Company Quick10K Filing
Quick10K
First Defiance Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.26 20 $538
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-04 Other Events, Exhibits
8-K 2019-09-09 Enter Agreement, Officers, Exhibits
8-K 2019-09-09 Other Events, Exhibits
8-K 2019-07-30 Other Events, Exhibits
8-K 2019-07-22 Earnings, Regulation FD, Exhibits
8-K 2019-05-29 Other Events, Exhibits
8-K 2019-05-23 Regulation FD
8-K 2019-04-30 Shareholder Vote
8-K 2019-04-16 Earnings, Officers, Regulation FD, Exhibits
8-K 2019-03-04 Officers, Other Events, Exhibits
8-K 2019-02-06 Other Events, Exhibits
8-K 2019-01-21 Earnings, Other Events, Exhibits
8-K 2019-01-01 Officers, Exhibits
8-K 2018-12-20 Officers, Exhibits
8-K 2018-10-15 Earnings, Other Events, Exhibits
8-K 2018-07-31 Other Events, Exhibits
8-K 2018-07-16 Earnings, Other Events, Exhibits
8-K 2018-06-22 Amend Bylaw, Exhibits
8-K 2018-04-24 Shareholder Vote, Other Events
8-K 2018-04-16 Earnings, Officers, Other Events, Exhibits
8-K 2018-03-16 Officers, Exhibits
8-K 2018-02-20 Officers, Exhibits
8-K 2018-01-22 Earnings, Other Events, Exhibits
8-K 2018-01-04 Officers, Other Events, Exhibits
HSBC Hsbc Holdings 732,176
ETFC E Trade Financial 9,875
BNCL Beneficial Bancorp 1,236
KRNY Kearny Financial 1,142
PDLB PDL Community Bancorp 253
CVLY Codorus Valley Bancorp 209
FCCY 1st Constitution Bancorp 149
FSFG First Savings Financial Group 137
LSBK Lake Shore Bancorp 89
KFFB Kentucky First Federal Bancorp 66
FDEF 2019-06-30
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv526805_ex31-1.htm
EX-31.2 tv526805_ex31-2.htm
EX-32.1 tv526805_ex32-1.htm
EX-32.2 tv526805_ex32-2.htm

First Defiance Financial Earnings 2019-06-30

FDEF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv526805_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the Quarterly Period Ended June 30, 2019

 

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, every Interactive Data File required to be submitted 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 such files). Yes x No ¨

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

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

 

Title of each class   Trading
symbol
  Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share   FDEF   The NASDAQ Stock Market

 

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 – 19,728,023 shares outstanding at July 31, 2019.

 

 

 

 

 

 

FIRST DEFIANCE FINANCIAL CORP.

 

INDEX

 

    Page Number
PART I.-FINANCIAL INFORMATION
     
Item 1. Consolidated Condensed Financial Statements (Unaudited):  
     
  Consolidated Condensed Statements of Financial Condition – June 30, 2019 and December 31, 2018 2
     
  Consolidated Condensed Statements of Income - Three and six months ended June 30, 2019 and 2018 4
     
  Consolidated Condensed Statements of Comprehensive Income – Three and six months ended June 30, 2019 and 2018 5
     
  Consolidated Condensed Statements of Changes in   Stockholders’ Equity – Three and Six months ended June 30, 2019 and 2018 6
     
  Consolidated Condensed Statements of Cash Flows  - Six months ended June 30, 2019 and 2018 7
     
  Notes to Consolidated Condensed Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 50
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 74
     
Item 4. Controls and Procedures 75
     
PART II-OTHER INFORMATION:  
     
Item 1. Legal Proceedings 76
     
Item 1A. Risk Factors 76
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 76
     
Item 3. Defaults upon Senior Securities 76
     
Item 4. Mine Safety Disclosures 76
     
Item 5. Other Information 76
     
Item 6. Exhibits 77
     
  Signatures 78

  

 1 

 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FIRST DEFIANCE FINANCIAL CORP.

 

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

 

 

 

  

June 30,

2019

  

December 31,

2018

 
     
Assets          
Cash and cash equivalents:          
Cash and amounts due from depository institutions  $50,597   $55,962 
Federal funds sold   33,000    43,000 
    83,597    98,962 
Securities:          
Available-for-sale, carried at fair value   296,115    294,076 
Held-to-maturity, carried at amortized cost (fair value $484 and $526 at June 30, 2019 and December 31, 2018, respectively)   485    526 
    296,600    294,602 
Loans held for sale   14,509    6,613 
Loans receivable, net of allowance of $28,934 at June 30, 2019 and $28,331 at December 31, 2018, respectively   2,595,285    2,511,708 
Mortgage servicing rights   9,855    10,119 
Accrued interest receivable   10,771    9,641 
Federal Home Loan Bank stock   11,915    14,217 
Bank owned life insurance   75,086    67,660 
Premises and equipment   39,959    40,670 
Real estate and other assets held for sale   -    1,205 
Goodwill   98,569    98,569 
Core deposit and other intangibles   3,816    4,391 
Other assets   37,590    23,365 
Total assets  $3,277,552   $3,181,722 

 

(continued)

 

 2 

 

 

FIRST DEFIANCE FINANCIAL CORP.

 

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

 

 

 

  

June 30,

2019

  

December 31,

2018

 
     
Liabilities and stockholders’ equity          
Liabilities:          
Deposits  $2,680,637   $2,620,882 
Advances from the Federal Home Loan Bank   105,178    85,189 
Subordinated debentures   36,083    36,083 
Securities sold under repurchase agreements   3,064    5,741 
Advance payments by borrowers   3,550    3,652 
Deferred taxes   1,593    264 
Other liabilities   40,231    30,322 
Total liabilities   2,870,336    2,782,133 
           
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: 50,000,000 shares authorized; 25,371,086 and 25,398,992 shares issued and 19,727,630 and 20,171,392 shares outstanding at June 30, 2019 and December 31, 2018, respectively   127    127 
Additional paid-in capital   161,205    161,593 
Accumulated other comprehensive income (loss), net of tax of $1,108 and $(468), respectively   4,167    (2,148)
Retained earnings   311,576    295,588 
Treasury stock, at cost, 5,643,456 shares at June 30, 2019 and 5,227,600 shares at December 31, 2018   (69,859)   (55,571)
Total stockholders’ equity   407,216    399,589 
Total liabilities and stockholders’ equity  $3,277,552   $3,181,722 

 

See accompanying notes.

 

 3 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

(Amounts in Thousands, except per share data)

 

 

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Interest Income                    
Loans  $32,660   $27,660   $63,874   $54,186 
Investment securities:                    
Taxable   1,289    1,189    2,655    2,238 
Non-taxable   849    850    1,688    1,652 
Interest-bearing deposits   260    373    545    670 
FHLB stock dividends   183    227    398    458 
Total interest income   35,241    30,299    69,160    59,204 
Interest Expense                    
Deposits   5,581    3,144    10,586    5,755 
FHLB advances and other   304    282    580    601 
Subordinated debentures   350    320    714    600 
Notes payable   17    6    21    14 
Total interest expense   6,252    3,752    11,901    6,970 
Net interest income   28,989    26,547    57,259    52,234 
Provision for loan losses   282    423    494    (672)
Net interest income after provision for loan losses   28,707    26,124    56,765    52,906 
Non-interest Income                    
Service fees and other charges   3,301    3,296    6,308    6,427 
Insurance commissions   3,616    3,493    7,731    7,770 
Mortgage banking income   2,137    2,013    3,978    3,755 
Gain on sale of non-mortgage loans   21    43    110    267 
Trust income   476    522    999    1,074 
Income from Bank Owned Life Insurance   527    566    919    966 
Other non-interest income   408    281    1,254    658 
Total non-interest income   10,486    10,214    21,299    20,917 
Non-interest Expense                    
Compensation and benefits   14,398    12,885    28,483    26,134 
Occupancy   2,304    2,026    4,545    4,097 
FDIC insurance premium   258    202    531    562 
Financial institutions tax   556    531    1,112    1,062 
Data processing   2,267    2,083    4,564    4,188 
Amortization of intangibles   276    332    575    679 
Other non-interest expense   4,176    4,606    9,291    9,194 
Total non-interest expense   24,235    22,665    49,101    45,916 
Income before income taxes   14,958    13,673    28,963    27,907 
Federal income taxes   2,759    2,564    5,282    5,061 
Net Income  $12,199   $11,109   $23,681   $22,846 
                     
Earnings per common share (1)                    
Basic  $0.62   $0.54   $1.19   $1.12 
Diluted  $0.61   $0.54   $1.19   $1.12 
Dividends declared per share (1)  $0.19   $0.15   $0.38   $0.30 
Average common shares outstanding (1)                    
Basic   19,780    20,388    19,897    20,359 
Diluted   19,860    20,492    19,976    20,466 

  

See accompanying notes.

 

 4 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

 

 

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Net income  $12,199   $11,109   $23,681   $22,846 
                     
Other comprehensive income (loss):                    
Unrealized gains (losses) on securities available for sale   3,289    (872)   7,892    (4,429)
Income tax expense (benefit)   (691)   183    (1,659)   930 
Net of tax amount   2,598    (689)   6,233    (3,499)
                     
Change in unrealized gain/(loss) on postretirement benefit:                    
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan   -    -    82    - 
Net of tax amount   -    -    82    - 
                     
Total other comprehensive income (loss)   2,598    (689)   6,315    (3,499)
                     
Comprehensive income  $14,797   $10,420   $29,996   $19,347 

 

See accompanying notes.

 

 5 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statement of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands, except share data)

 

                   Accumulated             
       Common       Additional   Other           Total 
   Preferred   Stock   Common   Paid-In   Comprehensive   Retained   Treasury   Stockholders’ 
   Stock   Shares(1)   Stock   Capital   Income   Earnings   Stock   Equity 
                                 
Balance at December 31, 2018  $-    20,171,392   $127   $161,593   $(2,148)  $295,588   $(55,571)  $399,589 
 Net income                            11,482         11,482 
Other comprehensive income                       3,717              3,717 
Deferred compensation plan                  (22)             42    20 
Stock based compensation expenses                  11                   11 
Shares issued under stock option plan,  net of 178 repurchased and retired        17,822         (22)        (5)   212    185 
Restricted share activity under stock incentive plans net of 25,195 repurchased and retired        38,890         (751)             440    (311)
Shares issued from direct stock sales        1,065         19              12    31 
Shares repurchased        (515,977)                       (15,147)   (15,147)
Common stock dividends declared                            (3,788)        (3,788)
Balance at March 31, 2019  $-    19,713,192   $127   $160,828   $1,569   $303,277   $(70,012)  $395,789 
 Net income                            12,199         12,199 
Other comprehensive income                       2,598              2,598 
Deferred compensation plan                  (12)             29    17 
Stock based compensation expenses                  255                   255 
Shares issued under stock option plan,  net of 0 repurchased and retired        1,200         (9)             15    6 
Restricted share activity under stock incentive plans net of 2,533 repurchased and retired        12,304         129         (153)   98    74 
Shares issued from direct stock sales        934         14              11    25 
Common stock dividends declared                            (3,747)        (3,747)
Balance at June 30, 2019  $-    19,727,630   $127   $161,205   $4,167   $311,576   $(69,859)  $407,216 

 

                   Accumulated             
       Common       Additional   Other           Total 
   Preferred   Stock   Common   Paid-In   Comprehensive   Retained   Treasury   Stockholders’ 
   Stock   Shares(1)   Stock   Capital   Income   Earnings   Stock   Equity 
                                 
Balance at December 31, 2017  $-    20,312,082   $127   $160,940   $217   $262,900   $(50,898)  $373,286 
Net income                            11,737         11,737 
Other comprehensive loss                       (2,810)             (2,810)
Adoption of ASU 2018-02 – See Note 2                       47    (47)        - 
Stock based compensation expenses                  84                   84 
Shares issued under stock option plan, net of 1,224 repurchased and retired        11,276         (33)        (36)   125    56 
Restricted share activity under stock incentive plans net of 17,818 repurchased and retired        39,696         (458)        (81)   426    (113)
Shares issued from direct stock sales        744         14              7    21 
Common stock dividends declared                            (3,047)        (3,047)
Balance at March 31, 2018  $-    20,363,798   $127   $160,547   $(2,546)  $271,426   $(50,340)  $379,214 
Net income                            11,109         11,109 
Other comprehensive loss                       (689)             (689)
Stock based compensation expenses                  88                   88 
Shares issued under stock option plan, net of 7,648 repurchased and retired        27,352         (60)        (234)   349    55 
Restricted share activity under stock incentive plans net of 0 repurchased and retired        4,104         253         (120)   40    173 
Shares issued from direct stock sales        924         19              10    29 
Common stock dividends declared                            (3,059)        (3,059)
Balance at June 30, 2018  $-    20,396,178   $127   $160,847   $(3,235)  $279,122   $(49,941)  $386,920 

 

(1)Share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018

 

See accompanying notes.

 

 6 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

 

 

 

   Six Months Ended 
   June 30, 
   2019   2018 
Operating Activities          
Net income  $23,681   $22,846 
Items not requiring (providing) cash:          
Provision for loan losses   494    (672)
Depreciation   2,073    1,719 
Amortization of mortgage servicing rights, net of impairment charges/recoveries   980    586 
Amortization of core deposit and other intangible assets   575    679 
Net accretion of premiums and discounts on loans and deposits   (450)   (192)
Amortization of premiums and discounts on securities   633    588 
Change in deferred taxes   (246)   70 
Proceeds from the sale of loans held for sale   99,438    100,481 
Originations of loans held for sale   (104,974)   (103,730)
Gain from sale of loans   (3,186)   (2,731)
Loss on sale or write down of property plant and equipment   10    - 
Gain/loss on sale / write-down of real estate and other assets held for sale   278    529 
Stock option expense   266    172 
Restricted stock (income)/expense   (239)   60 
Income from bank owned life insurance   (919)   (966)
Excess tax benefit on stock compensation plans   (106)   (158)
Changes in:          
Accrued interest receivable   (1,130)   (769)
Other assets   (5,417)   (2,219)
Other liabilities   1,246    (3,382)
Net cash provided by operating activities   13,007    12,911 
           
Investing Activities          
Proceeds from maturities of held-to-maturity securities   38    41 
Proceeds from maturities, calls and pay-downs of available-for-sale securities   16,432    12,519 
Proceeds from sale of premises and equipment, real estate and other assets held for sale   1,073    343 
Proceeds from sale of non-mortgage loans   14,378    14,086 
Purchases of available-for-sale securities   (11,211)   (42,839)
Proceeds from Federal Home Loan stock redemption   2,302    3 
Proceeds from sale of bank owned life insurance   -    17,689 
Purchases of premises and equipment, net   (1,372)   (1,946)
Investment in bank owned life insurance   (6,600)   - 
Proceeds from bank owned life insurance death benefit   93    336 
Net increase in loans receivable   (98,035)   (49,941)
Net cash used by  investing activities   (82,902)   (49,709)
           
Financing Activities          
Net increase in deposits and advance payments by borrowers   59,652    53,612 
Repayment of Federal Home Loan Bank advances   (35,062)   (28,557)
Proceeds from Federal Home Loan Bank advances   35,000    30,000 
Net change in Federal Home Loan Bank advances   20,051    - 
Decrease in securities sold under repurchase agreements   (2,677)   (19,120)
Net cash paid for repurchase of common stock   (15,147)   - 
Proceeds from exercise of stock options   191    111 
Proceeds from direct stock sales   57    50 
Cash dividends paid on common stock   (7,535)   (6,106)
Net cash provided by financing activities   54,530    29,990 
Increase in cash and cash equivalents   (15,365)   (6,808)
Cash and cash equivalents at beginning of period   98,962    113,693 
Cash and cash equivalents at end of period  $83,597   $106,885 
           
Supplemental cash flow information:          
Interest paid  $11,811   $6,901 
Income taxes paid  $4,200   $5,250 
Initial recognition of right-of-use asset  $8,808   $- 
Initial recognition of lease liability  $9,339   $- 
Transfers from loans to real estate and other assets held for sale  $146   $930 
Securities purchased but not yet settled  $-   $397 

 

See accompanying notes. 

 

 7 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

June 30, 2019 and 2018

 

 

 

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” or the “Bank”), 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 community banking. It attracts deposits from the general public through its offices and website, and uses those and other available sources of funds to originate residential real estate loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer loans. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and residential collateralized mortgage obligations (“CMOs”), and corporate bonds. First Federal’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is a member of the Federal Home Loan Bank (“FHLB”) System.

 

First Insurance is an insurance agency that conducts business throughout First Federal’s markets. The Maumee and Oregon, Ohio, offices were consolidated into a new office in Sylvania, Ohio, in January 2018. First Insurance offers property and casualty insurance, life insurance and group health insurance.

 

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 help minimize the risk allocable to each participating insurer.

 

The consolidated condensed statement of financial condition at December 31, 2018, has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

 

The accompanying consolidated condensed financial statements as of June 30, 2019, and for the three and six month periods ended June 30, 2019 and 2018 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 (“GAAP”). These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the 2018 Form 10-K. 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, 2019, are not necessarily indicative of the results that may be expected for the entire year.

 

 8 

 

 

On June 22, 2018, the Company announced a stock split in the form of a share distribution of one common share for each outstanding common share. The stock split was distributed on July 12, 2018, to shareholders of record as of July 2, 2018. All share and per share data in this Quarterly Report on Form 10-Q has been adjusted and is reflective of the stock split.

 

2.Significant Accounting Policies

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

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, restricted stock awards and stock grants.

 

Goodwill and Other Intangibles

 

Goodwill resulting from business combinations prior to January 1, 2009, represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s balance sheet.

 

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10 to 20 years for core deposit and customer relationship intangibles.

 

 9 

 

 

Accounting Standards Adopted in 2019

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet. For public companies, this update was effective for interim and annual periods beginning after December 15, 2018. The Company adopted this guidance in the first quarter of 2019. Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has elected to account for lease and related nonlease components as a single lease component. The Company has also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases, which are twelve months or less. Implementation of the guidance resulted in the recording of a right-of-use asset and lease liability on the balance sheet; however it does not have a material impact on the Company's other consolidated financial statements. See additional disclosures in Note 10.

 

Accounting Standards Updates

 

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018; however, the Company does not currently plan to adopt this ASU early. As a result of this ASU, the Company could experience an increase in its allowance. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). Interagency guidance issued in December 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting purposes. The Company continues its implementation efforts through its established Company-wide implementation committee along with a third-party software vendor to assist in the implementation process. The committee’s review indicates the Company has maintained sufficient historical loan data to support the requirement of this pronouncement and is currently evaluating the various loss methodologies to determine their correlations to the Company’s loan segments historical performance. The Company is currently running parallel computations in 2019 and continues to evaluate the impact of adoption of this ASU.

 

 10 

 

 

3.Fair Value

 

FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) 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 2 include U.S. federal government agencies, mortgage-backed securities, corporate bonds and municipal securities.

 

 11 

 

  

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 investor’s 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 30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include but are not limited to:  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:

 

 12 

 

  

Assets and Liabilities Measured on a Recurring Basis

 

June 30, 2019  Level 1
Inputs
   Level 2
Inputs
   Level 3
 Inputs
   Total Fair
Value
 
   (In Thousands) 
Available for sale securities:                    
Obligations of U.S. federal government corporations and agencies  $-   $2,533   $-   $2,533 
Mortgage-backed - residential   -    79,204    -    79,204 
REMICs   -    2,412    -    2,412 
Collateralized mortgage obligations- residential   -    97,526    -    97,526 
Preferred Stock   1    -    -    1 
Corporate bonds   -    12,986    -    12,986 
Obligations of state and political subdivisions   -    101,453    -    101,453 
Mortgage banking derivative - asset   -    1,392    -    1,392 
Mortgage banking derivative - liability   -    205    -    205 

 

December 31, 2018  Level 1
Inputs
   Level 2
Inputs
   Level 3
Inputs
   Total
Fair Value
 
   (In Thousands) 
Available for sale securities:                    
Obligations of U.S. federal government corporations and agencies  $-   $2,503   $-   $2,503 
Mortgage-backed - residential   -    74,710    -    74,710 
REMICs   -    2,709    -    2,709 
Collateralized mortgage obligations-residential   -    101,461    -    101,461 
Corporate bonds   -    12,806    -    12,806 
Obligations of state and political subdivisions   -    99,887         99,887 
Mortgage banking derivative - asset   -    367    -    367 
Mortgage banking derivative -liability   -    73    -    73 

 

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:

 

 13 

 

  

Assets and Liabilities Measured on a Non-Recurring Basis

 

June 30, 2019  Level 1 Inputs   Level 2 Inputs   Level 3 Inputs   Total Fair
Value
 
   (In Thousands) 
                 
Impaired loans                    
Commercial real estate  $-   $-   $459   $459 
Commercial   -    -    205    205 
Total impaired loans   -    -    664    664 
Mortgage servicing rights   -    288    -    288 

 

December 31, 2018  Level 1 Inputs   Level 2 Inputs   Level 3 Inputs   Total Fair
Value
 
   (In Thousands) 
Impaired loans                    
Commercial real estate  $-   $-   $1,456   $1,456 
Commercial   -    -    319    319 
Total impaired loans   -    -    1,775    1,775 
Mortgage servicing rights   -    629    -    629 
Real estate held for sale                    
Commercial real estate   -    -    705    705 
Total real estate held for sale   -    -    705    705 

 

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2019, 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  $664   Appraisals which utilize sales comparison, net income and cost approach   Discounts for collection issues and changes in market conditions      10-40%   19.3% 

 

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2018, 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  $1,775   Appraisals which utilize sales comparison, net income and cost approach  Discounts for collection issues and changes in market conditions      10-13%   10.86% 
                    
Real estate held for sale – Applies to all classes  $705   Appraisals which utilize sales comparison, net income and cost approach  Discounts for changes in market conditions    20%   20% 

 

 14 

 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $664,000 with a $91,000 valuation allowance and a fair value of $1.8 million with a $9,000 valuation allowance at June 30, 2019, and December 31, 2018, respectively. Provision expense of $52,000 and $176,000 were included in earnings for the three and six months ended June 30, 2019. A provision recovery of $72,000 for the three months ended June 30, 2018 and a provision expense of $61,000 for the six months ended June 30, 2018 were included in earnings.

 

Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $288,000 with a valuation allowance of $603,000 and a fair value of $629,000 with a valuation allowance of $300,000 at June 30, 2019, and December 31, 2018, respectively. Charges of $190,000 and $303,000 for the three and six months ended June 30, 2019 and recoveries of $47,000 and $83,000 for the three and six months ended June 30, 2018, 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 was $0 and $264,000 for the three and six months ended June 30, 2019, respectively, 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 $0 and $544,000 for the three and six months ended June 30, 2018.

 

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 June 30, 2019, and December 31, 2018. 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 and notes payable, 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 FHLB stock due to restrictions placed on its transferability.

 

 15 

 

 

The Company adopted the amendments to ASU 2016-01 relating to the loan portfolio in the first quarter of 2018 and an exit price income approach is now used to determine the fair value. The loans were valued on an individual basis, with consideration given to the loans underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow approach to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. The estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 within the valuation hierarchy.

 

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, checking 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 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 a 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, 2019.

 

   Carrying   Fair Value Measurements at June 30, 2019
(In Thousands)
 
   Value   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and cash equivalents  $83,597   $83,597   $83,597   $-   $- 
Investment securities   296,600    296,599    1    296,598    - 
Federal Home Loan Bank Stock   11,915    N/A    N/A    N/A    N/A 
Loans, net, including loans held for sale   2,609,794    2,631,763    -    14,982    2,616,781 
Accrued interest receivable   10,771    10,771    3    1,225    9,543 
                          
Financial Liabilities:                         
Deposits  $2,680,637   $2,681,088   $584,735   $2,096,353   $- 
Advances from Federal Home Loan Bank   105,178    105,063    -    105,063    - 
Securities sold under repurchase agreements   3,064    3,064    -    3,064    - 
Subordinated debentures   36,083    32,330    -    -    32,330 

 

 16 

 

  

   Carrying   Fair Value Measurements at December 31, 2018
(In Thousands)
 
   Value   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and cash equivalents  $98,962   $98,962   $98,962   $-   $- 
Investment securities   294,602    294,602    -    294,602    - 
FHLB Stock   14,217    N/A    N/A    N/A    N/A 
Loans, net, including loans held for sale   2,518,321    2,501,096    -    6,865    2,494,231 
Accrued interest receivable   9,641    9,641    18    1,168    8,455 
                          
Financial Liabilities:                         
Deposits  $2,620,882   $2,613,965   $607,198   $2,006,767   $- 
Advances from FHLB   85,189    84,281    -    84,281    - 
Securities sold under repurchase agreements   5,741    5,741    -    5,741    - 
Subordinated debentures   36,083    28,854    -    -    28,854 

 

4.Stock Compensation Plans

 

First Defiance has established equity based compensation plans for its directors and employees. On February 27, 2018, the Board adopted, and the shareholders approved at the 2018 Annual Shareholders Meeting, the First Defiance Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018 Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. 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 2018 Equity Plan. The 2018 Equity Plan allows for issuance of up to 900,000 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, 2019, 20,200 options to acquire First Defiance shares were outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted vest 20% per year. 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.

 

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

 

Under the 2018 and 2019 STIPs, the participants could earn between 10% 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 STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive the payment.

 

 17 

 

 

Under each LTIP, the participants could earn between 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 41,676 and 69,014 RSUs to the participants in the 2018 and 2019 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive the payment. A total of 48,363 RSUs were issued to the participants of the 2016 LTIP in the first quarter of 2019 for the three year performance period ended December 31, 2018.

 

In the six months ended June 30, 2019, the Company also granted to employees 13,916 RSUs and 24,651 shares of restricted stock. Of the 24,651 restricted shares granted, 5,258 were issued to directors and have a one-year vesting period. The remaining 19,393 were issued to employees and have a three-year vesting period. The fair value of all granted restricted shares was determined by the stock price on the date of the grant.

 

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.

 

There were no options granted during the three or six months ended June 30, 2019, or June 30, 2018.

 

Following is stock option activity under the plans during the six months ended June 30, 2019:

 

   Options
Outstanding
   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Term (in years)
   Aggregate
Intrinsic
Value
(in 000’s)
 
Options outstanding, January 1, 2019   39,400   $14.00           
Forfeited or cancelled   -    -           
Exercised   (19,200)   10.15           
Granted   -    -           
Options outstanding, June 30, 2019   20,200   $17.66    5.27   $221 
Vested or expected to vest at June 30, 2019   20,200   $17.66    5.27   $221 
Exercisable at June 30, 2019   14,500   $17.48    4.90   $161 

 

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (in thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Proceeds of options exercised  $6   $55   $191   $111 
Related tax benefit recognized   -    6    4    28 
Intrinsic value of options exercised   30    781    390    1,034 

 

 18 

 

 

As of June 30, 2019, there was $27,000 of total unrecognized compensation cost 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 1.3 years.

 

At June 30, 2019, 160,995 RSUs and 48,919 restricted stock grants were unvested. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. A total expense of $437,000 and $960,000 was recorded during the three and six months ended June 30, 2019 compared to an expense of $343,000 and $907,000 for the three and six months ended June 30, 2018. There was approximately $457,000 and $961,000 included within other liabilities at June 30, 2019 and December 31, 2018, respectively, 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, 2019   144,586   $23.94    30,372   $28.48 
Granted   82,930    25.61    78,922    22.25 
Vested   (54,771)   20.13    (60,375)   21.17 
Forfeited   (11,750)   25.63    -    - 
Unvested at  June 30, 2019   160,995   $25.72    48,919   $27.18 

 

The maximum amount of compensation expense that may be recorded for the 2019 STIP and the active LTIPs at March 31, 2019, is approximately $4.8 million. However, the estimated expense expected to be recorded as of June 30, 2019, based on the performance measures in the plans, is $3.8 million of which $2.0 million is unrecognized at June 30, 2019, and will be recognized over the remaining performance periods.

 

5.Dividends on Common Stock

 

First Defiance declared and paid a $0.19 per common stock dividend in the first and second quarters of 2019 and declared and paid a $0.15 per common stock dividend in the first and second quarters of 2018.

 

6.Earnings Per Common Share

 

Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e., unvested restricted stock), not subject to performance based measures.

 

 19 

 

 

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,
 
   2019   2018   2019   2018 
   (In Thousands, except per share data) 
Basic Earnings Per Share:                    
Net income available to common shareholders  $12,199   $11,109   $23,681   $22,846 
Less: Income allocated to participating securities   1    1    2    2 
Net income allocated to common shareholders   12,198    11,108    23,679    22,844 
                     
Weighted average common shares outstanding including participating securities(1)   19,791    20,399    19,908    20,370 
Less: Participating securities   11    11    11    11 
Average common shares(1)   19,780    20,388    19,897    20,359 
                     
Basic earnings per common share  $0.62   $0.54    1.19    1.12 
                     
Diluted Earnings Per Share:                    
Net income allocated to common shareholders  $12,198   $11,108   $23,679   $22,844 
Weighted average common shares outstanding for basic earnings per common share(1)   19,780    20,388    19,897    20,359 
Add: Dilutive effects of stock options   80    104    79    107 
Average shares and dilutive potential common shares(1)   19,860    20,492    19,976    20,466 
                     
Diluted earnings per common share  $0.61   $0.54    1.19    1.12 

 

(1) Share and per share data in above table has been adjusted for a 2-for-1 stock split on July 12, 2018.

 

There were 6,171 shares for both the three and six month periods in 2019 that were excluded from the diluted earnings per common share calculation as they were anti-dilutive. There were no anti-dilutive shares for both the three and six month periods in 2018 excluded subject to issue upon exercise of options.

 

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7.Investment Securities

 

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

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
   (In Thousands) 
At June 30, 2019                    
Available-for-Sale Securities:                    
Obligations of U.S. government corporations and agencies  $2,519   $14   $-   $2,533 
Mortgage-backed securities – residential   78,553    876    (225)   79,204 
REMICs   2,390    22    -    2,412 
Collateralized mortgage obligations   96,574    1,062    (110)   97,526 
Preferred stock   -    1    -    1 
Corporate bonds   12,906    97    (17)   12,986 
Obligations of state and political subdivisions   97,886    3,572    (5)   101,453 
Total Available-for-Sale  $290,828   $5,644   $(357)  $296,115 

 

   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair Value 
   (In Thousands) 
Held-to-Maturity Securities*:                    
FHLMC certificates  $7   $-   $-   $7 
FNMA certificates   25    -    (1)   24 
GNMA certificates   9    -    -    9 
Obligations of state and political subdivisions   444    -    -    444 
Total Held-to Maturity  $485   $-   $(1)  $484 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In Thousands) 
At December 31, 2018                    
Available-for-sale                    
Obligations of U.S. government corporations and agencies  $2,519   $2   $(18)  $2,503 
Mortgage-backed securities - residential   76,165    111    (1,566)   74,710 
REMICs   2,712    4    (7)   2,709 
Collateralized mortgage obligations - residential   103,026    124    (1,689)   101,461 
Corporate bonds   12,910    44    (148)   12,806 
Obligations of state and political subdivisions   99,349    1,258    (720)   99,887 
Total Available-for-Sale  $296,681   $1,543   $(4,148)  $294,076 

 

 21 

 

 

       Gross   Gross     
   Amortized   Unrecognized   Unrecognized   Fair 
   Cost   Gains   Losses   Value 
   (In Thousands) 
Held-to-Maturity                    
FHLMC certificates  $8   $-   $-   $8 
FNMA certificates   31    -    -    31 
GNMA certificates   12    -    -    12 
Obligations of states and political subdivisions   475    -    -    475 
Total Held-to-Maturity  $526   $-   $-   $526 

 

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

The amortized cost and fair value of the investment securities portfolio at June 30, 2019, 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  $5,594   $5,614   $-   $- 
Due after one year through five years   17,876    18,079    -    - 
Due after five years through ten years   33,585    34,483    444    444 
Due after ten years   56,256    58,797    -    - 
MBS/CMO/REMIC   177,517    179,142    41    40 
   $290,828   $296,115   $485   $484 

 

Investment securities with a carrying amount of $154.2 million at June 30, 2019, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

 

As of June 30, 2019, the Company’s investment portfolio consisted of 434 securities, 39 of which were in an unrealized loss position.

 

 22 

 

 

The following tables summarize First Defiance’s securities that were in an unrealized loss position at June 30, 2019, and December 31, 2018:

 

   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, 2019                              
Available-for-sale securities:                              
Obligations of U.S. government corporations and agencies  $-   $-   $-   $-   $-   $- 
Mortgage-backed securities-residential   2,038    (14)   23,742    (211)   25,780    (225)
Collateralized mortgage obligations   -    -    11,497    (110)   11,497    (110)
Corporate bonds   871    (17)   -    -    871    (17)
Obligations of state and political subdivisions   -    -    1,442    (5)   1,442    (5)
Held to maturity securities:   -    -    16    (1)   16    (1)
Total temporarily impaired securities  $2,909   $(31)  $36,697   $(327)  $39,606   $(358)

 

   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, 2018                              
Available-for-sale securities:                              
Obligations of U.S. government corporations and agencies  $-   $-   $500   $(18)  $500   $(18)
Mortgage-backed securities-residential   11,589    (71)   48,665    (1,495)   60,254    (1,566)
REMIC’s   -    -    857    (7)   857    (7)
Collateralized mortgage obligations   11,613    (53)   70,585    (1,636)   82,198    (1,689)
Corporate Bonds   5,752    (148)   -    -    5,752    (148)
Obligations of state and political subdivisions   11,974    (69)   16,492    (651)   28,466    (720)
Total temporarily impaired securities  $40,928   $(341)  $137,099   $(3,807)  $178,027   $(4,148)

 

There were no realized gains from the sales and calls of investment securities in the three and six month periods ending June 30, 2019 and 2018.

 

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, Investments-Debt and Equity Securities. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

 

 23 

 

 

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.

 

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.

 

In the second quarter of 2019 and 2018, management determined there was no OTTI.

 

8.Loans

 

Loans receivable consist of the following:

 

   June 30,
2019
   December 31,
2018
 
   (In Thousands) 
Real Estate:          
           
Secured by 1-4 family residential  $322,123   $322,686 
Secured by multi-family residential   281,679    278,358 
Secured by commercial real estate   1,129,784    1,126,452 
Construction   335,847    265,772 
    2,069,433    1,993,268 
Other Loans:          
Commercial   530,528    509,577 
Home equity and improvement   125,860    128,152 
Consumer finance   35,350    34,405 
    691,738    672,134 
Total loans   2,761,171    2,665,402 
Deduct:          
Undisbursed loan funds   (134,794)   (123,293)
Net deferred loan origination fees and costs   (2,158)   (2,070)
Allowance for loan loss   (28,934)   (28,331)
Totals  $2,595,285   $2,511,708 

 

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 quarters ended June 30, 2019 and 2018 by portfolio segment (In Thousands):

 

 24 

 

 

Quarter Ended June 30,
2019
  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  $2,811   $3,068   $12,001   $731   $7,276   $1,928   $349   $28,164 
Charge-Offs   (11)   0    (15)   0    (13)   (64)   (33)   (136)
Recoveries   156    24    269    0    94    60    21    624 
Provisions   (163)   10    (106)   156    531    (161)   15    282 
Ending Allowance  $2,793   $3,102   $12,149   $887   $7,888   $1,763   $352   $28,934 

 

Quarter Ended June 30, 2018  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  $2,534   $2,983   $10,773   $667   $7,838   $2,209   $263   $27,267 
Charge-Offs   (78)   0    (254)   0    (84)   (41)   (72)   (529)
Recoveries   34    2    26    0    30    57    11    160 
Provisions   192    (72)   708    70    (329)   (193)   47    423 
Ending Allowance  $2,682   $2,913   $11,253   $737   $7,455   $2,032   $249   $27,321 

 

The following table discloses allowance for loan loss activity for the year-to-date periods ended June 30, 2019 and June 30, 2018 by portfolio segment (In Thousands):

 

Year-to-date Period Ended
June 30, 2019
  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  $2,881   $3,101   $12,041   $682   $7,281   $2,026   $319   $28,331 
Charge-Offs   (183)   0    (15)   0    (200)   (97)   (175)   (670)
Recoveries   170    36    353    0    106    84    30    779 
Provisions   (75)   (35)   (230)   205    701    (250)   178    494 
Ending Allowance  $2,793   $3,102   $12,149   $887   $7,888   $1,763   $352   $28,934 

 

Year-to-date Period Ended
June 30, 2018
  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  $2,532   $2,702   $10,354   $647   $7,965   $2,255   $228   $26,683 
Charge-Offs   (94)   0    (309)   0    (181)   (158)   (103)   (845)
Recoveries   58    2    210    0    1,787    85    13    2,155 
Provisions   186    209    998    90    (2,116)   (150)   111    (672)
Ending Allowance  $2,682   $2,913   $11,253   $737   $7,455   $2,032   $249   $27,321 

  

 25 

 

 

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, 2019 (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  $196   $2   $65   $-   $161   $66   $-   $490 
                                         
Collectively evaluated for impairment   2,597    3,100    12,084    887    7,727    1,697    352    28,444 
                                         
 Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Total ending allowance balance  $2,793   $3,102   $12,149   $887   $7,888   $1,763   $352   $28,934 
                                         
Loans:                                        
                                         
Loans individually evaluated for impairment  $7,230   $179   $24,144   $-   $8,749   $881   $22   $41,205 
                                         
Loans collectively evaluated for impairment   314,359    281,595    1,108,728    200,767    523,640    125,921    35,476    2,590,486 
                                         
Loans acquired with deteriorated credit quality   1,003    293    652    -    119    -    -    2,067 
                                         
Total ending loans balance  $322,592   $282,067   $1,133,524   $200,767   $532,508   $126,802   $35,498   $2,633,758 

 

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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, 2018 (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  $175   $3   $95   $-   $79   $242   $1   $595 
                                         
Collectively evaluated for impairment   2,706    3,098    11,946    682    7,202    1,784    318    27,736 
                                         
 Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Total ending allowance balance  $2,881   $3,101   $12,041   $682   $7,281   $2,026   $319   $28,331 
                                         
Loans:                                        
                                         
Loans individually evaluated for impairment  $6,774   $1,347   $26,334   $-   $10,477   $963   $45   $45,940 
                                         
Loans collectively evaluated for impairment   315,385    277,105    1,102,355    142,096    500,730    128,065    34,486    2,500,222 
                                         
Loans acquired with deteriorated credit quality   1,012    296    846    -    177    -    -    2,331 
                                         
Total ending loans balance  $323,171   $278,748   $1,129,535   $142,096   $511,384   $129,028   $34,531   $2,548,493 

  

 27 

 

 

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, 2019   Six Months Ended June 30, 2019 
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
Residential Owner Occupied  $5,212   $46   $44   $4,882   $110   $104 
Residential Non Owner Occupied   2,040    26    26    2,060    56    56 
Total Residential Real Estate   7,252    72    70    6,942    166    160 
Construction   -    -    -    -    -    - 
Multi-Family   305    7    7    819    27    27 
CRE Owner Occupied   7,514    57    45    7,439    223    177 
CRE Non Owner Occupied   1,942    18    18    1,966    51    44 
Agriculture Land   13,734    170    94    13,319    376    291 
Other CRE   796    19    17    975    53    50 
Total Commercial Real Estate   23,986    264    174    23,699    703    562 
Commercial Working Capital   7,594    83    71    7,842    226    162 
Commercial Other   1,549    21    21    1,709    48    45 
Total Commercial   9,143    104    92    9,551    274    207 
Home Equity and  Improvement   889    6    5    905    20    18 
Consumer Finance   25    -    -    30    1    1 
Total Impaired Loans  $41,600   $453   $348   $41,946   $1,191   $975 

 

 28 

 

 

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, 2018   Six Months Ended June 30, 2018 
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
Residential Owner Occupied  $4,598   $40   $38   $4,619   $72   $69 
Residential Non Owner Occupied   2,392    30    30    2,450    74    71 
Total Residential Real Estate   6,990    70    68    7,069    146    140 
Construction   -    -    -    -    -    - 
Multi-Family   1,600    22    22    1,825    49    48 
CRE Owner Occupied   8,352    78    72    10,789    122    107 
CRE Non Owner Occupied   2,642    23    23    3,062    57    57 
Agriculture Land   14,478    155    110    12,997    250    152 
Other CRE   1,329    25    22    1,407    50    42 
Total Commercial Real Estate   26,801    281    227    28,255    479    358 
Commercial Working Capital   8,788    81    72    6,998    105    96 
Commercial Other   3,046    29    29    4,073    54    52 
Total Commercial   11,834    110    101    11,071    159    148 
Home Equity and  Improvement   1,019    9    9    1,247    20    20 
Consumer Finance   35    1    1    37    2    2 
Total Impaired Loans  $48,279   $493   $428   $49,504   $855   $716 

 

 29 

 

 

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

 

   June 30, 2019   December 31, 2018 
   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  $384   $385   $-   $901   $775   $- 
Residential Non Owner Occupied   891    894    -    950    955    - 
Total 1-4 Family Residential Real Estate   1,275    1,279    -    1,851    1,730    - 
Multi-Family Residential Real Estate   135    136    -    1,296    1,302    - 
CRE Owner Occupied   6,953    5,813    -    7,464    6,202    - 
CRE Non Owner Occupied   1,750    1,585    -    1,824    1,659    - 
Agriculture Land   13,276    13,470    -    14,915    14,994    - 
Other CRE   449    453    -    464    462    - 
Total Commercial Real Estate   22,428    21,321    -    24,667    23,317    - 
Construction   -    -    -    -    -    - 
Commercial Working Capital   6,309    6,333    -    7,569    7,498    - 
Commercial Other   1,407    1,400    -    2,095    2,100    - 
Total Commercial   7,716    7,733    -    9,664    9,598    - 
Home Equity and Home Improvement   -    -    -    -    -    - 
Consumer Finance   -    -    -    -    -    - 
Total loans with no allowance recorded  $31,554   $30,469   $-   $37,478   $35,947   $- 
                               
With an allowance recorded:                              
Residential Owner Occupied  $5,004   $4,843   $172   $3,926   $3,884   $148 
Residential Non Owner Occupied   1,104    1,108    24    1,152    1,160    27 
Total 1-4 Family Residential Real Estate   6,108    5,951    196    5,078    5,044    175 
Multi-Family Residential Real Estate   43    43    2    44    44    3 
CRE Owner Occupied   2,110    1,628    29    2,419    1,935    38 
CRE Non Owner Occupied   334    337    14    350    353    16 
Agriculture Land   552    555    5    37    38    2 
Other CRE   522    303    17    1,107    691    39 
Total Commercial Real Estate   3,518    2,823    65    3,913    3,017    95 
Construction   -    -    -    -    -    - 
Commercial Working Capital   866    869    147    525    528    55 
Commercial Other   144    147    14    560    352    24 
Total Commercial   1,010    1,016    161    1,085    880    79 
Home Equity and Home Improvement   926    881    66    1,013    963    242 
Consumer Finance   22    22    -    45    45    1 
Total loans with an allowance recorded  $11,627   $10,736   $490   $11,178   $9,993   $595 

 

* Presented gross of charge-offs

 

 30 

 

 

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,
2019
   December 31,
2018
 
   (In Thousands) 
Non-accrual loans  $15,334   $19,016 
Loans over 90 days past due and still accruing   -    - 
Total non-performing loans   15,334    19,016 
Real estate and other assets held for sale   -    1,205 
Total non-performing assets  $15,334   $20,221 
Troubled debt restructuring, still accruing  $10,308   $11,573 

 

The following table presents the aging of the recorded investment in past due and non- accrual loans as of June 30, 2019, by class of loans (In Thousands):

 

   Current   30-59 days   60-89 days   90+ days   Total
Past Due
   Total
Non-
Accrual
 
Residential Owner Occupied  $201,501   $1,015   $844   $984   $2,843   $2,931 
Residential Non Owner Occupied   118,191    33    3    21    57    249 
                               
Total 1-4 Family Residential Real Estate   319,692    1,048    847    1,005    2,900    3,180 
                               
Multi-Family Residential Real Estate   282,067    -    -    -    -    - 
                               
CRE Owner Occupied   409,221    244    104    489    837    3,214 
CRE Non Owner Occupied   549,736    -    108    481    589    639 
Agriculture Land   127,030    222    103    -    325    4,351 
Other Commercial Real Estate   45,775         -    11    11    29 
                               
Total Commercial Real Estate   1,131,762    466    315    981    1,762    8,233 
                               
Construction   200,767    -    -    -    -    - 
                               
Commercial Working Capital   234,347    140    -    2,681    2,821    2,914 
Commercial Other   294,958    105    59    218    382    423 
                               
Total Commercial   529,305    245    59    

2,899

    3,203    3,337 
                               
Home Equity/Home Improvement   125,556    946    186    114    1,246    552 
Consumer Finance   35,247    232    -    19    251    20 
                               
Total Loans  $2,624,396   $2,937   $1,407   $5,018   $9,362   $15,322 

 

 31 

 

 

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2018, by class of loans (In Thousands):

 

   Current   30-59 days   60-89 days   90+ days   Total
Past Due
   Total Non
Accrual
 
Residential Owner Occupied  $199,664   $887   $821   $1,402   $3,110   $3,266 
Residential Non Owner Occupied   119,988    64    180    165    409    363 
                               
Total 1-4 Family Residential Real Estate   319,652    951    1,001    1,567    3,519    3,629 
                               
Multi-Family Residential Real Estate   278,748    -    -    -    -    102 
                               
CRE Owner Occupied   416,879    52    300    138    490    4,377 
CRE Non Owner Occupied   534,823    6    119    -    125    620 
Agriculture Land   129,040    66    -    2,869    2,935    5,253 
Other Commercial Real Estate   45,232    11    -    -    11    - 
                               
Total Commercial Real Estate   1,125,974    135    419    3,007    3,561    10,250 
                               
Construction   142,096    -    -    -    -    - 
                               
Commercial Working Capital   217,832    268    -    3,838    4,106    4,021 
Commercial Other   289,125    32    54    235    321    480 
                               
Total Commercial   506,957    300    54    4,073    4,427    4,501 
                               
Home Equity and Home Improvement   127,346    1,446    146    90    1,682    394 
Consumer Finance   34,224    134    77    96    307    126 
                               
Total Loans  $2,534,997   $2,966   $1,697   $8,833   $13,496   $19,002 

 

 32 

 

 

Troubled Debt Restructurings

 

As of June 30, 2019, and December 31, 2018, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $17.3 million and $19.2 million, respectively. The Company allocated $399,000 and $581,000 of specific reserves to those loans at June 30, 2019, and December 31, 2018, respectively, and had committed to lend additional amounts totaling up to $315,000 and $169,000 at June 30, 2019, and December 31, 2018, 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 as of June 30, 2019, $6.9 million were 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.

 

 33 

 

 

The following tables present loans by class modified as TDRs that occurred during the three and six month periods ending June 30, 2019, and June 30, 2018:

 

   Loans Modified as a TDR for the Three
Months Ended June 30, 2019
($ in thousands)
   Loans Modified as a TDR for the Six
Months Ended June 30, 2019
($ 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   4   $434    7   $907 
1-4 Family Non Owner Occupied   0    -    0    - 
Multi Family   0    -    0    - 
CRE Owner Occupied   0    -    0    - 
CRE Non Owner Occupied   0    -    0    - 
Agriculture Land   0    -    0    - 
Other CRE   0    -    0    - 
Commercial Working Capital   1    46    1    46 
Commercial Other   0    -    1    13 
Home Equity and Improvement   1    26    2    26 
Consumer Finance   1    1    2    1 
Total   7   $507    13   $993 

 

The loans described above increased the allowance for loan and lease losses (“ALLL”) by $27,000 in the three month period ending June 30, 2019, and increased the ALLL by $21,000 in the six month period ending June 30, 2019.

 

   Loans Modified as a TDR for the Three
Months Ended June 30, 2018
($ in thousands)
   Loans Modified as a TDR for the Six
Months Ended June 30, 2018
($ 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   9   $481    12   $624 
1-4 Family Non Owner Occupied   1    75    2    142 
Multi Family   0    -    0    - 
CRE Owner Occupied   5    1,554    7    2,181 
CRE Non Owner Occupied   1    47    1    47 
Agriculture Land   0    -    0    - 
Other CRE   0    -    0    -