First Defiance Financial Corp. Announces Solid 2020 First Quarter Results

First Defiance Financial Corp. (NASDAQ: FDEF) (“First Defiance”) announced today a solid first quarter including the completion of its strategic merger with UCFC, solid core profitability and a 15.8% increase in its year-over-year dividend. On a GAAP basis, net earnings for the first quarter of 2020 were a loss of $22.5 million, or $0.71 per diluted common share, compared to income of $11.5 million, or $0.57 per diluted common share, for the first quarter of 2019. The year-over-year comparison is substantially impacted by the current year’s loan loss provision expense of $43.8 million, which included an expected $25.9 million related to acquisition accounting for an after-tax cost of $20.5 million, or $0.65 per diluted common share. The first quarter of 2019 included a provision for loan losses expense of $212,000, which had an after-tax cost of $168,000, or $0.01 per diluted common share, and no acquisition impact. Additionally, the current year’s results include the impact of $11.5 million of acquisition-related charges, which had an after-tax cost of $9.5 million, or $0.30 per diluted common share. Excluding the impact of acquisition-related provision and charges, earnings for the first quarter of 2020 were $7.5 million, or $0.24 per diluted common share.

“The great momentum we had through most of the first quarter started to slow with the effects of COVID-19,” said Donald P. Hileman, Chief Executive Officer of First Defiance. “The pandemic has caused a severe disruption on the global and regional economic outlooks as well as the markets in which we operate. We have shifted focus to servicing the immediate needs of our clients and the health and well-being of our employees while supporting the communities we serve. We have been working extremely hard to assist clients by executing the Small Business Administration Paycheck Protection Program enacted as part of the CARES Act stimulus plan, and by helping them navigate additional relief programs.”

UCFC Merger

On January 31, 2020, First Defiance and United Community Financial Corp. (“UCFC”) completed the previously announced merger under which UCFC merged into First Defiance in a stock-for-stock transaction. Under the terms of the merger agreement, shareholders of UCFC received 0.3715 First Defiance common shares for each UCFC common share. The merger combined two complementary banking companies, and First Defiance and UCFC consider this partnership an ideal strategic, financial and operational fit, particularly given their individual strong and consistent performance over time. The combined company leverages the respective strengths of each institution in commercial banking, residential lending, retail banking, insurance and wealth management, and better positions the combined company to serve the geographies of Ohio, Michigan, Indiana, Pennsylvania and West Virginia with increased scale and expanded product offerings.

At the closing of the merger, First Defiance issued 17.9 million common shares, which represented a transaction value of approximately $527 million based on its closing stock price of $29.39 on January 31, 2020. The transaction value has been preliminarily allocated to assets acquired and liabilities assumed including $2.3 billion in net loans, $459 million in other tangible assets, $2.1 billion in deposits, $441 million in other liabilities, and $250 million in goodwill and other intangible assets. Prior to closing, UCFC incurred $13.9 million of merger-related costs. The year-over-year comparison of First Defiance results is impacted by the UCFC merger, with 2020 including two months of operations from UCFC compared to none in the prior year.

Coinciding with the upcoming integration of the First Federal Bank and Home Savings Bank systems scheduled for July, our combined 77 branches will be brought together under the new name and brand of Premier Bank. The Premier Bank name represents and honors the commitment both banks have made to our customers and communities by providing the best in financial partnerships for over a decade. This name change will bring additional consistency throughout our footprint and an elevated promise to deliver a community banking experience that sets us apart.

“We are very pleased to have completed the merger of our two companies in the quarter and to have recently announced the new name Premier Bank for our banking franchise,” said Gary M. Small, President of First Defiance. “The Premier Bank name and brand are reflections of our commitment to helping customers, employees and our communities achieve their best.”

Net interest income up compared to first quarter 2019

Net interest income of $45.5 million in the first quarter of 2020 was up from $28.3 million in the first quarter of 2019. The increase over the prior year’s first quarter was attributable to organic growth and two months of income from UCFC compared to none in 2019. Net interest margin was 3.78% for the first quarter of 2020, down from 3.80% in the fourth quarter of 2019, and down from 4.03% in the first quarter of 2019. Yield on interest earning assets decreased to 4.54% in the first quarter of 2020, down 13 basis points from 4.67% in the fourth quarter of 2019. The cost of interest-bearing liabilities decreased 14 basis points in the first quarter of 2020 to 1.01% from 1.15% in the fourth quarter of 2019. The first quarter 2020 results include the impact of acquisition marks and related accretion. Interest income includes $312,000 of accretion and interest expense includes $1,025,000 of accretion, which combined added 10 basis points of net interest margin. Excluding these amounts, net interest margin would be 3.68% for first quarter of 2020.

“We are satisfied with our net interest margin, which contracted less than expected quarter over quarter,” said Hileman. “We are proud of the efforts of our teams that were able to generate organic growth of over 5% annualized for both loans and deposits in the first quarter despite the economic headwinds.”

Non-interest income up from first quarter 2019

First Defiance’s non-interest income in the first quarter of 2020 was $14.0 million compared with $10.8 million in the first quarter of 2019. Results for the first quarter 2020 included two months of income from UCFC compared to none in 2019.

Mortgage banking income decreased to $0.8 million in the first quarter of 2020 from $1.8 million in the first quarter of 2019. Gains from the sale of mortgage loans increased to $4.9 million in the first quarter of 2020 from $1.3 million in the first quarter of 2019. Mortgage loan servicing revenue increased to $1.6 million in the first quarter of 2020 from $0.9 million in the first quarter of 2019. Amortization of mortgage servicing rights increased to $1.2 million in the first quarter 2020 from $286,000 in the first quarter 2019. First Defiance had a negative change in the valuation adjustment in mortgage servicing assets of $4.5 million in the first quarter of 2020 compared with a negative adjustment of $113,000 in the first quarter of 2019. The year-over-year change is primarily due to the significant decline in rates with the 10-year treasury declining 122 basis points during the first quarter of 2020 compared to a 28 basis point decline in the first quarter of 2019.

For the first quarter 2020, service fees and other charges were $5.2 million, up from $3.0 million in the first quarter of 2019. Commissions from the sale of insurance products were $5.2 million, up from $4.1 million in the first quarter of 2019. The first quarter typically includes contingent revenues, bonuses paid by insurance carriers when the Company achieves certain loss ratios or growth targets. In the first quarter of 2020, First Defiance’s insurance subsidiary, First Insurance Group, earned $1.3 million of contingent income, compared to $0.9 million during the first quarter of 2019. Trust income was $838,000 in the first quarter of 2020, up from $523,000 in the first quarter of 2019. Other non-interest income for the first quarter was $960,000 compared to $846,000 in 2019. Other non-interest income for the first quarter 2020 includes $1.1 million for reversal of an earnout accrual that was not achieved related to a prior acquisition.

“This was a quarter that highlighted the importance of diverse revenue sources as non-interest income represented over 23% of total revenues despite the significant hit to mortgage servicing rights valuation,” said Hileman. “Non-interest income remains an important element to our earnings growth goals and we continue to seek ways to improve these revenue streams.”

Non-interest expenses up from first quarter 2019

Total non-interest expense was $43.8 million in the first quarter of 2020, or $32.3 million excluding $11.5 million of acquisition related charges, up from $24.9 million in the first quarter of 2019. Results for the first quarter 2020 included two months of expenses from UCFC compared to none in 2019. Compensation and benefits increased to $17.6 million in the first quarter of 2020, compared to $14.1 million in the first quarter of 2019. Occupancy expense was $3.7 million in the first quarter of 2020, up from $2.2 million in the first quarter of 2019. Data processing cost was $3.0 million in the first quarter of 2020, up from $2.3 million in the first quarter of 2019. Amortization of intangibles was $1.2 million in the first quarter of 2020, up from $299,000 in the first quarter of 2019. Other non-interest expense was $5.4 million in the first quarter of 2020, up from $5.1 million in the first quarter of 2019.

Credit quality

Non-performing loans totaled $32.6 million at March 31, 2020, an increase from $13.5 million at December 31, 2019, and an increase from $17.6 million at March 31, 2019, due to the UCFC merger. In addition, First Defiance had $0.5 million of OREO at March 31, 2020, compared to $0.9 million at March 31, 2019. Accruing troubled debt restructured loans were $7.5 million at March 31, 2020, compared with $11.9 million at March 31, 2019.

On January 1, 2020, First Defiance adopted the Current Expected Credit Loss (“CECL”) model of accounting for credit losses. This new GAAP model, which replaces the former incurred loss model, requires entities to estimate credit losses over the life of an asset or off-balance sheet exposure. At adoption, First Defiance recorded a $2.4 million increase to its allowance for loan losses and a $0.9 million increase to its reserve for off-balance sheet commitments for a combined $3.2 million, of which $2.6 million was recorded as a reduction to retained earnings with remainder to deferred taxes. In connection with the UCFC merger on January 31, 2020, First Defiance recorded a $33.6 million increase to its allowance for loan losses, which was comprised of $25.9 million required to be recorded as a provision for loan losses related to non-purchased credit deteriorated loans and $7.7 million required to be recorded as a reduction of loan balances for purchased credit deteriorated loans.

Excluding the merger impact noted above, the first quarter 2020 results include net recoveries of $778,000 and a provision expense for loan losses of $17.8 million compared with net charge-offs of $379,000 and a provision expense of $212,000 for the same period in 2019. The allowance for loan loss as a percentage of total loans was 1.68% at March 31, 2020, compared with 1.10% at March 31, 2019. The increase in the provision expense and allowance percentage is primarily attributable to the impact of the economic deterioration that began in the first quarter 2020 as a result of the COVID-19 pandemic.

“While the adoption of CECL in a period of economic downturn dramatically increased our provision, we believe our enhanced allowance will serve us well as we support our customers during this challenging time,” said Paul D. Nungester, Chief Financial Officer of First Defiance. “Our strong capital levels and allowance coverage ratios provide a solid base in the current uncertain environment.”

Total assets at $6.54 billion

Total assets at March 31, 2020, were $6.54 billion compared to $3.47 billion at December 31, 2019, and $3.22 billion at March 31, 2019. Gross loans receivable (excluding loans held for sale) were $5.11 billion at March 31, 2020, compared to $2.78 billion at December 31, 2019, and $2.55 billion at March 31, 2019. At March 31, 2020, gross loans receivable grew $2.56 billion, or 101% from a year ago, including $2.30 billion from the UCFC merger and $277.0 million organically. Also, at March 31, 2020, goodwill and other intangible assets totaled $353.1 million compared to $103.8 million at December 31, 2019, and $102.7 million at March 31, 2019, with the increase attributable to the UCFC merger.

Total deposits at March 31, 2020, were $4.99 billion compared with $2.87 billion at December 31, 2019, and $2.69 billion at March 31, 2019. At March 31, 2020, total deposits grew $2.31 billion, or 86% from a year ago, including $2.08 billion from the UCFC merger and $225.8 million organically.

Total stockholders’ equity was $916.4 million at March 31, 2020, compared to $426.2 million at December 31, 2019, and $395.8 million at March 31, 2019. The increase in stockholders’ equity from year-end 2019 was due to the UCFC merger, offset partially by the company’s repurchase of 430,000 common shares for $10.1 million during the first quarter of 2020. At March 31, 2020, 570,000 common shares remained available for repurchase under its existing authorization.

Dividend to be paid May 22

The Board of Directors declared a quarterly cash dividend of $0.22 per common share payable May 22, 2020, to shareholders of record at the close of business on May 15, 2020. The dividend represents an annual dividend of 5.97 percent based on the First Defiance common stock closing price on April 24, 2020. First Defiance has approximately 37,285,730 common shares outstanding.

Business Client Support Efforts

As a part of the CARES Act, the Payment Protection Program (“PPP”) was created as a loan program at the Small Business Administration (“SBA”) designed to provide a direct incentive for small businesses to keep their workers on the payroll. First Federal Bank is actively participating in the PPP program for clients and, through April 27, 2020, it has approved and the SBA has authorized approximately 2,200 loan requests for approximately $400 million under this program. First Federal Bank has also been approved to participate in the Federal Reserve Board’s Payment Protection Program Liquidity Facility and intends to utilize that to fund PPP loans. Separately, First Federal Bank has partnered with JobsOhio on a loan program designed to support existing Ohio small business clients with maintaining operations and payroll during the COVID-19 pandemic. The partnership enables First Federal Bank to provide additional financing on favorable terms for local Ohio business customers in good standing that would otherwise not be able to access this credit on such terms due to the COVID-19 crisis.

Conference call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. ET on Wednesday, April 29, 2020, to discuss the earnings results and business trends. The conference call may be accessed by calling 1-877-444-1726. In addition, a live webcast may be accessed at https://services.choruscall.com/links/fdef200429.html. The replay of the conference call will be available at www.fdef.com until April 28, 2021, at 9:00 a.m. ET.

First Defiance Financial Corp.

First Defiance Financial Corp. (Nasdaq: FDEF), headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the Midwest and First Insurance Group. United Community Financial Corp. merged with First Defiance Financial Corp. on January 31, 2020. The combined organization operates 77 branches, 12 loan offices and 3 wealth offices in Ohio, Michigan, Indiana, Pennsylvania, and West Virginia. Currently, 33 branches, 3 wealth offices and 11 loan production offices continue to operate as Home Savings Bank. First Insurance Group is a full-service insurance agency with ten offices in Ohio including James & Sons Insurance in Youngstown, Ohio.

For more information, visit the company’s website at www.fdef.com.

Financial Statements and Highlights Follow-

Safe Harbor Statement

This news release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Exchange Act of 1934, as amended. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of First Defiance Financial Corp. and its management, and specifically include statements regarding: changes in economic conditions; the nature, extent and timing of governmental actions and reforms; future movements of interest rates; the ability to benefit from a changing interest rate environment; the production levels of mortgage loan generation; the ability to continue to grow loans and deposits; the ability to sustain credit quality ratios at current or improved levels; continued strength in the market area for First Federal Bank of the Midwest; the ability to sell real estate owned properties; and the ability to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including: impacts from the novel coronavirus (COVID-19) pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis; the effects of various governmental responses to the COVID-19 pandemic; those inherent in general and local banking, insurance and mortgage conditions; competitive factors specific to markets in which First Defiance and its subsidiaries operate; future interest rate levels; legislative and regulatory decisions or capital market conditions; and other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the year ended December 31, 2019. One or more of these factors have affected or could in the future affect First Defiance’s business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this news release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by First Defiance or any other persons, that our objectives and plans will be achieved. All forward-looking statements made in this news release are based on information presently available to the management of First Defiance and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. As required by U.S. GAAP, First Defiance will evaluate the impact of subsequent events through the issuance date of its December 31, 2019, consolidated financial statements as part of its Annual Report on Form 10-K to be filed with the SEC. Accordingly, subsequent events could occur that may cause First Defiance to update its critical accounting estimates and to revise its financial information from that which is contained in this news release.

Non-GAAP Reporting Measures

We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider core net income and core pre-tax pre-provision income to be useful supplemental measures of our operating performance. We define core net income as net income excluding the after-tax impact of acquisition related charges. We define core pre-tax pre-provision income as pre-tax pre-provision income excluding the pre-tax impact of acquisition related charges. We believe that these metrics are useful supplemental measures of operating performance because investors and equity analysts may use these measures to compare the operating performance of the Company between periods or as compared to other financial institutions or other companies on a consistent basis without having to account for one-time acquisition related charges. Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and ratings agencies in the valuation, comparison, rating and investment recommendations of companies. Our management uses these financial measures to facilitate internal and external comparisons to historical operating results and in making operating decisions. Additionally, they are utilized by the Board of Directors to evaluate management. The supplemental reporting measures do not represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental reporting measures, as defined by us, may not be comparable to similarly entitled items reported by other financial institutions or other companies. Please see the exhibits for reconciliations of our supplemental reporting measures.

Consolidated Balance Sheets (Unaudited)
First Defiance Financial Corp.
		March 31,					December 31,
(in thousands)		2020					2019
Assets
Cash and cash equivalents
Cash and amounts due from depository institutions		$	79,491				$	46,254
Interest-bearing deposits			66,217					85,000
			145,708					131,254
Securities available-for sale, carried at fair value			534,206					283,448
Loans			5,113,917					2,777,564
Allowance for loan losses			(85,859	)				(31,243	)
Loans, net			5,028,058					2,746,321
Loans held for sale			85,594					18,008
Mortgage servicing rights			15,742					10,267
Accrued interest receivable			19,048					10,244
Federal Home Loan Bank stock			89,252					11,915
Bank Owned Life Insurance			142,259					75,544
Office properties and equipment			59,870					39,563
Real estate and other assets held for sale			548					100
Goodwill			317,520					100,069
Core deposit and other intangibles			35,540					3,772
Other assets			67,541					38,487
Total Assets		$	6,540,886				$	3,468,992
Liabilities and Stockholders’ Equity
Non-interest-bearing deposits		$	1,041,315				$	630,359
Interest-bearing deposits			3,952,833					2,239,966
Total deposits			4,994,148					2,870,325
Advances from Federal Home Loan Bank			486,000					85,063
Notes payable and other interest-bearing liabilities			1,961					2,999
Subordinated debentures			36,083					36,083
Advance payments by borrowers for tax and insurance			8,702					5,491
Deferred taxes			6,268					905
Other liabilities			91,365					41,959
Total Liabilities			5,624,527					3,042,825
Stockholders’ Equity
Preferred stock			-					-
Common stock, net			306					127
Additional paid-in-capital			684,441					161,955
Accumulated other comprehensive income (loss)			12,068					4,595
Retained earnings			299,297					329,175
Treasury stock, at cost			(79,753	)				(69,685	)
Total stockholders’ equity			916,359					426,167
Total Liabilities and Stockholders’ Equity		$	6,540,886				$	3,468,992

Consolidated Statements of Income (Unaudited)
First Defiance Financial Corp.
			Three Months Ended
			March 31,
(in thousands, except per share amounts)			2020						2019
Interest Income:
Loans			$	51,460					$	31,214
Investment securities				2,717						2,205
Interest-bearing deposits				230						285
FHLB stock dividends				115						215
Total interest income				54,522						33,919
Interest Expense:
Deposits				7,771						5,005
FHLB advances and other				1,006						276
Subordinated debentures				273						364
Notes Payable				9						4
Total interest expense				9,059						5,649
Net interest income				45,463						28,270
Provision for loan losses				43,786						212
Net interest income after provision for loan losses				1,677						28,058
Non-interest Income:
Service fees and other charges				5,183						3,007
Mortgage banking income				848						1,841
Gain on sale of non-mortgage loans				234						89
Gain on sale of securities				-						-
Insurance commissions				5,155						4,115
Trust income				838						523
Income from Bank Owned Life Insurance				781						392
Other non-interest income				960						846
Total Non-interest Income				13,999						10,813
Non-interest Expense:
Compensation and benefits				17,585						14,085
Occupancy				3,731						2,241
FDIC insurance premium				492						273
Financial institutions tax				834						556
Data processing				3,040						2,297
Amortization of intangibles				1,245						299
Acquisition related charges				11,486						-
Other non-interest expense				5,355						5,115
Total Non-interest Expense				43,768						24,866
Income (loss) before income taxes				(28,092	)					14,005
Income tax expense (benefit)				(5,610	)					2,523
Net Income (Loss)			$	(22,482	)				$	11,482
Earnings per common share:
Basic			$	(0.71	)				$	0.57
Diluted			$	(0.71	)				$	0.57
Average Shares Outstanding:
Basic				31,642						20,014
Diluted				31,642						20,095

Financial Summary and Comparison (Unaudited)
First Defiance Financial Corp.
		Three Months Ended
		March 31,
(dollars in thousands, except per share data)		2020				2019				% change
Summary of Operations
Tax-equivalent interest income (2)		$	54,773			$	34,166			60.3	%
Interest expense			9,059				5,649			60.4
Tax-equivalent net interest income (2)			45,714				28,517			60.3
Provision for loan losses			43,786				212			20,553.8
Core provision for loan losses (4)			17,837				212			8,313.7
Investment securities gains			-				-			-
Non-interest income (excluding securities gains/losses)			13,999				10,813			29.5
Non-interest expense			43,768				24,866			76.0
Core non-interest expense (4)			32,282				24,866			29.8
Income tax expense (benefit)			(5,610	)			2,523			(322.4	)
Net income (loss)			(22,482	)			11,482			(295.8	)
Core net income (4)			7,470				11,482			(34.9	)
Tax equivalent adjustment (2)			251				247			1.6
At Period End
Assets			6,540,886				3,221,249			103.1
Earning assets			5,889,186				2,934,860			100.7
Loans			5,113,917				2,548,968			100.6
Allowance for loan losses			85,859				28,164			204.9
Deposits			4,994,148				2,685,792			85.9
Stockholders’ equity			916,359				395,789			131.5
Average Balances
Assets			5,357,598				3,183,012			68.3
Earning assets			4,862,532				2,871,340			69.3
Loans			4,317,857				2,517,283			71.5
Deposits and interest-bearing liabilities			4,488,003				2,742,626			63.6
Deposits			4,240,053				2,642,158			60.5
Stockholders’ equity			787,519				395,138			99.3
Stockholders’ equity / assets			14.70	%			12.41	%		18.4
Per Common Share Data
Net Income (Loss)
Basic		$	(0.71	)		$	0.57			(224.6	)
Diluted			(0.71	)			0.57			(224.6	)
Core diluted (4)			0.24				0.57			(57.9	)
Dividends			0.22				0.19			15.8
Market Value:
High		$	32.05			$	31.30			2.4
Low			10.98				24.12			(54.5	)
Close			14.74				28.74			(48.7	)
Common Book Value			24.58				20.08			22.4
Tangible Common Book Value (1)			15.11				14.87			1.6
Shares outstanding, end of period (000)			37,288				19,713			89.2
Performance Ratios (annualized)
Tax-equivalent net interest margin (2)			3.78	%			4.03	%		(6.1	)
Return on average assets			-1.69	%			1.46	%		(215.4	)
Core return on average assets (4)			0.56	%			1.46	%		(61.7	)
Return on average equity			-11.48	%			11.78	%		(197.4	)
Core return on average equity (4)			3.82	%			11.78	%		(67.6	)
Efficiency ratio (3)			73.30	%			63.22	%		15.9
Core efficiency ratio (4)			54.06	%			63.22	%		(14.5	)
Effective tax rate			19.97	%			18.01	%		10.9
Dividend payout ratio (core)			91.67	%			33.33	%		175.0

(1)	Tangible common book value = total stockholders' equity less the sum of goodwill, core deposit and other intangibles, and preferred stock divided by shares outstanding at the end of the period.
(2)	Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 21%.
(3)	Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains or losses, net.
(4)	Core items exclude the impact of acquisition related charges and provision. See non-GAAP reconciliations.
NM Percentage change not meaningful

Mortgage Banking
		Three Months Ended
		March 31,
(dollars in thousands)		2020				2019
Revenue from sales and servicing of mortgage loans:
Gain from sale of mortgage loans		$	4,902			$	1,301
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue			1,594				939
Amortization of mortgage servicing rights			(1,163	)			(286	)
Mortgage servicing rights valuation adjustments			(4,485	)			(113	)
			(4,054	)			540
Total revenue from sale and servicing of mortgage loans		$	848			$	1,841
Mortgage servicing rights:
Balance at beginning of period		$	10,801			$	10,419
Loans sold, servicing retained			1,376				278
Mortgage servicing rights acquired			9,747				-
Amortization			(1,163	)			(286	)
Carrying value before valuation allowance at end of period			20,761				10,411
Valuation allowance:
Balance at beginning of period			(534	)			(300	)
Impairment recovery (charges)			(4,485	)			(113	)
Balance at end of period			(5,019	)			(413	)
Net carrying value at end of period		$	15,742			$	9,998
Goodwill and Purchase Price Accounting
Deal Value:
Shares issued (000s)			17,927
1/31/20 Price		$	29.39
Stock value			526,875
Cash in lieu of fractional shares			132
Total value		$	527,007
Allocation:
Cash and cash equivalents		$	52,580
Securities available-for sale			262,753			(1)
Net loans, including loans held for sale and allowance			2,340,701			(2)
Federal Home Loan Bank stock			12,753
Office properties and equipment			21,216			(3)
Core deposit and other intangibles			33,014			(4)
Bank Owned Life Insurance			65,934
Mortgage servicing rights			9,747			(5)
Other assets			34,452
Non-interest-bearing deposits			(430,921	)
Interest-bearing deposits			(1,651,669	)		(6)
Advances from Federal Home Loan Bank			(381,000	)
Other liabilities			(60,004	)
Net assets			309,556
Goodwill			217,451
Total value		$	527,007

(1) Includes $13.8 million of accumulated losses to be amortized against interest income over ~7 years.

(2) Includes $27.2 million non-PCD credit mark down to be accreted into interest income over ~5 years, $8.8 million total rate mark up to be amortized against interest income over ~5 years, $19.1 million elimination of allowance and $7.7 million PCD credit mark addition to allowance.

(3) Includes $1.1 million mark down that reduces future depreciation.

(4) Includes $29.3 million of core deposit intangible to be amortized to expense using sum-of-the-years digits over 10 years and $3.7 million of insurance/trust/wealth intangibles to be amortized to expense over ~10 years.

(5) Includes $3.0 million mark up to be amortized against mortgage banking income over ~8.5 years.

(6) Includes $7.1 million rate mark up on time-based deposits to be accreted against interest expense over ~2 years based on maturities.

Yield Analysis
First Defiance Financial Corp.
	Three Months Ended March 31,
	(dollars in thousands)
	2020										2019
	Average						Yield				Average						Yield
	Balance			Interest(1)			Rate(2)				Balance			Interest(1)			Rate(2)
Interest-earning assets:
Loans receivable	$	4,317,857		$	51,485		4.80	%			$	2,517,283		$	31,238		5.03	%
Securities		449,744			2,943		2.69	%	(3	)		295,824			2,428		3.31	%	(3	)
Interest Bearing Deposits		68,980			230		1.34	%				44,752			285		2.58	%
FHLB stock		25,951			115		1.78	%				13,481			215		6.47	%
Total interest-earning assets		4,862,532			54,773		4.54	%				2,871,340			34,166		4.82	%
Non-interest-earning assets		495,066										311,672
Total assets	$	5,357,598									$	3,183,012
Deposits and Interest-bearing liabilities:
Interest bearing deposits	$	3,343,833		$	7,771		0.93	%			$	2,061,023		$	5,005		0.98	%
FHLB advances and other		209,508			1,006		1.93	%				58,954			276		1.90	%
Subordinated debentures		36,083			273		3.04	%				36,083			364		4.09	%
Notes payable		2,359			9		1.53	%				5,431			4		0.30	%
Total interest-bearing liabilities		3,591,783			9,059		1.01	%				2,161,491			5,649		1.06	%
Non-interest bearing deposits		896,220			-		-					581,135			-		-
Total including non-interest-bearing demand deposits		4,488,003			9,059		0.81	%				2,742,626			5,649		0.84	%
Other non-interest-bearing liabilities		82,076										45,248
Total liabilities		4,570,079										2,787,874
Stockholders' equity		787,519										395,138
Total liabilities and stockholders' equity	$	5,357,598									$	3,183,012
Net interest income; interest rate spread				$	45,714		3.53	%						$	28,517		3.76	%
Net interest margin (4)							3.78	%									4.03	%
Average interest-earning assets to average interest bearing liabilities							135	%									133	%

(1)	Interest on certain tax exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21%.
(2)	Annualized.
(3)	Securities yield = annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.
(4)	Net interest margin is tax equivalent net interest income divided by average interest-earning assets.

Selected Quarterly Information
First Defiance Financial Corp.
(dollars in thousands, except per share data)		1st Qtr 2020				4th Qtr 2019				3rd Qtr 2019				2nd Qtr 2019				1st Qtr 2019
Summary of Operations
Tax-equivalent interest income (1)		$	54,773			$	36,473			$	35,922			$	35,490			$	34,166
Interest expense			9,059				6,743				6,791				6,252				5,649
Tax-equivalent net interest income (1)			45,714				29,730				29,131				29,238				28,517
Provision for loan losses			43,786				1,084				1,327				282				212
Core provision for loan losses (3)			17,837				1,084				1,327				282				212
Investment securities gains, net of impairment			-				13				11				-				-
Non-interest income (excluding securities gains/losses)			13,999				11,803				11,831				10,486				10,813
Non-interest expense			43,768				24,760				23,203				24,235				24,866
Core non-interest expense (3)			32,282				23,878				22,663				24,235				24,866
Income tax expense (benefit)			(5,610	)			2,953				3,033				2,759				2,523
Net income (loss)			(22,482	)			12,517				13,171				12,199				11,482
Core net income (3)			7,470				13,214				13,598				12,199				11,482
Tax equivalent adjustment (1)			251				232				239				249				247
At Period End
Total assets		$	6,540,886			$	3,468,992			$	3,350,724			$	3,277,552			$	3,221,249
Earning assets			5,889,186				3,175,935				3,045,659				2,980,243				2,934,860
Loans			5,113,917				2,777,564				2,665,300				2,624,219				2,548,968
Allowance for loan losses			85,859				31,243				30,250				28,934				28,164
Deposits			4,994,148				2,870,325				2,760,615				2,680,637				2,685,792
Stockholders’ equity			916,359				426,167				418,046				407,216				395,789
Stockholders’ equity / assets			14.01	%			12.29	%			12.48	%			12.42	%			12.29	%
Goodwill			317,520				100,069				100,069				98,569				98,569
Average Balances
Total assets		$	5,357,598			$	3,425,097			$	3,303,013			$	3,223,997			$	3,183,012
Earning assets			4,862,532				3,107,224				2,985,498				2,914,587				2,871,340
Loans			4,317,857				2,688,519				2,624,314				2,561,341				2,517,283
Deposits and interest-bearing liabilities			4,488,003				2,954,049				2,843,079				2,781,216				2,742,626
Deposits			4,240,053				2,830,043				2,718,632				2,678,060				2,642,158
Stockholders’ equity			787,519				420,352				411,041				398,612				395,138
Stockholders’ equity / assets			14.70	%			12.27	%			12.44	%			12.36	%			12.41	%
Per Common Share Data
Net Income (Loss):
Basic		$	(0.71	)		$	0.63			$	0.67			$	0.62			$	0.57
Diluted			(0.71	)			0.63				0.66				0.61				0.57
Core diluted (3)			0.24				0.66				0.68				0.61				0.57
Dividends			0.22				0.22				0.19				0.19				0.19
Market Value:
High		$	32.05			$	32.39			$	29.44			$	30.44			$	31.30
Low			10.98				27.77				25.50				26.59				24.12
Close			14.74				31.32				28.97				28.57				28.74
Common Book Value			24.58				21.60				21.19				20.65				20.08
Shares outstanding, end of period (in thousands)			37,288				19,730				19,729				19,723				19,713
Performance Ratios (annualized)
Tax-equivalent net interest margin (1)			3.78	%			3.80	%			3.88	%			4.03	%			4.03	%
Return on average assets			-1.69	%			1.45	%			1.58	%			1.52	%			1.46	%
Core return on average assets (3)			0.56	%			1.53	%			1.63	%			1.52	%			1.46	%
Return on average equity			-11.48	%			11.81	%			12.71	%			12.28	%			11.78	%
Core return on average equity (3)			3.82	%			12.47	%			13.12	%			12.28	%			11.78	%
Efficiency ratio (2)			73.30	%			59.62	%			56.65	%			61.01	%			63.22	%
Core efficiency ratio (3)			54.06	%			57.49	%			55.33	%			61.01	%			63.22	%
Effective tax rate			19.97	%			19.09	%			18.72	%			18.44	%			18.01	%
Common dividend payout ratio (core)			91.67	%			34.92	%			28.36	%			30.65	%			33.33	%

(1)	Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 21%.
(2)	Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains, net.
(3)	Core items exclude the impact of acquisition related charges and provision. See non-GAAP reconciliations.

Selected Quarterly Information
First Defiance Financial Corp.
(dollars in thousands, except per share data)		1st Qtr 2020					4th Qtr 2019					3rd Qtr 2019					2nd Qtr 2019					1st Qtr 2019
Loan Portfolio Composition
One to four family residential real estate		$	1,265,901				$	324,773				$	330,369				$	322,123				$	321,644
Construction			521,442					305,305					308,061					335,847					304,241
Commercial real estate			2,200,266					1,506,026					1,430,919					1,411,463					1,394,500
Commercial			897,865					578,071					537,806					530,528					509,627
Consumer finance			137,679					37,649					36,644					35,350					34,262
Home equity and improvement			301,146					122,864					123,871					125,860					124,450
Total loans			5,324,299					2,874,688					2,767,670					2,761,171					2,688,724
Less:
Undisbursed loan funds			206,236					94,865					100,260					134,794					137,742
Deferred loan origination fees			4,146					2,259					2,110					2,158					2,014
Allowance for loan loss			85,859					31,243					30,250					28,934					28,164
Net Loans		$	5,028,058				$	2,746,321				$	2,635,050				$	2,595,285				$	2,520,804
Allowance for loan loss activity
Beginning allowance		$	31,243				$	30,250				$	28,934				$	28,164				$	28,331
CECL adoption			2,354
Acquisition related allowance/provision (non PCD)			25,949
Acquisition related allowance/goodwill (PCD)			7,698
Provision for loan losses excluding acquisition amounts			17,837					1,084					1,327					282					212
Net recoveries (charge-offs)			778					(91	)				(11	)				488					(379	)
Ending allowance		$	85,859				$	31,243				$	30,250				$	28,934				$	28,164
Credit Quality
Total non-performing loans (1)		$	32,593				$	13,459				$	14,677				$	15,334				$	17,645
Real estate owned (REO)			548					100					-					-					941
Total non-performing assets (2)		$	33,141				$	13,559				$	14,677				$	15,334				$	18,586
Net charge-offs (recoveries)			(778	)				91					11					(488	)				379
Restructured loans, accruing (3)			7,474					8,427					10,334					10,308					11,908
Allowance for loan losses / loans			1.68	%				1.12	%				1.13	%				1.10	%				1.10	%
Allowance for loan losses / non-performing assets			259.07	%				230.42	%				206.10	%				188.69	%				151.53	%
Allowance for loan losses / non-performing loans			263.43	%				232.13	%				206.10	%				188.69	%				159.61	%
Non-performing assets / loans plus REO			0.65	%				0.49	%				0.55	%				0.58	%				0.73	%
Non-performing assets / total assets			0.51	%				0.39	%				0.44	%				0.47	%				0.58	%
Net charge-offs / average loans (annualized)			-0.07	%				0.01	%				0.00	%				-0.08	%				0.06	%
Deposit Balances
Non-interest-bearing demand deposits		$	1,041,315				$	630,359				$	604,129				$	584,735				$	586,033
Interest-bearing demand deposits and money market			2,069,723					1,198,012					1,124,208					1,088,694					1,107,511
Savings deposits			606,508					303,166					294,594					304,051					300,244
Retail time deposits less than $250,000			1,091,038					631,253					634,737					610,345					601,012
Retail time deposits greater than $250,000			185,564					107,535					102,947					92,812					90,992
Total deposits		$	4,994,148				$	2,870,325				$	2,760,615				$	2,680,637				$	2,685,792

(1)	Non-performing loans consist of non-accrual loans.
(2)	Non-performing assets are non-performing loans plus real estate and other assets acquired by foreclosure or deed-in-lieu thereof.
(3)	Accruing restructured loans are loans with known credit problems that are not contractually past due and therefore are not included in non-performing loan.

Loan Delinquency Information
First Defiance Financial Corp.
(dollars in thousands)		Total Balance			Current			30 to 89 days past due			Non Accrual Loans
March 31, 2020
One to four family residential real estate		$	1,265,901		$	1,253,304		$	5,890		$	6,707
Construction			521,442			521,442			-			-
Commercial real estate			2,200,266			2,180,660			220			19,386
Commercial			897,865			893,605			299			3,961
Consumer finance			137,679			135,727			712			1,240
Home equity and improvement			301,146			296,330			3,517			1,299
Total loans		$	5,324,299		$	5,281,068		$	10,638		$	32,593
December 31, 2019
One to four family residential real estate		$	324,773		$	321,058		$	1,298		$	2,417
Construction			305,305			305,305			-			-
Commercial real estate			1,506,026			1,497,845			546			7,635
Commercial			578,071			574,593			519			2,959
Consumer finance			37,649			37,444			205			-
Home equity and improvement			122,864			121,211			1,205			448
Total loans		$	2,874,688		$	2,857,456		$	3,773		$	13,459
March 31, 2019
One to four family residential real estate		$	321,644		$	317,684		$	776		$	3,184
Construction			304,241			304,241			-			-
Commercial real estate			1,394,500			1,384,815			225			9,460
Commercial			509,627			504,722			547			4,358
Consumer finance			34,262			34,076			148			38
Home equity and improvement			124,450			123,694			151			605
Total loans		$	2,688,724		$	2,669,232		$	1,847		$	17,645

Non-GAAP Reconciliations
First Defiance Financial Corp.
(In thousands, except per share and ratio data)		1st Qtr 2020				4th Qtr 2019				3rd Qtr 2019				2nd Qtr 2019				1st Qtr 2019
Acquisition related charges (pre-tax)		$	11,486			$	882			$	540			$	-			$	-
Less: Tax benefit of acquisition related charges			2,034				185				113				-				-
Acquisition related charges (after-tax)		$	9,452			$	697			$	427			$	-			$	-
Total non-interest expenses		$	43,768			$	24,760			$	23,203			$	24,235			$	24,866
Less: Acquisition related charges (pre-tax)			11,486				882				540				-				-
Core non-interest expenses		$	32,282			$	23,878			$	22,663			$	24,235			$	24,866
Acquisition related provision (pre-tax)		$	25,949			$	-			$	-			$	-			$	-
Less: Tax benefit of acquisition related provision			5,449				-				-				-				-
Acquisition related provision (after-tax)		$	20,500			$	-			$	-			$	-			$	-
Provision for loan losses		$	43,786			$	1,084			$	1,327			$	282			$	212
Less: Acquisition related provision (pre-tax)			25,949				-				-				-				-
Core provision for loan losses		$	17,837			$	1,084			$	1,327			$	282			$	212
Tax-equivalent net interest income		$	45,714			$	29,730			$	29,131			$	29,238			$	28,517
Non-interest income (excluding securities gains/losses)			13,999				11,803				11,831				10,486				10,813
Total revenues			59,713				41,533				40,962				39,724				39,330
Core non-interest expenses		$	32,282			$	23,878			$	22,663			$	24,235			$	24,866
Core efficiency ratio			54.06	%			57.49	%			55.33	%			61.01	%			63.22	%
Income (loss) before income taxes		$	(28,092	)		$	15,470			$	16,204			$	14,958			$	14,005
Add: Provision for loan losses			43,786				1,084				1,327				282				212
Pre-tax pre-provision income			15,694				16,554				17,531				15,240				14,217
Add: Acquisition related charges (pre-tax)			11,486				882				540				-				-
Core pre-tax pre-provision income		$	27,180			$	17,436			$	18,071			$	15,240			$	14,217
Average total assets		$	5,357,598			$	3,425,097			$	3,303,013			$	3,223,997			$	3,183,012
Core pre-tax pre-provision return on average assets			2.04	%			2.02	%			2.17	%			1.90	%			1.81	%
Net income (loss)		$	(22,482	)		$	12,517			$	13,171			$	12,199			$	11,482
Add: Acquisition related provision (after-tax)			20,500				-				-				-				-
Add: Acquisition related charges (after-tax)			9,452				697				427				-				-
Core net income		$	7,470			$	13,214			$	13,598			$	12,199			$	11,482
Diluted shares - Reported			31,642				19,895				19,875				19,860				20,095
Add: Dilutive shares for core net income			121				-				-				-				-
Diluted shares - Core			31,763				19,895				19,875				19,860				20,095
Core diluted EPS		$	0.24			$	0.66			$	0.68			$	0.61			$	0.57
Average total assets		$	5,357,598			$	3,425,097			$	3,303,013			$	3,223,997			$	3,183,012
Core return on average assets			0.56	%			1.53	%			1.63	%			1.52	%			1.46	%
Average total equity		$	787,519			$	420,352			$	411,041			$	398,612			$	395,138
Core return on average equity			3.82	%			12.47	%			13.12	%			12.28	%			11.78	%

 

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