Premier Financial Corp.

Tera Murphy – Marketing Specialist, First Federal Bank of the Midwest Donald P. Hileman – President, Chief Executive Officer and Chief Financial Officer Kevin T.

Thompson – Chief Financial Officer and Executive Vice President James L. Rohrs – Executive Vice President, Director; President and Chief Executive Officer of the Bank

Christopher Marinac – FIG Partners LLC Damon DelMonte – Keefe, Bruyette & Woods, Inc.

Thank you. Good morning, everyone, and thank you for joining us for today’s 2014 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 Don Hileman, President and CEO of First Defiance; and Kevin Thompson, 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’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 forecasts 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 in the company’s reports on file with the Securities and Exchange Commission.

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

Good morning, and welcome to the First Defiance Financial Corp third quarter 2014 conference call. Last night, we issued our 2014 third quarter earnings release.

And we’d now like to discuss that release, and give you our outlook for the remainder of 2014. At the conclusion of our remarks, we will answer any questions you may have.

Joining me on the call this morning to discuss the details of the financial performance for the third quarter is Kevin Thompson, CFO. Also joining us to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

This will be Jim’s last call, earnings call since he is retiring at the end of the year, and I’d like to personally thank you him for his service and dedication to the company and we wish him well on his retirement but not to the first of the years so. In our third quarter earnings release, we announced net income on a GAAP basis of $7.1 million or a $0.71 per diluted common share compared to $5.5 million or $0.54 per diluted common share in the third quarter of 2013.

We are very close to our performance this quarter and the continued improvement in core operating results. We’re encouraged by the year-over-year and main quarter growth.

This was driven both by increased activity from existing customers and new lending relationships. Loan demand was robust this quarter was solid growth in each of our market areas including our new Columbus, Ohio higher loan production office.

The growth in the loan portfolio enabled us to improve our earning asset mix leading to increased net interest margin and then in interest income. The growth in both our net interest income and noninterest income revenues reflect contribution from our core business strategies over the past quarter and last year.

We are pleased with our strong net interest income growth this quarter of 3% over the third quarter of last year. The primary factor for growth this quarter was the beneficial change in the earning asset mix.

The competitive loan rate environment remains very challenging as the industry focuses on growth. We are expecting interest rate environment to be relatively stable at current levels in the near term as most sustainable growth is built into the overall economy.

In addition, the deposits of the balance sheet continue to show strong growth over last year. Noninterest bearing and interest bearing demand deposits have been the primary growth areas.

We did experience decline in an earning quarter in noninterest bearing and interest bearing balances. On a linked quarter basis we were able to increase our margin to 3.73% from 3.62%.

Noninterest income show growth on a GAAP and core operating basis, we believe several of strategic initiatives put into place of first half of the year are starting to show results included in these are interests in insurance revenues and both the year-over-year and linked quarter basis and interest income, this is up and both the year-over-year and linked quarter basis. Service fees and other account related charges also reflected some more growth pattern.

(Inaudible) income continue to decline on a year-over-year basis as mortgage loan production in the third quarter of 2014 declined 15% from the third quarter of 2013. More significantly mortgage revenues remains at the same level as last year.

Total noninterest expense increased 671,000 from the third quarter of 2013 and also increased on only quarterly basis primarily due to variable costs associated with revenue growth. The credit quality metrics continued showing improvement this quarter.

Non-performing assets declined approximately $8.2 million or 23% year-over-year. Non-performing loans decreased approximately $8 million or 26% year-over-year to $22.8 million at quarter-end down from $24.9 million on the quarter basis.

Approximately, 52% of the non-performing loans continue to make payments. Classified loans and non-accrual loans also showed progress in the third quarter of 2014 staying on a downward trend.

We are also pleased with the decline from a year ago on the level (inaudible) 2014 compared to 0.20% of loans in the third quarter of 2013. Non-performing and classified assets were remained areas of focus to ensure additional declined in the future.

Regarding our capital management plans, our stock buyback continued in the third quarter with repurchasing of 147,000 shares and we completed the repurchase of all 489,000 shares authorized by September. The board also authorized a buyback and additional 469,000 shares.

We are also happy to announce a third quarter dividend of $0.17.5 per share representing an annual dividend yield of approximately 2.5%. Our outgoing solid performance and capital level support this utilization of capital.

I will now ask Kevin Thompson to provide additional financial details for the quarter before I conclude with an overview. Kevin?

Thank you, Don, and good morning, everyone. As Don stated, net income for the third quarter was $7.1 million or $0.71 per diluted share, and this compares quite favorably to the prior year results of $5.5 million or $0.54 in the third quarter of 2013.

The third quarter of this year did include several nonrecurring type items that aggregated to about $1.4 million after tax or about $0.14 per diluted share. These items included securities gains of 299,000 after tax, a tax free bank on life insurance benefit of 903,000 a tax free gain realized through a deferred compensation plan trust of $498,000 plus an additional net adjustment income taxes of 250,000 which included the write off of a portion of unused deferred tax assets.

Even with the exclusion of these items and this clearly seen we had a very good quarter. We were very pleased with the overall performance and the continued progress quarter on almost all fronts.

Very strong loan growth improved the earning asset mix increasing the net interest margin and net interest income. Non-interest revenue also grew on a quarter basis from a year ago.

Operating expenses remained in line supporting our growth strategies and credit quality continued to improve. Looking at the details of the income statement our net interest income was $17.7 million for the third quarter of 2014 up from 17.1 million in the length quarter which had one less accrual day and up above 507,000 from the 17.2 million in the third quarter last year.

For the third quarter of 2014 our margin was 3.73%, up 11 basis points from last quarter. The down from 3.84% in the third quarter last year.

After a slow start to the year our earning asset mix and margin improved significantly in the third quarter. Growth and loans in securities reduced our excess liquidity position benefiting both the margin and earnings.

Our yield on earning assets is still down 14 basis points from last year adopt 10 basis points on a length quarter basis. Our cost of interest bearing liabilities was down three basis points from a year ago and was -- on a length quarter basis.

Total new loans originated in the third quarter were put on at a weighted average of 4.12% a decrease from 4.51% in the second quarter of 2014, but our loan portfolio yield in the third quarter of 4.35% declined only two basis points on a linked quarter basis. We still look to improve our earning asset mix through additional growth in loans and investments going forward and our margin is expected to improve accordingly.

Total non-interest income was $9.4 million in the third quarter of 2014, up from $7.6 million on a linked quarter basis, and up from $7.3 million in the third quarter of 2013. Again, the third quarter this year included a bank on life insurance benefit of $903,000 again realized through a deferred compensation plan trust of 498,000 and pretax securities gains of 460,000.

Comparatively, the second quarter 2014 has securities gains of 471,000 and the third quarter last year had no securities gains and no significant non-recurring type items. On a quarter basis all major categories of non-interest income except mortgage banking increased over the third quarter last year.

Overall mortgage banking income for the third quarter of 2014 was 1.5 million which was about even with the linked quarter but down from 1.8 million in the third quarter of 2013. The third quarter decline in mortgage banking from the prior year was primarily due to the valuation adjustment of mortgage servicing rights which was a positive 68,000 this year versus positive 480,000 last year.

While mortgage banking originations were still lower compared to the third quarter of last year at $52.2 million in the third quarter this year compared to $51.6 million last quarter and $61.2 million in the third quarter of 2013. Gain on sale income was $973,000 in the third quarter compared to $986,000 on a linked-quarter basis and actually up from $894,000 in the third quarter last year.

At September 30, 2014, First Defiance have $1.4 billion in loan service for others. The mortgage servicing rights associated with those loans had a fair value of $9 million, or 71 basis points of the outstanding loan balances serviced.

Total impairment reserves, which are available for recapture in future periods, totaled $921,000 at quarter end. Service fee income with some fee and product design changes made this quarter was $2.7 million in the third quarter of 2014, an increase from $2.5 million in the linked quarter, and from $2.6 million in the third quarter last year.

Insurance revenue was nearly $2.4 million in the third quarter of 2014, up from $2.2 million in both the linked quarter and the third quarter of 2013. Also, our trust income while a smaller component of revenue continues to show significant growth from a year ago totaling $315 million in the third quarter, up 25% from $251,000 in the third quarter last year.

As for non-interest expense, third quarter expenses totaled $16.8 million, up from $16.4 million in the linked-quarter and $16.1 million in the third quarter of 2013. The increase was primarily in compensation and benefit expense which in the third quarter was $569,000 up from last year primarily due to merit increases, higher incentives, increased sales commissions, and higher health plan cost as well as some staffing additions for our Columbus, Ohio loan production office and our new Fort Wayne, Indiana office opened in August.

Regarding provision expense, the third quarter of 2014 totaled $406,000, compared to $446,000 last quarter and $476,000 in the third quarter last year. Net charge-offs were 12 basis points of average loans for the third quarter of 2014, compared with 16 basis points last quarter and 20 basis points in the third quarter a year ago.

Our allowance for loan loss at September 30, 2014 was $24.6 million or 1.50% of total loans versus $26 million or 1.66% at September 30, last year. The change reflects the continued credit quality improvements achieved during the past year such that the allowance coverage of non-performing loans has increased to 109% at quarter end up from 85% at September 30, 2013.

We expect the reserve to loans percentage to continue to track favorably with continued asset quality improvement. As per the asset quality numbers, non-performing loans decreased again this quarter to $22.5 million, down from $24.9 million on a linked quarter basis, and down from 26% from $30.5 million at September 30, 2013.

Our OREO balance also decreased to $5.3 million from $5.5 million in both the linked quarter and the third quarter last year. Overall, non-performing assets ended the quarter at $27.9 million or 1.29% of total assets, down from 1.75% of total assets at September 30, 2013.

Total classified loans also declined to $45.1 million at September 30, 2014, compared to $47.6 million on a linked quarter basis, and considerably below the $59.7 million at September 30, 2013. Moving to the balance sheet, total assets were $2.15 billion at September 30, 2014, virtually flat with last quarter end but up $92.6 million from last year.

Gross loan balances increased $54.3 million during the quarter and are now up $75 million or 4.8% year-over-year. Securities increased $54.2 million from a year ago while cash and equivalents declined $31 million.

The significant long growth this past quarter clearly improved our earning asset mix and our long growth outlook remains very positive. Total deposits of $1.73 million at quarter end reflect an increase of $72.2 million from a year ago, but were down $11.2 million on a linked quarter basis.

Non-interest bearing deposits have increased to $340.6 million at September 30, 2014 from $30.9 million at September 30, 2013. We are continually pleased with our ability to generate and maintain a solid low-cost core deposit base.

Looking at our capital position, total period and stockholders' equity finished at September 30 at $278.2 million, up from $269.4 million at September 30, 2013. Our capital position remains strong with period and shareholders’ equity to assets of 12.93% this year compared to 13.09% last year and with the banks totaled risk-based capital ratio at approximately 14.9%, a healthy capital position continues to provide us the opportunities to pursue our growth strategies as well as enhance shareholder value through dividends and share repurchases as Don mentioned.

Finally regarding our year-to-date results. For first nine months of 2014, net income was $17.9 million or $1.79 per diluted share versus $17.1 million or $1.69 per diluted share for the same period in 2013.

That’s an increase of $0.10 per share while overcoming a significant decline in mortgage banking income of about $1.8 million after tax or $0.18 per share year-to-date. This year's results have benefited from net non-recurring type items of about $0.12 per share year-to-date, about $0.14 per share this quarter as I mentioned earlier, about $0.03 per share at last quarter from securities gains for the first quarter included onetime merger termination charge which cost us about $0.05 per share.

With the exclusion of mortgage banking decline and the non-recurring items earnings grew about $0.16 per share. We see this as an indication of success in our core business strategies that will continue to contribute to our improvement in our financial results going forward.

That completes my financial review and now I will turn the call back to Don.

Thank you, Kevin. I am very delighted with our progress we have made over the course of the year in the position of First Defiance.

I anticipate continued strong performance with the remainder of 2014. Our results are beginning to reflect the revenue benefit of our non-interest income initiatives as pricing and account bundling changes are going into the fact with recent statement cycles.

We expect that to build throughout the year. First Defiance is focused on several areas believed to improve financial performance and help drive greater shareholder value.

These areas of internal focus are core balance sheet growth, with a focus on loan growth, revenue growth, expense control and improve asset quality. We foresee continued improvement in loan demand for the rest of 2014 and into 2015.

The third quarter reflected strong growth but I will expect a slightly more moderate pace going forward. The size of our current pipeline is reassuring and our lender say activity is robust within our footprint.

The lending environment room remains very competitive but we believe we can grow our business without making significant concessions in rate and other terms. Our average loan declined only 2 basis points only quarter basis.

As we learn from the past several years, we know it is important to maintain our disciplined underwriting during this period and continue our under willingness to compromise our standards to achieve the long portfolio growth. Our business banking initiatives is underway and balances share growth during the quarter.

Our business bankers in each market area are focusing entirely on this new opportunity and we expect product volumes to build each quarter. Additional balances result of the activity from Columbus, Ohio loan production office and we expect a further contribution to long growth in fourth quarter.

Regarding our non-interest revenue initiatives, there are quarter changes to our fee schedule and product designs based on relationships and fees for services we’re beginning to offset the changes in customer use patterns and contribute to the overall service for income growth. We are looking to continue enhancements in our electronic and mobile capabilities giving our customers more choices on how they interact and bank with us.

This environment is rapidly changing and we need to keep pace and continue our conversation on growth I am also pleased to announce that we opened our second Fort Wayne, Indiana location this quarter. Fort Wayne has been a very good market for us when we look forward to expanding our presence intend to growth Fort Wayne market area in alignment with our strategic plans for growing revenue both on insurance and with management divisions reflect the growth in our quarterly results while organic expansion for our insurance revenues since our primary purpose we are continually looking for strategic acquisition opportunities.

We are very up lifted by our recent performance and look to continue to drive the initiatives we believe that will help to obtain our goal being a consistently high performing community bank prescribed to be every day. We remain confident in our strategies and the people we have working hard to execute our plans and looking at our new initiatives as enhancements to our overall strategy.

We feel positive about our performance to this point in 2014 and look forward to the remainder of the year. We are committed to all of our customers and shareholders and appreciate the trust you have placed in us as we work to make First Defiance a high performing community banking organization.

Thank you for your interest in First Defiance Financial Corp., and we thank you for joining us this morning. We will be now happy to take your questions.

Question-and-Answer Session

Thanks. Good morning.

Don, can you remind us on the number of lenders that you have now system wide and perhaps just talk about seeing some slight increases to the team in the next year?

Yes, I think we have got about 25 lenders and we are looking to strategically add to that group in the areas where we think we have an opportunity. We are putting our final plans and the number of that as we start our plan for 2015 but right now we are expecting that we will increase our number of loan producers.

Okay. Great.

And then I guess just the balance sheet question for either of you, how should we think about the relationship between loans and learning assets. I know this improves this quarter you mentioned at the release in the remarks is there something that we will see it again or is it more sort of just kind of the catch up if you will?

Well I would characterize this certainly probably more but catch up in a sense but I think there is still room for us to see the long mix within our earnings assets continue to improve and that’s what we are expecting.

Okay. Great.

And then I guess Kevin, there is one more before I go, on the expense side do you think the deficiency ratio in general should trend lower not asking for a specific guidance per say but just kind of a more directional if we should expect more operating leverage to comfort the company.

Well we think we have got some very positive movement on the revenue side and we think our expense controls are in line so we think that leads to improvement in the efficiency ratio but we spend money to grow revenues a little bit. So it's going to be directionally I think improving but we are focused on maintaining a positive leverage in growing that bottom line.

Okay. Very good.

Thank you guys for the color.

Thanks.

Hey good morning guys. How are you?

I am good. How are you Damon?

Good. Thanks.

My first question is just kind of deals with the margins. Could you talk a little bit about your outlook from this level going forward, I know the benefit of this quarter is driven a large part by the remixing on the earning assets do you think that you are able to sustain this level or would you expect to trend a little bit lower given where rates are?

You know rates are certainly going to be a challenge Damon on the loan side. But we still have some opportunities again on the mix and so I think when we kind of think at least in the near term going forward, I guess I am expecting with the margin I am not expecting the margin to decline, but I know that it's going to expand considerably from here.

I think if we can continue to grow the balance sheet and keep the margin where it’s at, but perhaps some improvement from an earning asset mix I mean that’s probably what we are trying to do. The rate environment though is a little bit of a wild colored and whether that presents more head wind we will just have to see how that plays out.

Yes, and then the yield on the securities portfolio is 3.7% this quarter, can you remind us what’s in the portfolio to achieve such a yield and what the duration is?

We have a little bit of heavier waiting on this I suppose than most banks perhaps. But it's about 35% to 40% and then the rest is primarily CMOs and nothing exotic.

Okay. What’s the --

Four to five years, yes something like that, yes.

Okay. All right.

And then with respect to the long growth I think linked quarter annualized it was probably 9.5% or so, it sounds like you have a lot of momentum going so you think that as we ground out this year and head into 2015, this is at sustainable level?

I think there is an opportunity there but I think it's probably on the high side and I don't think we look out for four quarters. I think that would be pretty high growth rate for us.

Okay. So you think this is a good quarter you had some build up in the pipeline maybe that things that came through and you are able to close them?

I think so. I think that I look at little bit more of that than a new sustainable level that we are going to continue with.

I would like to, but I am little bit more realistic that that’s probably on the high side and we are probably looking at couple of percentage points lower than that on a more sustainable level.

Okay. Great.

And then it's my last question. Can you just kind of refresh this on your M&A thoughts what your appetite is for size and for location?

I think that really hasn’t changed. I think our appetite is still in our geographic footprint.

We understand the business in our markets and we think there is still – it's going to be good opportunity in our footprint, size I think (inaudible) a little bit more open to different size of the transaction but I think obviously on a hot top size something like a billion will be pretty large money for us to swallow, sweet spots probably half a billion.

Okay. Great.

That’s all I had. Thank you very much.

All right. Thanks a lot.

All right. Thanks.

Kevin can you may just go over the mortgage banking statistics that you provided I didn’t get all of those. I thought you said that the originations this quarter were 52.2 million and last quarter?

Last quarter was 51.6 and the third quarter last year was 61.2.

Okay and gain on sales this quarter was 973, correct.

973, that’s correct.

Okay. All right.

That’s all I had. Thanks.

Alright. Thanks.

Thank you very much for joining us the call and have a good day.