UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the Quarterly Period Ended June
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 – 9,277,113
shares outstanding at July 31, 2015.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
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)
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
| |
Assets | |
| | | |
| | |
Cash and cash equivalents: | |
| | | |
| | |
Cash and amounts due from depository institutions | |
$ | 33,586 | | |
$ | 41,936 | |
Federal funds sold | |
| 32,000 | | |
| 71,000 | |
| |
| 65,586 | | |
| 112,936 | |
Securities: | |
| | | |
| | |
Available-for-sale, carried at fair value | |
| 237,012 | | |
| 239,321 | |
Held-to-maturity, carried at
amortized cost (fair value $261 and $308 at June 30, 2015 and December 31, 2014, respectively) | |
| 257 | | |
| 313 | |
| |
| 237,269 | | |
| 239,634 | |
Loans held for sale | |
| 9,793 | | |
| 4,535 | |
Loans receivable, net of allowance of $25,384 at June
30, 2015 and $24,766 at December 31, 2014, respectively | |
| 1,680,332 | | |
| 1,622,020 | |
Accrued interest receivable | |
| 6,204 | | |
| 6,037 | |
Federal Home Loan Bank stock | |
| 13,802 | | |
| 13,802 | |
Bank owned life insurance | |
| 51,433 | | |
| 47,013 | |
Premises and equipment | |
| 39,393 | | |
| 40,496 | |
Real estate and other assets held for sale | |
| 5,371 | | |
| 6,181 | |
Goodwill | |
| 61,525 | | |
| 61,525 | |
Core deposit and other intangibles | |
| 2,016 | | |
| 2,395 | |
Mortgage servicing rights | |
| 9,128 | | |
| 9,012 | |
Deferred taxes | |
| 69 | | |
| - | |
Other assets | |
| 14,589 | | |
| 13,366 | |
Total assets | |
$ | 2,196,510 | | |
$ | 2,178,952 | |
(continued)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial
Condition
(UNAUDITED)
(Amounts in Thousands, except share and per
share data)
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
| |
Liabilities and stockholders’ equity | |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Deposits | |
$ | 1,763,390 | | |
$ | 1,760,813 | |
Advances from the Federal Home Loan Bank | |
| 41,050 | | |
| 21,544 | |
Subordinated debentures | |
| 36,083 | | |
| 36,083 | |
Securities sold under repurchase agreements | |
| 54,237 | | |
| 54,759 | |
Advance payments by borrowers | |
| 2,492 | | |
| 2,309 | |
Deferred taxes | |
| - | | |
| 1,176 | |
Other liabilities | |
| 23,230 | | |
| 22,763 | |
Total liabilities | |
| 1,920,482 | | |
| 1,899,447 | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Preferred stock, $.01 par value per share: 37,000 shares authorized;
no shares issued | |
| – | | |
| – | |
Preferred stock, $.01 par value per share: 4,963,000 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 9,275,183 and 9,234,534 shares outstanding,
respectively | |
| 127 | | |
| 127 | |
Common stock warrant | |
| - | | |
| 878 | |
Additional paid-in capital | |
| 125,231 | | |
| 136,266 | |
Accumulated other comprehensive income, net of tax
of $1,397 and $2,214, respectively | |
| 2,594 | | |
| 4,114 | |
Retained earnings | |
| 210,169 | | |
| 200,600 | |
Treasury stock, at cost, 3,447,286
and 3,500,779 shares respectively | |
| (62,093 | ) | |
| (62,480 | ) |
Total stockholders’ equity | |
| 276,028 | | |
| 279,505 | |
| |
| | | |
| | |
Total liabilities and stockholders’ equity | |
$ | 2,196,510 | | |
$ | 2,178,952 | |
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except share and per
share data)
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Interest Income | |
| | | |
| | | |
| | | |
| | |
Loans | |
$ | 18,139 | | |
$ | 16,878 | | |
$ | 36,026 | | |
$ | 33,529 | |
Investment securities: | |
| | | |
| | | |
| | | |
| | |
Taxable | |
| 918 | | |
| 852 | | |
| 1,832 | | |
| 1,627 | |
Non-taxable | |
| 803 | | |
| 756 | | |
| 1,581 | | |
| 1,508 | |
Interest-bearing deposits | |
| 41 | | |
| 118 | | |
| 80 | | |
| 219 | |
FHLB stock dividends | |
| 136 | | |
| 170 | | |
| 275 | | |
| 365 | |
Total interest income | |
| 20,037 | | |
| 18,774 | | |
| 39,794 | | |
| 37,248 | |
Interest Expense | |
| | | |
| | | |
| | | |
| | |
Deposits | |
| 1,312 | | |
| 1,327 | | |
| 2,584 | | |
| 2,685 | |
FHLB advances and other | |
| 173 | | |
| 133 | | |
| 283 | | |
| 266 | |
Subordinated debentures | |
| 150 | | |
| 146 | | |
| 297 | | |
| 292 | |
Notes payable | |
| 37 | | |
| 39 | | |
| 75 | | |
| 80 | |
Total interest expense | |
| 1,672 | | |
| 1,645 | | |
| 3,239 | | |
| 3,323 | |
Net interest income | |
| 18,365 | | |
| 17,129 | | |
| 36,555 | | |
| 33,925 | |
Provision for loan losses | |
| - | | |
| 446 | | |
| 120 | | |
| 549 | |
Net interest income after provision for loan losses | |
| 18,365 | | |
| 16,683 | | |
| 36,435 | | |
| 33,376 | |
Non-interest Income | |
| | | |
| | | |
| | | |
| | |
Service fees and other charges | |
| 2,690 | | |
| 2,508 | | |
| 5,219 | | |
| 4,832 | |
Insurance commissions | |
| 2,344 | | |
| 2,244 | | |
| 5,483 | | |
| 5,274 | |
Mortgage banking income | |
| 1,793 | | |
| 1,540 | | |
| 3,568 | | |
| 2,787 | |
Gain on sale of non-mortgage loans | |
| 197 | | |
| 36 | | |
| 233 | | |
| 39 | |
Gain on sale or call of securities | |
| - | | |
| 471 | | |
| - | | |
| 471 | |
Trust income | |
| 367 | | |
| 302 | | |
| 725 | | |
| 580 | |
Income from Bank Owned Life Insurance | |
| 212 | | |
| 235 | | |
| 420 | | |
| 454 | |
Other non-interest income | |
| 206 | | |
| 281 | | |
| 443 | | |
| 506 | |
Total non-interest income | |
| 7,809 | | |
| 7,617 | | |
| 16,091 | | |
| 14,943 | |
Non-interest Expense | |
| | | |
| | | |
| | | |
| | |
Compensation and benefits | |
| 9,182 | | |
| 8,709 | | |
| 18,105 | | |
| 17,181 | |
Occupancy | |
| 1,809 | | |
| 1,704 | | |
| 3,573 | | |
| 3,292 | |
FDIC insurance premium | |
| 319 | | |
| 353 | | |
| 670 | | |
| 738 | |
Financial institutions tax | |
| 411 | | |
| 514 | | |
| 893 | | |
| 1,009 | |
Data processing | |
| 1,599 | | |
| 1,479 | | |
| 3,121 | | |
| 2,844 | |
Amortization of intangibles | |
| 162 | | |
| 274 | | |
| 379 | | |
| 563 | |
Other non-interest expense | |
| 3,314 | | |
| 3,324 | | |
| 6,953 | | |
| 7,391 | |
Total non-interest expense | |
| 16,796 | | |
| 16,357 | | |
| 33,694 | | |
| 33,018 | |
Income before income taxes | |
| 9,378 | | |
| 7,943 | | |
| 18,832 | | |
| 15,301 | |
Federal income taxes | |
| 2,815 | | |
| 2,254 | | |
| 5,668 | | |
| 4,433 | |
Net Income | |
$ | 6,563 | | |
$ | 5,689 | | |
$ | 13,164 | | |
$ | 10,868 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings per common share (Note 6) | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.71 | | |
$ | 0.59 | | |
$ | 1.42 | | |
$ | 1.13 | |
Diluted | |
$ | 0.70 | | |
$ | 0.57 | | |
$ | 1.39 | | |
$ | 1.08 | |
Dividends declared per share (Note 5) | |
$ | 0.20 | | |
$ | 0.15 | | |
$ | 0.375 | | |
$ | 0.30 | |
Average common shares outstanding (Note 6) | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 9,268 | | |
| 9,607 | | |
| 9,251 | | |
| 9,644 | |
Diluted | |
| 9,349 | | |
| 10,066 | | |
| 9,483 | | |
| 10,096 | |
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Comprehensive
Income
(UNAUDITED)
(Amounts in Thousands)
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net Income | |
$ | 6,563 | | |
$ | 5,689 | | |
$ | 13,164 | | |
$ | 10,868 | |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
Unrealized gains (losses) on securities available for sale | |
| (3,839 | ) | |
| 2,743 | | |
| (2,337 | ) | |
| 4,465 | |
Reclassification adjustment for security gains (losses) included in net
income(1) | |
| - | | |
| (471 | ) | |
| - | | |
| (471 | ) |
Income tax benefit (expense) | |
| 1,344 | | |
| (795 | ) | |
| 817 | | |
| (1,397 | ) |
Other comprehensive income (loss) | |
| (2,495 | ) | |
| 1,477 | | |
| (1,520 | ) | |
| 2,597 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income | |
$ | 4,068 | | |
$ | 7,166 | | |
$ | 11,644 | | |
$ | 13,465 | |
(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 June 30, 2015 and
2014 was $0 and $141, respectively. Income tax expense associated with the reclassification adjustments, included in federal income
taxes, for the six months ended June 30, 2015 and 2014 was $0 and $141, respectively.
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 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 13,164 | | |
| | | |
| 13,164 | |
Other comprehensive loss | |
| | | |
| | | |
| | | |
| | | |
| (1,520 | ) | |
| | | |
| | | |
| (1,520 | ) |
Stock option expense | |
| | | |
| | | |
| | | |
| 59 | | |
| | | |
| | | |
| | | |
| 59 | |
Warrant repurchase | |
| | | |
| | | |
| (878 | ) | |
| (11,101 | ) | |
| | | |
| | | |
| | | |
| (11,979 | ) |
65,206 shares issued
under stock option plan, with $659 income tax benefit, net of 12,844 repurchased and retired | |
| | | |
| | | |
| | | |
| 213 | | |
| | | |
| (312 | ) | |
| 1,360 | | |
| 1,261 | |
Restricted share activity
under stock incentive Plans, including 15,006 shares issued | |
| | | |
| | | |
| | | |
| (223 | ) | |
| | | |
| 185 | | |
| 270 | | |
| 232 | |
1,090 shares issued direct
purchases | |
| | | |
| | | |
| | | |
| 17 | | |
| | | |
| | | |
| 21 | | |
| 38 | |
37,857 shares repurchased | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (1,264 | ) | |
| (1,264 | ) |
Common
stock dividends declared | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (3,468 | ) | |
| | | |
| (3,468 | ) |
Balance at June 30,
2015 | |
$ | - | | |
$ | 127 | | |
$ | - | | |
$ | 125,231 | | |
$ | 2,594 | | |
$ | 210,169 | | |
$ | (62,093 | ) | |
$ | 276,028 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at January 1, 2014 | |
$ | - | | |
$ | 127 | | |
$ | 878 | | |
$ | 136,403 | | |
$ | 545 | | |
$ | 182,290 | | |
$ | (48,096 | ) | |
$ | 272,147 | |
Net income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 10,868 | | |
| | | |
| 10,868 | |
Other comprehensive income | |
| | | |
| | | |
| | | |
| | | |
| 2,597 | | |
| | | |
| | | |
| 2,597 | |
Stock option expense | |
| | | |
| | | |
| | | |
| 34 | | |
| | | |
| | | |
| | | |
| 34 | |
26,900 shares issued
under stock option plan with $58 income tax benefit, net of repurchases | |
| | | |
| | | |
| | | |
| 18 | | |
| | | |
| (23 | ) | |
| 438 | | |
| 433 | |
Restricted share activity
under Stock Incentive Plans including 13,087 shares issued | |
| | | |
| | | |
| | | |
| (342 | ) | |
| | | |
| | | |
| 212 | | |
| (130 | ) |
2,352 shares issued direct
purchases | |
| | | |
| | | |
| | | |
| 26 | | |
| | | |
| | | |
| 38 | | |
| 64 | |
247,269 shares repurchased | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (6,675 | ) | |
| (6,675 | ) |
Common
stock dividends declared | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (2,889 | ) | |
| | | |
| (2,889 | ) |
Balance at June 30,
2014 | |
$ | - | | |
$ | 127 | | |
$ | 878 | | |
$ | 136,139 | | |
$ | 3,142 | | |
$ | 190,246 | | |
$ | (54,083 | ) | |
$ | 276,449 | |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
| |
Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
Operating Activities | |
| | | |
| | |
Net income | |
$ | 13,164 | | |
$ | 10,868 | |
Items not requiring (providing) cash | |
| | | |
| | |
Provision for loan losses | |
| 120 | | |
| 549 | |
Depreciation | |
| 1,624 | | |
| 1,462 | |
Amortization of mortgage servicing rights, net of impairment recoveries | |
| 690 | | |
| 623 | |
Amortization of core deposit and other intangible assets | |
| 379 | | |
| 563 | |
Net amortization of premiums and discounts on loans and deposits | |
| 231 | | |
| 295 | |
Amortization of premiums and discounts on securities | |
| 376 | | |
| 156 | |
Loss on write-downs of property, plant and equipment | |
| 426 | | |
| - | |
Change in deferred taxes | |
| (428 | ) | |
| (218 | ) |
Proceeds from the sale of loans held for sale | |
| 108,174 | | |
| 69,421 | |
Originations of loans held for sale | |
| (111,707 | ) | |
| (67,695 | ) |
Gain from sale of loans | |
| (2,764 | ) | |
| (1,667 | ) |
Gain from sale or call of securities | |
| - | | |
| (471 | ) |
Loss on sale or write-down of real estate and other assets held for sale | |
| 259 | | |
| 3 | |
Stock option expense | |
| 59 | | |
| 34 | |
Restricted stock expense (benefit) | |
| 232 | | |
| (130 | ) |
Income from bank owned life insurance | |
| (420 | ) | |
| (454 | ) |
Changes in: | |
| | | |
| | |
Accrued interest receivable | |
| (167 | ) | |
| 48 | |
Other assets | |
| (1,223 | ) | |
| (5,094 | ) |
Other liabilities | |
| 467 | | |
| 3,190 | |
Net cash provided by (used in) operating activities | |
| 9,492 | | |
| 11,483 | |
| |
| | | |
| | |
Investing Activities | |
| | | |
| | |
Proceeds from maturities of held-to-maturity securities | |
| 55 | | |
| 56 | |
Proceeds from maturities, calls and pay-downs of available-for-sale securities | |
| 15,648 | | |
| 9,958 | |
Proceeds from sale of real estate and other assets held for sale | |
| 1,690 | | |
| 1,295 | |
Proceeds from the sale of available-for-sale securities | |
| - | | |
| 3,782 | |
Proceeds from sale of non-mortgage loans | |
| 501 | | |
| 10,584 | |
Purchases of available-for-sale securities | |
| (16,051 | ) | |
| (43,550 | ) |
Proceeds from Federal Home Loan Bank stock redemption | |
| - | | |
| 5,548 | |
Purchase of bank-owned life insurance | |
| (4,000 | ) | |
| (4,000 | ) |
Purchases of portfolio mortgage loans | |
| - | | |
| (5,118 | ) |
Purchases of premises and equipment, net | |
| (1,214 | ) | |
| (2,335 | ) |
Net increase in loans receivable | |
| (59,803 | ) | |
| (7,945 | ) |
Net cash used in investing activities | |
| (63,174 | ) | |
| (31,725 | ) |
| |
| | | |
| | |
Financing Activities | |
| | | |
| | |
Net increase (decrease) in deposits and advance payments by borrowers | |
| 2,760 | | |
| 6,187 | |
Repayment of Federal Home Loan Bank advances | |
| (7,494 | ) | |
| (486 | ) |
Increase in Federal Home Loan Bank advances | |
| 27,000 | | |
| - | |
Increase (decrease) in securities sold under repurchase agreements | |
| (522 | ) | |
| 536 | |
Repayment of warrants | |
| (11,979 | ) | |
| - | |
Proceeds from exercise of stock options | |
| 1,261 | | |
| 433 | |
Proceeds from treasury stock sales | |
| 38 | | |
| 64 | |
Cash dividends paid on common stock | |
| (3,468 | ) | |
| (2,889 | ) |
Net cash paid for repurchase of common stock | |
| (1,264 | ) | |
| (6,675 | ) |
Net cash provided by (used in) financing activities | |
| 6,332 | | |
| (2,830 | ) |
Increase (decrease) in cash and cash equivalents | |
| (47,350 | ) | |
| (23,072 | ) |
Cash and cash equivalents at beginning of period | |
| 112,936 | | |
| 179,318 | |
Cash and cash equivalents at end of period | |
$ | 65,586 | | |
$ | 156,246 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 3,218 | | |
$ | 3,310 | |
Income taxes paid | |
$ | 5,200 | | |
$ | 3,650 | |
Transfers from loans to real
estate and other assets held for sale | |
$ | 872 | | |
$ | 993 | |
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(UNAUDITED)
June 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 and Oregon, Ohio areas, offering property and casualty, group
health and life insurance products. 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 June 30, 2015 and for the three and six month periods ended June 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 six month periods ended June 30, 2015 are not necessarily indicative
of the results that may be expected for the entire year.
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
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 is 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 is 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.
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 is 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. |
| · | 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 discounted from 0% to 20% 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: physical condition of comparable properties sold, net operating income generated
by the property and investor rates of return.
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
June
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 | |
$ | - | | |
$ | 2,982 | | |
$ | - | | |
$ | 2,982 | |
Mortgage-backed - residential | |
| - | | |
| 59,713 | | |
| - | | |
| 59,713 | |
REMICs | |
| - | | |
| 1,751 | | |
| - | | |
| 1,751 | |
Collateralized mortgage obligations | |
| - | | |
| 77,287 | | |
| - | | |
| 77,287 | |
Preferred stock | |
| 1 | | |
| - | | |
| - | | |
| 1 | |
Corporate bonds | |
| 1,995 | | |
| 3,998 | | |
| - | | |
| 5,993 | |
Obligations of state and political subdivisions | |
| - | | |
| 89,285 | | |
| - | | |
| 89,285 | |
Mortgage banking derivative - asset | |
| - | | |
| 732 | | |
| - | | |
| 732 | |
Mortgage banking derivative - liability | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
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 six months ended June 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 six months ended June 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, June 30, 2014 | |
$ | - | |
| |
| | |
Fair Value Measurements Using Significant Unobservable
Inputs (Level 3) (In Thousands) |
Beginning balance, April 1, 2014 | |
$ | 704 | |
Total gains or (losses) (realized/unrealized) | |
| | |
Included in earnings (realized) | |
| (329 | ) |
Included in other comprehensive income (presented
gross of taxes) | |
| 871 | |
Amortization | |
| - | |
Sales | |
| (1,246 | ) |
Transfers in and/or out of Level
3 | |
| - | |
Ending balance, June 30, 2014 | |
$ | - | |
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
June 30, 2015 | |
Level 1 Inputs | | |
Level 2 Inputs | | |
Level 3 Inputs | | |
Total Fair Value | |
| |
(In Thousands) | |
Impaired loans | |
| | | |
| | | |
| | | |
| | |
1-4 Family Residential Real Estate | |
$ | - | | |
$ | - | | |
$ | 408 | | |
$ | 408 | |
Multi Family Residential | |
| - | | |
| - | | |
| 107 | | |
| 107 | |
Commercial Real Estate | |
| - | | |
| - | | |
| 5,304 | | |
| 5,304 | |
Commercial loans | |
| - | | |
| - | | |
| 61 | | |
| 61 | |
Home Equity and Improvement | |
| - | | |
| - | | |
| 95 | | |
| 95 | |
Total Impaired loans | |
| - | | |
| - | | |
| 5,975 | | |
| 5,975 | |
Mortgage servicing rights | |
| - | | |
| 954 | | |
| - | | |
| 954 | |
Real estate held for sale | |
| | | |
| | | |
| | | |
| | |
Residential | |
| - | | |
| - | | |
| 66 | | |
| 66 | |
CRE | |
| - | | |
| - | | |
| 342 | | |
| 342 | |
Total real estate held for sale | |
| - | | |
| - | | |
| 408 | | |
| 408 | |
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 June 30, 2015, 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 | |
$ | 5,975 | | |
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 | |
$ | 408 | | |
Appraisals which utilize sales comparison, net income and cost approach | |
Discounts for changes in market conditions | |
| 20-30 | % | |
| 27 | % |
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 $6.0 million,
with a $12,000 valuation allowance and a fair value of $7.8 million, with a $19,000 valuation allowance at June 30, 2015 and December
31, 2014, respectively. A provision recovery of $98,000 and $719,000 for the three months and six months ended June 30, 2015 and
a provision expense of $725,000 and $1.5 million for the three and six months ended June 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 $954,000 with a valuation allowance of $743,000 and a
fair value of $1.0 million with a valuation allowance of $911,000 at June 30, 2015 and December 31, 2014, respectively. A recovery
of $141,000 and $167,000 for the three and six months ended June 30, 2015 and a recovery of $44,000 and $37,000 for the three
and six months ended June 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 $182,000 and $705,000 for the three
and six months ended June 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 $73,000 for the three and six months ended June 30, 2014.
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 March 31, 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.
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 June 30, 2015.
| |
| | |
Fair Value Measurements at June 30, 2015 (In Thousands) | |
| |
Carrying Value | | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Financial Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
$ | 65,586 | | |
$ | 65,586 | | |
$ | 65,586 | | |
$ | - | | |
$ | - | |
Investment securities | |
| 237,269 | | |
| 237,273 | | |
| 1,996 | | |
| 235,277 | | |
| - | |
Federal Home Loan Bank Stock | |
| 13,802 | | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | |
Loans, net, including loans held for sale | |
| 1,690,125 | | |
| 1,699,398 | | |
| - | | |
| 10,216 | | |
| 1,689,182 | |
Accrued interest receivable | |
| 6,204 | | |
| 6,204 | | |
| - | | |
| 860 | | |
| 5,344 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 1,763,390 | | |
$ | 1,766,560 | | |
$ | 378,970 | | |
$ | 1,387,590 | | |
$ | - | |
Advances from Federal Home Loan Bank | |
| 41,050 | | |
| 41,209 | | |
| - | | |
| 41,209 | | |
| - | |
Securities sold under repurchase agreements | |
| 54,237 | | |
| 54,237 | | |
| - | | |
| 54,237 | | |
| - | |
Subordinated debentures | |
| 36,083 | | |
| 35,318 | | |
| - | | |
| - | | |
| 35,318 | |
| |
| | |
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.
As of June 30, 2015, 96,820
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.
In the second quarter
of 2015, the Company granted 2,160 restricted shares to directors. These shares have a one-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 six months ended June 30, 2015 was determined at the date of grant using the Black-Scholes stock option-pricing
model and the following assumptions:
| |
Six Months ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
Expected average risk-free rate | |
| 2.04 | % | |
| 1.64 | % |
Expected average life | |
| 10.00 years | | |
| 7.44 years | |
Expected volatility | |
| 42.00 | % | |
| 44.62 | % |
Expected dividend yield | |
| 2.10 | % | |
| 2.17 | % |
The weighted-average fair
value of options granted was $13.13 for the six months ended June 30, 2015 and $11.25 for the six months ended June 30, 2014.
Following is activity
under the plans during the six months ended June 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 | |
| (78,050 | ) | |
| 22.01 | | |
| | | |
| | |
Granted | |
| 6,250 | | |
| 32.94 | | |
| | | |
| | |
Options outstanding, June 30, 2015 | |
| 96,820 | | |
$ | 20.37 | | |
| 3.72 | | |
$ | 1,661 | |
Vested or expected to vest at June 30, 2015 | |
| 96,820 | | |
$ | 20.37 | | |
| 3.72 | | |
$ | 1,661 | |
Exercisable at June 30, 2015 | |
| 82,170 | | |
$ | 18.74 | | |
| 2.77 | | |
$ | 1,544 | |
As
of June 30, 2015, there was $157,000 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 4.06 years.
At June 30, 2015, 74,545
RSU’s and 7,927 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 $477,000 was recorded during the six months
ended June 30, 2015 compared to an expense of $130,000 for the same period in 2014. The lower expense in the first six months
of 2014 was due to accrual reversals primarily from the 2013 LTIP adjusting for the actual payout in year one as well as adjusting
the estimated payouts in year two and three. There was approximately $193,000 included within other liabilities at June 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 | | |
| 15,006 | | |
| 19.51 | |
Vested | |
| (12,846 | ) | |
| 17.20 | | |
| (12,846 | ) | |
| 17.20 | |
Forfeited | |
| (29,178 | ) | |
| 19.48 | | |
| - | | |
| - | |
Unvested at June 30, 2015 | |
| 74,545 | | |
$ | 25.86 | | |
| 7,927 | | |
$ | 27.95 | |
The maximum amount of
compensation expense that may be recorded for the 2015 STIP and the 2013, 2014 and 2015 LTIPs at June 30, 2015 is approximately
$3.6 million. However, the estimated expense expected to be recorded as of June 30, 2015 based on the performance measures in
the plans, is $1.8 million of which $967,000 is unrecognized at June 30, 2015 and will be recognized over the remaining performance
periods.
5. Dividends on Common Stock
First Defiance declared
and paid a $0.175 and $0.20 per common stock dividend in the first and second quarters of 2015, respectively, and declared and
paid a $0.15 per common stock dividend in the first and second 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 June 30, | | |
Six months ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Numerator for basic and diluted earnings per common share – Net income | |
$ | 6,563 | | |
$ | 5,689 | | |
$ | 13,164 | | |
$ | 10,868 | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Denominator for basic earnings per common share – weighted average common shares, including participating securities | |
| 9,268 | | |
| 9,607 | | |
| 9,251 | | |
| 9,644 | |
Effect of warrants | |
| - | | |
| 350 | | |
| 147 | | |
| 345 | |
Effect of employee stock options
and restricted share activity | |
| 81 | | |
| 109 | | |
| 85 | | |
| 107 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator for diluted earnings per common share share | |
| 9,349 | | |
| 10,066 | | |
| 9,483 | | |
| 10,096 | |
Basic earnings per common share | |
$ | 0.71 | | |
$ | 0.59 | | |
$ | 1.42 | | |
$ | 1.13 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted earnings per common share | |
$ | 0.70 | | |
$ | 0.57 | | |
$ | 1.39 | | |
$ | 1.08 | |
There were 6,750 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 six months ended June 30, 2015, respectively. There were 1,000 and 35,000 shares under options granted to employees
excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and six months ended
June 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 | |
At June 30, 2015 | |
(In Thousands) | |
Available-for-Sale Securities: | |
| | | |
| | | |
| | | |
| | |
Obligations of U.S. government corporations and agencies | |
$ | 3,000 | | |
$ | - | | |
$ | (18 | ) | |
$ | 2,982 | |
Mortgage-backed securities – residential | |
| 59,181 | | |
| 768 | | |
| (236 | ) | |
| 59,713 | |
REMICs | |
| 1,722 | | |
| 29 | | |
| - | | |
| 1,751 | |
Collateralized mortgage obligations | |
| 76,556 | | |
| 1,094 | | |
| (363 | ) | |
| 77,287 | |
Trust preferred securities and preferred stock | |
| - | | |
| 1 | | |
| - | | |
| 1 | |
Corporate bonds | |
| 5,935 | | |
| 62 | | |
| (4 | ) | |
| 5,993 | |
Obligations of state and political subdivisions | |
| 85,731 | | |
| 3,778 | | |
| (224 | ) | |
| 89,285 | |
Totals | |
$ | 232,125 | | |
$ | 5,732 | | |
$ | (845 | ) | |
$ | 237,012 | |
| |
Amortized Cost | | |
Gross Unrecognized Gains | | |
Gross Unrecognized Losses | | |
Fair Value | |
| |
(In Thousands) | |
Held-to-Maturity Securities*: | |
| | | |
| | | |
| | | |
| | |
FHLMC certificates | |
$ | 16 | | |
$ | - | | |
$ | - | | |
$ | 16 | |
FNMA certificates | |
| 82 | | |
| 3 | | |
| - | | |
| 85 | |
GNMA certificates | |
| 35 | | |
| 1 | | |
| - | | |
| 36 | |
Obligations of state and political subdivisions | |
| 124 | | |
| - | | |
| - | | |
| 124 | |
Totals | |
$ | 257 | | |
$ | 4 | | |
$ | - | | |
$ | 261 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | |
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 | |
| |
| | | |
| | | |
| | | |
| | |
| |
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 June 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 | |
$ | 1,246 | | |
$ | 1,256 | | |
$ | - | | |
$ | - | |
Due after one year through five years | |
| 14,772 | | |
| 15,078 | | |
| 124 | | |
| 124 | |
Due after five years through ten years | |
| 36,311 | | |
| 38,157 | | |
| - | | |
| - | |
Due after ten years | |
| 42,337 | | |
| 43,770 | | |
| - | | |
| - | |
MBS/CMO | |
| 137,459 | | |
| 138,751 | | |
| 133 | | |
| 137 | |
| |
$ | 232,125 | | |
$ | 237,012 | | |
$ | 257 | | |
$ | 261 | |
Investment securities
with a carrying amount of $134.3 million at June 30, 2015 were pledged as collateral on public deposits, securities sold under
repurchase agreements and Federal Reserve discount window.
As of June 30, 2015, the
Company’s investment portfolio consisted of 366 securities, 78 of which were in an unrealized loss position.
The following tables summarize
First Defiance’s securities that were in an unrealized loss position at June 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 June 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Available-for-sale securities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Obligations of U.S. government corporations and agencies | |
$ | 1,994 | | |
$ | (6 | ) | |
$ | 988 | | |
$ | (12 | ) | |
$ | 2,982 | | |
$ | (18 | ) |
Collateralized mortgage obligations | |
| 11,258 | | |
| (96 | ) | |
| 10,325 | | |
| (267 | ) | |
| 21,583 | | |
| (363 | ) |
Mortgage-backed securities - residential | |
| 33,958 | | |
| (236 | ) | |
| - | | |
| - | | |
| 33,958 | | |
| (236 | ) |
Obligations of state and political subdivisions | |
| 14,101 | | |
| (208 | ) | |
| 415 | | |
| (16 | ) | |
| 14,516 | | |
| (224 | ) |
Corporate bonds | |
| 1,996 | | |
| (4 | ) | |
| - | | |
| - | | |
| 1,996 | | |
| (4 | ) |
Total temporarily impaired securities | |
$ | 63,307 | | |
$ | (550 | ) | |
$ | 11,728 | | |
$ | (295 | ) | |
$ | 75,035 | | |
$ | (845 | ) |
| |
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.
There were no realized
gains from the sales of investment securities in the first and second quarters of 2015.
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.
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 first and second
quarters of 2015, management determined there was no OTTI.
The Company holds three
CDO’s at June 30, 2015 and December 31, 2014 with a zero value.
The amount of OTTI recognized
in accumulated other comprehensive income (“AOCI”) was zero at June 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 June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
(In Thousands) | |
Proceeds | |
$ | - | | |
$ | 2,128 | | |
$ | - | | |
$ | 3,782 | |
Gross realized gains | |
| - | | |
| 1,113 | | |
| - | | |
| 1,113 | |
Gross realized losses | |
| - | | |
| (642 | ) | |
| - | | |
| (642 | ) |
8. Loans
Loans receivable consist
of the following:
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(In Thousands) | |
Real Estate: | |
| | |
| |
Secured by 1-4 family residential | |
$ | 205,044 | | |
$ | 206,437 | |
Secured by multi-family residential | |
| 162,595 | | |
| 156,530 | |
Secured by commercial real estate | |
| 722,530 | | |
| 683,958 | |
Construction | |
| 140,114 | | |
| 112,385 | |
| |
| 1,230,283 | | |
| 1,159,310 | |
Other Loans: | |
| | | |
| | |
Commercial | |
| 401,247 | | |
| 399,730 | |
Home equity and improvement | |
| 109,694 | | |
| 111,813 | |
Consumer Finance | |
| 14,911 | | |
| 15,466 | |
| |
| 525,852 | | |
| 527,009 | |
Total loans | |
| 1,756,135 | | |
| 1,686,319 | |
Deduct: | |
| | | |
| | |
Undisbursed loan funds | |
| (49,477 | ) | |
| (38,653 | ) |
Net deferred loan origination fees and costs | |
| (942 | ) | |
| (880 | ) |
Allowance for loan loss | |
| (25,384 | ) | |
| (24,766 | ) |
Totals | |
$ | 1,680,332 | | |
$ | 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 June 30, 2015 and 2014 by portfolio segment (In
Thousands):
Quarter Ended June 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 | |
$ | 2,483 | | |
$ | 2,554 | | |
$ | 11,684 | | |
$ | 303 | | |
$ | 6,766 | | |
$ | 1,420 | | |
$ | 92 | | |
$ | 25,302 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Charge-Offs | |
| (12 | ) | |
| (114 | ) | |
| (31 | ) | |
| 0 | | |
| (23 | ) | |
| (187 | ) | |
| (13 | ) | |
| (380 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recoveries | |
| 54 | | |
| 0 | | |
| 167 | | |
| 0 | | |
| 173 | | |
| 51 | | |
| 17 | | |
| 462 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provisions | |
| 352 | | |
| (171 | ) | |
| 276 | | |
| 5 | | |
| (1,349 | ) | |
| 823 | | |
| 64 | | |
| 0 | |
Ending Allowance | |
$ | 2,877 | | |
$ | 2,269 | | |
$ | 12,096 | | |
$ | 308 | | |
$ | 5,567 | | |
$ | 2,107 | | |
$ | 160 | | |
$ | 25,384 | |
Quarter Ended June 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 | |
$ | 2,639 | | |
$ | 2,615 | | |
$ | 11,987 | | |
$ | 138 | | |
$ | 5,610 | | |
$ | 1,647 | | |
$ | 147 | | |
$ | 24,783 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Charge-Offs | |
| (42 | ) | |
| (0 | ) | |
| (39 | ) | |
| 0 | | |
| (973 | ) | |
| (80 | ) | |
| (12 | ) | |
| (1,146 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recoveries | |
| 98 | | |
| 2 | | |
| 200 | | |
| 0 | | |
| 173 | | |
| 55 | | |
| 16 | | |
| 544 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provisions | |
| (350 | ) | |
| (137 | ) | |
| (672 | ) | |
| 61 | | |
| 1,389 | | |
| 158 | | |
| (3 | ) | |
| 446 | |
Ending Allowance | |
$ | 2,345 | | |
$ | 2,480 | | |
$ | 11,476 | | |
$ | 199 | | |
$ | 6,199 | | |
$ | 1,780 | | |
$ | 148 | | |
$ | 24,627 | |
The following
table discloses allowance for loan loss activity for the year-to-date periods ended June 30, 2015 and June 30, 2014 by
portfolio segment and impairment method (In Thousands):
Year-to-date Period Ended
June 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 | |
| (90 | ) | |
| (114 | ) | |
| (186 | ) | |
| 0 | | |
| (25 | ) | |
| (230 | ) | |
| (16 | ) | |
| (661 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recoveries | |
| 73 | | |
| 0 | | |
| 764 | | |
| 0 | | |
| 213 | | |
| 80 | | |
| 29 | | |
| 1,159 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provisions | |
| 400 | | |
| (70 | ) | |
| 250 | | |
| 87 | | |
| (1,130 | ) | |
| 553 | | |
| 30 | | |
| 120 | |
Ending Allowance | |
$ | 2,877 | | |
$ | 2,269 | | |
$ | 12,096 | | |
$ | 308 | | |
$ | 5,567 | | |
$ | 2,107 | | |
$ | 160 | | |
$ | 25,384 | |
Year-to-date Period Ended
June 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 | |
| (270 | ) | |
| (0 | ) | |
| (267 | ) | |
| 0 | | |
| (1,498 | ) | |
| (264 | ) | |
| (23 | ) | |
| (2,322 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recoveries | |
| 154 | | |
| 5 | | |
| 922 | | |
| 0 | | |
| 249 | | |
| 86 | | |
| 34 | | |
| 1,450 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provisions | |
| (386 | ) | |
| (33 | ) | |
| (1,179 | ) | |
| 65 | | |
| 1,770 | | |
| 323 | | |
| (11 | ) | |
| 549 | |
Ending Allowance | |
$ | 2,345 | | |
$ | 2,480 | | |
$ | 11,476 | | |
$ | 199 | | |
$ | 6,199 | | |
$ | 1,780 | | |
$ | 148 | | |
$ | 24,627 | |
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 June 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 | |
$ | 248 | | |
$ | - | | |
$ | 220 | | |
$ | - | | |
$ | 13 | | |
$ | 25 | | |
$ | 32 | | |
$ | 538 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Collectively evaluated for impairment | |
| 2,629 | | |
| 2,269 | | |
| 11,876 | | |
| 308 | | |
| 5,554 | | |
| 2,082 | | |
| 128 | | |
| 24,846 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Acquired with deteriorated
credit quality | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total ending allowance
balance | |
$ | 2,877 | | |
$ | 2,269 | | |
$ | 12,096 | | |
$ | 308 | | |
$ | 5,567 | | |
$ | 2,107 | | |
$ | 160 | | |
$ | 25,384 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans individually evaluated for impairment | |
$ | 9,807 | | |
$ | 2,256 | | |
$ | 20,358 | | |
$ | - | | |
$ | 5,124 | | |
$ | 2,394 | | |
$ | 62 | | |
$ | 40,001 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans collectively evaluated for impairment | |
| 195,613 | | |
| 160,442 | | |
| 704,220 | | |
| 90,626 | | |
| 397,369 | | |
| 107,774 | | |
| 14,835 | | |
| 1,670,879 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans acquired with deteriorated
credit quality | |
| 1 | | |
| - | | |
| 160 | | |
| - | | |
| 19 | | |
| - | | |
| - | | |
| 180 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total ending loans balance | |
$ | 205,421 | | |
$ | 162,698 | | |
$ | 724,738 | | |
$ | 90,626 | | |
$ | 402,512 | | |
$ | 110,168 | | |
$ | 14,897 | | |
$ | 1,711,060 | |
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 | |
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 June 30, 2015 | | |
Six Months Ended June 30, 2015 | |
| |
Average Balance | | |
Interest Income
Recognized | | |
Cash Basis Income
Recognized | | |
Average Balance | | |
Interest Income
Recognized | | |
Cash Basis Income
Recognized | |
Residential Owner Occupied | |
$ | 5,819 | | |
$ | 68 | | |
$ | 67 | | |
$ | 5,905 | | |
$ | 136 | | |
$ | 135 | |
Residential Non Owner Occupied | |
| 4,027 | | |
| 38 | | |
| 39 | | |
| 4,187 | | |
| 79 | | |
| 79 | |
Total Residential Real Estate | |
| 9,846 | | |
| 106 | | |
| 106 | | |
| 10,092 | | |
| 215 | | |
| 214 | |
Construction | |
| - | | |
| - | | |
| - | | |
| 75 | | |
| 2 | | |
| 2 | |
Multi-Family | |
| 2,408 | | |
| 5 | | |
| 6 | | |
| 2,435 | | |
| 13 | | |
| 14 | |
CRE Owner Occupied | |
| 6,711 | | |
| 41 | | |
| 29 | | |
| 6,612 | | |
| 78 | | |
| 68 | |
CRE Non Owner Occupied | |
| 9,452 | | |
| 111 | | |
| 129 | | |
| 9,820 | | |
| 244 | | |
| 264 | |
Agriculture Land | |
| 2,228 | | |
| 25 | | |
| 15 | | |
| 1,494 | | |
| 32 | | |
| 28 | |
Other CRE | |
| 2,118 | | |
| 16 | | |
| 16 | | |
| 2,280 | | |
| 26 | | |
| 25 | |
Total Commercial Real Estate | |
| 20,509 | | |
| 193 | | |
| 189 | | |
| 20,206 | | |
| 380 | | |
| 385 | |
Commercial Working Capital | |
| 1,537 | | |
| 14 | | |
| 12 | | |
| 1,702 | | |
| 27 | | |
| 25 | |
Commercial Other | |
| 3,622 | | |
| 13 | | |
| 17 | | |
| 3,731 | | |
| 26 | | |
| 35 | |
Total Commercial | |
| 5,159 | | |
| 27 | | |
| 29 | | |
| 5,433 | | |
| 53 | | |
| 60 | |
Home Equity and Home Improvement | |
| 2,409 | | |
| 21 | | |
| 21 | | |
| 2,305 | | |
| 41 | | |
| 41 | |
Consumer | |
| 65 | | |
| 1 | | |
| 1 | | |
| 54 | | |
| 1 | | |
| 1 | |
Total Impaired Loans | |
$ | 40,396 | | |
$ | 353 | | |
$ | 352 | | |
$ | 40,600 | | |
$ | 705 | | |
$ | 717 | |
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 June 30, 2014 | | |
Six Months Ended June 30, 2014 | |
| |
Average Balance | | |
Interest Income
Recognized | | |
Cash Basis Income
Recognized | | |
Average Balance | | |
Interest Income
Recognized | | |
Cash Basis Income
Recognized | |
Residential Owner Occupied | |
$ | 6,133 | | |
$ | 81 | | |
$ | 75 | | |
$ | 6,231 | | |
$ | 166 | | |
$ | 158 | |
Residential Non Owner Occupied | |
| 3,715 | | |
| 32 | | |
| 33 | | |
| 3,900 | | |
| 70 | | |
| 71 | |
Total Residential Real Estate | |
| 9,848 | | |
| 113 | | |
| 108 | | |
| 10,131 | | |
| 236 | | |
| 229 | |
Construction | |
| 261 | | |
| 3 | | |
| 4 | | |
| 261 | | |
| 6 | | |
| 9 | |
Multi-Family | |
| 369 | | |
| 1 | | |
| 1 | | |
| 378 | | |
| 2 | | |
| 2 | |
CRE Owner Occupied | |
| 8,967 | | |
| 37 | | |
| 33 | | |
| 9,402 | | |
| 73 | | |
| 68 | |
CRE Non Owner Occupied | |
| 18,469 | | |
| 201 | | |
| 204 | | |
| 18,912 | | |
| 405 | | |
| 408 | |
Agriculture Land | |
| 683 | | |
| 5 | | |
| 3 | | |
| 685 | | |
| 8 | | |
| 5 | |
Other CRE | |
| 1,788 | | |
| 5 | | |
| 6 | | |
| 1,825 | | |
| 10 | | |
| 11 | |
Total Commercial Real Estate | |
| 29,907 | | |
| 248 | | |
| 246 | | |
| 30,824 | | |
| 496 | | |
| 492 | |
Commercial Working Capital | |
| 3,286 | | |
| 8 | | |
| 8 | | |
| 3,105 | | |
| 11 | | |
| 11 | |
Commercial Other | |
| 4,552 | | |
| 2 | | |
| 1 | | |
| 4,756 | | |
| 4 | | |
| 3 | |
Total Commercial | |
| 7,838 | | |
| 10 | | |
| 9 | | |
| 7,861 | | |
| 15 | | |
| 14 | |
Home Equity and Home Improvement | |
| 2,095 | | |
| 25 | | |
| 25 | | |
| 2,267 | | |
| 50 | | |
| 50 | |
Consumer | |
| 51 | | |
| 1 | | |
| 1 | | |
| 54 | | |
| 2 | | |
| 2 | |
Total Impaired Loans | |
$ | 50,369 | | |
$ | 401 | | |
$ | 394 | | |
$ | 51,776 | | |
$ | 807 | | |
$ | 798 | |
The following
table presents loans individually evaluated for impairment by class of loans (In Thousands):
| |
June 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 | |
$ | 3,713 | | |
$ | 3,606 | | |
$ | - | | |
$ | 3,967 | | |
$ | 3,859 | | |
$ | - | |
Residential Non Owner Occupied | |
| 3,526 | | |
| 3,517 | | |
| - | | |
| 3,763 | | |
| 3,670 | | |
| - | |
Total 1-4 Family Residential Real Estate | |
| 7,239 | | |
| 7,123 | | |
| - | | |
| 7,730 | | |
| 7,529 | | |
| - | |
Multi-Family Residential Real Estate | |
| 2,408 | | |
| 2,256 | | |
| - | | |
| 2,627 | | |
| 2,482 | | |
| - | |
CRE Owner Occupied | |
| 4,249 | | |
| 3,903 | | |
| - | | |
| 7,109 | | |
| 6,481 | | |
| - | |
CRE Non Owner Occupied | |
| 2,406 | | |
| 2,144 | | |
| - | | |
| 4,106 | | |
| 3,759 | | |
| - | |
Agriculture Land | |
| 2,134 | | |
| 2,183 | | |
| - | | |
| 213 | | |
| 208 | | |
| - | |
Other CRE | |
| 2,073 | | |
| 1,751 | | |
| - | | |
| 2,923 | | |
| 2,378 | | |
| - | |
Total Commercial Real Estate | |
| 10,862 | | |
| 9,981 | | |
| - | | |
| 14,351 | | |
| 12,826 | | |
| - | |
Construction | |
| - | | |
| - | | |
| - | | |
| 150 | | |
| 150 | | |
| - | |
Commercial Working Capital | |
| 900 | | |
| 904 | | |
| - | | |
| 1,155 | | |
| 1,157 | | |
| - | |
Commercial Other | |
| 3,367 | | |
| 3,193 | | |
| - | | |
| 3,966 | | |
| 3,663 | | |
| - | |
Total Commercial | |
| 4,267 | | |
| 4,097 | | |
| - | | |
| 5,121 | | |
| 4,820 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Home Equity and Home Improvement | |
| 2,349 | | |
| 2,298 | | |
| - | | |
| 2,192 | | |
| 2,140 | | |
| - | |
Consumer Finance | |
| 29 | | |
| 29 | | |
| - | | |
| 35 | | |
| 34 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total loans
with no allowance recorded | |
$ | 27,154 | | |
$ | 25,784 | | |
$ | - | | |
$ | 32,206 | | |
$ | 29,981 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential Owner Occupied | |
$ | 2,183 | | |
$ | 2,186 | | |
$ | 241 | | |
$ | 2,112 | | |
$ | 2,114 | | |
$ | 204 | |
Residential Non Owner Occupied | |
| 494 | | |
| 498 | | |
| 7 | | |
| 636 | | |
| 638 | | |
| 12 | |
Total 1-4 Family Residential Real Estate | |
| 2,677 | | |
| 2,684 | | |
| 248 | | |
| 2,748 | | |
| 2,752 | | |
| 216 | |
Multi-Family Residential Real Estate | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
CRE Owner Occupied | |
| 3,231 | | |
| 2,832 | | |
| 169 | | |
| 2,667 | | |
| 2,257 | | |
| 148 | |
CRE Non Owner Occupied | |
| 7,156 | | |
| 7,093 | | |
| 44 | | |
| 13,020 | | |
| 12,606 | | |
| 842 | |
Agriculture Land | |
| 123 | | |
| 112 | | |
| 1 | | |
| 333 | | |
| 320 | | |
| 10 | |
Other CRE | |
| 583 | | |
| 340 | | |
| 6 | | |
| 137 | | |
| 108 | | |
| 3 | |
Total Commercial Real Estate | |
| 11,093 | | |
| 10,377 | | |
| 220 | | |
| 16,157 | | |
| 15,291 | | |
| 1,003 | |
Construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Commercial Working Capital | |
| 713 | | |
| 714 | | |
| 9 | | |
| 649 | | |
| 650 | | |
| 21 | |
Commercial Other | |
| 310 | | |
| 313 | | |
| 4 | | |
| 264 | | |
| 269 | | |
| 9 | |
Total Commercial | |
| 1,023 | | |
| 1,027 | | |
| 13 | | |
| 913 | | |
| 919 | | |
| 30 | |
Home Equity and Home Improvement | |
| 95 | | |
| 96 | | |
| 25 | | |
| 101 | | |
| 102 | | |
| 24 | |
Consumer Finance | |
| 32 | | |
| 33 | | |
| 32 | | |
| - | | |
| - | | |
| - | |
Total loans
with an allowance recorded | |
$ | 14,920 | | |
$ | 14,217 | | |
$ | 538 | | |
$ | 19,919 | | |
$ | 19,064 | | |
$ | 1,273 | |
* Presented gross of charge offs
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:
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
(In Thousands) | |
Non-accrual loans | |
$ | 16,737 | | |
$ | 24,130 | |
Loans over 90 days past due and still accruing | |
| - | | |
| - | |
Total non-performing loans | |
| 16,737 | | |
| 24,130 | |
Real estate and other assets held for sale | |
| 5,371 | | |
| 6,181 | |
Total non-performing assets | |
$ | 22,108 | | |
$ | 30,311 | |
Troubled debt restructuring, still accruing | |
$ | 22,234 | | |
$ | 24,686 | |
The following table
presents the aging of the recorded investment in past due and non accrual loans as of June 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 | |
$ | 141,983 | | |
$ | - | | |
$ | 427 | | |
$ | 290 | | |
$ | 717 | | |
$ | 1,502 | |
Residential Non Owner Occupied | |
| 61,597 | | |
| 245 | | |
| 157 | | |
| 722 | | |
| 1,124 | | |
| 1,440 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total 1-4 Family Residential Real Estate | |
| 203,580 | | |
| 245 | | |
| 584 | | |
| 1,012 | | |
| 1,841 | | |
| 2,942 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Multi-Family Residential Real Estate | |
| 160,594 | | |
| - | | |
| - | | |
| 2,104 | | |
| 2,104 | | |
| 2,123 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
CRE Owner Occupied | |
| 314,314 | | |
| 106 | | |
| 1,277 | | |
| 2,051 | | |
| 3,434 | | |
| 4,652 | |
CRE Non Owner Occupied | |
| 262,442 | | |
| 108 | | |
| 2,186 | | |
| 358 | | |
| 2,652 | | |
| 1,093 | |
Agriculture Land | |
| 98,224 | | |
| 62 | | |
| 427 | | |
| - | | |
| 489 | | |
| 452 | |
Other Commercial Real Estate | |
| 42,860 | | |
| - | | |
| - | | |
| 323 | | |
| 323 | | |
| 1,461 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Commercial Real Estate | |
| 717,840 | | |
| 276 | | |
| 3,890 | | |
| 2,732 | | |
| 6,898 | | |
| 7,658 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Construction | |
| 90,626 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Working Capital | |
| 153,126 | | |
| 145 | | |
| - | | |
| 327 | | |
| 472 | | |
| 397 | |
Commercial Other | |
| 245,954 | | |
| 5 | | |
| 1,857 | | |
| 1,098 | | |
| 2,960 | | |
| 3,054 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Commercial | |
| 399,080 | | |
| 150 | | |
| 1,857 | | |
| 1,425 | | |
| 3,432 | | |
| 3,451 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer Finance | |
| 14,881 | | |
| 16 | | |
| - | | |
| - | | |
| 16 | | |
| 10 | |
Home Equity/Home
Improvement | |
| 109,229 | | |
| 658 | | |
| 254 | | |
| 27 | | |
| 939 | | |
| 553 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Loans | |
$ | 1,695,830 | | |
$ | 1,345 | | |
$ | 6,585 | | |
$ | 7,300 | | |
$ | 15,230 | | |
$ | 16,737 | |
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 June 30, 2015
and December 31, 2014, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $29.0 million
and $33.0 million, respectively. The Company allocated $431,000 and $1.1 million of specific reserves to those loans at June 30,
2015 and December 31, 2014, and has committed to lend additional amounts totaling up to $28,000 and $69,000 at June 30, 2015 and
December 31, 2014, respectively.
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, $6.7 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding
balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan
is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine
if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance
is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective
interest rate.
The following table
presents loans by class modified as troubled debt restructurings that occurred during the three and six month periods ending June
30, 2015 and June 30, 2014:
| |
Loans Modified as a TDR for the Three
Months Ended June 30, 2015
($ in thousands) | | |
Loans Modified as a TDR for the Six
Months Ended June 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 | |
| 1 | | |
$ | 9 | | |
| 3 | | |
$ | 226 | |
1-4 Family Non Owner Occupied | |
| 0 | | |
| - | | |
| 4 | | |
| 65 | |
CRE Owner Occupied | |
| 1 | | |
| 582 | | |
| 1 | | |
| 582 | |
CRE Non Owner Occupied | |
| 2 | | |
| 260 | | |
| 2 | | |
| 260 | |
Agriculture Land | |
| 3 | | |
| 1,555 | | |
| 3 | | |
| 1,555 | |
Other CRE | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Commercial Working Capital | |
| 2 | | |
| 526 | | |
| 2 | | |
| 526 | |
Commercial Other | |
| 1 | | |
| 57 | | |
| 1 | | |
| 57 | |
Home Equity and Improvement | |
| 4 | | |
| 268 | | |
| 7 | | |
| 326 | |
Consumer Finance | |
| 2 | | |
| 34 | | |
| 4 | | |
| 37 | |
Total | |
| 16 | | |
$ | 3,291 | | |
| 27 | | |
$ | 3,634 | |
The
loans described above increased the ALLL by $53,000 in the three month period ending June 30, 2015 and increased the ALLL by $116,000
in the six month period ending June 30, 2015.
| |
Loans Modified as a TDR for the Three
Months Ended June 30, 2014
($ In Thousands) | | |
Loans Modified as a TDR for the Six
Months Ended June 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 | |
| 7 | | |
$ | 674 | | |
| 15 | | |
$ | 1,372 | |
Residential Non Owner Occupied | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
CRE Owner Occupied | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
CRE Non Owner Occupied | |
| 0 | | |
| - | | |
| 1 | | |
| 358 | |
Agriculture Land | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Other CRE | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Commercial working capital or other | |
| 9 | | |
| 727 | | |
| 11 | | |
| 1,676 | |
Home Equity / Improvement | |
| 4 | | |
| 82 | | |
| 7 | | |
| 167 | |
Consumer Finance | |
| 1 | | |
| 17 | | |
| 2 | | |
| 19 | |
Total | |
| 21 | | |
$ | 1,500 | | |
| 36 | | |
$ | 3,592 | |
The
loans described above increased the allowance for loan loss by $65,000 in the three month period ending June 30, 2014 and decreased
the allowance for loan loss by $5,000 in the six month period ending June 30, 2014.
Of
the 2015 modifications, 9 were made TDRs due to the fact that the borrower has been in bankruptcy, 1 was made TDR due to extending
the amortization, 1 was made a TDR due to an interest only period, 11 were made TDRs due to advancing funds to a watchlist credit,
1 was to term out a line of credit and 4 were made to refinance current debt for payment relief.
The following table
presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification
during the three and six month periods ended June 30, 2015 and June 30, 2014:
| |
Three Months Ended June 30, 2015
($ in thousands) | | |
Six Months Ended June 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 | |
| 1 | | |
| 104 | | |
| 1 | | |
| 104 | |
CRE Owner Occupied | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
CRE Non Owner Occupied | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Agriculture Land | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Other CRE | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Commercial Working Capital or Other | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Commercial Other | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Home Equity and Improvement | |
| 1 | | |
| 22 | | |
| 1 | | |
| 22 | |
Consumer Finance | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Total | |
| 2 | | |
$ | 126 | | |
| 2 | | |
$ | 126 | |
The
TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and six month periods
ended June 30, 2015.
| |
Three Months Ended June 30, 2014
($ In Thousands) | | |
Six Months Ended June 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 | | |
$ | 67 | | |
| 1 | | |
$ | 67 | |
Residential Non Owner Occupied | |
| 1 | | |
| 183 | | |
| 1 | | |
| 183 | |
CRE Owner Occupied | |
| 4 | | |
| 153 | | |
| 4 | | |
| 153 | |
CRE Non Owner Occupied | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Agriculture Land | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Other CRE | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Commercial working capital or other | |
| 3 | | |
| 387 | | |
| 3 | | |
| 387 | |
Home Equity / Improvement | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Consumer Finance | |
| 0 | | |
| - | | |
| 0 | | |
| - | |
Total | |
| 8 | | |
$ | 790 | | |
| 9 | | |
$ | 790 | |
The TDRs that
subsequently defaulted described above decreased the allowance for loan losses by $2,000 for the three and six month period ended
June 30, 2014.
The terms of certain
other loans were modified during the period ending June 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 115 loans were modified under this definition during the three month period ended June 30, 2015 and a total of 153 loans were
modified under this definition during the six month period ended June 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.
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 June 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 | |
$ | 5,153 | | |
$ | 155 | | |
$ | 2,262 | | |
$ | - | | |
$ | 135,130 | | |
$ | 142,700 | |
1-4 Family Non Owner Occupied | |
| 51,673 | | |
| 2,071 | | |
| 4,229 | | |
| - | | |
| 4,748 | | |
| 62,721 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total 1-4 Family Real Estate | |
| 56,826 | | |
| 2,226 | | |
| 6,491 | | |
| - | | |
| 139,878 | | |
| 205,421 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Multi-Family Residential Real Estate | |
| 158,945 | | |
| 214 | | |
| 2,653 | | |
| - | | |
| 886 | | |
| 162,698 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
CRE Owner Occupied | |
| 287,339 | | |
| 22,652 | | |
| 6,826 | | |
| - | | |
| 930 | | |
| 317,747 | |
CRE Non Owner Occupied | |
| 254,929 | | |
| 6,053 | | |
| 4,061 | | |
| - | | |
| 52 | | |
| 265,095 | |
Agriculture Land | |
| 95,480 | | |
| 2,215 | | |
| 1,019 | | |
| - | | |
| - | | |
| 98,714 | |
Other CRE | |
| 39,321 | | |
| 62 | | |
| 3,277 | | |
| - | | |
| 522 | | |
| 43,182 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Commercial Real Estate | |
| 677,069 | | |
| 30,982 | | |
| 15,183 | | |
| - | | |
| 1,504 | | |
| 724,738 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Construction | |
| 77,346 | | |
| 347 | | |
| - | | |
| - | | |
| 12,933 | | |
| 90,626 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Working Capital | |
| 148,750 | | |
| 3,662 | | |
| 1,187 | | |
| - | | |
| - | | |
| 153,599 | |
Commercial Other | |
| 240,718 | | |
| 3,905 | | |
| 4,290 | | |
| - | | |
| - | | |
| 248,913 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Commercial | |
| 389,468 | | |
| 7,567 | | |
| 5,477 | | |
| - | | |
| - | | |
| 402,512 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Home Equity and Home Improvement | |
| - | | |
| - | | |
| 560 | | |
| - | | |
| 109,608 | | |
| 110,168 | |
Consumer Finance | |
| - | | |
| - | | |
| 7 | | |
| - | | |
| 14,890 | | |
| 14,897 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Loans | |
$ | 1,359,654 | | |
$ | 41,336 | | |
$ | 30,371 | | |
$ | - | | |
$ | 279,699 | | |
$ | 1,711,060 | |
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 $367,000 as of June 30,
2015.
Net
revenues from the sales and servicing of mortgage loans consisted of the following:
| |
Three
Months Ended June
30, | | |
Six
Months Ended June
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
(In Thousands) | | |
(In Thousands) | |
Gain from sale of mortgage loans | |
$ | 1,246 | | |
$ | 986 | | |
$ | 2,531 | | |
$ | 1,628 | |
Mortgage loans servicing revenue (expense): | |
| | | |
| | | |
| | | |
| | |
Mortgage loans servicing revenue | |
| 852 | | |
| 878 | | |
| 1,727 | | |
| 1,782 | |
Amortization of mortgage servicing rights | |
| (446 | ) | |
| (368 | ) | |
| (857 | ) | |
| (660 | ) |
Mortgage servicing rights valuation adjustments | |
| 141 | | |
| 44 | | |
| 167 | | |
| 37 | |
| |
| 547 | | |
| 554 | | |
| 1,037 | | |
| 1,159 | |
| |
| | | |
| | | |
| | | |
| | |
Net revenue from sale and servicing of mortgage loans | |
$ | 1,793 | | |
$ | 1,540 | | |
$ | 3,568 | | |
$ | 2,787 | |
The unpaid principal
balance of residential mortgage loans serviced for third parties was $1.34 billion at June 30, 2015 and $1.35 billion at December
31, 2014.
Activity for capitalized
mortgage servicing rights and the related valuation allowance follows for the three and six months ended June 30, 2015 and 2014:
| |
Three
Months Ended June
30, | | |
Six
Months Ended June
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
(In Thousands) | | |
(In Thousands) | |
Mortgage servicing assets: | |
| | | |
| | | |
| | | |
| | |
Balance at beginning of period | |
$ | 9,832 | | |
$ | 10,048 | | |
$ | 9,923 | | |
$ | 10,133 | |
Loans sold, servicing retained | |
| 486 | | |
| 313 | | |
| 806 | | |
| 520 | |
Amortization | |
| (446 | ) | |
| (368 | ) | |
| (857 | ) | |
| (660 | ) |
Carrying value before valuation allowance at end of period | |
| 9,872 | | |
| 9,993 | | |
| 9,872 | | |
| 9,993 | |
| |
| | | |
| | | |
| | | |
| | |
Valuation allowance: | |
| | | |
| | | |
| | | |
| | |
Balance at beginning of period | |
| (885 | ) | |
| (1,034 | ) | |
| (911 | ) | |
| (1,027 | ) |
Impairment recovery (charges) | |
| 141 | | |
| 44 | | |
| 167 | | |
| 37 | |
Balance at end of period | |
| (744 | ) | |
| (990 | ) | |
| (744 | ) | |
| (990 | ) |
Net carrying value of MSRs at end of period | |
$ | 9,128 | | |
$ | 9,003 | | |
$ | 9,128 | | |
$ | 9,003 | |
Fair value of MSRs at end of period | |
$ | 9,574 | | |
$ | 9,584 | | |
$ | 9,574 | | |
$ | 9,584 | |
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 $72,000 for the first six months of 2015 mainly
due to no actual losses being recorded in 2015. In the first six months of 2014, the Company accrued $184,000 which was mostly
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.
A summary of deposit
balances is as follows (in thousands):
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
(In Thousands) | |
Non-interest-bearing checking accounts | |
$ | 378,970 | | |
$ | 379,552 | |
Interest-bearing checking and money market accounts | |
| 722,813 | | |
| 727,729 | |
Savings deposits | |
| 218,055 | | |
| 203,673 | |
Retail certificates of deposit less than $250,000 | |
| 419,990 | | |
| 422,907 | |
Retail certificates of deposit greater than $250,000 | |
| 23,562 | | |
| 26,952 | |
| |
$ | 1,763,390 | | |
$ | 1,760,813 | |
First Defiance’s
FHLB advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:
| |
June
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 | |
| 9,050 | | |
| 9,544 | |
Total | |
$ | 41,050 | | |
$ | 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 June 30, 2015. The call date for this advance is September 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 1.78% as of June
30, 2015 and 1.74% as of December 31, 2014.
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 1.66% and 1.62%
on June 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.
The remaining contractual
maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of June 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 June 30, 2015 | |
| | |
(In Thousands) | |
Repurchase agreements: | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities – residential | |
$ | 17,023 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 17,023 | |
Collateralized mortgage obligations | |
| 37,214 | | |
| - | | |
| - | | |
| - | | |
| 37,214 | |
Total borrowings | |
$ | 54,237 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 54,237 | |
Gross amount of recognized liabilities for repurchase
agreements | |
| | | |
| | | |
| | | |
| | | |
$ | 54,237 | |
| |
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):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
Fixed Rate | | |
Variable Rate | | |
Fixed Rate | | |
Variable Rate | |
Commitments to make loans | |
$ | 43,201 | | |
$ | 99,351 | | |
$ | 37,546 | | |
$ | 69,232 | |
Unused lines of credit | |
| 17,148 | | |
| 295,745 | | |
| 20,385 | | |
| 307,449 | |
Standby letters of credit | |
| - | | |
| 17,809 | | |
| - | | |
| 17,886 | |
Total | |
$ | 60,349 | | |
$ | 412,905 | | |
$ | 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 $25.2 million and $11.6 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T
Mortgage at June 30, 2015 and December 31, 2014, respectively.
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 $17.3 million and $7.4
million of interest rate lock commitments at June 30, 2015 and December 31, 2014, respectively. There were $25.2 million and $11.6
million of forward commitments for the future delivery of residential mortgage loans at June 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:
| |
June
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 | |
$ | 732 | | |
$ | - | | |
$ | 732 | | |
$ | 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
June 30, | | |
Six
Months Ended June
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
(In Thousands) | | |
(In Thousands) | |
Derivatives not designated
as hedging instruments | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage Banking Derivatives – Gain (Loss) | |
$ | (33 | ) | |
$ | 128 | | |
$ | 405 | | |
$ | 178 | |
The above amounts
are included in mortgage banking income with gain on sale of mortgage loans.
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 June 30, 2015: | |
| | | |
| | | |
| | |
Securities available for sale and transferred securities: | |
| | | |
| | | |
| | |
Change in net unrealized gain/loss during the period | |
$ | (3,839 | ) | |
$ | (1,344 | ) | |
$ | (2,495 | ) |
Reclassification adjustment for net gains included in
net income | |
| - | | |
| - | | |
| - | |
Total other comprehensive loss | |
$ | (3,839 | ) | |
$ | (1,344 | ) | |
$ | (2,495 | ) |
| |
| | | |
| | | |
| | |
Six months ended June 30, 2015: | |
| | | |
| | | |
| | |
Securities available for sale and transferred securities: | |
| | | |
| | | |
| | |
Change in net unrealized gain/loss during the period | |
$ | (2,337 | ) | |
$ | (817 | ) | |
$ | (1,520 | ) |
Reclassification adjustment for net gains included in
net income | |
| - | | |
| - | | |
| - | |
Total other comprehensive loss | |
$ | (2,337 | ) | |
$ | (817 | ) | |
$ | (1,520 | ) |
| |
Before Tax
Amount | | |
Tax Expense
(Benefit) | | |
Net of Tax
Amount | |
Three months ended June 30, 2014: | |
| | | |
| | | |
| | |
Securities available for sale and transferred securities: | |
| | | |
| | | |
| | |
Change in net unrealized gain (loss) during the period | |
$ | 2,743 | | |
$ | 936 | | |
$ | 1,807 | |
Reclassification adjustment for net gains included in
net income | |
| (471 | ) | |
| (141 | ) | |
| (330 | ) |
Total other comprehensive loss | |
$ | 2,272 | | |
$ | 795 | | |
$ | 1,477 | |
| |
Before Tax
Amount | | |
Tax Expense
(Benefit) | | |
Net of Tax
Amount | |
Six months ended June 30, 2014: | |
| | | |
| | | |
| | |
Securities available for sale and transferred securities: | |
| | | |
| | | |
| | |
Change in net unrealized gain (loss) during the period | |
$ | 4,465 | | |
$ | 1,538 | | |
$ | 2,927 | |
Reclassification adjustment for net gains included in
net income | |
| (471 | ) | |
| (141 | ) | |
| (330 | ) |
Total other comprehensive loss | |
$ | 3,994 | | |
$ | 1,397 | | |
$ | 2,597 | |
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 before reclassifications | |
| (1,520 | ) | |
| - | | |
| (1,520 | ) |
Amounts reclassified from accumulated
other comprehensive income | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Net other comprehensive income
during period | |
| (1,520 | ) | |
| - | | |
| (1,520 | ) |
| |
| | | |
| | | |
| | |
Balance June 30, 2015 | |
$ | 3,177 | | |
$ | (583 | ) | |
$ | 2,594 | |
| |
| | | |
| | | |
| | |
Balance January 1, 2014 | |
$ | 906 | | |
$ | (361 | ) | |
$ | 545 | |
Other comprehensive income before reclassifications | |
| 2,927 | | |
| - | | |
| 2,927 | |
Amounts reclassified from accumulated
other comprehensive income | |
| (330 | ) | |
| - | | |
| (330 | ) |
| |
| | | |
| | | |
| | |
Net other comprehensive income
during period | |
| 2,597 | | |
| - | | |
| 2,597 | |
| |
| | | |
| | | |
| | |
Balance June 30, 2014 | |
$ | 3,503 | | |
$ | (361 | ) | |
$ | 3,142 | |
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.
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 June 30, 2015 and December 31, 2014 the Company had $4.5 million and $4.6 million in qualified
investments recorded in other assets and $2.9 million and $3.0 million in unfunded commitments recorded in other liabilities,
respectively.
Unfunded Commitments
As of June 30, 2015,
the expected payments for unfunded affordable housing commitments were as follows:
(dollars in thousands) | |
Amount | |
2015 | |
$ | 1,333 | |
2016 | |
| 612 | |
2017 | |
| 160 | |
2018 | |
| 414 | |
2019 | |
| 93 | |
Thereafter | |
| 312 | |
Total Unfunded Commitments | |
$ | 2,924 | |
The following table
presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and
six months ended June 30, 2015 and 2014.
| |
Three Months Ended June 30, | |
(dollars in thousands) | |
2015 | | |
2014 | |
Proportional Amortization Method | |
| | | |
| | |
Tax credits and other tax benefits recognized | |
$ | 118 | | |
$ | 332 | |
Amortization expense in federal income taxes | |
| 89 | | |
| 44 | |
| |
Six Months Ended June 30, | |
(dollars in thousands) | |
2015 | | |
2014 | |
Proportional Amortization Method | |
| | | |
| | |
Tax credits and other tax benefits recognized | |
$ | 236 | | |
$ | 332 | |
Amortization expense in federal income taxes | |
| 179 | | |
| 44 | |
There were no impairment
losses of LIHTC investments for the three and six months ended June 30, 2015 and 2014.
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 and Oregon, Ohio areas. 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).
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 (“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.
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.
The new rules include
(a) a new common equity tier 1 capital ratio of at least 4.5 percent, (b) a Tier 1 capital ratio of at least 6.0 percent, rather
than the former 4.0 percent, (c) a minimum total capital ratio that remains at 8.0 percent, and (d) a minimum leverage ratio of
4 percent.
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 percent 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 percent at the beginning of the quarter. The capital conservation buffer
phases in starting on January 1, 2016, at .625 percent. 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.
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.
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 $257,000 at June 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 $237.0 million at June 30, 2015.
The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($3.0 million), certain
municipal obligations ($89.3 million), CMOs/REMICs ($79.0 million), corporate bonds ($6.0 million), mortgage backed securities
($59.7 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.
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 Bank 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.
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 June 30, 2015, First
Defiance's total assets, deposits and stockholders' equity amounted to $2.20 billion, $1.76 billion and $276.0 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 $58.3 million to $1.68 billion. The variance in loans receivable between June 30, 2015 and December
31, 2014 include increases in commercial real estate loans (up $44.6 million), construction loans (up $27.7 million) and commercial
loans (up $1.5 million). These increases were partially offset by decreases in residential real estate loans (down $1.4 million),
home equity loans (down $2.1 million) and consumer loans (down $555,000).
The investment securities
portfolio decreased $2.4 million to $237.3 million at June 30, 2015 from $239.6 million at December 31, 2014. The decrease is
the result of $15.6 million of securities maturing or being called during the first six months of 2015 as well as a decrease in
the unrealized gains of $2.3 million. This was partially offset by purchases of $16.1 million of securities. There was an unrealized
gain in the investment portfolio of $4.9 million at June 30, 2015 compared to an unrealized gain of $7.2 million at December 31,
2014.
Deposits remained flat
at $1.76 billion at June 30, 2015 and December 31, 2014. Non-interest bearing demand deposits decreased $582,000 to $379.0 million,
interest-bearing demand deposits and money market accounts decreased $4.9 million to $722.8 million and retail time deposits decreased
$6.3 million to $443.6 million. These decreases were mostly offset by an increase in savings accounts of $14.4 million to $218.1
million.
Stockholders’ equity
decreased from $279.5 million at December 31, 2014 to $276.0 million at June 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, $3.5 million of common stock dividends being paid in the first six months of 2015, $1.3 million in repurchased common
stock in the first six months of 2015 and a decrease in other comprehensive income of $1.5 million. These were partially offset
by recording net income of $13.2 million and a $1.3 million increase due to stock option exercises.
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 June 30, | |
| |
2015 | | |
2014 | |
| |
Average | | |
| | |
Yield/ | | |
Average | | |
| | |
Yield/ | |
| |
Balance | | |
Interest(1) | | |
Rate(2) | | |
Balance | | |
Interest(1) | | |
Rate(2) | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans receivable | |
$ | 1,673,750 | | |
$ | 18,186 | | |
| 4.36 | % | |
$ | 1,551,799 | | |
$ | 16,918 | | |
| 4.37 | % |
Securities | |
| 245,539 | | |
| 2,153 | | |
| 3.63 | | |
| 217,848 | | |
| 2,015 | | |
| 3.79 | |
Interest bearing deposits | |
| 58,739 | | |
| 41 | | |
| 0.28 | | |
| 168,991 | | |
| 118 | | |
| 0.28 | |
FHLB stock | |
| 13,802 | | |
| 136 | | |
| 3.95 | | |
| 13,802 | | |
| 170 | | |
| 4.94 | |
Total interest-earning assets | |
| 1,991,830 | | |
| 20,516 | | |
| 4.15 | | |
| 1,952,440 | | |
| 19,221 | | |
| 3.96 | |
Non-interest-earning assets | |
| 220,773 | | |
| | | |
| | | |
| 213,046 | | |
| | | |
| | |
Total assets | |
$ | 2,212,603 | | |
| | | |
| | | |
$ | 2,165,486 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 1,397,966 | | |
$ | 1,312 | | |
| 0.38 | % | |
$ | 1,407,795 | | |
$ | 1,327 | | |
| 0.38 | % |
FHLB advances and other | |
| 39,578 | | |
| 173 | | |
| 1.75 | | |
| 22,116 | | |
| 133 | | |
| 2.41 | |
Subordinated debentures | |
| 36,128 | | |
| 150 | | |
| 1.67 | | |
| 36,132 | | |
| 146 | | |
| 1.62 | |
Securities sold under repurchase agreements | |
| 52,754 | | |
| 37 | | |
| 0.28 | | |
| 51,478 | | |
| 39 | | |
| 0.30 | |
Total interest-bearing liabilities | |
| 1,526,426 | | |
| 1,672 | | |
| 0.44 | | |
| 1,517,521 | | |
| 1,645 | | |
| 0.43 | |
Non-interest bearing deposits | |
| 382,946 | | |
| - | | |
| | | |
| 348,303 | | |
| - | | |
| | |
Total including non-interest bearing demand deposits | |
| 1,909,372 | | |
| 1,672 | | |
| 0.35 | | |
| 1,865,824 | | |
| 1,645 | | |
| 0.35 | |
Other non-interest-bearing liabilities | |
| 28,992 | | |
| | | |
| | | |
| 23,172 | | |
| | | |
| | |
Total liabilities | |
| 1,938,364 | | |
| | | |
| | | |
| 1,888,996 | | |
| | | |
| | |
Stockholders' equity | |
| 274,239 | | |
| | | |
| | | |
| 276,490 | | |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 2,212,603 | | |
| | | |
| | | |
$ | 2,165,486 | | |
| | | |
| | |
Net interest income; interest rate spread | |
| | | |
$ | 18,844 | | |
| 3.71 | % | |
| | | |
$ | 17,576 | | |
| 3.53 | % |
Net interest margin (3) | |
| | | |
| | | |
| 3.81 | % | |
| | | |
| | | |
| 3.62 | % |
Average interest-earning assets to average interest-bearing liabilities | |
| | | |
| | | |
| 130 | % | |
| | | |
| | | |
| 129 | % |
| (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%. |
| (3) | Net interest margin is net interest
income divided by average interest-earning assets. |
| |
Six
Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
Average | | |
| | |
Yield/ | | |
Average | | |
| | |
Yield/ | |
| |
Balance | | |
Interest
(1) | | |
Rate
(2) | | |
Balance | | |
Interest
(1) | | |
Rate
(2) | |
Interest-earning assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans receivable | |
$ | 1,660,404 | | |
$ | 36,118 | | |
| 4.39 | % | |
$ | 1,548,351 | | |
$ | 33,590 | | |
| 4.37 | % |
Securities | |
| 243,281 | | |
| 4,264 | | |
| 3.65 | | |
| 210,061 | | |
| 3,947 | | |
| 3.88 | |
Interest bearing deposits | |
| 57,659 | | |
| 80 | | |
| 0.28 | | |
| 170,829 | | |
| 219 | | |
| 0.26 | |
FHLB stock | |
| 13,802 | | |
| 275 | | |
| 4.02 | | |
| 15,552 | | |
| 365 | | |
| 4.73 | |
Total interest-earning assets | |
| 1,975,146 | | |
| 40,737 | | |
| 4.18 | | |
| 1,944,793 | | |
| 38,121 | | |
| 3.95 | |
Non-interest-earning assets | |
| 221,135 | | |
| | | |
| | | |
| 211,134 | | |
| | | |
| | |
Total assets | |
$ | 2,196,281 | | |
| | | |
| | | |
$ | 2,155,927 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest-bearing liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits | |
$ | 1,396,114 | | |
$ | 2,584 | | |
| 0.37 | % | |
$ | 1,403,873 | | |
$ | 2,685 | | |
| 0.39 | % |
FHLB advances | |
| 30,534 | | |
| 283 | | |
| 1.87 | | |
| 22,240 | | |
| 266 | | |
| 2.41 | |
Subordinated debentures | |
| 36,129 | | |
| 297 | | |
| 1.66 | | |
| 36,133 | | |
| 292 | | |
| 1.63 | |
Notes payable | |
| 53,312 | | |
| 75 | | |
| 0.28 | | |
| 52,033 | | |
| 80 | | |
| 0.31 | |
Total interest-bearing liabilities | |
| 1,516,089 | | |
| 3,239 | | |
| 0.43 | | |
| 1,514,279 | | |
| 3,323 | | |
| 0.44 | |
Non-interest bearing deposits | |
| 374,533 | | |
| - | | |
| | | |
| 344,795 | | |
| - | | |
| | |
Total including non-interest bearing demand deposits | |
| 1,890,622 | | |
| 3,239 | | |
| 0.35 | | |
| 1,859,074 | | |
| 3,323 | | |
| 0.36 | |
Other non-interest-bearing liabilities | |
| 28,581 | | |
| | | |
| | | |
| 21,735 | | |
| | | |
| | |
Total liabilities | |
| 1,919,203 | | |
| | | |
| | | |
| 1,880,809 | | |
| | | |
| | |
Stockholders' equity | |
| 277,078 | | |
| | | |
| | | |
| 275,118 | | |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 2,196,281 | | |
| | | |
| | | |
$ | 2,155,927 | | |
| | | |
| | |
Net interest income; interest rate spread | |
| | | |
$ | 37,498 | | |
| 3.75 | % | |
| | | |
$ | 34,798 | | |
| 3.51 | % |
Net interest margin (3) | |
| | | |
| | | |
| 3.84 | % | |
| | | |
| | | |
| 3.62 | % |
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%. |
| (3) | Net interest margin is net interest
income divided by average interest-earning assets. |
Results of Operations
Three Months Ended June 30, 2015 and
2014
On a consolidated basis,
First Defiance’s net income for the quarter ended June 30, 2015 was $6.6 million compared to net income of $5.7 million
for the comparable period in 2014. On a per share basis, basic and diluted earnings per common share for the quarter ended June
30, 2015 were $0.71 and $0.70, respectively, compared to basic and diluted earnings per common share of $0.59 and $0.57, respectively,
for the same period in 2014.
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
$18.4 million for the quarter ended June 30, 2015, up from $17.1 million for the same period in 2014. The tax-equivalent net interest
margin was 3.81% for the quarter ended June 30, 2015, an increase from 3.62% for the same period in 2014. The increase in margin
between the 2014 and 2015 second quarters was due to an increase in interest-earning asset yields, which increased to 4.15% for
the quarter ended June 30, 2015, up 19 basis points from 3.96% for the same period in 2014. The cost of interest-bearing liabilities
between the two periods increased 1 basis point to 0.44% in the second quarter of 2015 from 0.43% in the same period in 2014.
Average loans grew $122.0 million year over year which were mainly funded by overnight interest bearing deposits which declined
$110.3 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 $1.3 million to $20.0 million for the quarter ended June 30, 2015 from $18.8 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 4.15% at June 30, 2015 from 3.96% for the same period in 2014. The loan portfolio yield decreased slightly to 4.36% at June
30, 2015 from 4.37% for the same period in 2014 while investment portfolio yields declined to 3.63% at June 30, 2015 from 3.79%
at June 30, 2014. Income from loans increased to $18.1 million for the quarter ended June 30, 2015 compared to $16.9 million for
the same period in 2014 due to $122.0 million of average loan growth year over year as well as a recovery of approximately $100,000
of non-accrual interest as a result of pay-offs and loans being put back on accrual status. Interest income from investments increased
to $1.7 million for the quarter ended June 30, 2015 compared to $1.6 million for the same period in 2014 due to increased average
volumes.
Total interest expense
increased by $27,000 in the second quarter of 2015 compared to the same period in 2014, to $1.67 million from $1.65 million. There
was a 1 basis point increase in the average cost of interest-bearing liabilities in the second quarter of 2015 due to an increase
in volume of FHLB advances. Interest expense related to interest-bearing deposits declined slightly to $1.31 million in the second
quarter of 2015 from $1.33 million in the same period in 2014. Interest expense recognized by the Company related to subordinated
debentures was $150,000 in the second quarter of 2015 compared to $146,000 for the same period in 2014. Expenses on FHLB advances
and securities sold under repurchase agreements were $173,000 and $37,000 respectively in the second quarter of 2015 compared
to $133,000 and $39,000 respectively for the same period in 2014.
Allowance for Loan Losses
The allowance for loan
losses represents management’s assessment of the estimated probable 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 all commercial loan and commercial real estate loan relationships. The goal is to have approximately 55% to 60% of the portfolio
reviewed. 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 $538,000 at June 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.
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 was 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 June 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. |
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 June 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. 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 six 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 qualitative analysis. 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 0.34% for pass rated construction loans to 13.62% for special mention
rated commercial loans at June 30, 2015.
As a result of the quantitative
and qualitative analyses, along with the change in specific reserves, the Company recorded no provision for loan losses in the
second quarter of 2015 compared to $446,000 for the same period in 2014. The allowance for loan losses was $25.4 million and $24.8
million and represented 1.49% and 1.50% of loans, net of undisbursed loan funds and deferred fees and costs, as of June 30, 2015
and December 31, 2014, respectively. Charge offs of $380,000 were offset by recoveries of $462,000, resulting in an increase to
the overall allowance for loan loss of $82,000 for the second quarter of 2015. In management’s opinion, the overall allowance
for loan losses of $25.4 million as of June 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 June 30, 2015, First Defiance had write-downs that totaled
$182,000 for real estate held for sale. Management believes that the values recorded at June 30, 2015 for real estate owned and
repossessed assets represent the realizable value of such assets.
Total classified loans
decreased to $30.3 million at June 30, 2015, compared to $47.3 million at December 31, 2014.
First Defiance’s
ratio of allowance for loan losses to non-performing loans was 151.7% at June 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 June 30, 2015 are appropriate. Of the $16.7 million in non-accrual loans at June 30, 2015, $9.4
million or 56.4% are less than 90 days past due.
At June 30, 2015, First
Defiance had total non-performing assets of $22.1 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 June 30, 2015
and December 31, 2014 by category were as follows:
Table 1 – Nonperforming Asset
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(In Thousands) | |
Non-performing loans: | |
| | | |
| | |
One to four family residential real estate | |
$ | 2,942 | | |
$ | 3,332 | |
Non-residential and multi-family residential real estate | |
| 9,786 | | |
| 15,174 | |
Commercial | |
| 3,446 | | |
| 4,993 | |
Construction | |
| - | | |
| - | |
Home equity and improvement | |
| 553 | | |
| 619 | |
Consumer Finance | |
| 10 | | |
| 12 | |
Total non-performing loans | |
| 16,737 | | |
| 24,130 | |
| |
| | | |
| | |
Real estate owned | |
| 5,371 | | |
| 6,181 | |
Other repossessed assets | |
| - | | |
| - | |
Total repossessed assets | |
$ | 5,371 | | |
| 6,181 | |
| |
| | | |
| | |
Total Nonperforming assets | |
$ | 22,108 | | |
$ | 30,311 | |
| |
| | | |
| | |
Restructured loans, accruing | |
$ | 22,234 | | |
$ | 24,686 | |
| |
| | | |
| | |
Total nonperforming assets as a percentage of total assets | |
| 1.01 | % | |
| 1.39 | % |
Total nonperforming loans as a percentage of total loans* | |
| 0.98 | % | |
| 1.47 | % |
Total nonperforming assets as a percentage of total loans plus REO* | |
| 1.29 | % | |
| 1.83 | % |
Allowance for loan losses as a percent of total nonperforming assets | |
| 114.82 | % | |
| 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 June 30, 2015 is primarily in commercial real estate loans. The balance of these types of
non-performing loans was $5.4 million lower at June 30, 2015 compared to December 31, 2014 mainly due to some of these relationships
paying off.
Non-performing loans in
the commercial loan category represented 0.86% of the total loans in those categories at June 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 1.11% of the
total loans in those categories at June 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 six months ended and as of June 30, 2015, commercial real estate,
which represented 50.40% of total loans, accounted for 93.17% of net recoveries and 58.47% of non-accrual loans, and commercial
loans, which represented 22.85% of total loans, accounted for 37.75% of net recoveries and 20.59% of non-accrual loans. For the
six months ended and as of June 30, 2014, commercial real estate, which represented 49.36% of total loans, accounted for (75.69)%
of net charge-offs (recovery) and 59.56% of non-accrual loans, and commercial loans, which represented 24.01% of total loans,
accounted for 143.12% of net charge-offs and 28.36% of non-accrual loans.
Table 2 – Net Charge-offs and Non-accruals
by Loan Type
| |
For the Six Months Ended June 30, 2015 | | |
As of June 30, 2015 | |
| |
Net
Charge-offs | | |
% of Total Net | | |
Nonaccrual | | |
% of Total Non- | |
| |
(Recoveries) | | |
Charge-offs | | |
Loans | | |
Accrual Loans | |
| |
(In Thousands) | | |
| | |
(In Thousands) | | |
| |
Residential | |
$ | 16 | | |
| (3.21 | )% | |
$ | 2,942 | | |
| 17.58 | % |
Construction | |
| - | | |
| 0.00 | % | |
| - | | |
| 0.00 | % |
Commercial real estate | |
| (464 | ) | |
| 93.17 | % | |
| 9,786 | | |
| 58.47 | % |
Commercial | |
| (188 | ) | |
| 37.75 | % | |
| 3,446 | | |
| 20.59 | % |
Consumer | |
| (11 | ) | |
| 2.21 | % | |
| 10 | | |
| 0.06 | % |
Home equity and improvement | |
| 149 | | |
| (29.92 | )% | |
| 553 | | |
| 3.30 | % |
Total | |
$ | (498 | ) | |
| 100.00 | % | |
$ | 16,737 | | |
| 100.00 | % |
| |
For the Six Months Ended June 30, 2014 | | |
As of June 30, 2014 | |
| |
Net
Charge-offs | | |
% of Total Net | | |
Nonaccrual | | |
% of Total Non- | |
| |
(Recoveries) | | |
Charge-offs | | |
Loans | | |
Accrual Loans | |
| |
(In Thousands) | | |
| | |
(In Thousands) | | |
| |
Residential | |
$ | 116 | | |
| 13.30 | % | |
$ | 2,901 | | |
| 11.67 | % |
Construction | |
| - | | |
| 0.00 | % | |
| - | | |
| 0.00 | % |
Commercial real estate | |
| (660 | ) | |
| (75.69 | )% | |
| 14,807 | | |
| 59.56 | % |
Commercial | |
| 1,248 | | |
| 143.12 | % | |
| 7,052 | | |
| 28.36 | % |
Consumer | |
| (11 | ) | |
| (1.26 | )% | |
| - | | |
| 0.00 | % |
Home equity and improvement | |
| 179 | | |
| 20.53 | % | |
| 103 | | |
| 0.41 | % |
Total | |
$ | 872 | | |
| 100.00 | % | |
$ | 24,863 | | |
| 100.00 | % |
Table 3 – Allowance for Loan Loss Activity
| |
For the Quarter Ended | |
| |
2nd 2015 | | |
1st 2015 | | |
4th 2014 | | |
3rd 2014 | | |
2nd 2014 | |
| |
(In Thousands) | |
| |
| | |
| | |
| | |
| | |
| |
Allowance at beginning of period | |
$ | 25,302 | | |
$ | 24,766 | | |
$ | 24,567 | | |
$ | 24,627 | | |
$ | 24,783 | |
Provision for credit losses | |
| - | | |
| 120 | | |
| 162 | | |
| 406 | | |
| 446 | |
Charge-offs: | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
| 11 | | |
| 78 | | |
| 61 | | |
| 95 | | |
| 42 | |
Commercial real estate | |
| 146 | | |
| 155 | | |
| 505 | | |
| 246 | | |
| 39 | |
Commercial | |
| 23 | | |
| 2 | | |
| 212 | | |
| 1,272 | | |
| 973 | |
Consumer finance | |
| 13 | | |
| 3 | | |
| 1 | | |
| 16 | | |
| 12 | |
Home equity and improvement | |
| 187 | | |
| 43 | | |
| 87 | | |
| 42 | | |
| 80 | |
Total charge-offs | |
| 380 | | |
| 281 | | |
| 866 | | |
| 1,671 | | |
| 1,146 | |
Recoveries | |
| 462 | | |
| 697 | | |
| 903 | | |
| 1,205 | | |
| 544 | |
Net charge-offs (recoveries) | |
| (82 | ) | |
| (416 | ) | |
| (37 | ) | |
| 466 | | |
| 602 | |
Ending allowance | |
$ | 25,384 | | |
$ | 25,302 | | |
$ | 24,766 | | |
$ | 24,567 | | |
$ | 24,627 | |
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
| |
June 30, 2015 | | |
March 31, 2015 | | |
December 31,
2014 | | |
September 30,
2014 | | |
June 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 | |
$ | 2,877 | | |
| 11.68 | % | |
$ | 2,483 | | |
| 11.79 | % | |
$ | 2,494 | | |
| 12.24 | % | |
$ | 2,424 | | |
| 12.44 | % | |
$ | 2,345 | | |
| 12.30 | % |
Construction | |
| 308 | | |
| 7.98 | % | |
| 303 | | |
| 7.25 | % | |
| 221 | | |
| 6.66 | % | |
| 214 | | |
| 6.95 | % | |
| 199 | | |
| 6.68 | % |
Commercial real estate | |
| 14,365 | | |
| 50.40 | % | |
| 14,238 | | |
| 50.77 | % | |
| 13,721 | | |
| 49.84 | % | |
| 13,668 | | |
| 49.65 | % | |
| 13,956 | | |
| 49.36 | % |
Commercial | |
| 5,567 | | |
| 22.85 | % | |
| 6,766 | | |
| 22.90 | % | |
| 6,509 | | |
| 23.70 | % | |
| 6,420 | | |
| 23.35 | % | |
| 6,199 | | |
| 24.01 | % |
Consumer | |
| 160 | | |
| 0.85 | % | |
| 92 | | |
| 0.87 | % | |
| 117 | | |
| 0.92 | % | |
| 150 | | |
| 0.99 | % | |
| 148 | | |
| 0.97 | % |
Home equity and improvement | |
| 2,107 | | |
| 6.24 | % | |
| 1,420 | | |
| 6.42 | % | |
| 1,704 | | |
| 6.64 | % | |
| 1,691 | | |
| 6.62 | % | |
| 1,780 | | |
| 6.68 | % |
| |
$ | 25,384 | | |
| 100.00 | % | |
$ | 25,302 | | |
| 100.00 | % | |
$ | 24,766 | | |
| 100.00 | % | |
$ | 24,567 | | |
| 100.00 | % | |
$ | 24,627 | | |
| 100.00 | % |
Key Asset Quality Ratio Trends
Table 5 – Key Asset Quality Ratio Trends
| |
2nd Qtr 2015 | | |
1st Qtr 2015 | | |
4th Qtr 2014 | | |
3rd Qtr2014 | | |
2ndQtr 2014 | |
Allowance for loan losses / loans* | |
| 1.49 | % | |
| 1.50 | % | |
| 1.50 | % | |
| 1.50 | % | |
| 1.56 | % |
Allowance for loan losses to net charge-offs | |
| -30956.10 | % | |
| -6082.21 | % | |
| -66935.14 | % | |
| 5271.89 | % | |
| 4090.86 | % |
Allowance for loan losses / non-performing assets | |
| 114.82 | % | |
| 100.82 | % | |
| 81.71 | % | |
| 88.21 | % | |
| 80.96 | % |
Allowance for loan losses / non-performing loans | |
| 151.66 | % | |
| 135.28 | % | |
| 102.64 | % | |
| 109.07 | % | |
| 99.05 | % |
Non-performing assets / loans plus REO* | |
| 1.29 | % | |
| 1.48 | % | |
| 1.83 | % | |
| 1.70 | % | |
| 1.92 | % |
Non-performing assets / total assets | |
| 1.01 | % | |
| 1.14 | % | |
| 1.39 | % | |
| 1.29 | % | |
| 1.41 | % |
Net charge-offs / average loans (annualized) | |
| -0.02 | % | |
| -0.10 | % | |
| -0.01 | % | |
| 0.12 | % | |
| 0.16 | % |
* Total loans are net of undisbursed funds
and deferred fees and costs.
Non-Interest
Income.
Total non-interest income
increased $192,000 in the second quarter of 2015 to $7.8 million from $7.6 million for the same period in 2014.
Service Fees. Service
fees and other charges increased by $182,000 or 7.3% in the second 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
June 30, 2015 and 2014 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts,
were $705,000 and $737,000, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible
overdrafts was $26,000 at June 30, 2015, $16,000 at December 31, 2014 and $12,000 at June 30, 2014.
Mortgage
Banking Activity. Total revenue from the sale and servicing of mortgage loans increased $253,000 to $1.8 million for the
second quarter of 2015 compared to $1.5 million for the same period in 2014. Mortgage banking activity was elevated from
the second 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 second quarter of 2015 to $1.2 million from $986,000 for the same
period in 2014. The amortization of mortgage servicing rights expense increased $78,000 to $446,000 in the second quarter of 2015
compared to $368,000 for the same period in 2014. The Company recorded a positive valuation adjustment of $141,000 on mortgage
servicing rights in the second quarter of 2015 compared to a positive valuation adjustment of $44,000 for the same period in 2014.
Insurance Sales
Commissions. Income from the sale of insurance and investment products was $2.3 million in the second quarter of 2015
compared to $2.2 million for the same period in 2014.
Trust Income.
Trust income was $367,000 in the second quarter of 2015, up 21.5% from $302,000 for the same period in 2014.
Non-Interest Expense.
Non-interest expense increased
to $16.8 million for the second quarter of 2015 compared to $16.4 million for the same period in 2014.
Compensation and
Benefits. Compensation and benefits increased to $9.2 million for the quarter ended June 30, 2015 from $8.7 million for
the same period in 2014. The increase is mainly attributable to merit increases and higher incentive compensation accruals partially
offset by lower medical insurance costs.
Occupancy
Expense. Occupancy expense was $1.8 million in the second quarter 2015, up from $1.7 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.
Data Processing
Expense. Data processing cost increased to $1.6 million in the second quarter of 2015 from $1.5 million for the same period
in 2014. The increase in data processing is primarily due to the implementation of new products in the electronic delivery channel.
The efficiency ratio,
considering tax equivalent interest income and excluding securities gains and losses, for the second quarter of 2015 was 63.02%
compared to 66.16% 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 30.02% for
the quarter ended June 30, 2015 compared to 28.38% 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.
Six Months Ended June 30, 2015 and 2014
On a consolidated basis,
First Defiance’s net income for the six months ended June 30, 2015 was $13.2 million compared to income of $10.9 million
for the same period in 2014. On a per share basis, basic and diluted earnings per common share for the six months ended June 30,
2015 were $1.42 and $1.39, respectively, compared to basic and diluted earnings per common share of $1.13 and $1.08, respectively,
for the same period in 2014.
Net Interest Income
Net interest income was
$36.6 million for the six months ended June 30, 2015 compared to $33.9 million for the same period in 2014. For the six month
period ended June 30, 2015, total interest income was $39.8 million compared to $37.2 million for the same period in 2014.
Interest expense decreased
by $84,000 to $3.2 million for the six months ended June 30, 2015 compared to $3.3 million for the same period in 2014.
Net interest margin for
the first six months of 2015 was 3.84%, up 22 basis points from the 3.62% margin reported in the six month period ended June 30,
2014.
Provision for Loan Losses
The provision for loan
losses was $120,000 for the six months ended June 30, 2015, compared to $549,000 during the six months ended June 30, 2014. Charge-offs
for the first half of 2015 were $661,000 and recoveries of previously charged off loans totaled $1.2 million for net recoveries
of $498,000. By comparison, $2.3 million of charge-offs were recorded in the same period of 2014 and $1.5 million of recoveries
were realized for net charge-offs of $872,000.
Non-Interest Income
Total non-interest income
increased to $16.1 million for the six months ended June 30, 2015 from $14.9 million recognized for the same period in 2014.
Service Fees. Service
fees and other charges were $5.2 million for the first six months of 2015, up from $4.8 million for the same period in 2014.
Mortgage Banking
Activity. Total revenue from the sale and servicing of mortgage loans increased $781,000 to $3.6 million for the six months
ended June 30, 2015 from $2.8 million for the same period in 2014. Gains realized from the sale of mortgage loans increased $903,000
to $2.5 million for the first half of 2015 from $1.6 million for the same period in 2014. Mortgage loan servicing revenue remained
relatively flat at $1.7 million in the first half of 2015 compared to $1.8 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 $857,000
in first half of 2015 up from $660,000 for the same period in 2014. The Company recorded a positive valuation adjustment of $167,000
in the first half of 2015 compared to a positive adjustment of $37,000 in the first half of 2014.
Gain on Sale of
Securities. First Defiance recorded no gains on the sale of investments in the first half of 2015 compared to net gains
of $471,000 in the first half of 2014.
Non-Interest Expense
Non-interest expense was
$33.7 million for the first six months of 2015, up from $33.0 million for the same period in 2014.
Compensation and
Benefits. Compensation and benefits increased to $18.1 million for the six months ended June 30, 2015 compared to $17.2
million for the same period in 2014. The increase is mainly attributable to merit increases and higher incentive compensation
accruals partially offset by lower medical insurance costs.
Occupancy
Expense. Occupancy expense increased $281,000 to $3.6 million for the six months ended June 30, 2015, up from $3.3
million for the same period in 2014.
Data Processing.
Data processing expenses increased to $3.1 million in the first six months of 2015, from $2.8 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 $438,000 to $7.0 million for the first six months of 2015 from $7.4 million
for the same period in 2014. Year-over-year decreases between 2015 and 2014 include $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 half of 2015 was 62.87% compared to 67.01% 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 $9.5
million of cash provided by operating activities during the first six months of 2015.
At June 30, 2015, First
Federal had $142.6 million in outstanding loan commitments and loans in process to be funded generally within the next six months
and an additional $340.4 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 $25.2 million of mortgage loans at June 30, 2015. 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.
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 June 30, 2015. The following table indicates the capital ratios for First Defiance and
First Federal at June 30, 2015 and December 31, 2014. (In Thousands):
As of June 30, 2015 |
| |
Leverage | | |
Tier 1 Risk- Based | | |
Common Equity Tier 1 | | |
Total Risk-Based | |
First Federal Bank of the Midwest | |
| 10.93 | % | |
| 12.24 | % | |
| 12.24 | % | |
| 13.50 | % |
First Defiance Financial Corp. | |
| 11.69 | % | |
| 13.12 | % | |
| 13.12 | % | |
| 14.37 | % |
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 six months of 2015. Management has modified the historical loss rate calculation in the allowance
for loan loss methodology as of June 30, 2015 and is described in Note 2 – Significant Accounting Policies. This modification
did not have a material impact on the allowance for loan losses.
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 June 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 June 30, 2015, net
interest income is expected to slightly decrease, almost neutral, as interest rates rise. This is due in part to our strategy
to grow longer term loans and fund that growth out of existing liquidity. Based on our net interest income simulation as of June
30, 2015, net interest income sensitivity to changes in interest rates for the twelve months subsequent to June 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.
Net Interest Income Sensitivity Profile |
| |
Impact on Future Annual Net Interest Income | |
(dollars in thousands) | |
June 30, 2015 | | |
December 31, 2014 | |
Gradual Change in Interest Rates | |
| | | |
| | | |
| | | |
| | |
+200 | |
$ | (370 | ) | |
| -0.49 | % | |
$ | 702 | | |
| 0.98 | % |
+100 | |
| (340 | ) | |
| -0.45 | % | |
| 155 | | |
| 0.22 | % |
-100 | |
| (704 | ) | |
| -0.93 | % | |
| (667 | ) | |
| -0.93 | % |
| |
| | | |
| | | |
| | | |
| | |
Immediate Change in Interest Rates | |
| | | |
| | | |
| | | |
| | |
+200 | |
$ | 258 | | |
| 0.34 | % | |
$ | 2,274 | | |
| 3.16 | % |
+100 | |
| (10 | ) | |
| -0.01 | % | |
| 877 | | |
| 1.22 | % |
-100 | |
| (1,978 | ) | |
| -2.60 | % | |
| (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.
The results of all the
simulation scenarios are within the board mandated guidelines as of June 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 June 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 six months ended June 30, 2015 and the year-ended December 31, 2014.
June 30, 2015 |
Economic Value of Equity |
Change in Rates | |
$ Amount | | |
$ Change | | |
% Change | |
| |
(Dollars in Thousands) | | |
| |
+ 400 bp | |
| 464,990 | | |
| 37,091 | | |
| 8.67 | % |
+ 300 bp | |
| 458,813 | | |
| 30,914 | | |
| 7.22 | % |
+ 200 bp | |
| 451,414 | | |
| 23,515 | | |
| 5.50 | % |
+ 100 bp | |
| 444,143 | | |
| 16,244 | | |
| 3.80 | % |
0 bp | |
| 427,899 | | |
| – | | |
| – | |
- 100 bp | |
| 406,827 | | |
| (21,072 | ) | |
| (4.92 | )% |
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.
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 June 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 June 30, 2015 that materially affected,
or are reasonably likely to materially affect, the internal controls over financial reporting.
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 June 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, April 1, 2015 | |
| | | |
| | | |
| | | |
| 296,041 | |
April 1 – April 30, 2015 | |
| 2,321 | | |
$ | 33.45 | | |
| - | | |
| 296,041 | |
May 1 – May 31, 2015 | |
| - | | |
| - | | |
| - | | |
| 296,041 | |
June 1 – June 30, 2015 | |
| - | | |
| - | | |
| - | | |
| 296,041 | |
Total | |
| 2,321 | | |
$ | 33.45 | | |
| - | | |
| 296,041 | |
| (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.
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 June 30, 2015 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Balance Sheet at June 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and Six Months ended June 30, 2015 and 2014 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months ended June 30, 2015 and 2014, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholder’ Equity for the Six Months ended June 30, 2015 and 2014, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the Six Months ended June 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) |
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: August 7, 2015 |
By: |
/s/ Donald P. Hileman |
|
|
Donald P. Hileman |
|
|
President and |
|
|
Chief Executive Officer |
|
|
|
Date: August 7, 2015 |
By: |
/s/ Kevin T. Thompson |
|
|
Kevin T. Thompson |
|
|
Executive Vice President and |
|
|
Chief Financial Officer |
EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT
I, Donald P. Hileman, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of First Defiance Financial Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| (b) | Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting. |
Date: August 7, 2015 |
/s/ Donald P. Hileman |
|
Donald P. Hileman |
|
President and |
|
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT
I, Kevin T. Thompson, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of First Defiance Financial Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting. |
Date: August 7, 2015 |
/s/ Kevin T. Thompson |
|
Kevin T. Thompson |
|
Executive Vice President and |
|
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending June 30, 2015 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Donald P. Hileman, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and in connection with this quarterly report on Form 10-Q that:
| 1. | The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, and |
| 2. | The information contained in the Report fairly presents, in all material respects, the Company's
financial condition and results of operations. |
Date: August 7, 2015 |
/s/ Donald P. Hileman |
|
Donald P. Hileman |
|
Chief Executive Officer |
A signed original of this written statement required by Section
906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending June 30, 2015 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin T. Thompson, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and in connection with this quarterly report on Form 10-Q that:
| 1. | The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, and |
| 2. | The information contained in the Report fairly presents, in all material respects, the Company's
financial condition and results of operations. |
Date: August 7, 2015 |
/s/ Kevin T. Thompson |
|
Kevin T. Thompson |
|
Chief Financial Officer |
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
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