Premier Financial Corp.

William J. Small – President and Chief Executive Offiver, First Defiance Financial Corp.

James L. Rohrs – President and Chief Executive Officer, First Federal Bank Donald P.

Hileman – Executive Vice President and Chief Financial Officer, First Defiance Financial Corp. Terra Via – Head-Media Relations

John Barber – KBW

Thank you. Good morning, everyone, and thank you for joining us for today’s third quarter earnings conference call.

This call is also being webcast, and the audio replay will be available at the First Defiance website at fdef.com. Providing commentary this morning will be Bill Small, Chairman, President, and CEO of First Defiance; and Don Hileman, Executive Vice President and Chief Financial Officer.

Following the prepared comments on the Company’s strategy and performance, they will be available to take your questions. Before we begin, I’d like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for First Defiance Financial Corp.

Actual results may differ materially from current management forecast and projections as a result of factors over which the Company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release, and the Company’s reports on file with the Securities and Exchange Commission.

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

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

conference call to review the 2013 third quarter. Last night, we issued our earnings release reporting the third quarter 2013 results.

And this morning, we would like to discuss that release and look forward into the rest of this year. Joining me on the call this morning to give more detail on the financial performance through the third quarter is Executive Vice President and CFO, Don Hileman; and Jim Rohrs, President and CEO of First Federal Bank, who will assist in answering your questions.

Don will also be welcoming two new members of our management team that will be working with him, as we transition the Company’s leadership in 2014. And as always, we will answer any questions you might have at the conclusion of our presentation.

Third quarter 2013 net income on a GAAP basis was $5.5 million, or $0.54 per diluted common share. This compares to net income of $5.4 million and $0.54 per diluted common share in the 2012 third quarter.

Net income for the first nine months of 2013 is $17.1 million, or $1.69 per diluted common share versus $13.5 million or $1.29 per diluted common share for the nine months ending September 30, 2012. In light of the current operating environment, we are very pleased with the earnings results this quarter.

The dramatic slowdown in mortgage production, a result of higher mortgage rates had a substantial impact on the quarter. External factors, such as the Federal Reserves’ ongoing manipulation of interest rates, and a tentative economy also remain as challenges.

The economy faced additional headwinds with the uncertainty proceeding with Federal budget and the debt ceiling debates in Washington. With all of this in perspective, it is another solid performance for First Defiance this quarter.

Without a doubt, the improved credit quality was the significant factor in the strong results, but another quarter of strong core performance coupled with a slight increase in the margin, and good expense control were also positive factors in the overall performance. We saw more progress in some key credit metrics in our third quarter performance as classified loans and delinquent loans showed solid improvement this quarter and charge-offs were 25 basis points annualized.

This level of charge-off has remained fairly consistent each quarter this year, and is inline with our expectations. The lower provision is a result of the stable credit quality, and reflects the strength of our credit administration program.

On the loan production side, commercial loan demand remains sporadic. The slow loan environment that we all have been experiencing over the past several years has made loan growth a challenge.

The uncertainty amongst many businesses as to overall economic environment has been cautious towards new capital investments, and many still have strong liquidity. Our total loan balances at period end were up $36 million year-to-date.

The September 30 balance was basically flat to the linked-quarter. This was in spite of the fact we originated $96 million in new loans during the quarter.

We do anticipate increased commercial loan demand in the coming months. And we will continue to look for these opportunities while maintaining our strong underwriting practices and pricing disciplines.

Mortgage loan activity dropped dramatically this quarter after showing signs of deceleration rates in the second quarter. Purchase loan activity was simply not able to makeup for the reduction in refinances.

The deposit side of the balance sheet saw some reduction in average total deposits to the linked-quarter there about 2% above the third quarter 2012 level. The low rate environment had pushed many depositors to part funds in liquid accounts as they awaited an opportunity for higher returns.

And recently, we have seen some of these funds leave the bank looking for yields and alternative investments. We’ve made some changes in the pricing of our time deposits to address this.

Management of the net interest margin in this low rate environment remains a challenge with competitive pressure on the asset yields, and as we’ve noted previously, the opportunities to offset declining yields on the asset side with additional rate reductions on the deposit side are diminishing. However, in light of these challenges we are pleased with the stability we have seen in our margin performance, and actually saw an increase compared to both the linked-quarter and the year-ago period.

The significant decrease in mortgage originations during the third quarter had a large negative impact on non-interest income for the period. The $2 million decrease and gain on sale income year-over-year was partially offset by a positive mortgage servicing right adjustment due primarily to the higher mortgage rates.

But we also saw a slight decline in service fees and charges. On the positive side, we saw increases compared to linked-quarter in both insurance commissions and wealth management income to help offset some of the decreases from the other sources.

Non-interest expense was up slightly over the linked-quarter, but down compared to September 30, 2012. I will now ask Don Hileman to give you the financial details for the quarter, before I wrap up with an overview, and look at what we see developing for the balance of the year.

Don?

Thank you, Bill, and good morning, everyone. As Bill indicated, overall financial results were very solid this quarter.

Our mortgage banking revenues were impacted by the higher rates during the quarter. Our earnings continue to reflect the profitable contribution from our other businesses.

The third quarter net interest margin was 3.84%, reflecting improvement compared to the same period of 2012 and on a linked-quarter basis. While credit quality continues to be a bit choppy, the total non-performing assets down 11% from the third quarter of 2012, but up slightly from the second quarter of 2013.

Most importantly, net charge-offs for the quarter at 20 basis points continued below our target level and provision for loan losses was again favorable versus the same quarter last year. As Bill noted, net income applicable to common shareholders was $5.5 million, basically flat with the third quarter of 2012.

EPS for the quarter was $0.54 per diluted share consistent with the third quarter of 2012. Now, turning to some details, from the income statement, our net interest income was $17.2 million for the third quarter of 2013, up on a linked-quarter basis, and flat with the third quarter of 2012.

For the third quarter of 2013, our margin was 3.84%, an increase from 3.80% in the third quarter of 2012 and up from 3.82% on a linked-quarter basis. Our yield on earning assets declined 2 basis points on a linked-quarter basis, while our cost of interest-bearing liabilities declined 4 basis points on a linked-quarter basis.

While total new loans originated in third quarter were put on a weighted average rate of 4.13%, and the increase from 4.05% in the second quarter of 2013. We saw a continued contraction of our loan portfolio yield in the third quarter of 2013 declining 9 basis points to 4.41% on a linked-quarter basis.

Total non-interest income was $7.3 million in the third quarter of 2013, down from $7.8 million in the third quarter of 2012, a decline of 6%, including a reduction of 17% in total mortgage banking. Service fee income was $2.6 million in the third quarter of 2013, a slight increase on a linked-quarter basis, but down from $2.8 million in the third quarter of 2012.

Net NSF fee income was $919,000 in the third quarter of 2013, compared with $1.1 million in the third quarter of 2012, and $884,000 on a linked-quarter basis. Insurance revenue was $2.2 million in the third quarter of 2013, up from $2 million in the third quarter of 2012.

Regarding the decline in mortgage banking revenues, it was mainly due to lower volumes resulting from higher rates during the quarter. Mortgage banking originations were $61 million in the third quarter of 2013, down from $114 million on a linked-quarter basis, and down from $146 million in the third quarter of 2012.

The percentage of originations for purchase and construction averaged 49% in the third quarter of 2013, up from 21% in the third quarter of 2012, and 36% on a linked-quarter basis. Higher rates during the quarter led to significant declines in our refinance activity.

Overall, mortgage banking income for the third quarter of 2013 was $1.8 million compared to $2.2 million in the third quarter of 2012, and $2.4 million on a linked-quarter basis. Gain on sale income dropped to $894,000 in the third quarter of 2013, compared to $2.9 million in the third quarter of 2012, and $1.9 million on a linked-quarter basis.

However, the third quarter of 2013 did include a positive valuation adjustment to mortgage servicing rates of $480,000 compared with a negative valuation adjustment of $600,000 in the third quarter of 2012. At September 30, 2013, First Defiance had $1.4 billion in loan service for others.

The mortgage servicing rights associated with those loans had a fair value of $9.9 million, or 73 basis points of the outstanding loan balances serviced. Total non-impairment reserves, which are available for recapture in future periods, totaled $1 million at quarter end.

Overall, non-interest expense decreased to $16 million this quarter, compared to $16.5 million in the third quarter of 2012. The third quarter compensation and benefits expense was $8.7 million, a $500,000 increase from the third quarter of 2012.

FDIC costs were $326,000 in the third quarter of 2013, compared with $691,000 in the third quarter of 2012, and $275,000 on a linked-quarter basis due to the improvement in the Company’s risk category late in the first quarter of 2013. Other non-interest expense was $3.1 million in the third quarter of 2013, down when compared to $3.2 million in third quarter of 2012 and increased slightly from $3 million on a linked-quarter basis.

Total credit-related costs, which included net gain loss on the sale of OREO, OREO repairs and write-downs, collection and secondary market buyback costs were $484,000 in the third quarter of 2013, compared with $567,000 in the third quarter of 2012, and $535,000 on a linked-quarter. Regarding secondary market buyback losses, accrual for the estimated losses of $399,000 was established in the third quarter of 2013.

These losses were accrued and expensed as of September 30, 2013, based on an estimated exposure to repurchase requests resulting from notifications received from Freddie Mac during the third quarter of 2013, and included reversal of $498,000 was recorded in the third quarter of 2013. As a result of Fannie Mae completing their post-foreclosure review process that began in the first quarter of 2013, original accrual of $581,000 was established in the first quarter of 2013 for Fannie Mae.

This resulted in the company have a credit balance of $95,000 in the third quarter for secondary market buyback losses compared to an expense of $115,000 for the same period in 2012. Regarding provision expense, the third quarter of 2013 totaled $476,000 down from $705,000 a year-ago and basically flat on a linked-quarter basis.

In 2013 third quarter provision was $306,000 lower than net charge-offs for the quarter. Net charge-offs with 20 basis points of the average loans for the third quarter of 2013, down from 22 basis points in the third quarter of 2012.

Of the total charge-offs, 72% related to commercial real estate loans, 15% home equity, 7% residential, 3% commercial, and 3% consumer, and recoveries has remained fairly consistent over the last three quarters of $367,000 for the third quarter of 2013, $324,000 for the second quarter of 2013, and $318,000 for the first quarter of 2013. The average of the net charge-off as a percentage of average loans over the last several quarters have been at levels management believes to be more consistent with long-term expectations.

Our allowance for the loan losses decreased to $26 million at September 30, 2013, from $26.3 million last September 30, 2012. The allowance percentage decreased to 1.66% from 1.7% a year ago, primarily due to credit quality improvement overall from a year ago.

The allowance now represents 85.09% over the non-performing loans, up from 69.6% at September 30 of 2012. As I mentioned in the past, we believe that the reserve percentage will attract between the current level, and 1.5% as the quality continues to improve.

We saw an increase in non-performing loans in the third quarter 2013 to $30.5 million, up from $28.7 million on a linked-quarter basis, but down from $37.8 million at September 30, 2012. However OREO balance decreased on a linked-quarter basis to $5.5 million from $6.5 million, but was up from a year ago.

Overall, non-performing assets increased 834,000, at 2.4% on a linked-quarter basis, incurring and specialty loans decreased slightly 722,000 or 2.5% on a linked-quarter basis. Looking year-over-year, non-performing assets ended the third quarter at $36, million or 1.75% of total assets down from 1.98% of total assets as of September 30, 2012.

Total classified loans remain relatively flat at $59.7 million at September 30, 2013, compared with $58.3 million on a linked-quarter basis, and well below the $90.3 million at September 30, 2012. We look for continued new improvement level of well classified assets.

Total past due and non-accrual rate was 2.13% at September 30, 2013, down from 2.87% at September 30, 2012. Delinquency rate for the loans 90-days past due and on our non-accrual decreased to 1.93% this quarter from 2.47% in the third quarter of 2012, but up from 1.82% on a linked-quarter basis.

We are encouraged by the overall steady improvement in the levels of 90-day delinquencies on non-accruals. Of the $30.5 million total non-accrual loans, 20.8% or 68% are under 90 days past due.

We had a decrease in the 30-day and 90-day levels of delinquencies this quarter, compared to the second quarter of 2013 and from the third quarter of 2012. We believe that directionally, we will improve an overall credit quality in the coming quarters with reductions in both non-performing and continued reductions and classified.

Turning to the balance sheet, we saw a decline in the second quarter of 2013 with total assets of $2.06 billion at September 30, 2013. On the asset side, cash and equivalents increased to $127.6 million from $92.4 million at September 30, 2012.

Securities declined over the year to $184.5 million. Gross loan balances increased 3.25% or $49.1 million year-over-year, and 2.36% year-to-date.

We were basically flat on a linked-quarter basis. While, overall loan growth was less than we would have like, we are still optimistic in our outlook for growth in the loan portfolio.

Total deposits increased $49.1 million over the same period a year-ago, and increased $22.8 million on a linked-quarter basis. We’re pleased with the mix of deposits, but have seen a shift from non-interest bearing accounts to interest bearing accounts from year-end 2012, as well as more interest in CDs with longer terms.

Non-interest bearing deposits increased to $301 million at September 30, 2013, and $271.3 million at September 30, 2012. Deposit mix and pricing opportunities are a continued focus of our overall strategy and efforts to reduce and/or maintain our cost of funds in this interest-rate environment.

Total period-end shareholders' equity ended September 30, 2013, at $269.4 million, up from $255.1 million at September 30, 2012. Our capital position is strong with peer and shareholders' equity to assets of 13.1% at September 30, 2013 compared with 12.29% in the September 30, 2012, and the bank’s overall risk-based capital ratio is strong at 14.8%.

In the quarter, the company announced a new share repurchase program that authorizes the company to buyback 5%, or approximately 489,000 shares of the company’s stock outstanding. We purchased what we made depending on market conditions and other factors.

We have not set a timeline for the completion of the buyback authorization. We also announced the continuation of the quarter’s dividend last night.

We consider these both as important components of our overall capital management strategy. I would like to take this opportunity to welcome Kevin Thompson to the First Federal team.

Kevin will be transitioning into the CFO role on January 1, as I move into the CEO role at Bill’s retirement. Kevin has over 30 years of banking experience, specializing in finance, and most recently servicing as a consultant to the financial services industry.

His previous positions include EVP, Chief Financial Officer of Sky Financial Group; and Senior Vice President Line of Business, Chief Financial Officer for Huntington Bancshares. I would also like to welcome John Reisner to the First Federal team as General Counsel and Chief Risk Officer.

John also brings 30 years of banking experience specializing in financial services, law and risk management. His most recent position was Managing Director & Principal, Risk Management Division at Austin Associates, national consulting agency, community banks and thrifts.

His previous positions included Senior Vice President, General Counsel at Sky Bank and Senior Vice president and Director of Corporate Compliance at Sky Financial Group. We are very pleased to have these two well qualified individuals as part of the First Defiance leadership team.

That completes my overview for the quarter, and I’ll turn the call back over to Bill.

Thank you, Don. Kevin and John are both great additions to First Defiance, in a short time they’ve been with us; they’ve had a positive impact as members of our management team.

I look forward to their continued involvement in the growth and success of First Defiance. As we progressed through the final quarter of 2013, we’re aware that there are still many challenges to the economy and to stable operating environment much of this is related to national issues, and we’re probably going to face another round of budget and debt ceiling of debates early in 2014.

This will not do much for positive reassurance of the business community, but there is not much we can do it to control that. We will stay focused on our business plan regardless of what is going on elsewhere.

The overall economic climate throughout our market area had shown cautious optimism, and employment has remained relatively stable. Our geographic region certainly benefits from the strong automotive recovery, and the overall diversity of industry throughout this area is a good complement to that.

Instability relative to a variety of issues in Washington, combined with the concerns with the global economy, still have many businesses concerned, but we see more optimism developing. Don discussed some of our capital plans.

And in addition, we are very interested in finding acquisition partners that would add strategic value to First Defiance and feel our strong capital levels positioned us for this. From a business development standpoint, we are actively engaged in a calling program both on potential and existing clients, to develop new business and solidify existing relationships.

Many of these calls are joint calls with bank and insurance personnel teaming up to introduce each other to clients and expand relationships. We are hoping that recent indications of increased insurance opportunities and stronger loan demand continue to build as a result of this program.

Sales initiatives on the retail side are also showing encouraging results, and we will pursue these throughout our markets. The housing market continues to be one of the biggest question marks facing the full recovery of the economy.

Many areas are reporting a shortage of homes and building plots available for sale, while other areas report a soft demand for purchases. We are encouraged by the rising prices and are hopeful that buyers become more active as interest rates still remain at historically low levels.

Agriculture, it’s been a really – it’s been a good year for our farmers. Yields are not coming in quite as high as many had anticipated early in the growing season due to the timing of rainfall, but they are still solid especially for the corn crop.

These yields along with current prices, even though they are off their earlier highs should result in another good year for agriculture in this area. In the third quarter, we converted to a new mortgage operating system that will not only enhance our traditional delivery system, but will increase our ability to originate applications online 24-hours a day.

We are developing extended hour sales support for this to further leverage our strong reputation in the mortgage origination business. We’re also in the process of developing a business banking program here toward the loan and cash management needs of the many small businesses located throughout our market.

Parts of this program would be launched in the fourth quarter of this year with full implementation scheduled for early 2014. We recognized and need to be proactive and progressive in finding new ways to deliver on our proven business plan, and these are couple of the initiatives we have underway to do this.

We are continuing to look for and develop other programs, services and technology that will allow us to remain a strong performing financial services provider meeting the needs of our clients. We feel as if we have positioned the company well to move forward in the areas that we have control over.

However, not everything is within our control, concerns remained with a regulatory and legislative scene on the federal level. We are concerned with the rollout of the Consumer Financial Protection Bureau’s new mortgage rules that go into effect January 1, 2014.

But we are confident that we are prepared to meet all of the new lending requirements. We are working with our industry to encourage regulations that offer protection to consumers without hindering our ability to offer affordable financial products.

With all these challenges, we continue to build on our strong core strategy and philosophy. Our transition plan has developed as anticipated, and we have great confidence in the new management team led by Don, as they prepare to transition at the first of the year.

Our mission remains the same. We maintain our focus of being a financial services provider offering a complete line of products and services with the relationship oriented approach on a profitable basis.

The staff we have throughout this organization, all work hard so we can achieve that goal, and they deserve much of the credit for our success. I thank them for their diligence and loyalty, and I thank you for joining us this morning on the call.

And now we would be happy to take your questions.

Hi good morning.

Good morning John.

Hi, John.

Bill, you mentioned that, you adjusted the deposit pricing this quarter. I’m just wondering when that occurred and was it across multiple deposit products?

Most of that took place in mid to late July, that was probably closer to the end of July before we got them implemented and we did that primarily on some of the longer-term CD products trying to extent maturities a little bit on the deposit side.

Okay, thanks. And I was hoping you could maybe speak about mortgage banking outlook, especially with this new mortgage operating system platform that you rolled out, and also just the pipeline for origination volumes?

We’re excited about the new operating system in the transition went very, very well. Our people did an excellent job of preparing for it, and I think it was pretty much a seamless transaction, narrow transition to the new system.

It does give us a little bit more flexibility in ways that we can receive applications and process them. We are strong believers, and not just sitting behind the desk and waiting for business to come through the door, and this gives us a lot more flexibility to be out, and go through the application process, and then follow that application all the way through to closing, and I think a much more efficient method.

As far as the outlook is concerned, we definitely have seen decline in the pipeline. Interest rates have settled back a little bit, but we haven’t seen that really cause much additional pickup.

We are hopeful that our purchase activity will continue to build as I mentioned in my comments earlier, these rates are still at very low levels on a historical basis, and hopefully there is some pent-up demand out there for purchase activity.

Okay, thanks, Bill. Also with the changes in the senior management team, does that at all impact the timing of your M&A strategy?

No. Not at all.

No.

We are – as always we’re going to continue to pursue that and I have no reason to slow up based on as John and Kevin are both very, very experienced individuals and I think the team – the rest of the team we have here in place we’ve been through this drill Jim and many of his people have worked with us on our past one, so there is no reason for us to slow up at all.

I think, it put this in a better position John, then maybe we will be forecast so.

Okay, thank you. And just the last one I had, I was wondering, if you could talk about the build out in Fort Wayne and also any other potential markets that you’re interested in expanding a presence in?

Yeah, I’ll let Jim comment on Fort Wayne he is kind of been driving that for us and we will talk about some other markets, Jim.

We have one location there now and the second that we’ve signed a contract for the construction of which is in process, we hope to have that building occupied in probably April, May of next year, that will be our main office operations in that market and we’re already looking for our third site that would be geographically located in the different part of Fort Wayne from the other two offices, and borrowing an acquisition in that market I suspect will be looking for forth site at some point and not to distant future that’s a very important market for us, we have a very good foothold there ready, good people there and looking to add the staff there also.

I think, the, obviously there is a little bit of possible disruption in that market due to a recent acquisition announcements and we certainly feel that we’re positioned to take advantage of that. As far as some other areas as always we’re interested in looking at - it ways to expand relatively close to our geographic area, we’re not looking to jump states or anything like that.

But from a acquisition standpoint, we continue to look at opportunities throughout this region. We also are discussing possibilities of doing some de novo expansion.

We think there's opportunities here in Northwest Ohio, as well as Northeast Indiana and Southeast Michigan.

Great. Thanks for the color.

Okay. Thanks, John.

Thanks, John.

Well. Thank you, for joining us today.

And this concludes our third quarter conference call. Thank you.