XNAS:FDEF First Defiance Financial Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period Ended March 31, 2012

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

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

601 Clinton Street, Defiance, Ohio   43512
(Address of principal executive office)   (Zip Code)

Registrant’s telephone number, including area code: (419) 782-5015

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

 

Large accelerated filer  ¨

 

Accelerated filer  x

 
 

Non-accelerated filer  ¨

 

Smaller reporting company  ¨

 

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 9,728,491 shares outstanding at May 4, 2012.


Table of Contents

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, 2012 and December 31, 2011

     2   
 

Consolidated Condensed Statements of Income - Three months ended March 31, 2012 and 2011

     4   
 

Consolidated Condensed Statements of Comprehensive Income - Three months ended March 31, 2012 and 2011

     5   
 

Consolidated Condensed Statements of Changes in Stockholders’ Equity - Three months ended March 31, 2012 and 2011

     6   
 

Consolidated Condensed Statements of Cash Flows - Three months ended March 31, 2012 and 2011

     7   
 

Notes to Consolidated Condensed Financial Statements

     9   

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

     48   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     68   

Item 4.

 

Controls and Procedures

     68   

PART II-OTHER INFORMATION:

  

Item 1.

 

Legal Proceedings

     69   

Item 1A.

 

Risk Factors

     69   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     69   

Item 3.

 

Defaults upon Senior Securities

     69   

Item 4.

 

Mine Safety Disclosures

     69   

Item 5.

 

Other Information

     69   

Item 6.

 

Exhibits

     69   
 

Signatures

     71   

 

1


Table of Contents

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,
2012
     December 31,
2011
 

Assets

     

Cash and cash equivalents:

     

Cash and amounts due from depository institutions

   $ 32,882       $ 31,931   

Federal funds sold

     217,000         143,000   
  

 

 

    

 

 

 
     249,882         174,931   

Securities:

     

Available-for-sale, carried at fair value

     242,964         232,919   

Held-to-maturity, carried at amortized cost (fair value $654 and $672 at March 31, 2012 and December 31, 2011, respectively)

     644         661   
  

 

 

    

 

 

 
     243,608         233,580   

Loans held for sale

     11,201         13,841   

Loans receivable, net of allowance of $28,833 at March 31, 2012 and $33,254 at December 31, 2011, respectively

     1,445,122         1,453,822   

Accrued interest receivable

     6,243         6,142   

Federal Home Loan Bank stock

     20,655         20,655   

Bank owned life insurance

     36,128         35,908   

Premises and equipment

     40,548         40,045   

Real estate and other assets held for sale

     3,408         3,628   

Goodwill

     61,525         61,525   

Core deposit and other intangibles

     5,776         6,151   

Mortgage servicing rights

     8,498         8,690   

Deferred taxes

     —           629   

Other assets

     9,670         8,643   
  

 

 

    

 

 

 

Total assets

   $ 2,142,264       $ 2,068,190   
  

 

 

    

 

 

 

 

(continued)

 

2


Table of Contents

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

 

 

 

     March 31,
2012
    December 31,
2011
 

Liabilities and stockholders’ equity

    

Liabilities:

    

Deposits

   $ 1,671,370      $ 1,596,241   

Advances from the Federal Home Loan Bank

     81,830        81,841   

Subordinated debentures

     36,083        36,083   

Securities sold under repurchase agreements

     54,609        60,386   

Advance payments by borrowers

     1,316        1,402   

Deferred taxes

     404        —     

Other liabilities

     15,288        14,110   
  

 

 

   

 

 

 

Total liabilities

     1,860,900        1,790,063   

Stockholders’ equity:

    

Preferred stock, $.01 par value per share: 37,000 shares authorized and issued with a liquidation preference of $37,231, net of discount

     36,687        36,641   

Preferred stock, $.01 par value per share:

    

4,963,000 shares authorized; no shares issued

     —          —     

Common stock, $.01 par value per share:

    

25,000,000 shares authorized; 12,739,496 and 12,739,496 shares issued and 9,728,491 and 9,726,243 shares outstanding, respectively

     127        127   

Common stock warrant

     878        878   

Additional paid-in capital

     135,888        135,825   

Accumulated other comprehensive income (loss), net of tax of $2,121 and $2,153, respectively

     3,937        3,997   

Retained earnings

     151,163        148,010   

Treasury stock, at cost, 3,011,005 and 3,013,253 shares respectively

     (47,316     (47,351
  

 

 

   

 

 

 

Total stockholders’ equity

     281,364        278,127   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,142,264      $ 2,068,190   
  

 

 

   

 

 

 

See accompanying notes

 

3


Table of Contents

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

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

 

 

 

     Three Months Ended
March 31,
 
     2012     2011  

Interest Income

    

Loans

   $ 18,650      $ 20,224   

Investment securities:

    

Taxable

     1,111        1,029   

Non-taxable

     672        569   

Interest-bearing deposits

     92        101   

FHLB stock dividends

     229        235   
  

 

 

   

 

 

 

Total interest income

     20,754        22,158   

Interest Expense

    

Deposits

     2,369        3,594   

FHLB advances and other

     751        906   

Subordinated debentures

     331        326   

Securities sold under repurchase agreements

     104        130   
  

 

 

   

 

 

 

Total interest expense

     3,555        4,956   
  

 

 

   

 

 

 

Net interest income

     17,199        17,202   

Provision for loan losses

     3,503        2,833   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     13,696        14,369   

Non-interest Income

    

Service fees and other charges

     2,671        2,617   

Insurance commission income

     2,536        1,655   

Mortgage banking income

     2,445        1,288   

Gain on sale of non-mortgage loans

     9        104   

Gain on sale or call of securities

     43        49   

Other-than-temporary impairment (OTTI) losses on investment securities

    

Total impairment losses on investment securities

     —          (13

Losses recognized in other comprehensive income

     —          11   
  

 

 

   

 

 

 

Net impairment loss recognized in earnings

     —          (2

Trust income

     153        148   

Income from Bank Owned Life Insurance

     220        237   

Other non-interest income

     342        (151
  

 

 

   

 

 

 

Total non-interest income

     8,419        5,945   

Non-interest Expense

    

Compensation and benefits

     8,465        7,834   

Occupancy

     1,788        1,852   

FDIC insurance premium

     669        913   

State franchise tax

     514        542   

Data processing

     1,169        1,061   

Amortization of intangibles

     375        344   

Other non-interest expense

     3,279        4,080   
  

 

 

   

 

 

 

Total non-interest expense

     16,259        16,626   
  

 

 

   

 

 

 

Income before income taxes

     5,856        3,688   

Federal income taxes

     1,703        1,028   
  

 

 

   

 

 

 

Net Income

   $ 4,153      $ 2,660   
  

 

 

   

 

 

 

Dividends accrued on preferred shares

   $ (462   $ (462

Accretion on preferred shares

   $ (46   $ (43
  

 

 

   

 

 

 

Net income applicable to common shares

   $ 3,645      $ 2,155   
  

 

 

   

 

 

 

Earnings per common share (Note 6)

    

Basic

   $ 0.37      $ 0.25   

Diluted

   $ 0.37      $ 0.25   

Dividends declared per share (Note 5)

   $ 0.05      $ —     

Average common shares outstanding (Note 6)

    

Basic

     9,726        8,519   

Diluted

     9,970        8,671   

See accompanying notes

 

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FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

 

 

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

Net income

   $ 4,153      $ 2,660   

Other comprehensive income:

    

Unrealized gains/losses on securities:

    

Unrealized holding gains (losses) on securities arising during the period

     (49     1,207   

Reclassification adjustment for (gains) losses realized in income

     (43     (49

Other-than-temporary impairment losses on securities realized in income

     —          2   
  

 

 

   

 

 

 

Net unrealized gains (losses)

     (92     1,160   

Income tax effect

     32        (407
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (60     753   
  

 

 

   

 

 

 

Comprehensive income

   $ 4,093      $ 3,413   
  

 

 

   

 

 

 

 

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FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands)

 

 

 

     Preferred
Stock
     Common
Stock
     Common
Stock
Warrant
     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
 

Balance at January 1, 2012

   $ 36,641       $ 127       $ 878       $ 135,825      $ 3,997      $ 148,010      $ (47,351   $ 278,127   

Net income

     —           —           —           —          —          4,153        —          4,153   

Change in net unrealized gains and losses on available-for-sale securities

     —           —           —           —          (60     —          —          (60

Stock option expense

     —           —           —           34        —          —          —          34   

150 shares issued under stock option plan with no income tax benefit

     —           —           —           —          —          (1     2        1   

Restricted share activity under Stock Incentive Plans

     —           —           —           29        —          —          29        58   

211 shares issued direct purchases

     —           —           —           —          —          —          4        4   

Preferred Stock Dividends accrued

     —           —           —           —          —          (462     —          (462

Accretion on preferred shares

     46         —           —           —          —          (46     —          —     

Common stock dividends declared

     —           —           —           —          —          (491     —          (491
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 36,687       $ 127       $ 878       $ 135,888      $ 3,937      $ 151,163      $ (47,316   $ 281,364   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2011

   $ 36,463       $ 127       $ 878       $ 140,845      $ (342   $ 134,988      $ (72,628   $ 240,331   

Net income

     —           —           —           —          —          2,660        —          2,660   

Change in net unrealized gains and losses on available-for-sale securities

     —           —           —           —          753        —          —          753   

Stock option expense

     —           —           —           39        —          —          —          39   

1,600,800 shares issued capital stock

     —           —           —           (5,338     —          —          25,156        19,818   

Restricted share activity under Stock Incentive Plans

     —           —           —           (75     —          —          75        —     

466 shares issued direct purchases

     —           —           —           (1     —          —          7        6   

Preferred Stock Dividends accrued

     —           —           —           —          —          (462     —          (462

Accretion on preferred shares

     43         —           —           —          —          (43     —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $ 36,506       $ 127       $ 878       $ 135,470      $ 411      $ 137,143      $ (47,390   $ 263,145   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

 

 

 

     Three Months Ended
March 31,
 
     2012     2011  

Operating Activities

    

Net income

   $ 4,153      $ 2,660   

Items not requiring (providing) cash

    

Provision for loan losses

     3,503        2,833   

Depreciation

     832        866   

Amortization of mortgage servicing rights, net of impairment recoveries

     942        283   

Amortization of core deposit and other intangible assets

     375        344   

Net amortization of premiums and discounts on loans and deposits

     213        256   

Amortization of premiums and discounts on securities

     164        (60

Change in deferred taxes

     1,064        (48

Proceeds from the sale of loans held for sale

     109,551        53,483   

Originations of loans held for sale

     (105,117     (55,626

Gain from sale of loans

     (2,553     (830

OTTI losses on investment securities

     —          2   

Gain from sale or call of securities

     (43     (49

Loss on sale or write-down of real estate and other assets held for sale

     197        581   

Stock option expense

     34        39   

Restricted stock expense

     58        —     

Income from bank owned life insurance

     (220     (237

Changes in:

    

Accrued interest receivable

     (101     (160

Other assets

     (1,027     (19

Other liabilities

     (34     2,628   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     11,991        6,946   

Investing Activities

    

Proceeds from maturities of held-to-maturity securities

     17        21   

Proceeds from maturities, calls and pay-downs of available-for-sale securities

     16,376        7,083   

Proceeds from sale of real estate and other assets held for sale

     286        1,638   

Proceeds from the sale of available-for-sale securities

     218        1,982   

Proceeds from sale of non-mortgage loans

     9        1,976   

Purchases of available-for-sale securities

     (25,639     (22,057

Proceeds from sale of office properties and equipment

     —          12   

Purchases of portfolio mortgage loans

     —          (10,696

Purchases of premises and equipment, net

     (1,335     (226

Net decrease in loans receivable

     4,716        59,111   
  

 

 

   

 

 

 

Net cash provided by investing activities

     (5,352     38,844   

Financing Activities

    

Net increase in deposits and advance payments by borrowers

     75,048        16,523   

Repayment of Federal Home Loan Bank advances

     (11     (20,011

Increase (decrease) in securities sold under repurchase agreements

     (5,777     4,489   

Net cash received from common stock issuance

     —          19,824   

Proceeds from exercise of stock options

     1        —     

Proceeds from treasury stock purchases

     4        —     

Cash dividends paid on common stock

     (491     —     

Cash dividends paid on preferred stock

     (462     (462
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     68,312        20,363   
  

 

 

   

 

 

 

 

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Increase (decrease) in cash and cash equivalents

     74,951         66,153   

Cash and cash equivalents at beginning of period

     174,931         169,164   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 249,882       $ 235,317   
  

 

 

    

 

 

 

Supplemental cash flow information:

     

Interest paid

   $ 3,556       $ 5,047   
  

 

 

    

 

 

 

Income taxes paid

   $ —         $ —     
  

 

 

    

 

 

 

Transfers from loans to real estate and other assets held for sale

   $ 263       $ 1,778   
  

 

 

    

 

 

 

Transfers from loans held for sale to loans

   $ —         $ 7,213   
  

 

 

    

 

 

 

Securities traded but not yet settled

   $ 1,212       $ —     
  

 

 

    

 

 

 

See accompanying notes.

 

8


Table of Contents

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements

(Unaudited at March 31, 2012 and 2011)

 

 

1. Basis of Presentation

First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its two wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”) and First Insurance Group of the Midwest, Inc. (“First Insurance”). All significant intercompany transactions and balances are eliminated in consolidation.

First Federal is primarily engaged in attracting deposits from the general public and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository, trust and wealth management services. First Insurance is an insurance agency that does business in the Defiance, Archbold, Bryan and Bowling Green, Maumee and Oregon, Ohio areas, offering property and casualty, and group health and life insurance products.

The consolidated condensed statement of financial condition at December 31, 2011 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K.

The accompanying consolidated condensed financial statements as of March 31, 2012 and for the three month periods ended March 31, 2012 and 2011 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance’s 2011 Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2012 are not necessarily indicative of the results that may be expected for the entire year.

2. Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas where First Defiance uses estimates are the valuation of certain investment securities, the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, the determination of unrecognized income tax benefits, and the determination of post-retirement benefits.

 

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Earnings Per Common Share

Basic earnings per common share is computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, warrants, restricted stock awards or units and stock grants.

Newly Effective Accounting Standards

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities was not permitted. The amendments of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments of this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption was permitted because compliance with the amendments was already permitted. The amendments do not require any transition disclosures. The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The provisions of ASU No. 2011-08 permits an entity an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. ASU No. 2011-08 includes examples of events and circumstances that may indicate that a reporting unit’s fair value is less than its carrying amount. The provisions of ASU No. 2011-08 are effective for annual and interim goodwill

 

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impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted provided that the entity has not yet performed its annual impairment test for goodwill. The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to re-deliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 were not affected by ASU 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011 and did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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3. Fair Value

FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

   

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

   

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means.

 

   

Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Available for sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an

 

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independent pricing service which uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 1 include federal agency preferred stock securities. Securities in Level 2 include U.S. Government agencies, mortgage-backed securities, corporate bonds and municipal securities. The Company classifies its pooled trust preferred collateralized debt obligations as Level 3. The portfolio consists of collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies. Based on the lack of observable market data, the Company estimated fair values based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model which used appropriately adjusted discount rates reflecting credit and liquidity risks. The Company used an independent third party which is described further in Note 7.

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 in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Real Estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, established 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 between a range of 10% to 30% to account for various disposal costs and other factors than may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

 

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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, 2012    Level 1 Inputs      Level 2 Inputs     Level 3 Inputs      Total Fair
Value
 
     (In Thousands)  

Available for sale securities:

Obligations of U.S. Government corporations and agencies

   $ —         $ 19,955      $ —         $ 19,955   

U.S. treasury bonds

        2,007           2,007   

Mortgage-backed – residential

     —           70,583        —           70,583   

REMICs

     —           1,608        —           1,608   

Collateralized mortgage obligations

     —           65,074        —           65,074   

Trust preferred stock

     —           —          1,377         1,377   

Preferred stock

     114         —          —           114   

Corporate bonds

     —           8,591        —           8,591   

Obligations of state and political subdivisions

     —           73,655        —           73,655   

Mortgage banking derivative – asset

     —           1,037        —           1,037   

Mortgage banking derivative – liability

     —           (157     —           (157

 

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December 31, 2011    Level 1 Inputs      Level 2 Inputs     Level 3 Inputs      Total Fair
Value
 
     (In Thousands)  

Available for sale securities:

Obligations of U.S. Government corporations and agencies

   $ —         $ 17,085      $ —         $ 17,085   

U.S. treasury bonds

        2,010           2,010   

Mortgage-backed – residential

     —           70,716        —           70,716   

REMICs

     —           2,894        —           2,894   

Collateralized mortgage obligations

     —           59,009        —           59,009   

Trust preferred stock

     —           —          1,342         1,342   

Preferred stock

     108         —          —           108   

Corporate bonds

        8,252           8,252   

Obligations of state and political subdivisions

     —           71,503        —           71,503   

Mortgage banking derivative – asset

     —           865        —           865   

Mortgage banking derivative – liability

        (258        (258

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 and March 31, 2011:

 

     Fair Value Measurements
Using Significant Unobservable
Inputs (Level 3)

(In Thousands)
 

Beginning balance, January 1, 2012

   $ 1,342   

Total gains or losses (realized/unrealized)

  

Included in earnings (unrealized)

     —     

Included in other comprehensive income (presented gross of taxes)

     35   

Amortization

     —     

Sales

     —     

Transfers in and/or out of Level 3

     —     
  

 

 

 

Ending balance, March 31, 2012

   $ 1,377   
  

 

 

 

 

     Fair Value Measurements
Using Significant Unobservable
Inputs (Level 3)

(In Thousands)
 

Beginning balance, January 1, 2011

   $ 1,498   

Total gains or losses (realized/unrealized)

  

Included in earnings (unrealized)

     (2

Included in other comprehensive income (presented gross of taxes)

     66   

Amortization

     4   

Sales

     —     

Transfers in and/or out of Level 3

     —     
  

 

 

 

Ending balance, March 31, 2011

   $ 1,566   
  

 

 

 

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:

 

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Assets and Liabilities Measured on a Non-Recurring Basis

 

March 31, 2012    Level 1 Inputs      Level 2 Inputs      Level 3 Inputs      Total Fair
Value
 
     (In Thousands)  

Impaired loans

           

Residential Loans

   $ —         $ —         $ 685       $ 685   

Commercial Loans

     —           —           16         16   

Multi Family Loans

     —           —           455         455   

CRE loans

     —           —           5,854         5,854   
        

 

 

    

 

 

 

Total Impaired loans

     —           —           7,010         7,010   

Mortgage servicing rights

     —           8,498         —           8,498   

Real estate held for sale

           

Residential Loans

     —           —           —           —     

CRE loans

     —           —           296         296   
        

 

 

    

 

 

 

Total Real Estate held for sale

     —           —           296         296   
December 31, 2011    Level 1 Inputs      Level 2 Inputs      Level 3 Inputs      Total Fair
Value
 
     (In Thousands)  

Impaired loans

           

Residential Loans

   $ —         $ —         $ 1,092       $ 1,092   

Commercial Loans

     —           —           1,268         1,268   

Multi Family Loans

     —              103         103   

CRE loans

     —           —           8,449         8,449   
        

 

 

    

 

 

 

Total Impaired loans

     —           —           10,912         10,912   

Mortgage servicing rights

     —           8,690         —           8,690   

Real estate held for sale

           

Residential Loans

     —           —           28         28   

CRE loans

     —           —           1,600         1,600   
        

 

 

    

 

 

 

Total Real Estate held for sale

     —           —           1,628         1,628   

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $7,010,000, with a valuation allowance of $5,184,000 at March 31, 2012. A provision expense of $4,763,000 for the three months ended March 31, 2012 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $8,498,000 at March 31, 2012, resulting in a valuation allowance of $1,608,000. A charge of $79,000 for the three months ended March 31, 2012 was included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and estimated costs to sell. The change in fair value of real estate held for sale was $137,000 for the three months ended March 31, 2012 which was recorded directly as an adjustment to current earnings through non-interest expense.

 

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Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $10.9 million, with a valuation allowance of $7.2 million at December 31, 2011. A provision expense of $5.4 million for year ended December 31, 2011 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $8,690,000 at December 31, 2011, resulting in a valuation allowance of $1,529,000. A charge of $404,000 was included in the earnings for the year ended December 31, 2011.

Real estate held for sale is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. The change in fair value of real estate held for sale was $1,047,000 for the year ended December 31, 2011 was recorded directly as an adjustment to current earnings through non-interest expense.

In accordance with FASB ASC Topic 825, the following table is a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of March 31, 2012 and December 31, 2011. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.

The carrying amount of cash and cash equivalents, term notes payable and advance payments by borrowers for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

It was not practicable to determine the fair value of Federal Home Loan Bank (“FHLB”) stock due to restrictions placed on its transferability.

The fair value of loans which reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on discounted cash flow analysis, using interest rates currently being offered for loans with similar terms, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost of fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based on binding contracts and quotes from third party investors resulting in a Level 2 classification.

The fair value of accrued interest receivable is equal to the carrying amounts resulting in a Level 2 or Level 3 classification which is consistent with its underlying value.

The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e. carrying value) and are classified as Level 1. The fair value of savings, NOW and certain money market accounts are equal to their carrying amounts and are a Level 2 classification. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation

 

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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 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, 2012.

 

            Fair Value Measurements at March 31, 2012  
     Carrying
Value
     Total      Level 1      Level 2      Level 3  

Financial Assets:

              

Cash and cash equivalents

   $ 249,882       $ 249,882       $ 249,882       $ —         $ —     

Investment securities

     243,608         243,618         114         242,127         1,377   

Federal Home Loan Bank Stock

     20,655         N/A         N/A         N/A         N/A   

Loans, net, including loans

held for sale

     1,456,323         1,475,938         —           11,201         1,464,737   

Accrued interest receivable

     6,243         6,243         —           1,357         4,886   

Financial Liabilities:

              

Deposits

   $ 1,671,370       $ 1,678,142       $ 265,716       $ 1,412,426       $ —     

Advances from Federal Home Loan Bank

     81,830         85,020         —           85,820         —     

Securities sold under repurchase agreements

     54,609         54,609         —           54,609         —     

Subordinated debentures

     36,083         38,576         —           —           38,576   

 

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     December 31, 2011  
     Carrying
Value
     Estimated
Fair Values
 

Assets:

     

Cash and cash equivalents

   $ 174,931       $ 174,931   

Investment securities

     233,580         233,591   

Federal Home Loan Bank Stock

     20,655         N/A   

Loans, net, including loans

held for sale

     1,467,663         1,494,573   

Mortgage banking derivative asset

     865         865   

Accrued interest receivable

     6,142         6,142   
  

 

 

    

 

 

 
     1,903,836       $ 1,910,102   
     

 

 

 

Other assets

     164,354      
  

 

 

    

Total assets

   $ 2,068,190      
  

 

 

    

Liabilities and stockholders’ equity:

     

Deposits

   $ 1,596,241       $ 1,603,111   

Advances from Federal Home Loan Bank

     81,841         85,196   

Securities sold under repurchase agreements

     60,386         60,386   

Subordinated debentures

     36,083         31,814   

Accrued interest payable

     446         446   

Mortgage banking derivative liability

     258         258   

Advance payments by borrowers for taxes and insurance

     1,402         1,402   
  

 

 

    

 

 

 
     1,776,399       $ 1,782,613   
     

 

 

 

Other liabilities

     13,664      
  

 

 

    

Total liabilities

     1,790,063      

Stockholders’ equity

     278,127      
  

 

 

    

Total liabilities and stockholders’ equity

   $ 2,068,190      
  

 

 

    

4. Stock Compensation Plans

First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaces all existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of March 31, 2012, 317,650 options have been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually, subject to certain other limitations required by the Emergency Economic Stabilization Act of 2008. All options expire ten years from the date of

 

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grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

On August 15, 2011, the Company approved a 2011 Short-Term (“STIP”) and a 2011 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management. The Plans are effective January 1, 2011 and provide for cash and/or equity benefits if certain performance targets are achieved. Awards issued under these Plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.

On March 9, 2012, the Company approved a 2012 STIP and a 2012 LTIP for selected members of management. The Plans are effective January 1, 2012 and provide for cash and/or equity benefits if certain performance targets are achieved. Awards issued under these Plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.

Under both STIPs the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate and/or market area performance targets during the calendar year. The final amount of benefits under the STIP will be determined at December 31 of each year and will be paid out in cash and/or equity, as elected by the participant, in accordance with the following vesting schedule: 50% in the first quarter after the calendar year, 25% on the one-year anniversary, and 25% on the second-year anniversary. The participants are required to be employed on the day of payout in order to receive such payment.

Under both LTIPs the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets either over a two or three year period. The final amount of benefit under the 2011 LTIP will be determined at December 31, 2012 and the final amount of benefit under the 2012 LTIP will be determined on December 31, 2014. The benefits earned under the plan will be paid out in cash and/or equity, as elected by the participant, in the first quarter following the close of the performance period. The participants are required to be employed on the day of payout in order to receive such payment.

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, 2012 or 2011.

 

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Following is activity under the plans during the three months ended March 31, 2012:

 

Stock options

   Options
Outstanding
     Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (in years)
     Aggregate
Intrinsic
Value
 

Options outstanding, January 1, 2012

     317,800       $ 20.35         

Forfeited or cancelled

     —           —           

Exercised

     150         9.22         

Granted

     —           —           
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding, March 31, 2012

     317,650       $ 20.35         4.69       $ 477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest at March 31, 2012

     317,650       $ 20.35         4.69       $ 477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at March 31, 2012

     238,690       $ 22.31         4.08       $ 180   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2012, there were $97,000 of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 1.8 years.

At March 31, 2012, 5,681 stock grants and 51,849 RSU’s were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established with the plan documents. Total expense of $163,000 was recorded during the three months ended March 31, 2012 and approximately $272,000 is included within other liabilities at March 31, 2012 related to the STIPs and LTIPs.

 

     Restricted Stock Units      Stock Grants  

Unvested Shares

   Shares     Weighted-Average
Grant Date

Fair Value
     Shares     Weighted-Average
Grant Date

Fair Value
 

Unvested at January 1, 2012

     27,108      $ 11.97         4,738      $ 14.00   

Granted

     29,535        14.59         1,887        17.46   

Vested

     —          —           (944     17.46   

Forfeited

     (4,794     11.97         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Unvested at March 31, 2012

     51,849      $ 13.46         5,681      $ 14.57   
  

 

 

   

 

 

    

 

 

   

 

 

 

The maximum amount of compensation expense that may be recorded for the STIP and both LTIPs at March 31, 2012 is approximately $1.3 million. However, the estimated expense expected to be recorded as of March 31, 2012 based on the performance measures in the plans, is $1.1 million of which $785,000 is unrecognized at March 31, 2012 and will be recognized over the remaining performance period.

5. Dividends on Common Stock

First Defiance declared and paid a $0.05 per common stock dividend in the first quarter of 2012. There was no common stock dividend declared or paid in the first quarter of 2011.

As a result of its participation in the Capital Purchase Program (“CPP”), First Defiance is prohibited without prior approval of the U.S. Treasury, from paying a quarterly cash dividend of more than $0.26 per share until the U.S. Treasury’s preferred stock is redeemed or transferred to an unaffiliated third

 

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party. Further, First Defiance has agreed in its Memorandum of Understanding with the Federal Reserve to obtain the approval of the Federal Reserve prior to the declaration of dividends.

6. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share data):

 

     Three months ended
March 31,
 
     2012      2011  

Numerator for basic and diluted earnings per common share – Net income applicable to common shares

   $ 3,645       $ 2,155   

Denominator:

     

Denominator for basic earnings per common share – weighted average common shares

     9,726         8,519   

Effect of warrants

     208         140   

Effect of restricted stock units

     10         —     

Effect of employee stock options

     26         12   
  

 

 

    

 

 

 

Denominator for diluted earnings per common share share

     9,970         8,671   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 0.37       $ 0.25   
  

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.37       $ 0.25   
  

 

 

    

 

 

 

There were 256,643 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three months ended March 31, 2012. Shares under option of 355,538 were excluded from the diluted earnings per common share calculations as they were anti-dilutive for the three months ended March 31, 2011.

 

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7. Investment Securities

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

At March 31, 2012

          

Available-for-Sale Securities:

          

Obligations of U.S. government corporations and agencies

   $ 19,995       $ 46       $ (86   $ 19,955   

U.S. treasury bonds

     2,000         7         —          2,007   

Mortgage-backed securities – residential

     68,282         2,326         (25     70,583   

REMICs

     1,596         12         —          1,608   

Collateralized mortgage obligations

     63,025         2,049         —          65,074   

Trust preferred securities and preferred stock

     3,790         79         (2,378     1,491   

Corporate bonds

     8,651         86         (146     8,591   

Obligations of state and political subdivisions

     68,480         5,231         (56     73,655   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 235,819       $ 9,836       $ (2,691   $ 242,964   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-Maturity Securities*:

          

FHLMC certificates

   $ 79       $ —         $ (1   $ 78   

FNMA certificates

     188         5         —          193   

GNMA certificates

     69         3         —          72   

Obligations of state and political subdivisions

     308         3         —          311   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 644       $ 11       $ (1   $ 654   
  

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2011

          

Available-for-Sale Securities:

          

Obligations of U.S. government corporations and agencies

   $ 16,989       $ 96       $ —        $ 17,085   

U.S. treasury bonds

     2,000         10         —          2,010   

Mortgage-backed securities – residential

     68,400         2,318         (2     70,716   

REMICs

     2,863         31         —          2,894   

Collateralized mortgage obligations

     57,083         1,926         —          59,009   

Trust preferred securities and preferred stock

     3,790         73         (2,413     1,450   

Corporate bonds

     8,629         —           (377     8,252   

Obligations of state and political subdivisions

     65,928         5,580         (5     71,503   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 225,682       $ 10,034       $ (2,797   $ 232,919   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-Maturity Securities*:

          

FHLMC certificates

   $ 82       $ 1       $ —        $ 83   

FNMA certificates

     199         4         —          203   

GNMA certificates

     72         3         —          75   

Obligations of state and political

subdivisions

     308         3         —          311   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 661       $ 11       $ —        $ 672   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

*

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

The amortized cost and fair value of the investment securities portfolio at March 31, 2012 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because

 

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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
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In Thousands)  

Due in one year or less

   $ 1,729       $ 1,739       $ 60       $ 63   

Due after one year through five years

     11,927         11,891         —           —     

Due after five years through ten years

     38,193         39,689         248         248   

Due after ten years

     51,068         52,380         —           —     

MBS/CMO/REMIC

     132,902         137,265         336         343   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 235,819       $ 242,964       $ 644       $ 654   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities with a carrying amount of $136.7 million at March 31, 2012 were pledged as collateral on public deposits, securities sold under repurchase agreements and FHLB advances.

As of March 31, 2012, the Company’s investment portfolio consisted of 370 securities, 30 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, 2012 and December 31, 2011:

 

     Duration of Unrealized Loss Position        
     Less than 12 Months     12 Month or Longer     Total  
     Fair
Value
     Gross
Unrealized
Loss
    Fair
Value
     Gross
Unrealized
Loss
    Fair
Value
     Unrealized
Losses
 
     (In Thousands)  

At March 31, 2012

               

Available-for-sale securities:

               

Obligations of U.S. govt. corps. And agencies

   $ 9,909       $ (86   $ —         $ —        $ 9,909       $ (86

Mortgage-backed -residential

     4,047         (25     —           —          4,047         (25

Corporate bonds

     2,722         (146     —           —          2,722         (146

Trust preferred stock and preferred stock

     —           —          1,377         (2,378     1,377         (2,378

Obligations of state and political subdivisions

     1,900         (52     243         (4     2,143         (56

Held-to-maturity securities:

               

FHLMC certificates

     78         (1     —           —          78         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 18,656       $ (310   $ 1,620       $ (2,382   $ 20,276       $ (2,692
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Duration of Unrealized Loss Position        
     Less than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Gross
Unrealized
Loss
    Fair
Value
     Gross
Unrealized
Loss
    Fair
Value
     Unrealized
Loses
 
     (In Thousands)  

At December 31, 2011

               

Available-for-sale securities:

               

Mortgage-backed securities – residential

   $ 2,030       $ (2   $ —         $ —        $ 2,030       $ (2

Obligations of state and political subdivisions

     —           —          746         (5     746         (5

Trust preferred stock and preferred stock

     —           —          1,342         (2,413     1,342         (2,413

Corporate bonds

     8,252         (377     —           —          8,252         (377
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 10,282       $ (379   $ 2,088       $ (2,418   $ 12,370       $ (2,797
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

With the exception of Trust Preferred Securities, 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.

Realized gains from the sales of investment securities totaled $43,000 ($28,000 after tax) in the first quarter of 2012 while there were realized gains of $49,000 ($32,000 after tax) in the first quarter of 2011.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC Topic 320. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

 

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Table of Contents

In the first quarter of 2012, management determined there was no OTTI. In the first quarter of 2011, management determined OTTI on one CDO resulting in a write-down of $2,200 ($1,400 after tax).

The Company held nine CDOs at March 31, 2012. Four of those CDOs were written down in full prior to January 1, 2010. The remaining five CDOs have a total amortized cost of $3.8 million at March 31, 2012. Of these, three, with a total amortized cost of $1.8 million, were identified as OTTI in prior periods. The final two CDOs, with a total amortized cost of $2.0 million, continue to pay principal and interest payments in accordance with the contractual terms of the securities and no credit loss impairment has been identified in management’s analysis. Therefore, these two CDO investments have not been deemed by management to be OTTI.

Given the conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, the Company’s CDOs will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

As required under FASB ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.

The Company’s CDO valuations were supported by analysis prepared by an independent third party. Their approach to determining fair value involved several steps: 1) detailed credit and structural evaluation of each piece of collateral in the CDO; 2) collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities) and 3) discounted cash flow modeling.

Trust Preferred CDOs Discount Rate Methodology

First Defiance uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific CDO instruments. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for trust preferred CDOs, however, First Defiance looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific CDOs. Importantly, as part of the analysis described above, First Defiance considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

Fundamental to this evaluation is an assessment of the likelihood of CDO coverage test failures that would have the effect of diverting cash flow away from the relevant CDO bond for some period of time. Generally speaking, the Company adjusts indicative credit spreads upwards in the case of CDOs that have relatively weaker collateral and/or less cushion with respect to overcollateralization and interest coverage test ratios and downwards if the reverse is true. This aspect of the Company’s discount rate methodology is important because there is frequently a great difference in the risks present in CDO instruments that are otherwise very similar (i.e. CDOs with the same basic type of collateral, the same

 

26


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manager, the same vintage, etc., may exhibit vastly different performance characteristics). With respect to this last point, First Defiance notes that given today’s credit environment, characterized by high default and deferral rates, it is typically the case that deal-specific credit performance (determined on the basis of the credit characteristics of remaining collateral) is the best indicator of what a willing market participant would pay for an instrument.

The Company uses the same methodology for all of its CDOs and believes its valuation methodology is appropriate for all of its CDOs in accordance with FASB ASC Topic 320 as well as other related guidance.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already deferred, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% for insurance companies. Although there is a possibility that the deferring collateral will become current at some point in the future, First Defiance has conservatively assumed that it will continue to defer and gradually will default.

The following table details the seven securities with other-than-temporary impairment, their lowest credit rating at March 31, 2012 and the related credit losses recognized in earnings for the three month period ended March 31, 2012 (In Thousands):

 

     Preferred
Term VI
     TPREF
Funding II
     Alesco
VIII
     Preferred
Term
Security
XXVII
     Trapeza
CDO I
     Alesco
Preferred
Funding
VIII
     Alesco
Preferred
Funding
IX
        
     Rated Caa1      Rated Caa3      Rated Ca      Rated C      Rated Ca      Not Rated      Not Rated      Total  

Cumulative OTTI related to credit loss at January 1, 2012

   $ 80       $ 318       $ 1,000       $ 78       $ 857       $ 453       $ 465       $ 3,251   

Addition – Qtr 1

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cumulative OTTI related to credit loss at March 31, 2012

   $ 80       $ 318       $ 1,000       $ 78       $ 857       $ 453       $ 465       $ 3,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was $836,000 for the above securities at March 31, 2012. There was $808,000 recognized in AOCI at March 31, 2011.

The following table provides additional information related to the five CDO investments for which a balance remains as of March 31, 2012 (dollars in thousands):

 

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Table of Contents

CDO

   Class      Amortized
Cost
     Fair
Value
     Unrealized
Loss
     OTTI
Losses
2012
     Lowest
Rating
     Current
Number of
Banks and
Insurance
Companies
     Actual
Deferrals
and
Defaults
as a % of
Current
Collateral
    Expected
Deferrals
and
Defaults as
a % of
Remaining
Performing
Collateral
    Excess
Sub-ordination
as a % of
Current
Performing
Collateral
 

Preferred Term VI

     Mezz       $ 185       $ 53       $ 132       $ —           Caa1         5         73.62     —       —  

TPREF Funding II

     B         677         240         437         —           Caa3         17         38.81     16.61     —     

I-Preferred Term Sec I

     B-1         1,000         466         534         —           CCC         14         17.24     14.66     27.36

Dekania II CDO

     C-1         990         433         557         —           CCC         34         —       13.15     32.36

Preferred Term Sec XXVII

     C-1         903         185         718         —           C         33         28.14     25.26     4.59
     

 

 

    

 

 

    

 

 

    

 

 

              

Total

      $ 3,755       $ 1,377       $ 2,378       $ —                  
     

 

 

    

 

 

    

 

 

    

 

 

              

Excluding the Preferred Term VI, the Company’s assumed average lifetime default rate declined from 30.3% at the end of the first quarter 2011 to a rate of 28.5% at the end of the first quarter 2012.

The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for the period ended March 31, 2012 and March 31, 2011 (in thousands):

 

     Three Months Ended  
     March 31,  
     2012      2011  

Beginning balance, January 1

   $ 3,251       $ 3,249   

Additions for amounts related to credit loss for which an OTTI was not previously recognized

     —           —     

Reductions for amounts realized for securities sold during the period

     —           —     

Reductions for amounts related to securities for which the Company intends to sell or that it will be more likely than not that the Company will be required to sell prior to recovery of amortized cost basis

     —           —     

Reductions for increase in cash flows expected to be collected that are Recognized over the remaining life of the security

     —           —     

Increases to the amount related to the credit loss for which Other-than-temporary was previously recognized

     —           2   
  

 

 

    

 

 

 

Ending balance, March 31

   $ 3,251       $ 3,251   
  

 

 

    

 

 

 

 

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Table of Contents

The proceeds from the sales and calls of securities and the associated gains are listed below:

 

     Three Months Ended
March  31,
 
     2012      2011  
     (In thousands)  

Proceeds

   $ 218       $ 1,982   

Gross realized gains

     43         49   

Gross realized losses

     —           —     

The following table summarizes the changes within each classification of accumulated other comprehensive income for the quarters ended March 31, 2012 and 2011:

 

     Unrealized gains
(losses) on available

for sale securities
    Postretirement
Benefit
    Accumulated
other
comprehensive
income (loss), net
 
     (In Thousands)  

Balance at December 31, 2011

   $ 4,704      $ (707   $ 3,997   

Other comprehensive income (loss), net

     (60     —          (60
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 4,644      $ (707   $ 3,937   
  

 

 

   

 

 

   

 

 

 

 

     Unrealized gains
(losses) on available
for sale securities
     Postretirement
Benefit
    Accumulated
other
comprehensive
income (loss), net
 
     (In Thousands)  

Balance at December 31, 2010

   $ 32       $ (374   $ (342

Other comprehensive income (loss), net

     753         —          753   
  

 

 

    

 

 

   

 

 

 

Balance at March 31, 2011

   $ 785       $ (374   $ 411   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

8. Loans

Loans receivable consist of the following (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Real Estate:

    

Secured by 1-4 family residential

   $ 202,132      $ 203,401   

Secured by multi-family residential

     135,234        126,246   

Secured by commercial real estate

     654,934        649,746   

Construction

     36,362        31,552   
  

 

 

   

 

 

 
     1,028,662        1,010,945   

Other Loans:

    

Commercial

     326,904        349,053   

Home equity and improvement

     114,891        122,143   

Consumer Finance

     17,647        18,887   
  

 

 

   

 

 

 
     459,442        490,083   
  

 

 

   

 

 

 

Total loans

     1,488,104        1,501,028   

Deduct:

    

Undisbursed loan funds

     (13,430     (13,243

Net deferred loan origination fees and costs

     (719     (709

Allowance for loan loss

     (28,833     (33,254
  

 

 

   

 

 

 

Totals

   $ 1,445,122      $ 1,453,822   
  

 

 

   

 

 

 

Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.

The following table discloses allowance for loan loss activity for the quarter ended March 31, 2012 and 2011 by portfolio segment and impairment method ($ in thousands):

 

Quarter Ended March 31, 2012    1-4 Family
Residential
Real Estate
    Construction      Multi- Family
Residential
Real Estate
    Commercial
Real Estate
    Commercial     Home Equity
and
Improvement
    Consumer     Total  

Allowance for loans individually evaluated

                 

Beginning Specific Allocations

   $ 654      $ —         $ 195      $ 5,400      $ 969      $ —        $ —        $ 7,218   

Charge-Offs

     (355     —           (238     (2,867     (1,994     —          —          (5,454

Recoveries

     —          —           —          —          —          —          —          —     

Provisions

     206        —           198        1,978        1,038        —          —          3,420   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Specific Allocations

   $ 505      $ —         $ 155      $ 4,511      $ 13      $ —        $ —        $ 5,184   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loans collectively evaluated

                 

Beginning General Allocations

   $ 3,441      $ 63       $ 2,655      $ 12,240      $ 5,607      $ 1,856      $ 174      $ 26,036   

Charge-Offs

     (383     —           —          (1,391     (672     (211     (41     (2,698

Recoveries

     55        —           —          108        30        21        14        228   

Provisions

     (245     10         21        732        (285     (181     31        83   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending General Allocations

   $ 2,868      $ 73       $ 2,676      $ 11,689      $ 4,680      $ 1,485      $ 178      $ 23,649   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Quarter Ended March 31, 2011    1-4 Family
Residential
Real Estate
    Construction     Multi- Family
Residential
Real Estate
     Commercial
Real Estate
    Commercial     Home Equity
and
Improvement
    Consumer     Total  

Allowance for loans individually evaluated

                 

Beginning Specific Allocations

   $ 1,741      $ 13      $ 230       $ 10,213      $ 4,362      $ 36      $ —        $ 16,595   

Charge-Offs

     (145     —          —           (1,777     (206     —          —          (2,128

Recoveries

     —          —          —           —          —          —          —          —     

Provisions

     180        (13     20         2,261        163        —          —          2,611   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Specific Allocations

   $ 1,776      $ —        $ 250       $ 10,697      $ 4,319      $ 36      $ —        $ 17,078   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loans collectively evaluated

                 

Beginning General Allocations

   $ 4,215      $ 60      $ 1,917       $ 9,995      $ 6,509      $ 1,492      $ 297      $ 24,485   

Charge-Offs

     (402     —          —           (497     (129     (201     (11     (1,240

Recoveries

     5        —          —           211        8        —          29        253   

Provisions

     569        10        16         801        (1,189     123        (108     222   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending General Allocations

   $ 4,387      $ 70      $ 1,933       $ 10,510      $ 5,199      $ 1,414      $ 207      $ 23,720   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012:

(In Thousands)

 

      1-4 Family
Residential
Real Estate
     Construction      Multi-Family
Residential
Real Estate
     Commercial
Real Estate
     Commercial      Home Equity
&
Improvement
     Consumer      Total  

Allowance for loan losses:

                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ 505       $ —         $ 155       $ 4,511       $ 13       $ —         $ —         $ 5,184   

Collectively evaluated for impairment

     2,868         73         2,676         11,689         4,680         1,485         178         23,649   

Acquired with deteriorated credit quality

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,373       $ 73       $ 2,831       $ 16,200       $ 4,693       $ 1,485       $ 178       $ 28,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                       

Loans individually evaluated for impairment

   $ 4,713       $ 159       $ 3,137       $ 33,477       $ 6,619       $ 38       $ —         $ 48,143   

Loans collectively evaluated for impairment

     197,947         22,741         132,256         622,515         321,085         115,330         17,662         1,429,536   

Loans acquired with deteriorated credit quality

     43         —           —           807         307         —           —           1,157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 202,703       $ 22,900       $ 135,393       $ 656,799       $ 328,011       $ 115,368       $ 17,662       $ 1,478,836   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

32


Table of Contents

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, 2011:

(In Thousands)

 

      1-4 Family
Residential
Real Estate
     Construction      Multi-Family
Residential
Real Estate
     Commercial
Real Estate
     Commercial      Home Equity
& Improvement
     Consumer      Total  

Allowance for loan losses:

                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ 654       $ —         $ 195       $ 5,400       $ 969       $ —         $ —         $ 7,218   

Collectively evaluated for impairment

     3,441         63         2,655         12,240         5,607         1,856         174         26,036   

Acquired with deteriorated credit quality

     —           —           —                 —              —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,095       $ 63       $ 2,850       $ 17,640       $ 6,576       $ 1,856       $ 174       $ 33,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                       

Loans individually evaluated for impairment

   $ 4,537       $ —         $ 1,435       $ 34,009       $ 6,773       $ 40       $ —         $ 46,794   

Loans collectively evaluated for impairment

     199,453         18,288         125,080         616,856         343,147         122,623         18,910         1,444,357   

Loans acquired with deteriorated credit quality

     70         —           —           825         312         —           —           1,207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 204,060       $ 18,288       $ 126,515       $ 651,690       $ 350,232       $ 122,663       $ 18,910       $ 1,492,358   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

33


Table of Contents

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, 2012  
     Average
Balance
     Interest
Income
Recognized
     Cash Basis
Income
Recognized
 

Residential Owner Occupied

   $ 1,931       $ 13       $ 12   

Residential Non Owner Occupied

     2,728         23         23   
  

 

 

    

 

 

    

 

 

 

Total Residential Real Estate

     4,659         36         35   

Construction

     80         —           —     

Multi-Family

     2,288         16         16   

CRE Owner Occupied

     9,476         13         12   

CRE Non Owner Occupied

     15,580         91         71   

Agriculture Land

     1,441         14         14   

Other CRE

     8,044         1         1   
  

 

 

    

 

 

    

 

 

 

Total Commercial Real Estate

     34,541         119         98   

Commercial Working Capital

     2,210         3         3   

Commercial Other

     4,786         5         5   
  

 

 

    

 

 

    

 

 

 

Total Commercial

     6,996         8         8   

Consumer

     —           —           —     

Home Equity and Home Improvement

     38         1         1   
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 48,602       $ 180       $ 158   
  

 

 

    

 

 

    

 

 

 

 

34


Table of Contents
     Three Months Ended March 31, 2011  
     Average
Balance
     Interest
Income
Recognized
     Cash Basis
Income
Recognized
 

Residential Owner Occupied

   $ 3,190       $ 20       $ 20   

Residential Non Owner Occupied

     4,840         33         37   
  

 

 

    

 

 

    

 

 

 

Total Residential Real Estate

     8,030         53         57   

Construction

     62         —           —     

Multi-Family

     1,330         12         10   

CRE Owner Occupied

     10,955         115         94   

CRE Non Owner Occupied

     21,030         233         203   

Agriculture Land

     2,371         11         12   

Other CRE

     7,505         12         13   
  

 

 

    

 

 

    

 

 

 

Total Commercial Real Estate

     41,861         371         322   

Commercial Working Capital

     5,175         23         27   

Commercial Other

     12,477         72         71   
  

 

 

    

 

 

    

 

 

 

Total Commercial

     17,652         95         98   

Consumer

     —           —           —     

Home Equity and Home Improvement

     315         4         4   
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 69,250       $ 535       $ 491   
  

 

 

    

 

 

    

 

 

 

 

35


Table of Contents

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012: (In Thousands)

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

With no allowance recorded:

        

Residential Owner Occupied

   $ 927       $ 928       $ —     

Residential Non Owner Occupied

     2,629         2,638         —     
  

 

 

    

 

 

    

 

 

 

Total Residential Real Estate

     3,556         3,566         —     

Construction

     159         159         —     

Multi-Family Residential Real Estate

     2,530         2,527         —     

CRE Owner Occupied

     7,789         7,787         —     

CRE Non Owner Occupied

     8,853         8,864         —     

Agriculture Land

     1,509         1,509         —     

Other CRE

     5,734         5,733         —     
  

 

 

    

 

 

    

 

 

 

Total Commercial Real Estate

     23,885         23,893         —     

Commercial Working Capital

     2,672         2,673         —     

Commercial Other

     4,222         4,224         —     
  

 

 

    

 

 

    

 

 

 

Total Commercial

     6,894         6,897         —     

Consumer

     —           —           —     

Home Equity and Home Improvement

     37         38         —     
  

 

 

    

 

 

    

 

 

 

Total loans with no allowance recorded

   $ 37,061       $ 37,080       $ —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Residential Owner Occupied

   $ 932       $ 932       $ 329   

Residential Non Owner Occupied

     258         258         176   
  

 

 

    

 

 

    

 

 

 

Total Residential Real Estate

     1,190         1,190         505   

Construction

     —           —           —     

Multi-Family Residential Real Estate

     610         610         155   

CRE Owner Occupied

     2,980         2,981         1,428   

CRE Non Owner Occupied

     5,979         6,003         2,466   

Agriculture Land

     —           —           —     

Other CRE

     1,406         1,407         617   
  

 

 

    

 

 

    

 

 

 

Total Commercial Real Estate

     10,365         10,391         4,511   

Commercial Working Capital

     —           —           —     

Commercial Other

     29         29         13   
  

 

 

    

 

 

    

 

 

 

Total Commercial

     29         29         13   

Consumer

     —           —           —     

Home Equity and Home Improvement

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

   $ 12,194       $ 12,220       $ 5,184   
  

 

 

    

 

 

    

 

 

 

Impaired loans have been recognized in conformity with FASB ASC Topic 310.

 

36


Table of Contents

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011: (In Thousands)

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
 

With no allowance recorded:

        

Residential Owner Occupied

   $ 981       $ 984       $ —     

Residential Non Owner Occupied

     1,871         1,877         —     
  

 

 

    

 

 

    

 

 

 

Total Residential Real Estate

     2,852         2,861         —     

Construction

     —