Company Quick10K Filing
Quick10K
First Defiance Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$30.05 20 $593
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 2019-05-29 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 2019-02-06 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
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SSLJ sslj. Com 151
NETS Netshoes 59
ATAI ATA 46
SSNT Silversun Technologies 12
SEII Sharing Economy International 0
DLOC Digital Locations 0
FDEF 2019-03-31
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-10.1 tv520645_ex10-1.htm
EX-31.1 tv520645_ex31-1.htm
EX-31.2 tv520645_ex31-2.htm
EX-32.1 tv520645_ex32-1.htm
EX-32.2 tv520645_ex32-2.htm

First Defiance Financial Earnings 2019-03-31

FDEF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520645_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 March 31, 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. Yesx 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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 19,719,969 shares outstanding at April 30, 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 – March 31, 2019 and December 31, 2018   2
       
  Consolidated Condensed Statements of Income - Three months ended March 31, 2019 and 2018   4
       
  Consolidated Condensed Statements of Comprehensive Income – Three months ended March 31, 2019 and 2018   5
       
  Consolidated Condensed Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2019 and 2018   6
       
  Consolidated Condensed Statements of Cash Flows - Three months ended March 31, 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   48
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk   69
     
Item 4. Controls and Procedures   71
     
PART II-OTHER INFORMATION:    
       
Item 1. Legal Proceedings   73
     
Item 1A. Risk Factors   73
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   73
     
Item 3. Defaults upon Senior Securities   73
     
Item 4. Mine Safety Disclosures   73
     
Item 5. Other Information   74
     
Item 6. Exhibits   75
     
  Signatures   76

 

 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)

 

 

 

  

March 31,

2019

   December 31,
2018
 
     
Assets          
Cash and cash equivalents:          
Cash and amounts due from depository institutions  $45,517   $55,962 
Federal funds sold   67,000    43,000 
    112,517    98,962 
Securities:          
Available-for-sale, carried at fair value   299,895    294,076 
Held-to-maturity, carried at amortized cost (fair value $523 and $526 at March 31, 2019 and December 31, 2018, respectively)   523    526 
    300,418    294,602 
Loans held for sale   6,239    6,613 
Loans receivable, net of allowance of $28,164 at March 31, 2019 and $28,331 at December 31, 2018, respectively   2,520,804    2,511,708 
Mortgage servicing rights   9,998    10,119 
Accrued interest receivable   11,180    9,641 
Federal Home Loan Bank stock   12,235    14,217 
Bank owned life insurance   68,052    67,660 
Premises and equipment   40,422    40,670 
Real estate and other assets held for sale   941    1,205 
Goodwill   98,569    98,569 
Core deposit and other intangibles   4,092    4,391 
Other assets   35,782    23,365 
Total assets  $3,221,249   $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)

 

 

 

  

March 31,

2019

  

December 31,

2018

 
     
Liabilities and stockholders’ equity          
Liabilities:          
Deposits  $2,685,792   $2,620,882 
Advances from the Federal Home Loan Bank   55,158    85,189 
Subordinated debentures   36,083    36,083 
Securities sold under repurchase agreements   3,513    5,741 
Advance payments by borrowers   2,943    3,652 
Deferred taxes   1,304    264 
Other liabilities   40,667    30,322 
Total liabilities   2,825,460    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; 25,373,619 and 25,398,992  shares issued and 19,713,192 and 20,171,392 shares outstanding at March 31, 2019 and December 31, 2018, respectively
   127    127 
Additional paid-in capital   160,828    161,593 
Accumulated other comprehensive income (loss), net of tax of $417 and $(468), respectively   1,569    (2,148)
Retained earnings   303,277    295,588 
Treasury stock, at cost, 5,660,427 shares at March 31, 2019 and 5,227,600 shares at December 31, 2018   (70,012)   (55,571)
Total stockholders’ equity   395,789    399,589 
Total liabilities and stockholders’ equity  $3,221,249   $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 
   March 31, 
   2019   2018 
Interest Income          
Loans  $31,214   $26,526 
Investment securities:          
Taxable   1,365    1,049 
Non-taxable   840    802 
Interest-bearing deposits   285    297 
FHLB stock dividends   215    231 
Total interest income   33,919    28,905 
Interest Expense          
Deposits   5,005    2,611 
FHLB advances and other   276    319 
Subordinated debentures   364    280 
Notes payable   4    8 
Total interest expense   5,649    3,218 
Net interest income   28,270    25,687 
Provision for loan losses   212    (1,095)
Net interest income after provision for loan losses   28,058    26,782 
Non-interest Income          
Service fees and other charges   3,007    3,131 
Insurance commissions   4,115    4,277 
Mortgage banking income   1,841    1,742 
Gain on sale of non-mortgage loans   89    224 
Trust income   523    552 
Income from Bank Owned Life Insurance   392    400 
Other non-interest income   846    377 
Total non-interest income   10,813    10,703 
Non-interest Expense          
Compensation and benefits   14,085    13,249 
Occupancy   2,241    2,071 
FDIC insurance premium   273    360 
Financial institutions tax   556    531 
Data processing   2,297    2,105 
Amortization of intangibles   299    347 
Other non-interest expense   5,115    4,588 
Total non-interest expense   24,866    23,251 
Income before income taxes   14,005    14,234 
Federal income taxes   2,523    2,497 
Net Income  $11,482   $11,737 
           
Earnings per common share (Note 6)          
Basic  $0.57   $0.58 
Diluted  $0.57   $0.57 
Dividends declared per share (Note 5)  $0.19   $0.15 
Average common shares outstanding (Note 6)          
Basic   20,014    20,330 
Diluted   20,095    20,438 

 

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

 

See accompanying notes.

 

 4 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

 

 

 

   Three Months Ended 
   March 31, 
   2019   2018 
Net income  $11,482   $11,737 
           
Other comprehensive income (loss):          
Unrealized gains (losses) on securities available for sale   4,603    (3,557)
Reclassification adjustment for security gains          
included in net income   -    - 
Income tax expense (benefit)   (968)   747 
Net of tax amount   3,635    (2,810)
           
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)   3,717    (2,810)
           
Comprehensive income  $15,199   $8,927 

 

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 January 1, 2019  $-    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 
                                         
Balance at January 1, 2018  $-    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 

 

(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)

 

 

 

   Three Months Ended 
   March 31, 
   2019   2018 
Operating Activities          
Net income  $11,482   $11,737 
Items not requiring (providing) cash:          
Provision for loan losses   212    (1,095)
Depreciation   1,031    867 
Amortization of mortgage servicing rights, net of impairment charges/recoveries   399    282 
Amortization of core deposit and other intangible assets   299    347 
Net accretion of premiums and discounts on loans and deposits   (155)   (52)
Amortization of premiums and discounts on securities   285    284 
Change in deferred taxes   155    20 
Proceeds from the sale of loans held for sale   38,910    44,399 
Originations of loans held for sale   (37,513)   (44,474)
Gain from sale of loans   (1,390)   (1,304)
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   249    537 
Stock option expense   11    84 
Restricted stock income   (311)   (113)
Income from bank owned life insurance   (392)   (400)
Excess tax benefit on stock compensation plans   (105)   (148)
Changes in:          
Accrued interest receivable   (1,539)   (653)
Other assets   (3,609)   (1,541)
Other liabilities   1,662    75 
Net cash provided by operating activities   9,691    8,852 
           
Investing Activities          
Proceeds from maturities of held-to-maturity securities   -    6 
Proceeds from maturities, calls and pay-downs of available-for-sale securities   6,673    5,860 
Proceeds from sale of premises and equipment, real estate and other assets held for sale   161    249 
Proceeds from sale of non-mortgage loans   1,749    4,050 
Purchases of available-for-sale securities   (8,172)   (19,710)
Proceeds from Federal Home Loan stock redemption   1,982    3 
Proceeds from sale of bank owned life insurance   -    17,689 
Purchases of premises and equipment, net   (793)   (476)
Net increase in loans receivable   (10,959)   (12,335)
Net cash used by investing activities   (9,359)   (4,664)
           
Financing Activities          
Net increase in deposits and advance payments by borrowers   64,201    53,631 
Repayment of Federal Home Loan Bank advances   (35,031)   (23,278)
Proceeds from Federal Home Loan Bank advances   5,000    10,000 
Decrease in securities sold under repurchase agreements   (2,228)   (16,698)
Net cash paid for repurchase of common stock   (15,147)   - 
Proceeds from exercise of stock options   185    56 
Proceeds from direct stock sales   31    21 
Cash dividends paid on common stock   (3,788)   (3,047)
Net cash provided by financing activities   13,223    20,685 
Increase in cash and cash equivalents   13,555    24,873 
Cash and cash equivalents at beginning of period   98,962    113,693 
Cash and cash equivalents at end of period  $112,517   $138,566 
           
Supplemental cash flow information:          
Interest paid  $5,593   $3,160 
Income taxes paid  $-   $- 
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   $694 

 

See accompanying notes.

 

 7 

 

 

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

March 31, 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 March 31, 2019, and for the three month periods ended March 31, 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 month period ended March 31, 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 anticipates running parallel computations during 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.

 

 11 

 

 

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.

 

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.

 

 12 

 

 

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

 

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

 

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

 

Assets and Liabilities Measured on a Recurring Basis

 

March 31, 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  $-   $3,911   $-   $3,911 
Mortgage-backed - residential   -    77,496    -    77,496 
REMICs   -    2,600    -    2,600 
Collateralized mortgage obligations- residential   -    101,420    -    101,420 
Preferred Stock   1    -    -    1 
Corporate bonds   -    12,978    -    12,978 
Obligations of state and political subdivisions   -    101,489    -    101,489 
Mortgage banking derivative - asset   -    879    -    879 
Mortgage banking derivative - liability   -    147    -    147 

 

December 31, 2018  Level 1
Inputs
   Level 2
Inputs
   Level 3
Inputs
   Total Fair
Value
 
   (In Thousands) 
Available for sale securities:                    
Obligation 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 

 

 13 

 

 

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

 

Assets and Liabilities Measured on a Non-Recurring Basis

 

March 31, 2019  Level 1 Inputs   Level 2 Inputs   Level 3 Inputs   Total Fair
Value
 
   (In Thousands) 
Mortgage servicing rights  $-   $501   $-   $501 
Real estate held for sale Commercial real estate   -    -    236    236 
Total real estate held for sale   -    -    236    236 

 

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 March 31, 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)
                      
Real estate held for sale – Applies to all classes  $236   Purchase agreement.  Discounts for changes in market conditions   42.8%   42.8%

 

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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%

 

There were no impaired loans which were measured for impairment using the fair value of collateral at March 31, 2019. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $1.8 million, with a $9,000 valuation allowance December 31, 2018. A provision expense of $124,000 for the three months ended March 31, 2019 and $134,000 for the three months ended March 31, 2018, were included in earnings.

 

Mortgage servicing rights which are carried at the lower of cost or fair value, had a fair value of $501,000 with a valuation allowance of $413,000 and a fair value of $629,000 with a valuation allowance of $300,000 at March 31, 2019 and December 31, 2018, respectively. A charge of $113,000 and a recovery of $37,000 for the three months ended March 31, 2019, and March 31, 2018, respectively, was 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 $264,000 for the three months ended March 31, 2019, 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 $544,000 for the three months ended March 31, 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 March 31, 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.

 

 15 

 

 

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.

 

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 March 31, 2019.

 

      

Fair Value Measurements at March 31, 2019

(In Thousands)

 
   Carrying
Value
   Total   Level 1   Level 2   Level 3 
Financial Assets:                         
Cash and cash equivalents  $112,517   $112,517   $112,517   $-   $- 
Investment securities   300,418    300,418    1    300,417    - 
Federal Home Loan Bank Stock   12,235    N/A    N/A    N/A    N/A 
Loans, net, including loans held for sale   2,527,043    2,530,106    -    6,913    2,523,193 
Accrued interest receivable   11,180    11,180    12    1,699    9,469 
                          
Financial Liabilities:                         
Deposits  $2,685,792   $2,682,404   $586,033   $2,096,371   $- 
Advances from Federal Home Loan Bank   55,158    54,709    -    54,709    - 
Securities sold under repurchase agreements   3,513    3,513    -    3,513    - 
Subordinated debentures   36,083    31,455    -    -    31,455 

 

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Fair Value Measurements at December 31, 2018

(In Thousands)

 
   Carrying
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.

 

 17 

 

 

As of March 31, 2019, 21,400 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.

 

Under each LTIP, the participants may 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 RSU’s 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 RSU’s 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 three months ended March 31, 2019, the Company also granted to employees 13,916 RSUs and 15,722 shares of restricted stock. All awards were issued to employees, 27,424 of the awardshave a three-year vesting period while 2,214 have a one-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 months ended March 31, 2019, or March 31, 2018.

 

 18 

 

 

Following is stock option activity under the plans during the three months ended March 31, 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   (18,000)   10.52           
Granted   -    -           
Options outstanding, March 31, 2019   21,400   $16.92    5.92   $253 
Vested or expected to vest at March 31, 2019   21,400   $16.92    5.92   $253 
Exercisable at March 31, 2019   14,600   $16.36    5.67   $181 

 

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

 

   Three Months Ended March 31, 
   2019   2018 
Proceeds of options exercised  $185   $56 
Related tax benefit recognized   4    21 
Intrinsic value of options exercised   360    253 

 

As of March 31, 2019, there was $39,000 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 1.5 years.

 

At March 31, 2019, 178,465 RSU’s and 45,094 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 $523,000 was recorded during the three months ended March 31, 2019 compared to an expense of $565,000 for the three months ended March 31, 2018. There was approximately $249,000 and $961,000 included within other liabilities at March 31, 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    64,585    20.92 
Vested   (48,863)   19.65    (49,863)   19.84 
Forfeited   (188)   19.65    -    - 
Unvested at March 31, 2019   178,465   $25.66    45,094   $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 $4.7 million. However, the estimated expense expected to be recorded as of March 31, 2019, based on the performance measures in the plans, is $4.2 million of which $2.7 million is unrecognized at March 31, 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 quarter of 2019 and declared and paid a $0.15 per common stock dividend in the first quarter of 2018.

 

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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.

 

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

 

   Three Months Ended
March 31,
 
   2019   2018 
   (In Thousands, except per share data) 
Basic Earnings Per Share:        
Net income available to common shareholders  $11,482   $11,737 
Less: Income allocated to participating securities   9    3 
Net income allocated to common shareholders   11,473    11,734 
           
Weighted average common shares outstanding Including participating securities   20,030    20,352 
Less: Participating securities   16    22 
Average common shares   20,014    20,330 
           
Basic earnings per common share  $0.57   $0.58 
           
Diluted Earnings Per Share:          
Net income allocated to common shareholders  $11,473   $11,734 
Weighted average common shares outstanding for basic earnings per common share   20,014    20,330 
Add: Dilutive effects of stock options   81    108 
Average shares and dilutive potential common shares   20,095    20,438 
           
Diluted earnings per common share  $0.57   $0.57 

 

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

 

 20 

 

 

Shares subject to issue upon exercise of options of 3,376 in 2019 and 7,000 in 2018 were excluded from the diluted earnings per common share calculation as they were anti-dilutive.

 

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 March 31, 2019    
Available-for-Sale Securities:                    
U.S. Treasury securities and obligations of U.S. federal government corporations and agencies  $3,913   $4   $(6)  $3,911 
Mortgage-backed securities – residential   77,682    418    (604)   77,496 
REMICs   2,587    13    -    2,600 
Collateralized mortgage obligations   101,524    418    (522)   101,420 
Preferred stock   -    1    -    1 
Corporate bonds   12,909    98    (29)   12,978 
Obligations of state and political subdivisions   99,282    2,366    (159)   101,489 
Total Available-for-Sale  $297,897   $3,318   $(1,320)  $299,895 

 

   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair Value 
   (In Thousands) 
Held-to-Maturity Securities*:                    
FHLMC certificates  $7   $-   $-   $7 
FNMA certificates   30    -    -    30 
GNMA certificates   11    -    -    11 
Obligations of state and political subdivisions   475    -    -    475 
Total Held-to Maturity  $523   $-   $-   $523 

 

       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 March 31, 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  $4,987   $5,007   $31   $31 
Due after one year through five years   19,869    20,047    -    - 
Due after five years through ten years   34,265    35,050    444    444 
Due after ten years   56,983    58,275    -    - 
MBS/CMO/REMIC   181,793    181,516    48    48 
   $297,897   $299,895   $523   $523 

 

Investment securities with a carrying amount of $150.2 million at March 31, 2019, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

 

As of March 31, 2019, the Company’s investment portfolio consisted of 439 securities, 104 of which were in an unrealized loss position.

 

The following tables summarize First Defiance’s securities that were in an unrealized loss position at March 31, 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 March 31, 2019                              
Available-for-sale securities:                              
Obligations of U.S. government corporations and agencies  $-   $-   $513   $(6)  $513   $(6)
Mortgage-backed securities-residential   -    -    44,304    (604)   44,304    (604)
Collateralized mortgage obligations   904    (3)   48,948    (519)   49,852    (522)
Corporate bonds   2,859    (29)   -    -    2,859    (29)
Obligations of state and political subdivisions   -    -    10,124    (159)   10,124    (159)
Total temporarily impaired securities  $3,763   $(32)  $103,889   $(1,288)  $107,652   $(1,320)

 

 

 22 

 

 

   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)
Held to maturity securities:   8    -    26    -    34    - 
Total temporarily impaired securities  $40,936   $(341)  $137,125   $(3,807)  $178,061   $(4,148)

 

There were no realized gains from the sales and calls of investment securities in the first quarter of 2019 or in the first quarter of 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 first quarter of 2019 and 2018, management determined there was no OTTI.

 

There were no sales or calls of securities during the three months ended March 31, 2019 or 2018.

 

8.Loans

 

Loans receivable consist of the following:

 

  

March 31,

2019

  

December 31,

2018

 
  (In Thousands) 
Real Estate:          
Secured by 1-4 family residential  $321,644   $322,686 
Secured by multi-family residential   279,175    278,358 
Secured by commercial real estate   1,115,325    1,126,452 
Construction   304,241    265,772 
    2,020,385    1,993,268 
Other Loans:          
Commercial   509,627    509,577 
Home equity and improvement   124,450    128,152 
Consumer finance   34,262    34,405 
    668,339    672,134 
Total loans   2,688,724    2,665,402 
Deduct:          
Undisbursed loan funds   (137,742)   (123,293)
Net deferred loan origination fees and costs   (2,014)   (2,070)
Allowance for loan loss   (28,164)   (28,331)
Totals  $2,520,804   $2,511,708 

 

 24 

 

 

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 March 31, 2019 and 2018 by portfolio segment (In Thousands):

 

Quarter Ended March 31,
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   (172)   0    0    0    (187)   (33)   (142)   (534)
Recoveries   13    12    84    0    12    24    10    155 
Provisions   89    (45)   (124)   49    170    (89)   162    212 
Ending Allowance  $2,811   $3,068   $12,001   $731   $7,276   $1,928   $349   $28,164 

 

Quarter Ended March 31,
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   (16)   0    (55)   0    (97)   (117)   (31)   (316)
Recoveries   24    0    184    0    1,757    28    2    1,995 
Provisions   (6)   281    290    20    (1,787)   43    64    (1,095)
Ending Allowance  $2,534   $2,983   $10,773   $667   $7,838   $2,209   $263   $27,267 

 

 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 March 31, 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  $177   $2   $98   $-   $67   $236  $-    $580  
                                         
Collectively evaluated for impairment   2,634    3,066    11,903    731    7,209    1,692    349    27,584 
                                         
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Total ending allowance balance  $2,811   $3,068   $12,001   $731   $7,276   $1,928   $349   $28,164 
                                         
Loans:                                        
                                         
Loans individually evaluated for impairment  $6,640   $1,333   $23,297   $-   $10,052   $914   $33   $42,269 
                                         
Loans collectively evaluated for impairment   314,510    278,011    1,095,031    166,137    501,403    124,443    34,362    2,513,897 
                                         
Loans acquired with deteriorated credit quality   1,007    294    808    -    163    -    -    2,272 
                                         
Total ending loans balance  $322,157   $279,638   $1,119,136   $166,137   $511,618   $125,357   $34,395   $2,558,438 

 

 26 

 

 

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 March 31, 2019 
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
Residential Owner Occupied  $4,552   $64   $60 
Residential Non Owner Occupied   2,080    30    32 
Total Residential Real Estate   6,632    94    92 
Construction   -    -    - 
Multi-Family   1,332    20    20 
CRE Owner Occupied   7,365    166    132 
CRE Non Owner Occupied   1,989    33    26 
Agriculture Land   12,903    206    197 
Other CRE   1,154    34    33 
Total Commercial Real Estate   23,411    439    388 
Commercial Working Capital   8,089    143    91 
Commercial Other   1,870    27    24 
Total Commercial   9,959    170    115 
Home Equity and Improvement   921    14    13 
Consumer Finance   36    1    1 
Total Impaired Loans  $42,291   $738   $629 

 

 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 March 31, 2018 
   Average
Balance
   Interest
Income
Recognized
   Cash Basis
Income
Recognized
 
Residential Owner Occupied  $4,639   $32   $31 
Residential Non Owner Occupied   2,509    44    41 
Total Residential Real Estate   7,148    76    72 
Construction   -    -    - 
Multi-Family   2,049    27    26 
CRE Owner Occupied   13,225    44    35 
CRE Non Owner Occupied   3,482    34    34 
Agriculture Land   11,516    95    42 
Other CRE   1,486    25    20 
Total Commercial Real Estate   29,709    198    131 
Commercial Working Capital   5,208    24    24 
Commercial Other   5,100    25    23 
Total Commercial   10,308    49    47 
Home Equity and Improvement   1,474    11    11 
Consumer Finance   39    1    1 
Total Impaired Loans  $50,727   $362   $288 

 

 29 

 

 

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

 

   March 31, 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  $468   $343   $-   $901   $775   $- 
Residential Non Owner Occupied   906    911    -    950    955    - 
Total 1-4 Family Residential Real Estate   1,374    1,254    -    1,851    1,730    - 
Multi-Family Residential Real Estate   1,282    1,289    -    1,296    1,302    - 
CRE Owner Occupied   6,884    5,631    -    7,464    6,202    - 
CRE Non Owner Occupied   1,794    1,628    -    1,824    1,659    - 
Agriculture Land   12,664    12,809    -    14,915    14,994    - 
Other CRE   457    459    -    464    462    - 
Total Commercial Real Estate   21,799    20,527    -    24,667    23,317    - 
Construction   -    -    -    -    -    - 
Commercial Working Capital   7,715    7,725    -    7,569    7,498    - 
Commercial Other   1,688    1,686    -    2,095    2,100    - 
Total Commercial   9,403    9,411    -    9,664    9,598    - 
Home Equity and Home Improvement   -    -    -    -    -    - 
Consumer Finance   -    -    -    -    -    - 
Total loans with no allowance recorded  $33,858   $32,481   $-   $37,478   $35,947   $- 
                               
With an allowance recorded:                              
Residential Owner Occupied  $4,291   $4,255   $151   $3,926   $3,884   $148 
Residential Non Owner Occupied   1,126    1,131    26    1,152    1,160    27 
Total 1-4 Family Residential Real Estate   5,417    5,386    177    5,078    5,044    175 
Multi-Family Residential Real Estate   43    44    2    44    44    3 
CRE Owner Occupied   2,141    1,657    40    2,419    1,935    38 
CRE Non Owner Occupied   342    345    15    350    353    16 
Agriculture Land   95    96    6    37    38    2 
Other CRE   1,088    672    37    1,107    691    39 
Total Commercial Real Estate   3,666    2,770    98    3,913    3,017    95 
Construction   -    -    -    -    -    - 
Commercial Working Capital   507    510    54    525    528    55 
Commercial Other   128    131    13    560    352    24 
Total Commercial   635    641    67    1,085    880    79 
Home Equity and Home Improvement   965    914    236    1,013    963    242 
Consumer Finance   33    33    -    45    45    1 
Total loans with an allowance recorded  $10,759   $9,788   $580   $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:

 

  

March 31,

2019

   December 31,
2018
 
   (In Thousands) 
Non-accrual loans  $17,645   $19,016 
Loans over 90 days past due and still accruing   -    - 
Total non-performing loans   17,645    19,016 
Real estate and other assets held for sale   941    1,205 
Total non-performing assets  $18,586   $20,221 
Troubled debt restructuring, still accruing  $11,908   $11,573 

 

The following table presents the aging of the recorded investment in past due and non- accrual loans as of March 31, 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  $201,526   $84   $789   $1,535   $2,408   $2,933 
Residential Non Owner Occupied   118,110    39    22    52    113    241 
                               
Total 1-4 Family Residential Real Estate   319,636    123    811    1,587    2,521    3,174 
                               
Multi-Family Residential Real Estate   279,638    -    -    -    -    - 
                               
CRE Owner Occupied   416,888    616    320    331    1,267    4,122 
CRE Non Owner Occupied   527,519    513    -    -    513    672 
Agriculture Land   129,563    -    171    3    174    4,618 
Other Commercial Real Estate   43,057    110    -    45    155    45 
                               
Total Commercial Real Estate   1,117,027    1,239    491    379    2,109    9,457 
                               
Construction   166,137    -    -    -    -    - 
                               
Commercial Working Capital   220,777    85    -    3,874    3,959    3,903 
Commercial Other   286,182    469    -    231    700    456 
                               
Total Commercial   506,959    554    -    

4,105

    4,659    4,359 
                               
Home Equity/Home Improvement   125,080    89    64    124    277    606 
Consumer Finance   34,247    108    9    31    148    38 
                               
Total Loans  $2,548,724   $2,113   $1,375   $6,226   $9,714   $17,634 

 

 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 &n