NEWS RELEASE
Contact: William J. Small
[LOGO] FIRST DEFIANCE Chairman, President and CEO
FINANCIAL CORP. (419) 782-5015
bsmall@first-fed.com
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For Immediate Release
FIRST DEFIANCE ANNOUNCES THIRD QUARTER 2005 EARNINGS
DEFIANCE, OHIO (October 17, 2005) - First Defiance Financial Corp.
(NASDAQ: FDEF) today announced net income of $3.6 million or $0.50 per diluted
share for the quarter ended September 30, 2005 compared to $1.7 million or $0.26
per diluted share for the quarter ended September 30, 2004. For the nine-month
period ended September 30, 2005, First Defiance realized income of $8.5 million
or $1.20 per diluted share compared to $7.3 million or $1.15 per diluted share
for the first nine months of 2004.
Both the 2005 and 2004 quarterly amounts include adjustments that are not
part of core operating earnings, which is income from continuing operations
adjusted to exclude merger, integration, restructuring and other large or
unusual expenses. Non-core charges recorded in 2005 relate to the first quarter
acquisition of ComBanc, Inc., Delphos Ohio ("ComBanc") and the second quarter
acquisition of the Genoa Savings and Loan Company, Genoa Ohio ("Genoa"). The
2005 third quarter includes approximately $100,000 of pre-tax
acquisition-related expenses ($65,000 or $0.01 per share after tax) associated
with the acquisition of Genoa. The 2004 third quarter includes the impact of a
$1.9 million charge ($1.25 million or $0.20 per share after tax) recorded to
reflect the settlement of certain contingent liabilities related to the 2002
sale of the Company's former Leader Mortgage Subsidiary.
Excluding these items, core operating earnings were $3.7 million, or $0.51
per share and $2.9 million or $0.46 per share for the 2005 and 2004 third
quarters, respectively. For the nine-month period, First Defiance had core
operating earnings of $10.8 million or $1.52 per diluted share in 2005 (after
factoring out the after-tax effect of $3.5 million of acquisition related
charges from both the Genoa and ComBanc acquisitions) compared to $8.6 million
or $1.34 per diluted share in 2004. The attached schedules include a
reconciliation of GAAP-basis earnings to core operating earnings for both the
quarter and year-to-date periods.
"We had another solid quarter from an operating income standpoint,"
commented First Defiance Chairman, President and Chief Executive Officer William
J. Small. "Rising interest rates are putting significant pressure on margins
throughout the banking industry, but I think we managed well, dropping just two
basis points from the second to third quarters. At the same time we are
increasing non-interest income from a number of sources. The majority of the
increases in expenses associated with supporting our growth and the
significantly increased costs of compliance requirements have already been
incurred. I am very encouraged about our prospects for the remainder of 2005 and
beyond."
1
Net Interest Income Increased 40.1% for the quarter, 37.6% YTD
Net interest income for the 2005 third quarter was $12.2 million, a 40.1%
increase over the $8.7 million earned in the third quarter of 2004. Net interest
margin for the 2005 third quarter, on a tax-equivalent basis, was 3.85%, a 27
basis point improvement from the third quarter of 2004. The 2005 third quarter
margin was two basis points lower than the 2005 second quarter margin. The
improved margin in 2005 vs. 2004 is due to an improved mix between loans and
investment securities, an increase in the interest rate spread from 3.34% in the
third quarter of 2004 to 3.62% in the third quarter of 2005, and a significant
increase in non-interest bearing liabilities between the two periods.
Average interest-earning assets grew from $993.4 million in the third
quarter of 2004 to $1.28 billion in the third quarter of 2005, an increase of
28.3%. The average balance of loans outstanding increased from $832.1 million in
the 2004 third quarter to $1.14 billion in the third quarter of 2005, while the
average balance of investment securities dropped from $147.4 million to $113.8
million between those same periods. Approximately $117.3 million of the increase
in average loan balances related to the ComBanc acquisition, which closed on
January 21, 2005, and $66.9 million related to the Genoa acquisition, which
closed on April 8, 2005. The remainder of the increase, $120.9 million, is due
to year-over-year balance growth. Yields on loans improved to 6.42% for the 2005
third quarter from 5.84% in the third quarter of 2004 due to recent increases in
the prime interest rate. Overall, yields on interest-earning assets improved to
6.25% in the 2005 third quarter compared to 5.68% during that same period in
2004. The third quarter yield was also a 19 basis point improvement over the
6.06% yield realized in the 2005 second quarter.
Average interest-bearing deposits increased to $958.6 million in the 2005
third quarter compared with $712.8 million during the same period of 2004, an
increase of $245.8 million or 34.5%. The ComBanc acquisition added $146.0
million in average balances of interest-bearing deposits while the Genoa
acquisition added $71.8 million in average balances for the quarter. The average
balance in interest-bearing deposits reflects a decrease in brokered
certificates of deposits (CDs), which averaged $55.3 million in the 2004 third
quarter and compared to $49.0 million in the 2005 period. Excluding the
acquisitions and brokered CDs, average interest-earning deposits increased by
$34.4 million in the 2005 third quarter compared with the third quarter of 2004.
The cost of interest-bearing deposits increased 40 basis points, to 2.29% for
the 2005 third quarter from 1.89% in 2004 and the cost of Federal Home Loan Bank
(FHLB) advances increased 18 basis points, to 4.43% in the 2005 third quarter
from 4.25% in the 2004 third quarter. Overall, total funding costs for
interest-bearing liabilities increased by 29 basis points, to 2.63% in the 2005
third quarter from 2.34% in the same period in 2004. Comparing the 2005 third
quarter to the 2005 second quarter, the cost of interest-bearing liabilities
increased by 22 basis points. As a result of the above factors, the interest
rate spread improved to 3.62% in the 2005 third quarter from 3.34% during the
third quarter of 2004.
The net interest margin also benefited from growth in the average balance
of non-interest bearing deposits, which increased to $87.7 million in the 2005
third quarter compared with $55.6 million during the 2004 third quarter, an
increase of 57.7%. Of that $32.1 million increase, $17.7 million was due to the
ComBanc acquisition, $5.0 million was due to the Genoa acquisition, and
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the remaining increase of $9.4 million resulted from other Company initiatives
to grow those balances.
For the nine months ended September 30, 2005, net interest income
increased to $34.7 million, a 37.6% increase from the nine-month period ended
September 30, 2004. During those periods, net interest margin improved to 3.85%
from 3.57%, the result of a 43 basis point increase in the overall yield of
interest earning assets, to 6.08% for the 2005 period from 5.65% during the
first nine months of 2004. During that same period, the cost of interest-bearing
liabilities increased just 16 basis points, to 2.46% in the first nine months of
2005 compared to 2.30% in 2004. The average balance of non-interest bearing
deposits increased by $30.1 million or 55.2% between the first nine months of
2004 and the same period in 2005.
Credit Quality Continues to be a Strength
The provision for loan losses was $368,000 for the third quarter of 2005
compared to $376,000 for the third quarter of 2004. The 2005 third quarter's
provision level reflects continued favorable experience with the First Defiance
loan portfolios. Total charge-offs for the three months ended September 30, 2005
were $305,000 while recoveries were $101,000 compared with $247,000 of
charge-offs and $16,000 in recoveries during the third quarter of 2004. Net
charge-offs as a percentage of average loans were just 0.07% in the 2005 third
quarter (annualized) compared to 0.10% for the third quarter of 2004. At
September 30, 2005 the percentage of non-performing assets to total loans plus
Real Estate Owned was 0.60% compared to 0.23% at September 30, 2004 and 0.22% at
December 31, 2004.
Total non-performing loans increased to $6.7 million from $1.9 million at
December 31, 2004 and non-performing assets increased to $6.9 million from $2.0
million. Of the $6.7 million in non-performing loans at September 30, 2005, $4.7
million were acquired in one of the 2005 acquisitions and $2.0 million related
to loans originated by First Defiance. First Defiance's allowance for loan
losses as a percentage of non-performing loans declined to 202.7% at September
30, 2005 from 525.9% at December 31, 2004. The decrease in the coverage ratios
is due primarily to delinquent loans acquired in the acquisitions. However,
those ratios also are impacted by the accounting guidance which requires that
estimated losses on loans deemed impaired as of the acquisition date be recorded
as a purchase discount, which directly reduces the loan balance, as opposed to
establishing an allowance for loan losses. As a result of this accounting, net
loan balances totaling $4.3 million (after deducting appropriate purchase
discounts) at September 30, 2005 are deemed impaired and have no loan loss
reserve recorded for them. Approximately $710,000 of these impaired loans are
included in the $6.7 million of non-performing loans with no offsetting loan
loss reserve. In management's opinion, the allowance for loan losses at June 30,
2005 is sufficient and the provision for loan losses for both the three and
nine-month periods ended September 30, 2005 are consistent with charge-offs and
other information available as of that date.
"We continue to focus significant efforts toward improving our credit
quality ratios which declined as a result of the two acquisitions," said Mr.
Small. "We're making progress working through the problem loans we acquired and
I am confident that our efforts over time will result in improved credit quality
ratios. Our non-accrual loans increased from last quarter in part because we
have some loans that have matured that are in the process of being refinanced,
3
either with us or with other banks. However there are no significant new
non-accrual loans that were not previously identified and either reserved for or
considered impaired. I am pleased to again report that the portfolio that has
been originated under our strict underwriting standards, which represents the
vast majority of our outstanding loans, continues to perform very well from an
asset quality perspective."
Non-Interest Income Up $1.1 million
Non-interest income increased to $4.0 million for the 2005 third quarter
compared to $2.9 million during the same period in 2004. First Defiance realized
$86,000 of gains from sales of investment securities during the 2005 third
quarter compared with $302,000 of such gains in the 2004 period. Excluding
securities gains, non-interest income grew by $1.3 million in the 2005 third
quarter over the same period in 2004, an improvement of 48.5%. Mortgage banking
income increased to $1.1 million for the quarter ended September 30, 2005 from
$332,000 in the same period in 2004. Service fee income increased to $1.51
million from $1.09 million, while insurance and investment sales commissions and
trust income also increased over the prior year third quarter amounts.
Increases in the 10-year treasury rate from the end of the second quarter
to the end of the third quarter and a general slowdown in prepayment speeds of
mortgages between those two periods has resulted in an increase in the valuation
of First Defiance's mortgage servicing rights. As a result, First Defiance
realized recovery of previously recorded MSR impairment in the 2005 third
quarter of $240,000 compared with an impairment charge of $321,000 in the 2004
third quarter. MSR amortization and valuation adjustments are netted against
mortgage banking income in the financial statements. Also during the third
quarter, management determined that certain MSR impairment related to its
servicing of balloon mortgage loans likely will not be recovered under any rate
environment and First Defiance has therefore written off approximately $110,000
against the impairment reserve. As a result of the impairment recapture and the
permanent write-down, the remaining impairment reserves as of September 30, 2005
are approximately $131,000.
Year-to-date, non-interest income increased to $12.2 million for the first
nine months of 2005 from $10.1 million recognized in the same period of 2004. If
gains from the sale of securities of $1.2 million and $694,000 for the nine
months of 2005 and 2004, respectively, are excluded, non-interest income
increased by $1.6 million. Those year-to-date increases were primarily in
service fees and other charges, which increased to $4.0 million from $3.1
million and mortgage banking income, which increased to $2.4 million in 2005
from $2.1 million in 2004. Also on a year-to-date basis, insurance and
investment commission income and trust income are also up slightly.
Non-Interest Expense Increased Due to Acquisitions
Non-interest expense for the 2005 third quarter was $10.5 million compared
with $9.0 million in the 2004 third quarter. The 2004 non-interest expense
amount includes $1.9 million of costs associated with the settlement of certain
contingent liabilities related to the 2002 sale of the Company's Leader Mortgage
subsidiary. If acquisition-related costs and the costs of the contingent
liability are excluded, non-interest expenses for the 2005 third quarter were
$10.4 million compared to $7.1 million for the 2004 third quarter.
4
The majority of the increases were in compensation and benefits, which
increased by $1.8 million (to $6.1 million from $4.3 million), occupancy, which
increased by $399,000 (to $1.2 million from $798,000), data processing, which
increased by $218,000 (to $813,000 from $595,000) and other non-interest
expense, which increased by $589,000 (to $1.8 million from $1.2 million).
Significant increases in other expense were in advertising, which increased by
$170,000, postage, which increased by $50,000, audit fees which increased by
$31,000 and bad check write-offs and other charges, which increased by $102,000.
Management believes that the majority of the cost savings associated with
the two acquisitions, which related primarily to personnel reductions, have been
realized. However, those cost reductions have been offset to a certain extent by
hiring in other areas to either support loan portfolio growth or compliance
requirements. For example, within the last 18 months, senior level positions
have been added in the credit administration, accounting and human resource
areas along with the addition of an in-house internal auditor. A total of
approximately 25 support positions have been added since the beginning of 2004.
The addition of these new positions also has resulted in a significant increase
in the Company's health insurance expense in 2005 compared with 2004. Also, the
acquisitions have also resulted in an increase in intangible amortization of
approximately $186,000.
The efficiency ratio for the third quarter of 2005 was 64.42% based on
GAAP earnings and 63.82% on a core operating earnings basis. The efficiency
ratio for the third quarter of 2004 was 77.80% based on GAAP earnings and 61.16%
on a core operating earnings basis.
For the year-to-date period ended September 30, 2005 non-interest expenses
totaled $33.3 million compared to $23.5 million for the first nine months of
2004. Excluding acquisition-related charges and the settlement of contingent
liabilities, non-interest expense was $29.8 million for the nine months ended
September 30, 2005, and $21.6 million for the nine-months ended September 30,
2004, which was an increase of $8.2 million. Compensation and benefits accounted
for $4.5 million of the year-to-date increase while occupancy increased by
$972,000, data processing costs increased by $687,000 and core deposit
intangibles increased by $459,000.
Total Assets at $1.4 Billion
Total assets at September 30, 2005 totaled $1.42 billion compared with
$1.13 billion at December 31, 2004 and $1.10 billion at September 30, 2004. At
September 30, 2005, net loans totaled $1.14 billion, deposits totaled $1.07
billion and stockholders equity was $149.3 million. At December 31, 2004, net
loans, deposits and equity were $881.2 million, $797.7 million and $126.9
million respectively. Goodwill and other intangible assets were $39.5 million at
September 30, 2005 compared to $18.9 million at December 31, 2004.
5
Strategic Overview
"We have made good progress in integrating the two acquisitions that we
made over the past year and are confident that the new customers and new markets
that we acquired will continue to contribute to our strategy of growing our
community banking and financial services businesses," said Mr. Small. "The
economy in our market area is relatively strong, although rising energy prices
and higher interest rates will present an ongoing challenge to the banking
industry. Our loan growth continues to be strong and our credit quality remains
exceptional. As I noted last quarter, our biggest challenge is finding cost
effective ways to fund our growth. As a management team, we are focused on cost
effectively growing our deposits and steadily increasing our non-interest
income. And, as always, expense controls are a priority."
"Looking ahead to the fourth quarter, I expect that our earnings will be
in the range of $0.47 to $0.52 per share, which would put us in the range of
$1.99 to $2.04 for core earnings for the year," added Mr. Small. "Keys to
reaching those levels will be our ability to hold the line on our net interest
margin, keep expenses in line, and maintain our current level of asset quality."
Conference Call
First Defiance Financial Corp. will host a conference call at 11:00 a.m.
(EDT) on Tuesday, October 18, 2005 to discuss the earnings results and business
trends. The conference call may be accessed by calling 888-880-1525. The
passcode for the conference call is "First Defiance." The conference
identification number for the call is 105487. Participants should be prepared to
provide both the passcode and conference identification number to access the
call.
Internet access to the call is also available (in listen-only mode) at the
following Web address: http://phx.corporate-ir.net/phoenix.zhtml?p=irol-
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eventDetails&c=90296&eventID=1096635 (Due to URL length, please copy and
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paste into browser.)
The audio replay of the Internet Web cast will be available at
www.fdef.com until November 30, 2005.
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About First Defiance Financial Corp.
First Defiance Financial Corp., headquartered in Defiance, Ohio, is the
holding company for First Federal Bank of the Midwest and First Insurance and
Investments. First Federal operates 25 full service branches and 31 ATM
locations in northwest Ohio. First Insurance and Investments is the largest
property and casualty insurance agency in the Defiance, Ohio area and it also
specializes in life and group health insurance and financial planning.
For more information, visit the company's Web site at www.fdef.com.
------------
-Financial Statements and Highlights Follow-
6
Safe Harbor Statement
This news release may contain certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21 B of the Securities Act of 1934, as amended, which are intended to be
safe harbors created thereby. Those statements may include, but are not limited
to, all statements regarding intent, beliefs, expectations, projections,
forecasts and plans of First Defiance Financial Corp. and its management, and
specifically include statements regarding: the future recapture of mortgage
servicing impairment reserves, future movements of interest rates and
particularly 10-year Treasury notes, the production levels of mortgage loan
generation, the ability to continue to grow loans and deposits, the ability to
benefit from a rising interest rate environment, the ability to sustain credit
quality ratios at current or improved levels, a secondary market for packaged
mortgage loan securities, future repurchases of First Defiance Financial Corp.
stock and the positive impact of exercised stock options on shareholders'
equity, ability to achieve expected earnings, expense reductions and levels of
one-time costs including acquisition-related and restructuring charges,
continued strength in the market area for First Federal Bank of the Midwest, and
the ability of the Company to grow in existing and adjacent markets. These
forward-looking statements involve numerous risks and uncertainties, including
those inherent in general and local banking, insurance and mortgage conditions,
competitive factors specific to markets in which the Company and its
subsidiaries operate, future interest rate levels, legislative and regulatory
decisions or capital market conditions and other risks and uncertainties
detailed from time to time in the Company's Securities and Exchange Commission
(SEC) filings, including the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. One or more of these factors have affected or could in
the future affect the Company's business and financial results in future periods
and could cause actual results to differ materially from plans and projections.
Therefore, there can be no assurances that the forward-looking statements
included in this news release will prove to be accurate. In light of the
significant uncertainties in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other persons, that the objectives and plans of the Company will
be achieved. All forward-looking statements made in this news release are based
on information presently available to the management of the Company. The Company
assumes no obligation to update any forward-looking statements.
7
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Consolidated Balance Sheets
First Defiance Financial Corp.
September 30, December 31, September 30,
(in thousands) 2005 2004 2004
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Assets
Cash and cash equivalents
Cash and amounts due from depository institutions $ 36,447 $ 19,891 $ 20,557
Interest-bearing deposits 3,587 630 627
----------- ----------- -----------
40,034 20,521 21,184
Securities
Available-for sale, carried at fair value 113,664 137,003 141,655
Held-to-maturity, carried at amortized costs 1,939 2,255 2,427
----------- ----------- -----------
115,603 139,258 144,082
Loans held for sale 8,153 2,295 6,812
Loans 1,145,413 888,868 854,258
Allowance for loan losses (13,624) (9,956) (9,712)
----------- ----------- -----------
Loans, net 1,139,942 881,207 851,358
Mortgage servicing rights 4,924 3,598 3,516
Accrued interest receivable 6,037 4,653 5,155
Federal Home Loan Bank stock and other interest-bearing assets 17,293 13,376 13,235
Bank Owned Life Insurance 19,122 18,581 18,532
Office properties and equipment 32,283 24,248 24,056
Real estate and other assets held for sale 170 98 61
Goodwill 35,345 18,340 18,340
Core deposit intangible 4,134 593 621
Other assets 2,690 2,194 2,243
----------- ----------- -----------
Total Assets $ 1,417,577 $ 1,126,667 $ 1,102,383
=========== =========== ===========
Liabilities and Stockholders' Equity
Non-interest-bearing deposits $ 92,720 $ 62,450 $ 55,321
Interest-bearing deposits 978,337 735,251 723,935
----------- ----------- -----------
Total deposits 1,071,057 797,701 779,256
Advances from Federal Home Loan Bank 164,051 178,213 173,670
Notes payable and other interest-bearing liabilities 21,192 14,804 12,052
Advance payments by borrowers for tax and insurance 411 278 179
Deferred taxes 1,201 934 1,074
Other liabilities 10,381 7,863 10,716
----------- ----------- -----------
Total liabilities 1,268,293 999,793 976,947
Stockholders' Equity
Preferred stock -- -- --
Common stock 71 63 63
Additional paid-in-capital 72,719 52,131 51,593
Stock acquired by ESOP (1,053) (1,479) (1,478)
Deferred compensation (3) (4) (6)
Accumulated other comprehensive income 254 2,131 2,963
Retained earnings 77,296 74,032 72,301
----------- ----------- -----------
Total stockholders' equity 149,284 126,874 125,436
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,417,577 $ 1,126,667 $ 1,102,383
=========== =========== ===========
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Consolidated Statements of Income (Unaudited)
First Defiance Financial Corp.
Three Months Ended Nine Months Ended
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September 30, September 30,
(in thousands, except per share amounts) 2005 2004 2005 2004
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Interest Income:
Loans $18,395 $12,205 $50,203 $34,412
Investment securities 1,255 1,633 3,979 5,225
Interest-bearing deposits 72 1 277 37
FHLB stock dividends 210 140 579 471
------- ------- ------- -------
Total interest income 19,932 13,979 55,038 40,145
Interest Expense:
Deposits 5,539 3,384 14,395 9,453
FHLB advances and other 2,059 1,843 5,650 5,418
Notes Payable 117 31 313 75
------- ------- ------- -------
Total interest expense 7,715 5,258 20,358 14,946
------- ------- ------- -------
Net interest income 12,217 8,721 34,680 25,199
Provision for loan losses 368 376 1,064 1,244
------- ------- ------- -------
Net interest income after provision for loan losses 11,849 8,345 33,616 23,955
Non-interest Income:
Service fees and other charges 1,511 1,090 4,023 3,119
Mortgage banking income 1,087 332 2,471 2,075
Gain on sale of securities 86 302 1,222 694
Insurance and investment sales commissions 966 906 3,229 3,192
Trust income 91 69 229 167
Income from Bank Owned Life Insurance 184 194 541 579
Other non-interest income 91 55 444 225
------- ------- ------- -------
Total Non-interest Income 4,016 2,948 12,159 10,051
Non-interest Expense:
Compensation and benefits 6,058 4,274 17,577 13,062
Occupancy 1,197 798 3,424 2,452
SAIF deposit insurance premiums 34 26 101 12
State franchise tax 290 155 865 467
Acquisition related charges 97 -- 3,457 --
Data processing 813 595 2,404 1,717
Amortization of intangibles 214 28 541 82
Settlement of contingent liability -- 1,927 -- 1,927
Other non-interest expense 1,793 1,204 4,891 3,767
------- ------- ------- -------
Total Non-interest Expense 10,496 9,007 33,260 23,486
------- ------- ------- -------
Income before income taxes 5,369 2,286 12,515 10,520
Income taxes 1,742 606 3,989 3,203
------- ------- ------- -------
Net income $ 3,627 $ 1,680 $ 8,526 $ 7,317
======= ======= ======= =======
Earnings per share:
Basic $ 0.52 $ 0.28 $ 1.25 $ 1.20
Diluted $ 0.50 $ 0.26 $ 1.20 $ 1.15
Core operating earnings per share*:
Basic $ 0.53 $ 0.48 $ 1.58 $ 1.40
Diluted $ 0.51 $ 0.46 $ 1.52 $ 1.34
Average Shares Outstanding:
Basic 6,966 6,084 6,835 6,106
Diluted 7,213 6,340 7,091 6,383
* - See Non-GAAP Disclosure Reconciliations
9
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Financial Summary and Comparison
First Defiance Financial Corp.
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands, except per share data) 2005 2004 % change 2005 2004 % change
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Summary of Operations
Tax-equivalent interest income (1) 20,079 14,189 41.5 55,516 40,733 36.3
Interest expense 7,715 5,258 46.7 20,358 14,946 36.2
Tax-equivalent net interest income (1) 12,364 8,931 38.4 35,158 25,787 36.3
Provision for loan losses 368 376 (2.1) 1,064 1,244 (14.5)
Tax-equivalent NII after provision for loan loss (1) 11,996 8,555 40.2 34,094 24,543 38.9
Securities gains 86 302 (71.5) 1,222 694 76.1
Non-interest income-excluding securities gains 3,930 2,646 48.5 10,937 9,357 16.9
Non-interest expense 10,496 9,007 16.5 33,260 23,486 41.6
One time acquisition related charges 97 -- NM 3,457 -- NM
Settlement of contingent liability -- 1,927 (100.0) -- 1,927 (100.0)
Income taxes 1,742 606 187.5 3,989 3,203 24.5
Net Income 3,627 1,680 115.9 8,526 7,317 16.5
Core operating earnings (2) 3,690 2,933 25.8 10,773 8,570 25.7
Tax equivalent adjustment (1) 147 210 (30.0) 478 588 (18.7)
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At Period End
Assets 1,417,577 1,102,383 28.6
Earning assets 1,276,425 1,009,302 26.5
Loans 1,153,566 861,070 34.0
Allowance for loan losses 13,624 9,712 40.3
Deposits 1,071,057 779,256 37.4
Stockholders' equity 149,284 125,436 19.0
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Average Balances
Assets 1,411,434 1,087,205 29.8 1,343,078 1,058,079 26.9
Earning assets 1,275,117 993,406 28.4 1,221,714 963,837 26.8
Deposits and interest-bearing liabilities 1,250,513 951,392 31.4 1,190,503 923,033 29.0
Loans 1,136,526 832,116 36.6 1,069,943 789,513 35.5
Deposits 1,046,287 768,455 36.2 1,005,482 745,615 34.9
Stockholders' equity 149,332 125,800 18.7 143,290 125,860 13.8
Stockholders' equity / assets 10.58% 11.57% (8.6) 10.67% 11.90% (10.3)
Per Common Share Data
Net Income
Basic $ 0.52 $ 0.28 85.7 $ 1.25 $ 1.20 4.2
Diluted 0.50 0.26 92.3 1.20 1.15 4.3
Core operating earnings (2)
Basic $ 0.53 $ 0.48 9.9 $ 1.58 $ 1.40 12.3
Diluted $ 0.51 $ 0.46 10.6 1.52 1.34 13.2
Dividends 0.22 0.20 10.0 0.66 0.60 10.0
Market Value:
High $ 31.44 $ 26.73 17.6 $ 31.44 $ 29.00 8.4
Low 26.21 22.01 19.1 25.29 22.01 14.9
Close 27.43 26.01 5.5 27.43 26.01 5.5
Book Value 21.14 19.94 6.0 21.14 19.94 6.0
Tangible Book Value 15.55 16.92 (8.1) 15.55 16.92 (8.1)
Shares outstanding, end of period (000) 7,060 6,286 12.3 7,060 6,286 12.3
- -------------------------------------------------------------------------------------------------------------------------
Performance Ratios (annualized)
Tax-equivalent net interest margin (1) 3.85% 3.58% 7.6 3.85% 3.57% 7.7
Return on average assets --GAAP 1.03% 0.62% 66.3 0.85% 0.92% (8.2)
Return on average assets -- Core Operating 1.05% 1.08% (3.1) 1.07% 1.08% (1.0)
Return on average equity -- GAAP 9.72% 5.34% 81.9 7.93% 7.75% 2.3
Return on average equity -- Core Operating 9.88% 9.33% 6.0 10.02% 9.08% 10.4
Efficiency ratio (3) -- GAAP 64.42% 77.80% (17.2) 72.16% 66.83% 8.0
Efficiency ratio (3) -- Core Operating 63.82% 61.16% 4.4 64.66% 61.34% 5.4
Effective tax rate 32.45% 26.51% 22.4 31.87% 30.45% 4.7
Dividend payout ratio (basic) 42.31% 71.43% (40.8) 52.80% 50.00% 5.6
- -------------------------------------------------------------------------------------------------------------------------
(1) Interest income on tax-exempt securities and loans has been adjusted to a
tax-equivalent basis using the statutory federal income tax rate of 35%
(2) Core operating earnings = Net income plus after-tax effect of acquisition
related and other one-time charges. See Non-GAAP Disclosure Reconciliation
(3) Efficiency ratio = Non-interest expense divided by sum of tax-equivalent
net interest income plus non-interest income, excluding securities gains,
net and asset sales gains, net.
NM Percentage change not meaningful
10
- ------------------------------------------------------------------------------------------------------------
Non-GAAP Disclosure Reconciliations
First Defiance Financial Corp.
Core operating earnings are net income adjusted to exclude discontinued
operations, merger, integration and restructuring expenses and the results of
certain significant transactions not representative of ongoing operations.
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands, except per share data) 2005 2004 2005 2004
-------------------- --------------------
Core Operating Earnings
Net Income $ 3,627 $ 1,680 $ 8,526 $ 7,317
One-time acquisition related charges 97 -- 3,457 --
Settlement of contingent liability -- 1,927 -- 1,927
Tax effect (34) (674) (1,210) (674)
-------------------- --------------------
After-tax non-operating items 63 1,253 2,247 1,253
-------------------- --------------------
Core operating earnings $ 3,690 $ 2,933 $ 10,773 $ 8,570
==================== ====================
One-time acquisition related charges in 2005 reflect charges associated with the
acquisition of ComBanc, Inc. and Genoa Savings and Loan Company.
Settlement of contingent liability relates to the Company's 2002 sales of The
Leader Mortgage Company subsidiary.
Core Operating earnings is used as the numerator to calculate core operating
return on average assets, core operating return on average equity and core
operating earnings per share. Additionally, non-operating items are deducted
from non-interest expense in the numerator and non-interest income in the
denominator of the core operating efficiency ratio disclosed in the tables.
Comparable information on a GAAP basis is also provided in the tables.
- ------------------------------------------------------------------------------------------------------------
Income from Mortgage Banking
Revenue from sales and servicing of mortgage loans consisted of the following:
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2005 2004 2005 2004
------------------ ------------------
Gain from sale of mortgage loans $ 705 $ 512 $ 1,682 $ 1,824
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue 359 282 1,036 831
Amortization of mortgage servicing rights (217) (141) (613) (547)
Mortgage servicing rights valuation adjustments 240 (321) 366 (33)
------------------ ------------------
382 (180) 789 251
------------------ ------------------
Total revenue from sale and servicing of mortgage loans $ 1,087 $ 332 $ 2,471 $ 2,075
================== ==================
11
- ----------------------------------------------------------------------------------------------------------------------------
Yield Analysis
First Defiance Financial Corp.
Three Months Ended September 30,
----------------------------------------------------------------------------
2005 2004
--------------------------------- -----------------------------------
Average Yield Average Yield
Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
Interest-earning assets:
Loans receivable $ 1,136,526 $ 18,402 6.42% $ 832,116 $ 12,209 5.84%
Securities 113,832 1,395 4.86% 147,358 1,839 4.96%
Interest Bearing Deposits 7,674 72 3.72% 835 1 0.48%
FHLB stock 17,085 210 4.88% 13,097 140 4.25%
----------- ----------- ----------- -----------
Total interest-earning assets 1,275,117 20,079 6.25% 993,406 14,189 5.68%
Non-interest-earning assets 136,307 93,799
----------- -----------
Total assets $ 1,411,424 $ 1,087,205
=========== ===========
Deposits and Interest-bearing liabilities:
Interest bearing deposits $ 958,590 $ 5,539 2.29% $ 712,814 $ 3,384 1.89%
FHLB advances and other 184,333 2,059 4.43% 172,620 1,843 4.25%
Other Borrowings 19,893 117 2.33% 10,317 31 1.20%
----------- ----------- ----------- -----------
Total interest-bearing liabilities 1,162,816 7,715 2.63% 895,751 5,258 2.34%
Non-interest bearing deposits 87,697 -- -- 55,641 -- --
----------- ----------- ----------- -----------
Total including non-interest-bearing demand
deposit 1,250,513 7,715 2.45% 951,392 5,258 2.20%
Other non-interest-bearing liabilities 11,579 10,013
----------- -----------
Total liabilities 1,262,092 961,405
Stockholders' equity 149,332 125,800
----------- -----------
Total liabilities and stockholders' equity $ 1,411,424 $ 1,087,205
=========== ----------- =========== -----------
Net interest income; interest rate spread $ 12,364 3.62% $ 8,931 3.34%
=========== ==== =========== ====
Net interest margin (3) 3.85% 3.58%
==== ====
Average interest-earning assets to average interest
bearing liabilities 110% 111%
==== ====
Nine Months Ended September 30,
----------------------------------------------------------------------------
2005 2004
----------------------------------- -----------------------------------
Average Yield Average Yield
Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
Interest-earning assets:
Loans receivable $ 1,069,943 $ 50,220 6.28% $ 789,513 $ 34,424 5.82%
Securities 124,091 4,440 4.78% 155,864 5,801 4.97%
Interest Bearing Deposits 11,643 277 3.18% 3,086 37 1.60%
FHLB stock 16,037 579 4.83% 15,374 471 4.09%
----------- ----------- ----------- ------------
Total interest-earning assets 1,221,714 55,516 6.08% 963,837 40,733 5.65%
Non-interest-earning assets 121,364 94,242
----------- -----------
Total assets $ 1,343,078 $ 1,058,079
=========== ===========
Deposits and Interest-bearing liabilities:
Interest bearing deposits $ 920,838 $ 14,395 2.09% $ 691,100 $ 9,453 1.83%
FHLB advances and other 167,225 5,650 4.52% 167,177 5,418 4.33%
Other Borrowings 17,796 313 2.35% 10,241 75 0.98%
----------- ----------- ----------- ------------
Total interest-bearing liabilities 1,105,859 20,358 2.46% 868,518 14,946 2.30%
Non-interest bearing deposits 84,644 -- -- 54,515 -- --
----------- ----------- ----------- ------------
Total including non-interest-bearing
demand deposit 1,190,503 20,358 2.29% 923,033 14,946 2.16%
Other non-interest-bearing liabilities 9,285 9,186
----------- -----------
Total liabilities 1,199,788 932,219
Stockholders' equity 143,290 125,860
----------- -----------
Total liabilities and stockholders' equity $ 1,343,078 $ 1,058,079
=========== ----------- =========== ------------
Net interest income; interest rate spread $ 35,158 3.61% $ 25,787 3.35%
=========== ==== ============ ====
Net interest margin (3) 3.85% 3.57%
==== ====
Average interest-earning assets to average interest
bearing liabilities 110% 111%
==== ====
- -----------------------------------------------------------------------------------------------------
(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.
12
- ----------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Information
First Defiance Financial Corp.
(dollars in thousands, except per share data) 3rd Qtr 2005 2nd Qtr 2005 1st Qtr 2005 4th Qtr 2004 3rd Qtr 2004
- ----------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Tax-equivalent interest income (1) $ 20,079 $ 18,830 $ 16,607 $ 14,781 $ 14,189
Interest expense 7,715 6,816 5,826 5,435 5,258
Tax-equivalent net interest income (1) 12,364 12,014 10,781 9,346 8,931
Provision for loan losses 368 349 347 304 376
Tax-equivalent NII after provision for loan losses (1) 11,996 11,665 10,434 9,042 8,555
Investment securities gains 86 515 621 732 302
Non-interest income (excluding securities gains/losses) 3,930 3,365 3,641 3,212 2,646
Non-interest expense 10,496 12,518 10,246 7,713 9,007
Acquisition and other one-time charges 97 2,476 884 1,927
Income taxes 1,742 838 1,409 1,599 606
Net income 3,627 2,028 2,871 3,479 1,680
Core operating earnings (2) 3,690 3,553 3,446 3,479 2,933
Tax equivalent adjustment (1) 147 161 170 195 210
- ----------------------------------------------------------------------------------------------------------------------------
At Period End
Total assets $1,417,577 $1,399,626 $1,283,911 $1,126,667 $1,102,370
Earning assets 1,276,425 1,264,326 1,163,699 1,034,471 1,009,302
Loans 1,153,566 1,140,885 1,027,418 891,163 861,070
Allowance for loan losses 13,624 13,460 12,749 9,956 9,712
Deposits 1,071,057 1,046,481 950,586 797,701 779,256
Stockholders' equity 149,284 147,550 146,136 126,874 125,436
Stockholders' equity / assets 10.53% 10.54% 11.38% 11.26% 11.38%
Goodwill and other intangibles 35,345 39,704 33,408 18,933 18,961
- ----------------------------------------------------------------------------------------------------------------------------
Average Balances (3)
Total assets $1,411,434 $1,382,129 $1,235,682 $1,108,979 $1,087,205
Earning assets 1,275,117 1,246,479 1,143,549 1,014,424 993,406
Deposits and interest-bearing liabilities 1,250,513 1,224,350 1,096,645 972,498 951,392
Loans 1,136,526 1,091,178 982,125 858,971 832,116
Deposits 1,046,287 1,048,961 921,196 784,466 768,455
Stockholders' equity 149,332 147,200 134,005 126,101 125,800
Stockholders' equity / assets 10.58% 10.65% 10.84% 11.37% 11.57%
- ----------------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Net Income:
Basic $ 0.52 $ 0.29 $ 0.43 $ 0.57 $ 0.28
Diluted 0.50 0.28 0.41 0.55 0.26
Core operating earnings (2)
Basic $ 0.53 $ 0.53 $ 0.52 $ 0.57 $ 0.48
Diluted 0.51 0.51 0.50 0.55 0.46
Dividends 0.22 0.22 0.22 0.22 0.20
Market Value:
High $ 31.44 $ 30.46 $ 29.90 $ 28.90 $ 26.73
Low 26.21 25.29 26.00 25.20 22.01
Close 27.43 26.69 26.00 28.85 26.01
Book Value 21.14 20.91 21.11 20.20 19.94
Shares outstanding, end of period (in thousands) 7,060 7,056 7,020 6,280 6,286
- ----------------------------------------------------------------------------------------------------------------------------
Performance Ratios (annualized)
Tax-equivalent net interest margin (1) 3.85% 3.87% 3.82% 3.67% 3.58%
Return on average assets -- GAAP (4) 1.03% 0.59% 0.93% 1.25% 0.62%
Return on average assets -- Core operating 1.05% 1.03% 1.12% 1.25% 1.08%
Return on average equity -- GAAP 9.72% 5.51% 8.57% 11.04% 5.34%
Return on average equity -- Core operating 9.88% 9.65% 10.29% 11.04% 9.33%
Efficiency ratio (5) -- GAAP 64.42% 81.78% 70.93% 61.80% 78.65%
Efficiency ratio -- Core operating 63.82% 66.02% 64.91% 61.42% 62.65%
Effective tax rate 32.45% 29.24% 32.92% 31.49% 26.51%
Dividend payout ratio (basic) 42.31% 75.86% 51.00% 38.60% 71.43%
- ----------------------------------------------------------------------------------------------------------------------------
(1) Interest income on tax-exempt securities and loans has been adjusted to a
tax-equivalent basis using the statutory federal income tax rate of 35%
(2) See Non-GAAP Disclosure Reconciliation
(3) Average balances do not reflect borrowings to fund discontinued operations
(4) Income from continuing operations divided by assets, excluding assets of
discontinued operations
(5) Efficiency ratio = Non-interest expense divided by sum of tax-equivalent
net interest income plus non-interest income, excluding securities gains,
net and asset sales gains, net.
13
- -----------------------------------------------------------------------------------------------------------------------------------
Selected Quarterly Information
First Defiance Financial Corp.
(dollars in thousands, except per share data) 3rd Qtr 2005 2nd Qtr 2005 1st Qtr 2005 4th Qtr 2004 3rd Qtr 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Loan Portfolio Composition
One to four family residential real estate $ 280,436 $ 291,036 $ 229,887 $ 190,070 $ 186,688
Construction 22,434 24,000 14,861 15,507 16,816
Commercial real estate 524,305 496,599 482,326 415,164 392,610
Commercial 167,990 172,351 160,749 141,643 141,264
Consumer finance 57,018 57,223 51,753 45,513 45,267
Home equity and improvement 111,234 111,291 95,200 90,839 87,755
----------- ----------- ----------- ----------- -----------
Total loans 1,163,417 1,152,500 1,034,776 898,736 870,400
Less:
Loans in process 8,601 10,372 6,170 6,340 8,155
Deferred loan origination fees 1,250 1,243 1,188 1,233 1,175
Allowance for loan loss 13,624 13,460 12,749 9,956 9,712
----------- ----------- ----------- ----------- -----------
Net Loans $ 1,139,942 $ 1,127,425 $ 1,014,669 $ 881,207 $ 851,358
=========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan loss activity
Beginning allowance $ 13,460 $ 12,749 $ 9,956 $ 9,712 $ 9,537
Provision for loan losses 368 349 349 304 376
Reserve from acquisitions -- 865 2,538 -- --
Reclassification between allowance for loan loss and
purchase loan discount on prior quarter acquisition (376)
Credit loss charge-offs:
One to four family residential real estate 32 -- -- -- --
Commercial real estate 134 -- 67 24 25
Commercial 65 104 45 107 144
Consumer finance 74 100 59 37 78
Home equity and improvement -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total charge-offs 305 204 171 168 247
Total recoveries 101 77 77 108 46
----------- ----------- ----------- ----------- -----------
Net charge-offs (recoveries) 204 127 94 60 201
----------- ----------- ----------- ----------- -----------
Ending allowance $ 13,624 $ 13,460 $ 12,749 $ 9,956 $ 9,712
=========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
Credit Quality
Non-accrual loans $ 6,720 $ 4,745 $ 3,142 $ 1,893 $ 1,945
Loans over 90 days past due and still accruing -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total non-performing loans (1) 6,720 4,745 3,142 1,893 1,945
Real estate owned (REO) 168 431 488 98 61
----------- ----------- ----------- ----------- -----------
Total non-performing assets (1) $ 6,888 $ 5,176 $ 3,630 $ 1,991 $ 2,006
=========== =========== =========== =========== ===========
Net charge-offs 204 127 94 60 201
Allowance for loan losses / loans 1.18% 1.18% 1.24% 1.12% 1.13%
Allowance for loan losses / non-performing assets 197.79% 260.05% 351.21% 500.05% 484.15%
Allowance for loan losses / non-performing loans 202.74% 283.67% 405.76% 525.94% 499.33%
Non-performing assets / loans plus REO 0.60% 0.45% 0.35% 0.22% 0.23%
Non-performing assets / total assets 0.49% 0.37% 0.28% 0.18% 0.18%
Net charge-offs / average loans (annualized) 0.07% 0.05% 0.04% 0.03% 0.10%
- -----------------------------------------------------------------------------------------------------------------------------------
Deposit Balances
Non-interest-bearing demand deposits $ 92,720 $ 87,172 $ 76,644 $ 62,450 $ 55,321
Interest-bearing demand deposits and money market 262,544 271,118 270,142 258,797 239,524
Savings deposits 88,994 94,391 85,581 52,132 53,143
Time deposits less than $100,000 436,823 426,204 389,844 289,878 285,939
Time deposits greater than $100,000 189,976 167,596 128,375 134,444 145,329
----------- ----------- ----------- ----------- -----------
Total deposits $ 1,071,057 $ 1,046,481 $ 950,586 $ 797,701 $ 779,256
=========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Non-performing loans consist of non-accrual loans that are contractually
past due 90 days or more and loans that are deemed impaired under the criteria
of FASB Statement No. 114. Non-performing assets are non-performing loans plus
real estate and other assets acquired by foreclosure or deed-in-lieu thereof.
14