Premier Financial Corp.

Carol Merry - Investor Relations William J. Small - Chairman, President and Chief Executive Officer Donald P.

Hileman - Executive Vice President and Chief Financial Officer

Eileen Rooney - Keefe, Bruyette & Woods Jack Roe - Sandler O'Neill Asset Management

Thank you. Good morning and thank you for joining us for today's first quarter 2009 conference call.

The call is being webcast and the audio replay will be available at the First Defiance website at fdef.com until April 30, 2009. With us this morning are Bill Small, Chairman, President and CEO of First Defiance, and Don Hileman, Executive Vice President and Chief Financial Officer.

Following their prepared comments on the company's strategy and performance, they will be available to take your questions. Before we begin, I would like to remind you that certain statements made during this conference call that are not historical, including statements made during the Q&A period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are based on information and assumptions available to management at this time, and are subject to change. Actual results may differ materially.

First Defiance assumes no obligation to update such forward-looking statements, to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements. For a complete discussion of the risks and uncertainties that may cause future events to differ from the results discussed in these forward-looking statements, please refer to the earnings release and materials filed with the SEC, including the company's most recent Form 10-K and 8-K filings.

And now, I'll turn the call over to Mr. Small for his comments.

Thank you very much, Carol. Good morning and thank you for joining us for the First Defiance Financial Corp.

conference call, to review the 2009 first quarter results. Last night, we issued our 2009 first quarter earnings release.

And this morning, we would like to discuss that release, look at the details behind it, and what we see ahead of us for the balance of 2009. At the conclusion of our presentation, we will answer any questions you might have.

Joining me on the call this morning to give more details on the financial performance for the quarter is Executive Vice President and CFO, Don Hileman. Also with us this morning to answer questions on credit quality is Jim Rohrs, President and CEO of First Federal Bank.

First quarter 2009 net income on a GAAP basis was 3.4 million or $0.36 per diluted common share, compared to 3.4 million or $0.47 per diluted share in the 2008 first quarter. The significant difference in the per common share income is primarily due to the dividend being paid on the preferred shares issued for the U.S.

Treasury's capital purchase program. First quarter results represent a substantial increase over the prior quarter, and we've reported net income of 880,000 or $0.09 per diluted common share.

The 2008 first quarter results included only 17 days of operations of the former Bank of Lenawee offices, since that transaction was closed on March 14, 2008 and also included 750,000 of acquisition-related charges associated with that transaction. The 2009 first quarter results was still not back to a normal run rate at a number of significant indicators that the core operation is strong.

Record setting mortgage production for the quarter are underway (ph) as we had the three strongest months of mortgage loan originations in our history. Non-interest income was up for the quarter both versus first quarter 2008 and fourth quarter 2008.

Deposit growth was very strong during the first quarter as depositors were booking for safety, and we're able to -- and we were able to attract funds without having to price up. The pricing discipline on both the deposit and loan side allowed us to maintain our net interest margin at 3.71%, down just one basis point from last quarter.

The quarter was not without its challenges though as the economy continues to present issues for many businesses and individuals. Asset quality had a significant negative impact again this quarter.

We booked 2.7 million in provision expense compared to just 1.1 million for the first quarter of 2008. However, this quarter's provision was less than we booked in each of the three prior quarters.

We also recognized additional other than temporary impairment and certain collateralized debt obligations in our portfolio. Asset quality remains a primary focus.

We're working to identify any weaknesses as early as possible, and we continue to monitor and analyze each credit to assure proper bubbles of reserves. The provision expense in the first quarter was attributable to a combination of deterioration in some credits and adjustments to several previously recognized problem loans, where additional reserves were added for deteriorating collateral values.

We've increased the allowance for loan losses to total loans from 1.21% at March 31, 2008 to 1.62% as of March 31, 2009. Non-interest income was strong this quarter, primarily due to the mortgage business.

Gain on sale of mortgage loans and mortgage servicing revenue were both up significantly over first quarter 2008 results. This was offset somewhat by a decline in revenue from the sale of insurance products at our insurance subsidiary, First Insurance & Investments, as that market remains soft.

The increase in non-interest expense was driven primarily by increases in FDIC premiums and collection and other real estate owned expenses. I will now ask Don Hileman to give you additional financial details for the quarter before I wrap up with an overview and look at what we see developing in the months ahead.

Don?

Thank you, Bill, and good morning everyone. The difficult operating environment has presented both challenges and opportunities for us.

We continue to see high unemployment in our market area and anticipate higher rates over the course of the year. While delinquency rates remain high; we did see some stabilization in the 90-day past due percentage this quarter.

Overall, we are pleased with our first quarter earnings performance in this environment. I will begin with the discussion on credit quality.

We saw another quarter in which we had a high level of provision for loan losses. As Bill noted, our provision expense totaled 2.7 million, down from 3.8 million in the fourth quarter as we increased our allowance for loan losses to 25.7 million.

The provision expense was 1.6 times our charge-offs for the quarter. Annualized net charge-offs were 0.41% of loans for the first quarter of 2009, down from 0.67% in the fourth quarter and up from 1.5% in the first quarter of 2008.

We are constantly analyzing our loan portfolio and have made decisions to reallocate resources to work with past due clients to determine a course of action that we hope will mitigate potential losses on client relationships. We have been actively working with residential borrowers to determine qualification for loan modifications.

We calculate our allowance for loan losses by analyzing all loans on our watch list, making judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. Based on those judgments, we record a specific amount for loan losses against each loan that we analyze.

The provision for loan losses is the adjustment we make through the allowance for loan losses necessary for the allowance to be adequate, based on the losses we estimate to be in the portfolio. At March 31st, our allowance for loan losses represented 1.62% of total loans outstanding, an increase of 10 basis points over last quarter, and 70.06% of our non-performing loans.

Non-performing assets ended the quarter at 44.5 million or 2.21% of total assets, up from 41.3 million last quarter, which was 2.11% of our total assets. Total non-performing loans increased 2.4 million or 7% during the quarter.

The non-accrual loans increased 1.5 million and restructured loans increased 949,000. Restructured loans are considered non-performing because of changes in their original terms granted to borrowers.

These loans are still accruing. This is a way we can work with our borrowers who have the ability to repay, to mitigate loss potential.

We did see an increase in the level of 90-plus days pass due from the last quarter in one to four family residential loans, construction loans, commercial loans and home equity loans. But we experienced a decrease in commercial real estate loans to 1.13% from 1.23% last quarter.

Although there was a decrease in the 90-plus days commercial real estate category 30 to 89 day pass due amount increased, which we are monitoring closely. Mortgage banking was strong in the first quarter.

We had a gain on sale income of $2.8 million in the first quarter of 2009 compared with $1.1 million in the first quarter of 2008 and $1.6 million in the fourth quarter of 2008. We also recorded a positive valuation adjustment to mortgage servicing rights for 169,000 in the first quarter compared with a negative adjustment of 2.7 million in the fourth quarter of 2008.

At March 31st First Defiance had 1.12 billion in loan service for others. Mortgage servicing rights associated with those loans had a fair value of 7 million or 62 basis points of outstanding loans serviced.

Total impairment reserves which are available for recapture in future periods totaled 2.6 million at quarter end. The economic environment continues to add stress on our investments in Trust Preferred Collateralized Debt Obligations or CDOS and required additional other-than-temporary impairment write-downs in the first quarter.

The CDOS are made up of pooled investments of Trust Preferred Securities issued primarily by commercials banks and through us. As the issuing institutions experience financial difficulties, they can differ payments, and in many cases we have seen these institutions default on their issue.

Which has a negative impact on the collateral supporting the pooled investments. The other temporary impairment charge recognized in the first quarter of 2009 totaled 672,000.

The other temporary impairment charge related to seven Trust Preferred CDOS investments, including charges of $418,600 on three CDO investments. They resulted in a total write-off of investments with original cost of $2 million.

The remaining OTTI charges of 253,400 were recorded on four Trust Preferred CDOS with a remaining book value of 2.4 million. First Defiance's other Trust Preferred CDO investments with a total class to 5 million and market values of 1.5 million at March 31, 2009.

The incline in value of those investments is primarily due to the overall lack of liquidity in the CDO market. These investments continue to pay principal and interest payments, in accordance with contractual terms of the securities.

Management has not been the impairment in the -- and value of these CDO investments to be other than temporary and therefore has not recognized the reduction in value of those investments and earnings. Turning to operating results, our net interest income of $16 million for the quarter was 18% increase over last quarter's last year's first quarter and flat on a linked quarter basis.

For the quarter, our margin was 3.71% which was a five basis point decline from the first quarter of 2008 and basically flat with the fourth quarter of 2008 with a one basis point decline. You will recall that we closed the Bank of Lenawee transaction on March 14, 2008.

Falling interest rates continue to impact us both -- on both the asset and liabilities side. We continue to look for opportunities to reprice deposits in line with market rates.

This is becoming increasingly more challenging at these low levels. The income continues to show steady growth over last year, with an increase of 463,000 or 18% in the first quarter of 2009 over the 2008 first quarter.

Insurance revenue was 1.5 million in the first quarter of 2009, down 413,000 from the first quarter of 2008. The decrease is primarily due to lower contingent income that is traditionally received in the first quarter of each year.

Overall, non-interest expense increased to 15 million this quarter compared with 13.5 million in the first quarter of 2008 and 13.6 million in the fourth quarter of 2008. The first quarter of 2008 included 750,000 of acquisition related charges.

Fourth quarter 2008 compensation and benefit expenses was positively impact by adjustments to performance based compensation. Increases in collection and OREO expenses, as well as additional FDIC costs were primary reasons for the increase in the other non-interest expense in the first quarter.

We saw a strong balance sheet growth this quarter with total assets growing 53.3 million to 2.01 billion. Total deposits grew 70.2 million reflecting growth of core deposits and increased customer deposit relationships.

Loan balances declined 43.4 million, while cash and equivalents increased 70 million. Although we're dissatisfied with the lack of loan growth, we believe that it is overall reflective of the environment and we are well positioned for future growth.

We have seen a pick up in lending activity toward the end of the quarter and into April; which is an encouraging sign. That completes my overview for the quarter and I'll turn the call back to Bill.

Thank you Don. As we move forward into 2009, we will continue to address the challenges that face all of us.

The overall economic climate throughout our market area varies from industry to industry, and while we see signs of continued weakness in some respects, we also have been encouraged by signs of optimism both nationally and locally. On both fronts, there are indications that the housing decline has bottomed out and while we don't expect a quick rebound, this will be an important stabilizer in the recovery.

We also hear through our business clients that they are receiving more opportunities to quote jobs as inventories have been drawn down to historically low levels. Unemployment numbers continue to run higher in this region compared to national numbers and we may see this continue for several months, since employment recovery usually lags overall economic improvement.

We have expanded our credit monitoring functions even beyond our traditionally strong focus. Additional asset review functions and more delinquent loan reporting requirements have been added to assist in this monitoring.

We continually review credit concentrations by industry, and have placed lower limits on lending within certain types of loan categories. Our diversified loan portfolio contains a significant amount in commercial real estate loans and we have implemented increased monitoring and stress testing of this segment of the portfolio since we are very well aware that this a loan category that is getting a lot of attention in this environment.

Of our $1.6 billion total loan portfolio, the largest concentration is in the category lesser (ph) of non-residential buildings with a the balance of just over 221 million, and a total delinquency of just over 6.1 million or 2.8%. Less than 1% of that is over 90-days past due.

All commercial construction and land development loans totaled 100 million; down from a 124 million a year ago with 5.1% over 30-days past due. In our entire commercial loan portfolio, our top 10 loan categories by NAICS code totaled $650 million with a total delinquency rate of 3.1% over 30-days past due.

This compares to a year-end peer group delinquency rate of 3.5%. The U.S.

government's TARP program which we participate in through the Capital Purchase Program has drawn a lot of attention lately. It seems to be in vogue to announce plans to exit the program as soon as possible.

When we made the decision last fall to participate, we did it after a full analysis that demonstrated the advantages of taking the additional capital. We still feel those advantages exist for a company like ours; that is a leading lender in our market area with a proven ability to grow.

We are disappointed in changes that have been made to the program since we entered the last fall, but none of those changes at this point negatively impact the overall advantages of our participation. We will continue to monitor and analyze our continued participation in the Capital Purchase Program and evaluate any decision based on what we see as best for First Defiance and its shareholders.

This is a difficult environment to forecast in with conditions constantly changing. As we anticipated, commercial loan growth in 2009 will be a challenge, but we have seen pickup in activity in recent weeks.

Mortgage loan growth could stay strong if treasury yields remain down, keeping mortgage rates low. Even after the strong first quarter of mortgage production, the amount of production in the pipeline is still significant.

Pricing discipline on both sides of the balance sheet and non-interest bearing deposit growth will be very important as we continued to work to maintain our net interest margin. The residual fact of all the stresses on the economy during the past 12-18 months is an extremely challenging banking environment.

But I believe it is a time of great opportunity for community banks like ours. We remain well capitalized with a proven operating strategy and as we move forward through 2009, we will work diligently on the factors within our control to continue to grow even in this economic environment.

Those factors beyond our control, we will continue to monitor and be prepared to respond to. We anticipate many potential opportunities will arise in these unusual times, and we feel we have positioned the company to be able to take advantage of those that offer strategic value.

We thank you for joining us this morning and now we will be happy to take your questions.

Good morning, guys.

Good morning.

Good morning Eileen.

Just had a question on the mortgage pipeline; where that stood at the end of the quarter?

I think we're a 100 million in locked rates. In other words those are loans where the rates are locked and the closing is scheduled.

Okay. And where is that compared to, say -- at year-end?

At year-end, I think we were probably -- because December was a strong month. We really started to pick up the business.

I'm going to say year-end we're probably in the 65 to 70 million range.

That sounds about right. We fully expect April to be our biggest month yet.

And May looks good with what's in the pipeline and June should be a decent month, yet just based on our application volumes.

Okay, great. And then, Bill related to your comments on the CRE portfolio, could you just talk a little bit about what areas of that portfolio concern you the most.

And then also has there been any impact with -- in your footprint with what's been going on in the auto industry?

First off, in general, the CRE portfolio, we've really been trying to keep an eye on like strip malls and places like that -- where rentals to other businesses taking a very aggressive approach, to making sure we have copies of all the rent rolls and understanding the terms of those leases. So far we've been very pleased with what we have seen there; we do a pretty thorough analysis on that.

Land development, fortunately an area that we have not gotten into heavily. We have seen some deterioration there that certainly has impacted our non-performing's but again it's a kind of an area that we exited really.

We haven't been involved in making any loans in that category for well over a year. So that continues to pay down on us actually and release some pressure there.

As far as the auto industry is concerned obviously with where we are located, as close to Detroit as we are and having a presence in southeast Michigan, we certainly watch that very closely. We do not have a lot of direct -- we have very-very little direct credit with the automotive.

However, we are very aware that many of the people that live within our footprint are dependent either directly or indirectly through supply organizations on that industry and so we're -- we certainly are watching it very-very closely.

Okay, great Thanks guys.

You are welcome.

Hi. Good morning guys.

Good morning.

A quick question. The linked quarter increase on the 30 or 89-day past due in commercial real estate, can you give us a little more detail on that such as, number of loans, perhaps some of your relationships or...?

There -- really nothing significant jumps out. I think it's a general struggle for borrowers to continue to keep loans current or 30-days due, bounce around little bit.

We get more concerned with obviously when they hit the 90 days. I suspect we are going to see that for a few months yet.

Kind of our sense is that we are nearing if we are not at the bottom in the economy. But I think the pain out there in terms of delinquencies is going to last for a little while I guess.

Nothing of any significant size or I think it's a number of smaller loans.

Okay.

We are putting a lot of effort to make sure they don't migrate to the 90 days. So I think that's one thing that we are focused on as to make sure they don't migrate.

We have -- in our loan committee meetings on a weekly basis, we review every commercial loan that's going be over 30-days past due at the end of the month if they don't make the payment, and we expect the lenders to have contact with the borrower and have a plan for that loan to get current and stay current. So we are very much on top of those.

While there were a number of smaller loans, I mean was there any particular type of concentration, where they were more retail related or...?

No, kind of across the board, the development loans that we that are delinquent, have been delinquent so that we aren't seeing new ones there. I wouldn't say it's not in any one category.

As Bill said earlier, we've segmented all of our real estate loans that are dependent on retailers for repayment and we've gotten rent rolls there. That category has one significantly size loan, in excess of a million dollars that's delinquent and in the process of being liquidated, but other than that those loans seems to be holding up fairly well.

By and large, everything we do is personally guaranteed, so we don't do non-recourse financing so to the extent the project suffers cash flow, we go directly to the guarantor and expect them to make the payments.

Okay, thank you very much.

Thank you, Jack.

How you guys doing?

Good, Brad.

Good Brad.

Can you remind me again in your secured portfolio looks like there is 20 -- 22 million in the CMO category. What's really -- does that consist of?

Majority of that is all agencies. We only have one small piece of non-agency CMO.

Okay.

Of Fannie and Freddie.

Okay. And so as far as fair market value and cost.

Do you have the information?

I don't have it with me, Brad.

Okay. And for the impairments, whether it's the Trust Preferred's or others; so that's all in the preferred stock category in your securities breakdown?

Yes.

Which I think was around -- cost us some 8, 9 million and fair value of 2 to 3 million. Do you have current breakdown there also for cost and fair value?

No, I don't have it with me.

Okay. My last question, whenever the fed decided to increase fed funds rate and interest rate, what will that mean for you guys over the near term for your margin?

We are slightly asset sensitive right now. So that would improve our margin on a go-forward basis.

If there is a corresponding increase in the fed rates that would apply back to client. The assumption is that if there is a fed increase that would also correspondingly relate to a prime increase.

Sure.

And we would be slightly asset sensitive there and benefit from our annual rate increase.

Okay. I appreciate it guys.

Okay.

Thank you, Brad.

Thank you very much everyone for joining us today and as always, if you have additional questions at any time, please give us a call. Thank you for participating and this will conclude our call.