgage obligations   -    -    8,574    (162)   8,574    (162)
Obligations of state and political subdivisions   5,150    (34)   424    (9)   5,574    (43)
Corporate bonds   984    (16)   -    -    984    (16)
Held to maturity securities:                              
FHLMC/FNMA certificates   20    (1)   9    -    29    (1)
Total temporarily impaired securities  $6,154   $(51)  $9,007   $(171)  $15,161   $(222)

 

   Duration of Unrealized Loss Position     
   Less than 12 Months   12 Months or Longer   Total 
       Gross       Gross         
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loses 
   (In Thousands) 
At December 31, 2014                              
Available-for-sale securities:                              
Obligations of U.S. government corporations and agencies  $-   $-   $980   $(20)  $980   $(20)
Collateralized mortgage obligations   4,466    (138)   14,633    (273)   19,099    (411)
Corporate bonds   -    -    994    (6)   994    (6)
Obligations of state and political subdivisions   1,194    (8)   1,499    (19)   2,693    (27)
Held to maturity securities:                              
FHLMC certificates   18    (8)   -    -    18    (8)
Total temporarily impaired securities  $5,678   $(154)  $18,106   $(318)  $23,784   $(472)

 

With the exception of corporate bonds, the above securities all have fixed interest rates, and all securities have defined maturities. Their fair value is sensitive to movements in market interest rates. First Defiance has the ability and intent to hold these investments for a time necessary to recover the amortized cost without impacting its liquidity position and it is not more than likely that the Company will be required to sell the investments before anticipated recovery.

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC Topic 320. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

 

 24 

 

 

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

 

In the three or nine months ended September 30, 2015 and September 30, 2014, management determined there was no OTTI.

 

The Company holds three CDO’s at September 30, 2015 and December 31, 2014 with a zero value.

 

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was zero at September 30, 2015 and December 31, 2014.

 

The proceeds from the sales and calls of securities and the associated gains and losses are listed below:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2015   2014   2015     2014 
   (In Thousands) 
Proceeds  $-   $10,738   $-   $14,520 
Gross realized gains   -    460    -    1,573 
Gross realized losses   -    -    -    (642)

 

 25 

 

 

8.Loans

 

Loans receivable consist of the following:

 

  

September 30,

2015

  

December 31,

2014

 
   (In Thousands) 
         
Real Estate:        
Secured by 1-4 family residential  $205,370   $206,437 
Secured by multi-family residential   163,255    156,530 
Secured by commercial real estate   758,952    683,958 
Construction   129,230    112,385 
    1,256,807    1,159,310 
Other Loans:          
Commercial   402,681    399,730 
Home equity and improvement   113,781    111,813 
Consumer Finance   15,774    15,466 
    532,236    527,009 
Total loans   1,789,043    1,686,319 
Deduct:          
Undisbursed loan funds   (54,484)   (38,653)
Net deferred loan origination fees and costs   (1,021)   (880)
Allowance for loan loss   (25,209)   (24,766)
Totals  $1,708,329   $1,622,020 

 

Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.

 

The following table discloses allowance for loan loss activity for the quarter ended September 30, 2015 and 2014 by portfolio segment (In Thousands):

 

Quarter Ended September 30,
2015
  1-4 Family
Residential
Real Estate
   Multi-
Family
Residential
Real Estate
   Commercial
Real Estate
   Construction   Commercial   Home Equity
and
Improvement
   Consumer
Finance
   Total 
Beginning Allowance  $2,877   $2,269   $12,096   $308   $5,567   $2,107   $160   $25,384 
Charge-Offs   (185)   0    (64)   0    (43)   (110)   (5)   (407)
Recoveries   105    0    25    0    42    76    11    259 
Provisions   (18)   (25)   96    (69)   (155)   152    (8)   (27)
Ending Allowance  $2,779   $2,244   $12,153   $239   $5,411   $2,225   $158   $25,209 

 

Quarter Ended September 30,
2014
  1-4 Family
Residential
Real Estate
   Multi- Family
Residential
Real Estate
   Commercial
Real Estate
   Construction   Commercial   Home Equity
and
Improvement
   Consumer
Finance
   Total 
Beginning Allowance  $2,345   $2,480   $11,476   $199   $6,199   $1,780   $148   $24,627 
Charge-Offs   (95)   -    (246)   -    (1,272)   (42)   (16)   (1,671)
Recoveries   13    2    978    -    109    87    16    1,205 
Provisions   161    99    (1,121)   15    1,384    (134)   2    406 
Ending Allowance  $2,424   $2,581   $11,087   $214   $6,420   $1,691   $150   $24,567 

 

 26 

 

 

The following table discloses allowance for loan loss activity for the year-to-date periods ended September 30, 2015 and September 30, 2014 by portfolio segment and impairment method (In Thousands):

 

Year-to-date Period Ended 
September 30, 2015
  1-4 Family
Residential
Real Estate
   Multi-
Family
Residential
Real Estate
   Commercial
Real Estate
   Construction   Commercial   Home Equity
and
Improvement
   Consumer   Total 
Beginning Allowance  $2,494   $2,453   $11,268   $221   $6,509   $1,704   $117   $24,766 
Charge-Offs   (275)   (114)   (250)   0    (68)   (340)   (21)   (1,068)
Recoveries   178    0    789    0    255    156    40    1,418 
Provisions   382    (95)   346    18    (1,285)   705    22    93 
Ending Allowance  $2,779   $2,244   $12,153   $239   $5,411   $2,225   $158   $25,209 

 

Year-to-date Ended
September 30, 2014
  1-4 Family
Residential
Real Estate
   Multi-
Family
Residential
Real Estate
   Commercial
Real Estate
   Construction   Commercial   Home Equity
and
Improvement
   Consumer   Total 
Beginning Allowance  $2,847   $2,508   $12,000   $134   $5,678   $1,635   $148   $24,950 
Charge-Offs   (364)   -    (514)   -    (2,770)   (306)   (39)   (3,993)
Recoveries   167    7    1,901    -    358    172    50    2,655 
Provisions   (226)   66    (2,300)   80    3,154    190    (9)   955 
Ending Allowance  $2,424   $2,581   $11,087   $214   $6,420   $1,691   $150   $24,567 

 

 27 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2015 (In Thousands):

 

   1-4 Family   Multi Family                         
   Residential   Residential   Commercial           Home Equity   Consumer     
   Real Estate   Real Estate   Real Estate   Construction   Commercial   & Improvement   Finance   Total 
Allowance for loan losses:                                        
                                         
Ending allowance balance attributable to loans:                                        
                                         
Individually evaluated for impairment  $186   $-   $137   $-   $11   $24   $-   $358 
                                         
Collectively evaluated for impairment   2,593    2,244    12,016    239    5,400    2,201    158    24,851 
                                         
 Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Total ending allowance balance  $2,779   $2,244   $12,153   $239   $5,411   $2,225   $158   $25,209 
                                         
Loans:                                        
                                         
Loans individually evaluated for impairment  $9,417   $3,139   $12,914   $-   $3,979   $2,168   $54   $31,671 
                                         
Loans collectively evaluated for impairment   196,331    160,191    748,367    74,677    400,087    112,108    15,706    1,707,467 
                                         
Loans acquired with deteriorated credit quality   -    -    156    -    18    -    -    174 
                                         
Total ending loans balance  $205,748   $163,330   $761,437   $74,677   $404,084   $114,276   $15,760   $ 1,739,312 

 

 28 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2014 (In Thousands):

 

   1-4 Family   Multi Family                         
   Residential   Residential   Commercial           Home Equity   Consumer     
   Real Estate   Real Estate   Real Estate   Construction   Commercial   & Improvement   Finance   Total 
Allowance for loan losses:                                        
                                         
Ending allowance balance attributable to loans:                                        
                                         
Individually evaluated for impairment  $216   $-   $1,003   $-   $30   $24   $-   $1,273 
                                         
Collectively evaluated for impairment   2,278    2,453    10,265    221    6,479    1,680    117    23,493 
                                         
 Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Total ending allowance balance  $2,494   $2,453   $11,268   $221   $6,509   $1,704   $117   $24,766 
                                         
Loans:                                        
                                         
Loans individually evaluated for impairment  $10,281   $2,482   $28,117   $150   $5,739   $2,242   $34   $49,045 
                                         
Loans collectively evaluated for impairment   196,582    154,178    657,677    73,572    395,270    110,040    15,417    1,602,736 
                                         
Loans acquired with deteriorated credit quality   1    -    163    -    22    -    -    186 
                                         
Total ending loans balance  $206,864   $156,660   $685,957   $73,722   $401,031   $112,282   $15,451   $1,651,967 

 

 29 

 

 

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):

 

   Three Months Ended September 30, 2015   Nine Months Ended September 30, 2015 
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
Residential Owner Occupied  $5,750   $67   $66   $5,854   $203   $201 
Residential Non Owner Occupied   3,762    38    38    4,045    117    117 
Total Residential Real Estate   9,512    105    104    9,899    320    318 
Construction   -    -    -    50    2    2 
Multi-Family   3,168    12    11    2,680    25    25 
CRE Owner Occupied   6,475    39    39    6,566    117    117 
CRE Non Owner Occupied   2,696    29    29    7,445    273    273 
Agriculture Land   2,236    21    2    1,741    53    30 
Other CRE   1,509    5    5    2,023    31    30 
Total Commercial Real Estate   12,916    94    75    17,775    474    450 
Commercial Working Capital   1,030    11    11    1,478    38    36 
Commercial Other   2,989    7    6    3,483    33    41 
Total Commercial   4,019    18    17    4,961    71    77 
Home Equity and Home Improvement   2,160    19    19    2,257    60    60 
Consumer   58    1    2    55    2    3 
Total Impaired Loans  $31,833   $249   $228   $37,677   $954   $935 

 

 30 

 

 

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):

 

   Three Months Ended September 30, 2014   Nine Months Ended September 30, 2014 
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
Residential Owner Occupied  $6,242   $84   $84   $6,235   $250   $245 
Residential Non Owner Occupied   3,537    31    31    3,778    101    101 
Total Residential Real Estate   9,779    115    115    10,013    351    346 
Construction   261    4    4    261    10    13 
Multi-Family   349    1    1    368    3    3 
CRE Owner Occupied   8,238    35    29    9,014    108    97 
CRE Non Owner Occupied   18,144    200    200    18,656    605    605 
Agriculture Land   536    3    2    635    11    7 
Other CRE   2,576    5    5    2,075    15    16 
Total Commercial Real Estate   29,494    243    236    30,381    739    725 
Commercial Working Capital   3,111    9    9    3,107    20    20 
Commercial Other   4,325    4    3    4,612    8    6 
Total Commercial   7,436    13    12    7,719    28    26 
Home Equity and Home Improvement   2,185    25    24    2,240    75    74 
Consumer   47    1    1    52    3    3 
Total Impaired Loans  $49,551   $402   $393   $51,034   $1,209   $1,190 

 

 31 

 

 

The following table presents loans individually evaluated for impairment by class of loans (In Thousands):

 

   September 30, 2015   December 31, 2014 
   Unpaid
Principal
Balance*
   Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Unpaid
Principal
Balance*
   Recorded
Investment
   Allowance
for Loan
Losses
Allocated
 
With no allowance recorded:                              
Residential Owner Occupied  $3,852   $3,746   $-   $3,967   $3,859   $- 
Residential Non Owner Occupied   3,527    3,535    -    3,763    3,670    - 
Total 1-4 Family Residential Real Estate   7,379    7,281    -    7,730    7,529    - 
Multi-Family Residential Real Estate   3,287    3,139    -    2,627    2,482    - 
CRE Owner Occupied   4,163    3,821    -    7,109    6,481    - 
CRE Non Owner Occupied   2,631    2,370    -    4,106    3,759    - 
Agriculture Land   2,134    2,184    -    213    208    - 
Other CRE   1,019    979    -    2,923    2,378    - 
Total Commercial Real Estate   9,947    9,354    -    14,351    12,826    - 
Construction   -    -    -    150    150    - 
Commercial Working Capital   463    467    -    1,155    1,157    - 
Commercial Other   2,610    2,611    -    3,966    3,663    - 
Total Commercial   3,073    3,078    -    5,121    4,820    - 
                               
Home Equity and Home Improvement   2,135    2,084    -    2,192    2,140    - 
Consumer Finance   54    54    -    35    34    - 
                               
Total loans with no allowance recorded  $25,875   $24,990   $-   $32,206   $29,981   $- 
                               
With an allowance recorded:                              
Residential Owner Occupied  $1,970   $1,972   $182   $2,112   $2,114   $204 
Residential Non Owner Occupied   160    164    4    636    638    12 
Total 1-4 Family Residential Real Estate   2,130    2,136    186    2,748    2,752    216 
Multi-Family Residential Real Estate   -    -    -    -    -    - 
CRE Owner Occupied   3,025    2,608    125    2,667    2,257    148 
CRE Non Owner Occupied   386    310    4    13,020    12,606    842 
Agriculture Land   121    111    1    333    320    10 
Other CRE   955    531    7    137    108    3 
Total Commercial Real Estate   4,487    3,560    137    16,157    15,291    1,003 
Construction   -    -    -    -    -    - 
Commercial Working Capital   622    624    8    649    650    21 
Commercial Other   273    277    3    264    269    9 
Total Commercial   895    901    11    913    919    30 
Home Equity and Home Improvement   84    84    24    101    102    24 
Consumer Finance   -    -    -    -    -    - 
Total loans with an allowance recorded  $7,596   $6,681   $358   $19,919   $19,064   $1,273 

 

* Presented gross of charge offs

 

 32 

 

 

The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned on the dates indicated:

 

   September 30,
2015
   December 31, 
2014
 
   (In Thousands) 
Non-accrual loans  $16,612   $24,130 
Loans over 90 days past due and still accruing   -    - 
Total non-performing loans   16,612    24,130 
Real estate and other assets held for sale   4,936    6,181 
Total non-performing assets  $21,548   $30,311 
Troubled debt restructuring, still accruing  $13,786   $24,686 

 

The following table presents the aging of the recorded investment in past due and non accrual loans as of September 30, 2015 by class of loans (In Thousands):

 

   Current   30-59 days   60-89 days   90+ days   Total
Past Due
   Total Non
Accrual
 
                         
Residential Owner Occupied  $139,765   $-   $406   $286   $692   $1,422 
Residential Non Owner Occupied   63,898    642    128    623    1,393    1,323 
                               
Total 1-4 Family Residential Real Estate   203,663    642    534    909    2,085    2,745 
                               
Multi-Family Residential Real Estate   161,262    -    -    2,068    2,068    2,491 
                               
CRE Owner Occupied   325,006    112    -    2,527    2,639    4,289 
CRE Non Owner Occupied   291,214    121    -    357    478    1,055 
Agriculture Land   96,007    190    104    -    294    838 
Other Commercial Real Estate   45,484    -    -    315    315    1,414 
                               
Total Commercial Real Estate   757,711    423    104    3,199    3,726    7,596 
                               
Construction   74,604    -    73    -    73    - 
                               
Commercial Working Capital   153,408    -    -    166    166    245 
Commercial Other   248,227    2    207    2,074    2,283    2,878 
                               
Total Commercial   401,635    2    207    2,240    2,449    3,123 
                               
Consumer Finance   15,671    62    9    18    89    29 
Home Equity/Home Improvement   113,698    459    76    43    578    632 
                               
Total Loans  $ 1,728,244   $1,588   $1,003   $8,477   $11,068   $16,616 

 

 33 

 

 

The following table presents the aging of the recorded investment in past due and non accrual loans as of December 31, 2014 by class of loans (In Thousands):

 

   Current   30-59 days   60-89 days   90+ days   Total
Past Due
   Total Non
Accrual
 
                         
Residential Owner Occupied  $141,597   $39   $1,079   $365   $1,483   $1,702 
Residential Non Owner Occupied   62,991    110    105    578    793    1,625 
                               
Total 1-4 Family Residential Real Estate   204,588    149    1,184    943    2,276    3,327 
                               
Multi-Family Residential Real Estate   156,413    247    -    -    247    2,546 
                               
CRE Owner Occupied   299,500    163    1,566    1,753    3,482    7,004 
CRE Non Owner Occupied   243,341    119    416    1,308    1,843    2,582 
Agriculture Land   93,529    -    14    -    14    686 
Other Commercial Real Estate   43,835    155    -    258    413    2,359 
                               
Total Commercial Real Estate   680,205    437    1,996    3,319    5,752    12,631 
                               
Construction   73,722    -    -    -    -    - 
                               
Commercial Working Capital   135,009    -    -    951    951    1,103 
Commercial Other   262,982    67    10    2,012    2,089    3,897 
                               
Total Commercial   397,991    67    10    2,963    3,040    5,000 
                               
Consumer Finance   15,326    68    57    -    125    12 
Home Equity/Home Improvement   110,940    1,236    -    106    1,342    619 
                               
Total Loans  $1,639,185   $2,204   $3,247   $7,331   $12,782   $24,135 

 

Troubled Debt Restructurings

 

As of September 30, 2015 and December 31, 2014, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $20.5 million and $33.0 million, respectively. The Company allocated $256,000 and $1.1 million of specific reserves to those loans at September 30, 2015 and December 31, 2014, and has committed to lend additional amounts totaling up to $81,000 and $69,000 at September 30, 2015 and December 31, 2014, respectively.

 

 34 

 

 

The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments, and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made.

 

Of the loans modified in a TDR, $6.8 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and nine month periods ending September 30, 2015 and September 30, 2014:

 

   Loans Modified as a TDR for the Three
Months Ended September 30, 2015
($ in thousands)
  Loans Modified as a TDR for the Nine
Months Ended September 30, 2015
($ in thousands)
Troubled Debt Restructurings  Number of
Loans
  Recorded Investment
(as of period end)
   Number of
Loans
  Recorded Investment
(as of period end)
 
               
1-4 Family Owner Occupied  0  $-   3  $226 
1-4 Family Non Owner Occupied  0   -   4   63 
CRE Owner Occupied  1   72   2   632 
CRE Non Owner Occupied  0   -   2   252 
Agriculture Land  0   -   3   1,552 
Other CRE  0   -   0   - 
Commercial Working Capital  2   114   4   119 
Commercial Other  1   19   2   73 
Home Equity and Improvement  4   114   11   217 
Consumer Finance  2   2   6   37 
Total  10  $321   37  $3,171 

 

The loans described above decreased the ALLL by $3,000 in the three month period ending September 30, 2015 and $23,000 in the nine month period ending September 30, 2015.

 

 35 

 

 

   Loans Modified as a TDR for the Three
Months Ended September 30, 2014
($ In Thousands)
  Loans Modified as a TDR for the Nine
Months Ended September 30, 2014
($ In Thousands)
Troubled Debt Restructurings  Number of
Loans
  Recorded Investment
(as of period end)
   Number of
Loans
  Recorded Investment
(as of period end)
 
               
Residential Owner Occupied  2  $308   17  $1,680 
Residential Non Owner Occupied  2   361   2   361 
CRE Owner Occupied  0   -   0   - 
CRE Non Owner Occupied  1   135   2   493 
Agriculture Land  0   -   0   - 
Other CRE  0   -   0   - 
Commercial working capital or other  2   24   13   1,700 
Home Equity / Improvement  5   234   12   401 
Consumer Finance  1   3   3   22 
Total  13  $1,065   49  $4,657 

 

The loans described above increased the allowance for loan loss by $60,000 in the three month period ending September 30, 2014 and increased the allowance for loan loss by $55,000 in the nine month period ending September 30, 2014.

 

Of the 2015 modifications, 13 were made TDRs due to the fact that the borrower has been in bankruptcy, 1 was made TDR due to extending the amortization, 1 was made a TDR due to an interest only period, 1 was made a TDR due to extending the maturity, 11 were made TDRs due to advancing funds to a watchlist credit, 3 was to term out a line of credit and 7 were made to refinance current debt for payment relief.

 

The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and nine month periods ended September 30, 2015 and September 30, 2014:

 

  

Three Months Ended September 30,
2015

($ in thousands)

 

Nine Months Ended September 30,
2015

($ in thousands)

Troubled Debt Restructurings That Subsequently Defaulted  Number of
Loans
  Recorded Investment
(as of period end)
   Number of
Loans
  Recorded Investment
(as of period end)
 
 1-4 Family Owner Occupied  0  $-   0  $- 
1-4 Family Non Owner Occupied  0   -   1   105 
CRE Owner Occupied  0   -   0   - 
CRE Non Owner Occupied  0   -   0   - 
Agriculture Land  0   -   0   - 
Other CRE  0   -   0   - 
Commercial Working Capital or Other  1   120   1   120 
Commercial Other  5   1,829   5   1,829 
Home Equity and Improvement  0   -   1   22 
Consumer Finance  0   -   0   - 
Total  6  $1,949   8  $2,076 

 

The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and nine month periods ended September 30, 2015.

 

 36 

 

 

   Three Months Ended September 30,
2014
($ In Thousands)
  Nine Months Ended September 30,
2014
($ In Thousands)
Troubled Debt Restructurings
That Subsequently Defaulted
  Number of
Loans
  Recorded Investment
(as of period end)
   Number of
Loans
  Recorded Investment
(as of period end)
 
               
Residential Owner Occupied  1  $80   1  $80 
Residential Non Owner Occupied  0   0   1   182 
CRE Owner Occupied  4   146   4   146 
CRE Non Owner Occupied  0   -   0   - 
Agriculture Land  0   -   0   - 
Other CRE  0   -   0   - 
Commercial  working capital or other  4   1,269   4   1,269 
Home Equity / Improvement  0   -   0   - 
Consumer Finance  0   -   0   - 
Total  9  $1,495   10  $1,677 

 

The TDRs that subsequently defaulted described above decreased the allowance for loan losses by $15,000 for the three and nine month periods ended September 30, 2014.

 

The terms of certain other loans were modified during the period ending September 30, 2015 that did not meet the definition of a TDR. The modification of these loans involved a modification of the terms of a loan to borrowers who were not experiencing financial difficulties. A total of 59 loans were modified under this definition during the three month period ended September 30, 2015 and a total of 212 loans were modified under this definition during the nine month period ended September 30, 2015.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

 

Credit Quality Indicators

 

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

 

 37 

 

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of September 30, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

 

Class  Pass   Special
Mention
   Substandard   Doubtful   Not
Graded
   Total 
                         
1-4 Family Owner Occupied  $5,516   $150   $1,970   $-   $132,820   $140,456 
1-4 Family Non Owner Occupied   54,283    2,088    4,394    -    4,527    65,292 
                               
Total 1-4 Family Real Estate   59,799    2,238    6,364    -    137,347    205,748 
                               
Multi-Family Residential Real Estate   159,206    208    3,798    -    118    163,330 
                               
CRE Owner Occupied   299,619    20,719    6,489    -    819    327,646 
CRE Non Owner Occupied   284,404    2,900    4,371    -    17    291,692 
Agriculture Land   92,750    993    2,557    -    -    96,300 
Other CRE   41,836    779    2,686    -    498    45,799 
                               
Total Commercial Real Estate   718,609    25,391    16,103    -    1,334    761,437 
                               
Construction   60,624    -    -    -    14,053    74,677 
                               
Commercial Working Capital   149,408    3,350    817    -    -    153,575 
Commercial Other   243,224    3,680    3,605    -    -    250,509 
                               
Total Commercial   392,632    7,030    4,422    -    -    404,084 
                               
Home Equity and Home Improvement   -    -    559    -    113,717    114,276 
Consumer Finance   -    -    8    -    15,752    15,760 
                               
Total Loans  $1,390,870   $34,867   $31,254   $-   $282,321   $1,739,312 

 

 38 

 

 

As of December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

 

Class  Pass   Special
Mention
   Substandard   Doubtful   Not
Graded
   Total 
                         
1-4 Family Owner Occupied  $4,230   $131   $3,048   $365   $135,306   $143,080 
1-4 Family Non Owner Occupied   51,327    2,404    4,872    7    5,174    63,784 
                               
Total 1-4 Family Real Estate   55,557    2,535    7,920    372    140,480    206,864 
                               
Multi-Family Residential Real Estate   152,290    220    3,236    -    914    156,660 
                               
CRE Owner Occupied   273,406    18,448    9,953    -    1,175    302,982 
CRE Non Owner Occupied   224,073    7,898    13,186    -    27    245,184 
Agriculture Land   90,875    1,849    819    -    -    93,543 
Other CRE   40,147    63    3,466    -    572    44,248 
                               
Total Commercial Real Estate   628,501    28,258    27,424    -    1,774    685,957 
                               
Construction   62,355    -    150    -    11,217    73,722 
                               
Commercial Working Capital   128,229    6,287    1,444    -    -    135,960 
Commercial Other   253,576    6,504    4,991    -    -    265,071 
                               
Total Commercial   381,805    12,791    6,435    -    -    401,031 
                               
Home Equity and Home Improvement   -    -    1,647    106    110,529    112,282 
Consumer Finance   -    -    125    -    15,326    15,451 
                               
Total Loans  $1,280,508   $43,804   $46,937   $478   $280,240   $1,651,967 

 

Foreclosure Proceedings

 

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $140,000 as of September 30, 2015.

 

 39 

 

 

9.Mortgage Banking

 

Net revenues from the sales and servicing of mortgage loans consisted of the following:

 

   Three Months Ended
 September 30,
   Nine Months Ended
 September 30,
 
   2015   2014   2015   2014 
   (In Thousands) 
Gain from sale of mortgage loans  $1,197   $973   $3,728   $2,601 
Mortgage loans servicing revenue (expense):                    
Mortgage loans servicing revenue   866    870    2,593    2,652 
Amortization of mortgage servicing rights   (407)   (366)   (1,264)   (1,026)
Mortgage servicing rights valuation adjustments   24    68    191    105 
    483    572    1,520    1,731 
                     
Net revenue from sale and servicing of mortgage loans  $1,680   $1,545   $5,248   $4,332 

 

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.35 billion at September 30, 2015 and December 31, 2014.

 

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and nine months ended September 30, 2015 and 2014:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2015   2014   2015   2014 
   (In Thousands) 
Mortgage servicing assets:                
Balance at beginning of period  $9,872   $9,993   $9,923   $10,133 
Loans sold, servicing retained   449    348    1,255    868 
Amortization   (407)   (366)   (1,264)   (1,026)
Carrying value before valuation allowance at end of period   9,914    9,975    9,914    9,975 
                     
Valuation allowance:                    
Balance at beginning of period   (744)   (990)   (911)   (1,027)
Impairment recovery (charges)   24    68    191    105 
Balance at end of period   (720)   (922)   (720)   (922)
Net carrying value of MSRs at end of period  $9,194   $9,053   $9,194   $9,053 
Fair value of MSRs at end of period  $9,629   $9,933   $9,629   $9,933 

 

Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced. Estimates of future amortization expense are not easily estimable.

 

The Company established an accrual for secondary market buy-back losses that resulted in a reversal of $84,000 for the first nine months of 2015 mainly due to no actual losses being recorded in 2015. In the first nine months of 2014, the Company accrued $276,000 which was partially offset by reversing $67,000 of accrued expenses related to the Freddie Mac post-foreclosure review that began in the third quarter of 2013 and was reversed in 2014 with no losses resulting.

 

 40 

 

 

10.Deposits

 

A summary of deposit balances is as follows (in thousands):

 

   September 30,
2015
   December 31,
2014
 
   (In Thousands) 
Non-interest-bearing checking accounts  $392,103   $379,552 
Interest-bearing checking and money market accounts   745,233    727,729 
Savings deposits   216,613    203,673 
Retail certificates of deposit less than $250,000   414,366    422,907 
Retail certificates of deposit greater than $250,000   24,738    26,952 
   $1,793,053   $1,760,813 

 

11.Borrowings

 

First Defiance’s FHLB advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:

 

   September 30,
2015
   December 31,
2014
 
   (In Thousands) 
FHLB Advances:          
Single maturity fixed rate advances  $27,000   $- 
Putable advances   5,000    12,000 
Amortizable mortgage advances   8,801    9,544 
Total  $40,801   $21,544 
           
Junior subordinated debentures owed to unconsolidated subsidiary trusts  $36,083   $36,083 

 

The putable advance can be put back to the Company at the option of the FHLB on a quarterly basis. A $5.0 million putable advance with a weighted average rate of 2.35% was not yet callable by the FHLB at September 30, 2015. The call date for this advance is December 14, 2015 and the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.

 

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 1.83% as of September 30, 2015 and 1.74% as of December 31, 2014.

 

 41 

 

 

The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.

 

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 1.71% and 1.62% on September 30, 2015 and December 31, 2014 respectively.

 

The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.

 

The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

 

Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the option of the issuer.

 

Repurchase Agreements. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.

 

 42 

 

 

The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of September 30, 2015 and December 31, 2014 is presented in the following tables.

 

  
Overnight and
Continuous
   Up to 30
Days
   30-90 Days   Greater 
than 90
 Days
   Total 
At September 30, 2015      (In Thousands) 
Repurchase agreements:                         
Mortgage-backed securities – residential  $19,618   $-   $-   $-   $19,618 
Collateralized mortgage obligations   34,220    -    -    -    34,220 
Total borrowings  $53,838   $-   $-   $-   $53,838 
Gross amount of recognized liabilities for repurchase agreements                      $53,838 

 

  

Overnight and
Continuous

   Up to 30
Days
   30-90 Days   Greater
than 90
Days
  

Total

 
At December 31, 2014      (In Thousands) 
Repurchase agreements:                         
Mortgage-backed securities – residential  $16,570   $-   $-   $-   $16,570 
Collateralized mortgage obligations   38,189    -    -    -    38,189 
Total borrowings  $54,759   $-   $-   $-   $54,759 
Gross amount of recognized liabilities for repurchase agreements                      $54,759 

 

12.Commitments, Guarantees and Contingent Liabilities

 

Loan commitments are made to accommodate the financial needs of First Federal’s customers; however, there are no long-term, fixed-rate loan commitments that result in market risk. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate customers’ trade transactions.

 

Both arrangements have credit risk, essentially the same as that involved in extending loans to customers, and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained based on Management’s credit assessment of the customer.

 

The Company’s maximum obligation to extend credit for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding as of the periods stated below were as follows (In Thousands):

 

   September 30, 2015   December 31, 2014 
   Fixed Rate   Variable Rate   Fixed Rate   Variable Rate 
Commitments to make loans  $40,383   $82,986   $37,546   $69,232 
Unused lines of credit   22,767    299,208    20,385    307,449 
Standby letters of credit   -    19,799    -    17,886 
Total  $63,150   $401,993   $57,931   $394,567 

 

Commitments to make loans are generally made for periods of 60 days or less. In addition to the above commitments, First Defiance had commitments to sell $24.1 million and $11.6 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at September 30, 2015 and December 31, 2014, respectively.

 

 43 

 

 

13.Income Taxes

 

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2010. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

 

14.Derivative Financial Instruments

 

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately $17.9 million and $7.4 million of interest rate lock commitments at September 30, 2015 and December 31, 2014, respectively. There were $24.1 million and $11.6 million of forward commitments for the future delivery of residential mortgage loans at September 30, 2015 and December 31, 2014, respectively.

 

The fair value of these mortgage banking derivatives are reflected by a derivative asset. The table below provides data about the carrying values of these derivative instruments:

 

   September 30, 2015   December 31, 2014 
   Assets   (Liabilities)       Assets   (Liabilities)     
           Derivative           Derivative 
   Carrying   Carrying   Net Carrying   Carrying   Carrying   Net Carrying 
   Value   Value   Value   Value   Value   Value 
   (In Thousands) 
Derivatives not designated as hedging instruments                              
Mortgage Banking                              
Derivatives  $738   $(100)  $638   $351   $(24)  $327 

 

The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:

 

   Three Months Ended 
September 30,
   Nine Months Ended
 September 30,
 
   2015   2014   2015   2014 
   (In Thousands) 
Derivatives not designated as hedging instruments                    
                     
Mortgage Banking Derivatives – Gain (Loss)  $(94)  $(27)  $311   $151 

 

The above amounts are included in mortgage banking income with gain on sale of mortgage loans.

 

 44 

 

 

Note 15 - Other Comprehensive Income (Loss)

 

The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below. Reclassification adjustments related to securities available for sale are included in gains on sale or call of securities in the accompanying consolidated condensed statements of income.

 

   Before Tax
Amount
   Tax Expense
(Benefit)
   Net of Tax
Amount
 
  (In Thousands) 
Three months ended September 30, 2015:    
Securities available for sale and transferred securities:               
Change in net unrealized gain (loss) during the period  $2,024   $709   $1,315 
Reclassification adjustment for net gains included in net income   -    -    - 
Total other comprehensive Income (loss)  $2,024   $709   $1,315 
                
Nine months ended September 30, 2015:               
Securities available for sale and transferred securities:               
Change in net unrealized gain (loss) during the period  $(313)  $(108)  $(205)
Reclassification adjustment for net gains included in net income   -    -    - 
Total other comprehensive loss  $(313)  $(108)  $(205)

 

   Before Tax
Amount
   Tax Expense
(Benefit)
   Net of Tax
Amount
 
Three months ended September 30, 2014:               
Securities available for sale and transferred securities:               
Change in net unrealized gain (loss) during the period  $707   $225   $482 
Reclassification adjustment for net gains included in net income   (460)   (138)   (322)
Total other comprehensive income (loss)  $247   $87   $160 

 

   Before Tax
Amount
   Tax Expense
(Benefit)
   Net of Tax
Amount
 
Nine months ended September 30, 2014:               
Securities available for sale and transferred securities:               
Change in net unrealized gain (loss) during the period  $5,172   $1,764   $3,408 
Reclassification adjustment for net gains included in net income   (931)   (279)   (652)
Total other comprehensive Income (loss)  $4,241   $1,485   $2,756 

 

 45 

 

 

Activity in accumulated other comprehensive income (loss), net of tax, was as follows:

 

           Accumulated 
   Securities   Post-   Other 
   Available   retirement   Comprehensive 
   For Sale   Benefit   Income 
   (In Thousands) 
Balance January 1, 2015  $4,697   $(583)  $4,114 
Other comprehensive income (loss) before reclassifications   (205)   -    (205)
Amounts reclassified from accumulated other comprehensive income   -    -    - 
                
Net other comprehensive income during period   (205)   -    (205)
                
Balance September 30, 2015  $4,492   $(583)  $3,909 
                
                
Balance January 1, 2014  $906   $(361)  $545 
Other comprehensive income (loss) before reclassifications   3,408    -    3,408 
Amounts reclassified from accumulated other comprehensive income   (652)   -    (652)
                
Net other comprehensive income during period   2,756    -    2,756 
                
Balance September 30, 2014  $3,662   $(361)  $3,301 

 

 

Note 16 – Affordable Housing Projects Tax Credit Partnership

 

The Company makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

 

The Company is a limited partner in each LIHTC Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

 

 46 

 

 

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01 “Accounting for Investments in Qualified Affordable Housing Projects.” The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and will recognize the net investment performance in the income statement as a component of income tax expense (benefit). The Company elected to early adopt ASU 2014-01 in January 2014. All of the Company’s investments are accounted for under the proportional amortization method, as there were no investments held prior to January of 2014. As of September 30, 2015 and December 31, 2014 the Company had $4.4 million and $4.6 million in qualified investments recorded in other assets and $2.6 million and $3.0 million in unfunded commitments recorded in other liabilities, respectively.

 

Unfunded Commitments

 

As of September 30, 2015, the expected payments for unfunded affordable housing commitments were as follows:

 

(dollars in thousands)  Amount 
2015  $997 
2016   612 
2017   160 
2018   414 
2019   93 
Thereafter   312 
Total Unfunded Commitments  $2,588 

 

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and nine months ended September 30, 2015 and 2014.

 

 47 

 

 

   Three Months Ended
September 30,
 
(dollars in thousands)  2015   2014 
Proportional Amortization Method          
Tax credits and other tax benefits recognized  $118   $65 
Amortization expense in federal income taxes   89    48 

 

   Nine Months Ended
September 30,
 
(dollars in thousands)  2015   2014 
Proportional Amortization Method          
Tax credits and other tax benefits recognized  $354   $397 
Amortization expense in federal income taxes   268    296 

 

There were no impairment losses of LIHTC investments for the three and nine months ended September 30, 2015 and 2014.

 

 48 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Information

 

Certain statements contained in this quarterly report are not historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, or “continue” or the negative thereof or other variations thereon or comparable terminology are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of market and other factors. The Company assumes no obligation to update any forward-looking statements.

 

General

 

First Defiance is a unitary thrift holding company that conducts business through its wholly owned subsidiaries, First Federal, First Insurance and First Defiance Risk Management. First Federal is a federally chartered stock savings bank that provides financial services to communities through 33 full service banking centers in communities based in northwest Ohio, northeast Indiana, and southeastern Michigan. First Federal operates one loan production office in central Ohio. First Federal provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust and wealth management services through its extensive branch network.

 

First Insurance sells a variety of property and casualty, group health and life, and individual health and life insurance products. Insurance products are sold through First Insurance’s offices in Defiance, Bryan, Bowling Green, Maumee, Oregon and Lima, Ohio areas. On September 1, 2015, First Insurance acquired a group medical benefits business from Buckeye Insurance Consultants, Inc. located in Lima, Ohio for a cash purchase price of $495,000 of which $198,000 is set aside for contingent payments to be paid in cash in 2016, 2017 and 2018 if certain conditions regarding future revenue are met. As of September 30, 2015, management had determined there was goodwill of $273,000 and identifiable intangible assets of $175,000 consisting of a customer relationship intangible of $64,000 and a non-compete intangible of $111,000 related to the acquisition.

 

First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

 

Impact of Legislation - Over the last several years, Congress and the U.S. Department of the Treasury have enacted legislation and taken actions to address the disruptions in the financial system, declines in the housing market, and the overall regulation of financial institutions and the financial system. In this regard, the 2010 Dodd-Frank Act, includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affect the regulation of community banks, thrifts, and bank and thrift holding companies, such as First Defiance. The Dodd-Frank Act relaxed rules regarding interstate branching, allows financial institutions to pay interest on business checking accounts, changed the scope of federal deposit insurance coverage, imposed new capital requirements on bank and thrift holding companies, and imposed limits on debit card interchange fees charged by issuer banks (commonly known as the Durbin Amendment).

 

 49 

 

 

The Dodd-Frank Act also established the CFPB as an independent bureau within the Federal Reserve, which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks.

 

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB recently published numerous final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, and mortgage loan originator compensation and more regulations are anticipated. First Defiance cannot predict the content of the final CFPB and other federal agency regulations or the impact they might have on First Defiance’s financial results. The CFPB’s authority over mortgage lending, and its authority to change regulations adopted in the past by other regulators, or to rescind or ignore past regulatory guidance, could increase First Defiance’s compliance costs and litigation exposure.

 

Volcker Rules - On December 10, 2013, the Board of Governors of the Federal Reserve System, the OCC, the FDIC, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (collectively, “Regulators”) adopted the final version of the Volcker Rule (“Final Volcker Rule”). The Final Volcker Rule restricts United States banks from making certain kinds of speculative investments that do not benefit their customers. The Final Volcker Rule’s purpose is to put in place, as mandated under Section 619 of the Dodd-Frank Act, regulations to help avoid the financial crisis that occurred during the recent past. The Final Volcker Rule is intended to effectively reduce risks posed to banking entities by proprietary trading activities and investments in or relationships with covered funds while permitting banking entities to continue to provide client-oriented financial services that are critical to capital generation and liquid markets.

 

On January 14, 2014, the Regulators issued an interim final rule (“Interim Final Volcker Rule”) regarding the treatment of certain collateralized debt obligations backed by trust preferred securities (“TruPS-backed CDOs”) under the Final Volcker Rule implementing Section 619 of the Dodd-Frank Act. The Interim Final Volcker Rule, which does not technically amend the Final Volcker Rule but will operate as a “companion rule” to the Final Volcker Rule, specifies that the Final Volcker Rule’s covered fund restrictions do not apply to the ownership by a banking entity of an interest in, or sponsorship of, any issuer of TruPS-backed CDOs if certain conditions are met. Contemporaneously with the Regulators release of the Interim Final Volcker Rule, the Regulators issued a non-exclusive list of issuers of TruPS-backed CDOs that meet the requirements of the Interim Final Volcker Rule. The Interim Final Volcker Rule provides that a banking entity “may rely” on this list.

 

 50 

 

 

First Defiance’s management team continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of First Defiance. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and First Defiance in particular, continues to be uncertain.

 

New Capital Rules - The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

 

Prior to January 1, 2015, the guidelines applicable to First Defiance and First Federal included a minimum for the ratio of total capital to risk-weighted assets of 8%, with at least half of the ratio composed of common shareholders’ equity, minority interests in certain equity accounts of consolidated subsidiaries and a limited amount of qualifying preferred stock and qualified trust preferred securities, less goodwill and certain other intangible assets (known as “Tier 1” risk-based capital). The guidelines also provided for a minimum ratio of Tier 1 capital to average assets, or “leverage ratio,” of 3% for savings and loan holding companies that meet certain criteria, including having the highest regulatory rating, and 4% for all other savings and loan holding companies.

 

The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”) in 1988. In 2004, the Basel Committee published a new capital adequacy framework (Basel II) for large, internationally active banking organizations and in December 2010 and January 2011, the Basel Committee issued an update to Basel II (“Basel III”). The Basel Committee frameworks did not become applicable to financial institutions supervised in the United States until adopted into United States law or regulations. Although the United States banking regulators imposed some of the Basel II and Basel III rules on financial institutions with $250 billion or more in assets or $10 billion of on-balance sheet foreign exposure, it was not until July 2013 that the United States banking regulators issued final (or, in the case of the FDIC, interim final) new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phase in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital will phase in from January 1, 2015, through January 1, 2019.

 

 51 

 

 

The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5%, (b) a Tier 1 capital ratio of at least 6.0%, rather than the former 4.0%, (c) a minimum total capital ratio that remains at 8.0%, and (d) a minimum leverage ratio of 4%.

 

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

 

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

 

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

 

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). The deductions phase in from 2015 through 2019.

 

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Some of the risk weightings have been changed effective January 1, 2015.

 

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016, at .625%. The implementation of Basel III did not have a material impact on First Defiance’s or First Federal’s capital ratios.

 

Business Strategy - First Defiance’s primary objective is to be a high performing community banking organization, well regarded in its market areas. First Defiance accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. First Defiance believes in a “Customer First” philosophy that is strengthened by its Trusted Advisor initiative. First Defiance also has a tagline of “Better Together” as an indication of its commitment to local, responsive, personalized service. First Defiance believes this strategy results in greater customer loyalty and profitability through core relationships. First Defiance is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of First Defiance’s business strategy are commercial banking, consumer banking, including the origination and sale of single family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.

 

 52 

 

 

Commercial and Commercial Real Estate Lending - Commercial and commercial real estate lending have been an ongoing focus and a major component of First Federal’s success. First Federal provides primarily commercial real estate and commercial business loans with an emphasis on owner occupied commercial real estate and commercial business lending with a focus on the deposit balances that accompany these relationships. First Federal’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. First Federal’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require First Federal to have a high degree of knowledge and understanding of their business in order to provide them with solutions to their financial needs. First Federal’s Customer First philosophy and culture complements this need of its clients. First Federal believes this personal service model differentiates First Federal from its competitors, particularly the larger regional institutions. First Federal offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. First Federal also believes that the small business customer is a strong market for First Federal. First Federal participates in many of the Small Business Administration lending programs and implemented a new program in 2014 targeting the small business customer. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.

 

Consumer Banking - First Federal offers customers a full range of deposit and investment products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service (“CDARS”) and savings accounts. First Federal offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. First Federal also offers online banking services, which include mobile banking, online bill pay along with debit cards.

 

Fee Income Development - Generation of fee income and the diversification of revenue sources are accomplished through the mortgage banking operation, insurance subsidiary and the wealth management department as First Defiance seeks to reduce reliance on retail transaction fee income.

 

Deposit Growth - First Federal’s focus has been to grow core deposits with an emphasis on total relationship banking with both our retail and commercial customers. First Federal has initiated a pricing strategy that considers the whole relationship of the customer. First Federal will continue to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service, business development strategies and branch expansion. First Federal will look to grow its footprint in areas believed to further complement its overall market share and complement its strategy of being a high performing community bank.

 

 53 

 

 

Asset Quality - Maintaining a strong credit culture is of the utmost importance to First Federal. First Federal has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. First Federal is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. First Federal has directed its attention on loan types and markets that it knows well and in which it has historically been successful. First Federal strives to have loan relationships that are well diversified in both size and industry, and monitor the overall trends in the portfolio to maintain its industry and loan type concentration targets. First Federal maintains a problem loan remediation process that focuses on detection and resolution. First Federal maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third party loan review.

 

Expansion Opportunities - First Defiance believes it is well positioned to take advantage of acquisitions or other business opportunities in its market areas. First Defiance believes it has a track record of successfully accomplishing both acquisitions and de novo branching in its market area. This track record puts the Company in a solid position to enter or expand its business. First Defiance has successfully integrated acquired institutions in the past. First Defiance will continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its primary geographic market area, which it knows well, and has been competing in for a long period of time as well as surrounding market areas.

 

Investments - First Defiance invests in U.S. Treasury and federal government agency obligations, obligations of municipal and other political subdivisions, mortgage-backed securities which are issued by federal agencies, corporate bonds, and collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"). Management determines the appropriate classification of all such securities at the time of purchase in accordance with FASB ASC Topic 320.

 

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of $251,000 at September 30, 2015. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of $236.9 million at September 30, 2015. The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($3.0 million), certain municipal obligations ($90.4 million), CMOs/REMICs ($75.4 million), corporate bonds ($6.0 million), and mortgage backed securities ($62.1 million).

 

In accordance with ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income.

 

 54 

 

 

Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new and renewed collateral dependent real estate term loans, and certain renewed collateral dependent real estate lines of credit. The appraisal process is handled by the Credit Department, which selects the appraiser and orders the appraisal. First Defiance’s loan policy prohibits the account officer from talking or communicating with the appraiser to insure that the appraiser is not influenced by the account officer in any way in making their determination of value.

 

First Federal generally does not require updated appraisals for performing loans unless new money is requested by the borrower.

 

First Federal has a qualified individual in the Credit Department perform a review of all commercial appraisals or evaluations received. If an appraisal or evaluation is not reviewed by credit department personnel, it will be reviewed by a qualified person independent of the transaction. During the review the individual shall review the appraisal for accuracy, reasonableness of assumptions used, appropriateness of comparables used, and the reasonableness of the opinion of value. For appraisals ordered to determine or update collateral values for criticized loans, a qualified individual in the Credit Department will perform a comprehensive review on the appraisal for loan exposure of $250,000 or more. For loans less than $250,000, the workout officer will perform an administrative review.

 

When a collateral dependent loan is downgraded to classified status, First Federal reviews the most current appraisal on file and if necessary, based on First Federal’s assessment of the appraisal, such as age, market, etc, First Federal will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s estimation of the carrying and selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, we may require a new appraisal. Finally, First Federal assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge off is necessary.

 

First Federal does not adjust any appraisals upward without written documentation of this valuation change from the appraiser. When setting reserves and charge offs on classified loans, appraisal values may be discounted downward based upon First Federal’s experience with liquidating similar properties.

 

All loans over 90 days past due and/or on non-accrual are classified as non-performing loans. Non-performing status automatically occurs in the month in which the 90 day delinquency occurs.

 

Appraisals are received within approximately 60 days after they are requested. The First Federal Loan Loss Reserve Committee reviews the amount of each new appraisal for classified borrowers and makes any necessary charge off decisions at its meeting prior to the end of each quarter.

 

 55 

 

 

Any partially charged-off collateral dependent loans are considered non-performing, and as such, would need to show an extended period of time with satisfactory payment performance as well as cash flow coverage capability supported by current financial statements before First Federal will consider an upgrade to performing status. First Federal may consider moving the loan to accruing status after approximately six months of satisfactory payment performance.

 

For loans where First Federal determines that an updated appraisal is not necessary, other means are used to verify the value of the real estate, such as recent sales of similar properties on which First Federal had loans as well as calls to appraisers, brokers, realtors and investors. First Federal monitors and tracks its loan to value quarterly to determine accuracy and any necessary charge offs. Based on these results, changes may occur in the processes used.

 

Loan modifications constitute a Troubled Debt Restructuring (“TDR”) if First Federal for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. For loans that are considered TDRs, First Federal either computes the present value of expected future cash flows discounted at the original loan’s effective interest rate or it may measure impairment based on the fair value of the collateral. For those loans measured for impairment utilizing the present value of future cash flows method, any discount is carried as a reserve in the allowance for loan and lease losses. For those loans measured for impairment utilizing the fair value of the collateral, any shortfall is charged off.

 

Earnings - The profitability of First Defiance is primarily dependent on its net interest income and non-interest income. Net interest income is the difference between interest income on interest-earning assets, principally loans and securities, and interest expense on interest-bearing deposits, FHLB advances, and other borrowings. The Company’s non-interest income is mainly derived from service fees and other charges, mortgage banking income, and insurance commissions. First Defiance's earnings also depend on the provision for loan losses and non-interest expenses, such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums, and miscellaneous other expenses, as well as federal income tax expense.

 

Changes in Financial Condition

 

At September 30, 2015, First Defiance's total assets, deposits and stockholders' equity amounted to $2.23 billion, $1.79 billion and $278.6 million, respectively, compared to $2.18 billion, $1.76 billion and $279.5 million, respectively, at December 31, 2014.

 

Net loans receivable (excluding loans held for sale) increased $86.3 million to $1.71 billion. The variance in loans receivable between September 30, 2015 and December 31, 2014 include increases in commercial real estate loans (up $81.7 million), commercial loans (up $2.9 million), home equity and improvement loans (up $2.0 million), and construction loans (up $1.0 million). These increases were just slightly offset by a decrease in residential real estate loans (down $1.1 million).

 

The investment securities portfolio decreased $2.5 million to $237.2 million at September 30, 2015 from $239.6 million at December 31, 2014. The decrease is the result of $22.2 million of securities maturing or being called during the first nine months of 2015. This was partially offset by purchases of $20.7 million of securities. There was an unrealized gain in the investment portfolio of $6.9 million at September 30, 2015 compared to an unrealized gain of $7.2 million at December 31, 2014.

 

 56 

 

 

Deposits increased $32.2 million to $1.79 billion at September 30, 2015 from $1.76 billion at December 31, 2014. Non-interest bearing demand deposits increased $12.6 million to $392.1 million, interest-bearing demand deposits and money market accounts increased $17.5 million to $745.2 million and savings deposits increased $12.9 million to $216.6 million. These increases were partially offset by a decrease in retail time deposits of $10.8 million to $439.1 million.

 

Stockholders’ equity decreased slightly from $279.5 million at December 31, 2014 to $278.6 million at September 30, 2015. The decrease in stockholders’ equity was the result of the $12.0 million cost of repurchasing the warrant issued to the U.S. Treasury under the TARP Capital Purchase Program, $5.3 million of common stock dividends being paid in the first nine months of 2015, and $5.3 million in repurchased common stock in the first nine months of 2015. These were mostly offset by recording net income of $19.9 million and a $1.6 million increase due to stock option exercises.

 

 57 

 

 

Average Balances, Net Interest Income and Yields Earned and Rates Paid

 

The following table presents for the periods indicated the total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in thousands of dollars and rates, and the net interest margin. The table reports interest income from tax-exempt loans and investment on a tax-equivalent basis. All average balances are based upon daily balances (dollars in thousands).

 

   Three Months Ended September 30, 
   2015   2014 
   Average       Yield/   Average       Yield/ 
   Balance   Interest(1)   Rate(2)   Balance   Interest(1)   Rate(2) 
Interest-earning assets:                              
Loans receivable  $1,696,370   $18,472    4.32%  $1,586,652   $17,406    4.35%
Securities   236,485    2,105    3.63    235,459    2,144    3.70 
Interest bearing deposits   53,627    33    0.24    98,738    64    0.26 
FHLB stock   13,802    138    3.97    13,802    137    3.94 
Total interest-earning assets   2,000,284    20,748    4.13    1,934,651    19,751    4.06 
Non-interest-earning assets   222,559              218,575           
Total assets  $2,222,843             $2,153,226           
                               
Interest-bearing liabilities:                              
Deposits  $1,397,965   $1,363    0.39%  $1,396,698   $1,304    0.37%
FHLB advances and other   41,047    178    1.72    21,872    131    2.38 
Subordinated debentures   36,128    154    1.69    36,129    147    1.61 
Securities sold under repurchase agreements   54,598    38    0.28    56,776    41    0.29 
Total interest-bearing liabilities   1,529,738    1,733    0.45    1,511,475    1,623    0.43 
Non-interest bearing deposits   388,849    -         341,796    -      
Total including non-interest bearing demand deposits   1,918,587    1,733    0.36    1,853,271    1,623    0.35 
Other non-interest-bearing liabilities   27,021              22,987           
Total liabilities   1,945,608              1,876,258           
Stockholders' equity   277,235              276,968           
Total liabilities and stock- holders' equity  $2,222,843             $2,153,226           
Net interest income; interest rate spread       $19,015    3.68%       $18,128    3.63%
Net interest margin (3)             3.78%             3.73%
Average interest-earning assets to average interest-bearing liabilities             131%             128%

 

 

(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.

 

 58 

 

 

   Nine Months Ended September 30, 
   2015   2014 
   Average       Yield/   Average      Yield/ 
   Balance   Interest (1)   Rate (2)   Balance   Interest (1)   Rate (2) 
Interest-earning assets:                              
Loans receivable  $1,672,393   $54,590    4.36%  $1,561,118   $50,996    4.37%
Securities   241,016    6,369    3.64    218,527    6,091    3.83 
Interest bearing deposits   56,315    113    0.27    146,798    283    0.26 
FHLB stock   13,802    413    4.00    14,969    502    4.48 
Total interest-earning assets   1,983,526    61,485    4.16    1,941,412    57,872    3.99 
Non-interest-earning assets   221,609              213,615           
Total assets  $2,205,135             $2,155,027           
                               
Interest-bearing liabilities:                              
Deposits  $1,396,731   $3,947    0.38%  $1,401,481   $3,989    0.38%
FHLB advances   34,038    461    1.81    22,117    397    2.40 
Subordinated debentures   36,129    451    1.67    36,132    439    1.62 
Securities sold under repurchase agreements   53,740    113    0.28    53,614    121    0.30 
Total interest-bearing liabilities   1,520,638    4,972    0.44    1,513,344    4,946    0.44 
Non-interest bearing deposits   379,305    -         343,795    -      
Total including non-interest bearing demand deposits   1,899,943    4,972    0.35    1,857,139    4,946    0.36 
Other non-interest-bearing liabilities   28,062              22,154           
Total liabilities   1,928,005              1,879,293           
Stockholders' equity   277,130              275,734           
Total liabilities and stock- holders' equity  $2,205,135             $2,155,027           
Net interest income; interest rate spread       $56,513    3.72%       $52,926    3.55%
Net interest margin (3)             3.82%             3.65%
Average interest-earning assets to average interest-bearing liabilities             130%             128%

 

 

(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.

 

 59 

 

 

Results of Operations

 

Three Months Ended September 30, 2015 and 2014

 

On a consolidated basis, First Defiance’s net income for the quarter ended September 30, 2015 was $6.7 million compared to net income of $7.1 million for the comparable period in 2014. On a per share basis, basic and diluted earnings per common share for the quarter ended September 30, 2015 were both $0.72, compared to basic and diluted earnings per common share of $0.75 and $0.71, respectively, for the same period in 2014. Earnings in the third quarter of 2014 were positively impacted by $299,000 of after tax gains on the sale of securities, a $903,000 tax-free benefit from a bank-owned life insurance policy and a $498,000 tax free gain realized through the company’s deferred compensation plan trust. Additional net adjustments to income taxes of $250,000, which included the write-off of a portion of unused deferred tax assets, negatively impacted third quarter 2014 results. These items combined increased the third quarter 2014 net income by $1.45 million, or $0.15 per diluted common share.

 

Net Interest Income

 

First Defiance’s net interest income is determined by its interest rate spread (i.e. the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.

 

Net interest income was $18.5 million for the quarter ended September 30, 2015, up from $17.7 million for the same period in 2014. The tax-equivalent net interest margin was 3.78% for the quarter ended September 30, 2015, an increase from 3.73% for the same period in 2014. The increase in margin between the 2014 and 2015 third quarters was due to an increase in interest-earning asset yields, which increased to 4.13% for the quarter ended September 30, 2015, up 7 basis points from 4.06% for the same period in 2014. The cost of interest-bearing liabilities between the two periods increased 2 basis points to 0.45% in the third quarter of 2015 from 0.43% in the same period in 2014. Average loan balances grew $109.7 million year over year which were partially funded by overnight interest bearing deposits which declined $45.1 million for that same period. This change in earning asset mix resulted in a positive impact to the net interest margin. Management continues to analyze and look for additional opportunities to maintain its margin, as well as other alternatives to minimize the impact of a looming rate increase in the near future.

 

Total interest income increased $980,000 to $20.3 million for the quarter ended September 30, 2015 from $19.3 million for the same period in 2014. Continued steady loan demand and an increase in the average balance of the investment portfolio continued the shift of earning assets out of lower yielding interest bearing deposits into higher yielding earning assets. The yield on total interest earning assets improved to 4.13% for the quarter ended September 30, 2015 from 4.06% for the same period in 2014. The loan portfolio yield decreased slightly to 4.32% for the quarter ended September 30, 2015 from 4.35% for the same period in 2014 while investment portfolio yields declined to 3.63% for the quarter ended September 30, 2015 from 3.70% for the same period in 2014. Income from loans increased to $18.5 million for the quarter ended September 30, 2015 compared to $17.4 million for the same period in 2014 due to $109.7 million of average loan growth year over year as well as a recovery of approximately $55,000 of non-accrual interest as a result of pay-offs and loans being put back on accrual status. Interest income from investments remained steady at $1.7 million for the quarters ended September 30, 2015 and 2014.

  

 60 

 

 

Total interest expense increased $110,000 in the third quarter of 2015 compared to the same period in 2014, to $1.7 million from $1.6 million. There was a 2 basis point increase in the average cost of interest-bearing liabilities in the third quarter of 2015 due to a slight increase in the rates on interest bearing deposits and an increase in the volume of FHLB advances. Interest expense related to interest-bearing deposits increased to $1.4 million in the third quarter of 2015 from $1.3 million in the same period in 2014. Interest expense recognized by the Company related to subordinated debentures was $154,000 in the third quarter of 2015 compared to $147,000 for the same period in 2014. Expenses on FHLB advances and securities sold under repurchase agreements were $178,000 and $38,000 respectively in the third quarter of 2015 compared to $131,000 and $41,000 respectively for the same period in 2014.

 

Allowance for Loan Losses

 

The allowance for loan losses represents management’s assessment of the estimated probable incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The allowance for loan losses is a material estimate that is susceptible to significant fluctuation and is established through a provision for loan losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of commercial loan and commercial real estate loan relationships. The goal is to have approximately 55% to 60% of the portfolio reviewed annually. This includes all relationships over $5.0 million with new exposure greater than $2.0 million and a sample of those relationships greater than $5.0 million; loan relationships between $1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of those relationships between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the allowance for loan losses associated with these types of loans.

 

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb incurred credit losses within the existing loan portfolio in the normal course of business. The allowance for loan loss is made up of two basic components. The first component is the specific allowance in which the Company sets aside reserves based on the analysis of individual credits that are cash flow dependent, yet there is a discount between the present value of the future cash flows and the carrying value. This was $358,000 at September 30, 2015. The second component is the general reserve. The general reserve is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolios based on quantitative and qualitative factors. Due to the uncertainty of risks in the loan portfolio, the Company’s judgment on the amount of the allowance necessary to absorb loans losses is approximate.

 

 61 

 

 

Due to regulatory guidance, the Company no longer carries specific reserves on collateral dependent loans, and instead charges off any shortfall. First Federal analyzes all loans on its classified and special mention lists at least quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantor in determining the amount of impairment of individual loans and the charge off to be taken.

 

For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type and by market area to allocate historic loss experience. The loss experience factor is then applied to the non-impaired loan portfolio. Beginning June 30, 2015, the Company refined the methodology to its allowance for loan loss calculation pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of the component for reserves on impaired loans. Within the general reserve, the determination of the historical loss component was modified from using a three-year average annual loss rate to a loss migration measurement. The loss migration measurement implemented June 30, 2015, utilizes an average of four (4) four-year loss migration periods for each loan portfolio segment with differentiation between loan risk grades. This approach provides for a more precise reflection of probable incurred losses by risk grade within each loan portfolio segment over an average loan life cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio, thereby requiring less weight to the subjective components of the allowance for loan losses. Prior to June 30, 2015, the approach to this component quantified the historical loss by calculating a rolling twelve quarter average annual loss rate for each portfolio segment, without differentiation between loan risk grades. This modification resulted in a change of the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses. The stratification and loss migration analysis of the loan portfolio resulted in an increase in the quantitative general allowance to $9.6 million at September 30, 2015 compared to $7.8 million at December 31, 2014.

 

In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on the non-impaired loan portfolio for various factors. The overall qualitative factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative factors: economic, environment and risk.

 

ECONOMIC

1)Changes in international, national and local economic business conditions and developments, including the condition of various market segments.
2)Changes in the value of underlying collateral for collateral dependent loans.

 

 62 

 

ENVIRONMENT

3)Changes in the nature and volume in the loan portfolio.
4)The existence and effect of any concentrations of credit and changes in the level of such concentrations.
5)Changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
6)Changes in the quality and breadth of the loan review process.
7)Changes in the experience, ability and depth of lending management and staff.

 

RISK

8)Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, trouble debt restructuring, and other loan modifications.
9)Changes in the political and regulatory environment.

 

The qualitative analysis at September 30, 2015 indicated a general reserve of $15.3 million compared with $15.7 million at December 31, 2014. Management reviewed the overall economic, environmental and risk factors. During the third quarter, the economic factors were decreased slightly due to the improvement in unemployment rates in the Northwest Ohio, Indiana and Michigan markets. Most national and regional economic indicators have also maintained favorable conditions. The environmental factors were increased due to the strong growth achieved in the first nine months of 2015 amidst highly competitive conditions on pricing and terms, including the continued growth in our new Business Banking initiative, and balances generated from the expansion of our Columbus loan production office. Changes in the commercial lending credit process were also factors considered in the environmental increases. The qualitative risk factors have been decreased as a result of continued favorable trends in asset quality and management’s consideration that implementing loss migration analysis results in more precise calculation of risk.

 

First Defiance’s general reserve percentages for main loan segments ranged from 0.32% for pass rated construction loans to 13.73% for special mention rated commercial loans at September 30, 2015.

 

As a result of the quantitative and qualitative analyses, along with the change in specific reserves, the Company recorded a credit provision for loan losses of $27,000 in the third quarter of 2015 compared to an expense of $406,000 for the same period in 2014. The allowance for loan losses was $25.2 million and $24.8 million and represented 1.45% and 1.50% of loans, net of undisbursed loan funds and deferred fees and costs, as of September 30, 2015 and December 31, 2014, respectively. Charge offs of $407,000 were partially offset by recoveries of $259,000, resulting in a reduction to the overall allowance for loan loss of $148,000 for the third quarter of 2015. In management’s opinion, the overall allowance for loan losses of $25.2 million as of September 30, 2015 is adequate.

 

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. For the quarter ended September 30, 2015, First Defiance had write-downs that totaled $19,000 for real estate held for sale. Management believes that the values recorded at September 30, 2015 for real estate owned and repossessed assets represent the realizable value of such assets.

 

 63 

 

 

Total classified loans are $31.1 million at September 30, 2015, a significant decrease compared to $47.3 million at December 31, 2014.

 

First Defiance’s ratio of allowance for loan losses to non-performing loans was 151.8% at September 30, 2015 compared with 102.6% at December 31, 2014. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that the allowances for those loans at September 30, 2015 are appropriate. Of the $16.6 million in non-accrual loans at September 30, 2015, $8.1 million or 49.0% are less than 90 days past due.

 

At September 30, 2015, First Defiance had total non-performing assets of $21.5 million, compared to $30.3 million at December 31, 2014. Non-performing assets include loans that are on non-accrual, real estate owned and other assets held for sale. Non-performing assets at September 30, 2015 and December 31, 2014 by category were as follows:

 

Table 1 – Nonperforming Asset

 

   September 30,   December 31, 
   2015   2014 
   (In Thousands) 
Non-performing loans:          
One to four family residential real estate  $2,745   $3,332 
Non-residential and multi-family residential real estate   10,090    15,174 
Commercial   3,117    4,993 
Construction   -    - 
Home equity and improvement   631    619 
Consumer Finance   29    12 
Total non-performing loans   16,612    24,130 
           
Real estate owned   4,936    6,181 
Other repossessed assets   -    - 
Total repossessed assets  $4,936    6,181 
           
Total Nonperforming assets  $21,548   $30,311 
           
Restructured loans, accruing  $13,786   $24,686 
           
Total nonperforming assets as a percentage of total assets   0.97%   1.39%
Total nonperforming loans as a percentage of total loans*   0.96%   1.47%
Total nonperforming assets as a percentage of total loans plus REO*   1.24%   1.83%
Allowance for loan losses as a percent of total nonperforming assets   116.99%   81.71%

 

* Total loans are net of undisbursed loan funds and deferred fees and costs.

 

The decrease in non-performing loans between December 31, 2014 and September 30, 2015 is primarily in commercial real estate loans. The balance of these types of non-performing loans was $5.1 million lower at September 30, 2015 compared to December 31, 2014 mainly due to some of these relationships paying off.

 

 64 

 

 

Non-performing loans in the commercial loan category represented 0.77% of the total loans in those categories at September 30, 2015 compared to 1.25% for the same category at December 31, 2014. Non-performing loans in the commercial real estate loan category represented 1.09% of the total loans in those categories at September 30, 2015 compared to 1.81% for the same category at December 31, 2014. Management believes that the current allowance for loan losses is appropriate and that the provision for loan losses is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.

 

First Federal’s Asset Review Committee meets monthly to review the status of work-out strategies for all criticized relationships, which include all non-accrual loans. Based on such factors as anticipated collateral values in liquidation scenarios, cash flow projections, assessment of net worth of guarantors and all other factors which may mitigate risk of loss, the Asset Review Committee makes recommendations regarding proposed charge-offs which are approved by the Senior Loan Committee or the Loan Loss Reserve Committee.

 

The following table details net charge-offs and non-accrual loans by loan type. For the nine months ended and as of September 30, 2015, commercial real estate, which represented 51.55% of total loans, accounted for 121.43% of net recoveries and 60.75% of non-accrual loans, and commercial loans, which represented 22.51% of total loans, accounted for 53.43% of net recoveries and 18.76% of non-accrual loans. For the nine months ended and as of September 30, 2014, commercial real estate, which represented 49.65% of total loans, accounted for (104.33)% of net charge-offs (recovery) and 61.59% of non-accrual loans, and commercial loans, which represented 23.35% of total loans, accounted for 180.27% of net charge-offs and 24.55% of non-accrual loans.

 

Table 2 – Net Charge-offs and Non-accruals by Loan Type

 

   For the Nine Months Ended September 30, 2015   As of September 30, 2015 
   Net
Charge-offs
(Recoveries)
   % of Total Net
Charge-offs
   Nonaccrual
Loans
   % of Total Non-
Accrual Loans
 
   (In Thousands)           (In Thousands)      
Residential  $97    (27.71)%  $2,745    16.52%
Construction   -    0.00%   -    0.00%
Commercial real estate   (425)   121.43%   10,090    60.75%
Commercial   (187)   53.43%   3,117    18.76%
Consumer   (19)   5.43%   29    0.17%
Home equity and improvement   184    (52.57)%   631    3.80%
Total  $(350)   100.00%  $16,612    100.00%

 

 65 

 

 

   For the Nine Months Ended September 30, 2014   As of September 30, 2014 
   Net
Charge-offs
(Recoveries)
   % of Total Net
Charge-offs
   Nonaccrual
Loans
   % of Total Non-
Accrual Loans
 
   (In Thousands)         (In Thousands)       
Residential  $197    14.80%  $3,053    13.55%
Construction   -    0.00%   -    0.00%
Commercial real estate   (1,394)   (104.33)%   13,873    61.59%
Commercial   2,412    180.27%   5,530    24.55%
Consumer   (11)   (0.75)%   -    0.00%
Home equity and improvement   134    10.01%   69    0.31%
Total  $1,338    100.00%  $22,525    100.00%

 

Table 3 – Allowance for Loan Loss Activity

 

   For the Quarter Ended 
   3rd 2015   2nd 2015   1st 2015   4th 2014   3rd 2014 
   (In Thousands) 
                     
Allowance at beginning of period  $25,384   $25,302   $24,766   $24,567   $24,627 
Provision for credit losses   (27)   -    120    162    406 
Charge-offs:                         
Residential   185    11    78    61    95 
Commercial real estate   64    146    155    505    246 
Commercial   43    23    2    212    1,272 
Consumer finance   5    13    3    1    16 
Home equity and improvement   110    187    43    87    42 
Total charge-offs   407    380    281    866    1,671 
Recoveries   259    462    697    903    1,205 
Net charge-offs (recoveries)   148    (82)   (416)   (37)   466 
Ending allowance  $25,209   $25,384   $25,302   $24,766   $24,567 

 

The following table sets forth information concerning the allocation of First Federal’s allowance for loan losses by loan categories at the dates indicated.

 

Table 4 – Allowance for Loan Loss Allocation by Loan Category

 

   September 30, 2015   June 30, 2015   March 31, 2015   December 31, 2014   September 30, 2014 
       Percent of       Percent of       Percent of       Percent of       Percent of 
       total loans       total loans       total loans       total loans       total loans 
   Amount   by category   Amount   by category   Amount   by category   Amount   by category   Amount   by category 
   (Dollars In Thousands) 
Residential  $2,779    11.48%  $2,877    11.68%  $2,483    11.79%  $2,494    12.24%  $2,424    12.44%
Construction   239    7.22%   308    7.98%   303    7.25%   221    6.66%   214    6.95%
Commercial real estate   14,397    51.55%   14,365    50.40%   14,238    50.77%   13,721    49.84%   13,668    49.65%
Commercial   5,411    22.51%   5,567    22.85%   6,766    22.90%   6,509    23.70%   6,420    23.35%
Consumer   158    0.88%   160    0.85%   92    0.87%   117    0.92%   150    0.99%
Home equity and improvement   2,225    6.36%   2,107    6.24%   1,420    6.42%   1,704    6.64%   1,691    6.62%
   $25,209    100.00%  $25,384    100.00%  $25,302    100.00%  $24,766    100.00%  $24,567    100.00%

 

 66 

 

 

Key Asset Quality Ratio Trends

 

Table 5 – Key Asset Quality Ratio Trends

 

   3rd Qtr 2015   2nd Qtr 2015   1st Qtr 2015   4th Qtr 2014   3rdQtr 2014 
Allowance for loan losses / loans*   1.45%   1.49%   1.50%   1.50%   1.50%
Allowance for loan losses to net charge-offs   17033.11%   -30956.10%   -6082.21%   -66935.14%   5271.89%
Allowance for loan losses / non-performing assets   116.99%   114.82%   100.82%   81.41%   88.21%
Allowance for loan losses / non-performing loans   151.75%   151.66%   135.28%   102.64%   109.07%
Non-performing assets / loans plus REO*   1.24%   1.29%   1.48%   1.83%   1.70%
Non-performing assets / total assets   0.97%   1.01%   1.14%   1.39%   1.29%
Net charge-offs / average loans (annualized)   0.03%   -0.02%   -0.10%   -0.01%   0.12%

* Total loans are net of undisbursed funds and deferred fees and costs.

 

Non-Interest Income.

 

Total non-interest income for the third quarter of 2015 was $8.0 million compared with

$9.4 million in the third quarter of 2014.

 

Service Fees. Service fees and other charges increased by $139,000 or 5.2% in the third quarter of 2015 compared to the same period in 2014 due to new fee structures and product redesigns implemented late in 2014.

 

First Federal’s overdraft privilege program generally provides for the automatic payment of modest overdraft limits on all accounts deemed to be in good standing when the account is accessed using paper-based check processing, a teller withdrawal, a point-of-sale terminal, an ACH transaction, an online banking or voice-response transfer, or an ATM. To be in good standing, an account must be brought to a positive balance within a 30-day period and have not excessively used the overdraft privilege program. Overdraft limits are established for all customers without discrimination using a risk assessment approach for each account classification. The approach includes a systematic review and evaluation of the normal deposit flows made to each account classification to establish reasonable and prudent negative balance limits that would be routinely repaid by normal, expected and reoccurring deposits. The risk assessment by portfolio approach assumes a minimal degree of undetermined credit risk associated with unidentified individual accounts that are overdrawn for 30 or more days. Consumer accounts overdrawn for more than 60 days are automatically charged off. Fees are charged as a one-time fee per occurrence, up to five charges per day, and the fee charged for an item that is paid is equal to the fee charged for a non-sufficient fund item that is returned.

 

Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s balance sheet. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a service to the customer and therefore deemed to be noninterest income rather than interest income. Fee income recorded for the quarters ending September 30, 2015 and 2014 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were $752,000 and $839,000, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $27,000 at September 30, 2015, $16,000 at December 31, 2014 and $16,000 at September 30, 2014.

 

 67 

 

 

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans increased $135,000 to $1.7 million for the third quarter of 2015 compared to $1.5 million for the same period in 2014. Mortgage banking activity was elevated from the third quarter a year ago, with our markets experiencing higher purchase and refinance loan volumes. Gains realized from the sale of mortgage loans increased in the third quarter of 2015 to $1.2 million from $1.0 million in the same period in 2014. Mortgage loan servicing revenue was $866,000 in the third quarter of 2015, down slightly from $870,000 in the third quarter of 2014. The amortization of mortgage servicing rights expense increased $41,000 to $407,000 in the third quarter of 2015 compared to $366,000 for the same period in 2014. The Company recorded a positive valuation adjustment of $24,000 on mortgage servicing rights in the third quarter of 2015 compared to a positive valuation adjustment of $68,000 for the same period in 2014.

 

Gain on Sale on Non-Mortgage Loans. Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $543,000 in the third quarter of 2015 compared to $40,000 in the third quarter of 2014. The Company has built up its pipeline of eligible small business administration loans since last year and increased its selling efforts in 2015.

  

Gain on Sale of Securities. The third quarter 2015 had no gains or losses on the sale of securities, while the third quarter of 2014 included gains of $460,000.

 

Trust Income. Trust income was $370,000 in the third quarter of 2015, up 17.5% from $315,000 for the same period in 2014.

 

Income from Bank Owned Life Insurance (“BOLI”). BOLI income decreased $892,000 in the third quarter of 2015 compared to the same period of 2014, resulting from a tax-free benefit from a BOLI policy due to a death claim in 2014.

 

Other Non-Interest Income. Other income decreased $798,000 in the third quarter of 2015 compared to the same period of 2014, which is mainly the result of a $498,000 tax-free gain realized in 2014 through the Company’s deferred compensation plan trust attributable to the aforementioned death claim.

 

Non-Interest Expense.

 

Non-interest expense increased to $16.8 million for the third quarter of 2015, an increase of only $77,000 from the third quarter of 2014.

 

Compensation and Benefits. Compensation and benefits increased to $9.8 million for the quarter ended September 30, 2015 from $9.3 million for the same period in 2014. The increase is mainly attributable to merit increases and higher incentive compensation.

 

 68 

 

 

Occupancy Expense. Occupancy expense was $1.8 million in the third quarter 2015, up from $1.6 million for the same period in 2014. The increase is attributable to projects relating to preventative maintenance and upkeep of the Company’s branch network.

 

Other Non-Interest Expense. Other non-interest expense of $2.8 million in the third quarter of 2015, decreased from $3.2 million in the third quarter of 2014 primarily due to reduced costs for advertising and management consulting.

 

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the third quarter of 2015 was 62.41% compared to 62.06% for the same period in 2014.

 

Income Taxes.

 

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of 30.93% for the quarter ended September 30, 2015 compared to 28.18% for the same period in 2014. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities and bank-owned life insurance (“BOLI”). The earnings on tax-exempt securities and BOLI are not subject to federal income tax.

 

Nine Months Ended September 30, 2015 and 2014

 

On a consolidated basis, First Defiance’s net income for the nine months ended September 30, 2015 was $19.9 million compared to income of $17.9 million for the same period in 2014. On a per share basis, basic and diluted earnings per common share for the nine months ended September 30, 2015 were $2.15 and $2.11, respectively, compared to basic and diluted earnings per common share of $1.87 and $1.79, respectively, for the same period in 2014.

 

Net Interest Income

 

Net interest income was $55.1 million for the nine months ended September 30, 2015 compared to $51.6 million for the same period in 2014. For the nine month period ended September 30, 2015, total interest income increased $3.5 million to $60.1 million compared to $56.5 million for the same period in 2014.

 

Interest expense increased by $26,000 to $5.0 million for the nine months ended September 30, 2015 compared to $4.9 million for the same period in 2014.

 

Net interest margin for the first nine months of 2015 was 3.82%, up 17 basis points from the 3.65% margin reported in the nine month period ended September 30, 2014.

 

Provision for Loan Losses

 

The provision for loan losses was $93,000 for the nine months ended September 30, 2015, compared to $955,000 during the nine months ended September 30, 2014. Charge-offs for the first nine months of 2015 totaled $1.1 million and recoveries of previously charged off loans totaled $1.4 million for net recoveries of $349,000. By comparison, $4.0 million of charge-offs were recorded in the same period of 2014 and $2.7 million of recoveries were realized for net charge-offs of $1.3 million.

 

 69 

 

 

Non-Interest Income

 

Total non-interest income decreased to $24.1 million for the nine months ended September 30, 2015 from $24.3 million recognized for the same period in 2014.

 

Service Fees. Service fees and other charges were $8.0 million for the first nine months of 2015, up from $7.5 million for the same period in 2014.

 

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans increased $916,000 to $5.2 million for the nine months ended September 30, 2015 from $4.3 million for the same period in 2014. Gains realized from the sale of mortgage loans increased $1.1 million to $3.7 million for the first nine months of 2015 from $2.6 million for the same period in 2014. Mortgage loan servicing revenue remained relatively flat at $2.6 million in the first nine months of 2015 compared to $2.7 million for the same period in 2014. The gains realized from the sale of mortgage loans were partially offset by the amortization of mortgage servicing rights in the amount of $1.3 million in the first nine months of 2015 up from $1.0 for the same period in 2014. The Company recorded a positive valuation adjustment of $191,000 in the nine months ended September 30, 2015 compared to a positive adjustment of $105,000 in the same period of 2014.

 

Gain on Sale on Non-Mortgage Loans. Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $776,000 for the first nine months of 2015 compared to $79,000 for the same period in 2014. The Company has built up its pipeline of eligible small business administration loans since last year and increased its selling efforts in 2015.

 

Gain on Sale of Securities. First Defiance recorded no gains on the sale of investments in the nine months ended 2015 compared to net gains of $931,000 in the same period in 2014.

 

BOLI and Other Non-Interest Income. The year-to-date decreases of $926,000 and $861,000, respectively, were both impacted by the positive adjustments mentioned above in the quarterly analysis.

 

Non-Interest Expense

 

Non-interest expense was $50.5 million for the first nine months of 2015, up slightly from $49.8 million for the same period in 2014.

 

Compensation and Benefits. Compensation and benefits increased to $27.9 million for the nine months ended September 30, 2015 compared to $26.5 million for the same period in 2014. The increase is mainly attributable to merit increases and higher incentive compensation accruals.

 

Occupancy Expense. Occupancy expense increased $456,000 to $5.4 million for the nine months ended September 30, 2015, up from $4.9 million for the same period in 2014. The increase is mainly attributable to projects relating to preventative maintenance and upkeep of the Company’s branch network.

 

 70 

 

 

Data Processing. Data processing expenses increased to $4.7 million in the first nine months of 2015, from $4.3 million for the same period in 2014. This increase is primarily due to Company strategic initiatives in implementing new products and alternative delivery channels for new and existing products.

 

Other Non-Interest Expenses. Other non-interest expenses decreased $881,000 to $9.8 million for the first nine months of 2015 from $10.6 million for the same period in 2014. The significant year-over-year decrease between 2015 and 2014 includes $786,000 of costs associated with the termination of First Federal’s merger agreement with First Community Bank in the first quarter of 2014.

 

The efficiency ratio for the first nine months of 2015 was 62.72% compared to 65.26% for the same period in 2014.

 

Liquidity

 

As a regulated financial institution, First Federal is required to maintain appropriate levels of "liquid" assets to meet short-term funding requirements.

 

First Defiance had $20.3 million of cash provided by operating activities during the first nine months of 2015.

 

At September 30, 2015, First Federal had $123.4 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $341.8 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Federal had commitments to sell $24.1 million of mortgage loans. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

 

Liquidity risk arises from the possibility that the Company may not be able to meet its financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Company’s Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates First Federal’s Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity on a monthly basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Controller.

 

Capital Resources

 

Capital is managed at First Federal and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity and operational risks inherent in our business, as well as flexibility needed for future growth and new business opportunities.

 

 71 

 

 

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer, includes the fully phased-in 2.50% buffer.

 

The Company met each of the well capitalized ratio guidelines at September 30, 2015. The following table indicates the capital ratios for First Defiance and First Federal at September 30, 2015 and December 31, 2014. (In Thousands):

 

As of September 30, 2015
   Leverage   Tier 1 Risk- Based   Common Equity
Tier 1
   Total Risk-Based 
First Federal Bank of the Midwest   11.01%   12.07%   12.07%   13.32%
First Defiance Financial Corp.   11.69%   12.85%   12.85%   14.10%
Adequately capitalized ratio   4.00%   6.00%   4.50%   8.00%
Adequately capitalized ratio plus capital conservation buffer (fully phased-in)   4.00%   8.50%   7.00%   10.50%
Well capitalized ratio (First Federal only)   5.00%   8.00%   6.50%   10.00%

 

As of December 31, 2014
   Leverage   Tier 1 Risk- Based   Common Equity
Tier 1
   Total Risk-Based 
First Federal Bank of the Midwest   11.31%   13.21%   N/A    14.46%
First Defiance Financial Corp.   11.89%   13.89%   N/A    15.15%
Adequately capitalized ratio   4.00%   4.00%   N/A    8.00%
Well capitalized ratio (First Federal only)   5.00%   6.00%   N/A    10.00%

 

Critical Accounting Policies

 

First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company’s Annual Report on Form 10-K include the Allowance for Loan Losses, Goodwill, and the Valuation of Mortgage Servicing Rights. There have been no material changes in assumptions or judgments relative to those critical policies during the first nine months of 2015. Management has modified the historical loss rate calculation in the allowance for loan loss methodology as described in Note 2 – Significant Accounting Policies. This modification did not have a material impact on the allowance for loan losses.

 

 72 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As discussed in detail in the Annual Report on Form 10-K for the year ended December 31, 2014, First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

 

First Defiance monitors its exposure to interest rate risk on a monthly basis through simulation analysis that measures the impact changes in interest rates can have on net interest income. The simulation technique analyzes the effect of a presumed 100 basis point shift in interest rates (which is consistent with management’s estimate of the range of potential interest rate fluctuations) and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, non-maturity deposit assumptions and capital requirements.

 

The table below presents, for the twelve months subsequent to September 30, 2015 and December 31, 2014, an estimate of the change in net interest income that would result from a gradual (ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of September 30, 2015, net interest income sensitivity to changes in interest rates for the twelve months subsequent to September 30, 2015 was mainly neutral for the ramp and less sensitive for the shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2014. This is due in part to our strategy to grow longer term loans and fund that growth out of existing liquidity.

 

Net Interest Income Sensitivity Profile                
   Impact on Future Annual Net Interest Income 
(dollars in thousands)  September 30, 2015   December 31, 2014 
Gradual Change in Interest Rates                    
+200  $(401)   -0.53%  $702    0.98%
+100   (346)   -0.46%   155    0.22%
-100   (675)   -0.89%   (667)   -0.93%
                     
Immediate Change in Interest Rates                    
+200  $452    0.60%  $2,274    3.16%
+100   28    0.04%   877    1.22%
-100   (1,990)   -2.62%   (1,713)   -2.38%

 

To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time. Conversely, if the yield curve should steepen, net interest income may increase.

 

 73 

 

 

The results of all the simulation scenarios are within the board mandated guidelines as of September 30, 2015.

 

In addition to the simulation analysis, First Defiance also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in rates beyond 100 basis points as of September 30, 2015 was considered to be remote given the current interest rate environment and, therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the nine months ended September 30, 2015 and the year-ended December 31, 2014.

 

September 30, 2015
Economic Value of Equity
Change in Rates  $ Amount   $ Change   % Change 
   (Dollars in Thousands)     
+400 bp   474,532    43,215    10.02%
+ 300 bp   467,418    36,100    8.37%
+ 200 bp   458,707    27,390    6.35%
+ 100 bp   447,269    15,951    3.70%
0 bp   431,317    -    - 
- 100 bp   407,168    (24,149)   (5.60)%

 

December 31, 2014
Economic Value of Equity
Change in Rates  $ Amount   $ Change   % Change 
   (Dollars in Thousands)     
+400 bp   475,594    47,730    11.16%
+ 300 bp   467,028    39,164    9.15%
+ 200 bp   457,038    29,174    6.82%
+ 100 bp   446,184    18,320    4.28%
0 bp   427,864    -    - 
- 100 bp   403,088    (24,776)   (5.79)%

 

Item 4. Controls and Procedures

 

Disclosure controls are procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

 74 

 

 

An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2015. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

No changes occurred in the Company’s internal controls over financial reporting during the quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

 

 75 

 

 

FIRST DEFIANCE FINANCIAL CORP.

 

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Neither First Defiance nor any of its subsidiaries is engaged in any legal proceedings of a material nature.

 

Item 1A. Risk Factors

 

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended September 30, 2015:

 

Period  Total Number of 
Shares
Purchased (1)
   Average Price
Paid Per 
Share
   Total Number of 
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (2)
   Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs (3)
 
Beginning Balance, July 1, 2015                  283,197 
July 1 – July 31, 2015   -   $-    -    283,197 
August 1 – August 31, 2015   87,777    37.37    -    195,420 
September 1 – September 30, 2015   21,405    37.57    -    174,015 
Total   109,182   $37.41    -    174,015 

 

(1)The share purchases in the second quarter of 2015 were made in conjunction with the cashless exercise of stock options by First Defiance’s employees and directors.

 

(2)First Defiance’s publicly announced stock repurchase program became effective October 20, 2014. Up to 469,000 shares were authorized to be purchased under the program. There is no expiration date for the program.

 

(3)The number of shares shown represents, as of the end of each period, the maximum number of shares of common stock that may yet be purchased under the publicly announced stock repurchase program. The shares may be purchased, from time to time, depending on market conditions.

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 76 

 

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

Exhibit 3.1 Articles of Incorporation (1)
   
Exhibit 3.2 Code of Regulations (1)
   
Exhibit 3.3 Amendment to Articles of Incorporation (2)
   
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101 The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Balance Sheet at September 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, 2015 and 2014 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2015 and 2014, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholder’ Equity for the Nine Months ended September 30, 2015 and 2014, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 2015 and 2014 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

 

(1)Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-1 (File No. 33-93354)
(2)Incorporated herein by reference to exhibit 3 in Form 8-K filed December 8, 2008 (Film No. 081236105)

 

 77 

 

 

FIRST DEFIANCE FINANCIAL CORP.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  First Defiance Financial Corp.
  (Registrant)
     
Date: November 6, 2015 By: /s/ Donald P. Hileman
    Donald P. Hileman
    President and
    Chief Executive Officer
     
     
Date: November 6, 2015 By: /s/ Kevin T. Thompson
    Kevin T. Thompson
    Executive Vice President and
    Chief Financial Officer

 

 78