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 Period Ended March 31, 2000
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.
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(Exact name of registrant as specified in its charter)
Ohio 34-1803915
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Clinton Street, Defiance, Ohio 43512
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(Address or principal executive office) (Zip Code)
(419) 782-5015
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Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to 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 [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ ] No [ ]
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 -
6,848,592 shares outstanding at May 8, 2000.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
Page Number
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PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - March 31, 2000 and December 31, 1999 1
Consolidated Condensed Statements of Income -
Three months ended March 31, 2000 and 1999 3
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Three months ended
March 31, 2000 4
Consolidated Condensed Statements of Cash Flows
- Three months ended March 31, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
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FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
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March 31,2000 December 31, 1999
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ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 11,231 $ 13,102
Interest-bearing deposits -- 3,134
-------- --------
11,231 16,236
Securities:
Available-for-sale, carried at fair value 53,264 53,946
Trading, carried at fair value 3,931 29,805
Held-to-maturity, carried at amortized cost
(approximate fair value $9,467 and $9,953
at March 31, 2000 and December 31,
1999, respectively) 9,428 9,895
-------- --------
66,623 93,646
Loans held for sale (at lower of cost or fair value,
approximate fair value $189,362 and $237,622 at
March 31, 2000 and December 31,1999, respectively) 189,362 237,622
Loans receivable, net 477,882 465,321
Mortgage servicing rights 104,684 97,519
Accrued interest receivable 5,180 3,868
Federal Home Loan Bank stock 14,428 14,181
Office properties and equipment 21,249 21,311
Real estate, mobile homes and other
assets held for sale 2,359 2,557
Goodwill, net 14,515 14,699
Other assets 23,277 21,034
-------- --------
Total assets $930,790 $987,994
======== ========
See accompanying notes.
1
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
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March 31, 2000 December 31, 1999
-------------- -----------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $ 511,057 $ 502,969
Advances from Federal Home Loan Bank 183,570 265,410
Advance payments by borrowers for taxes and insurance 68,992 61,542
Warehouse and term notes payable 60,230 53,504
Deferred taxes 2,114 2,232
Other liabilities 13,517 12,921
--------- ---------
Total liabilities 839,480 898,578
STOCKHOLDERS' EQUITY
Preferred stock, no par value per share:
5,000,000 shares authorized; no shares
issued -- --
Common stock, $.01 par value per share:
20,000,000 shares authorized; 6,837,510
and 6,814,156 shares outstanding, respectively 68 68
Additional paid-in capital 53,344 53,181
Stock acquired by ESOP (3,451) (3,664)
Deferred compensation (391) (458)
Accumulated other comprehensive income,
net of income taxes of $(586)
and $(565), respectively (1,137) (1,096)
Retained earnings 42,877 41,385
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Total stockholders' equity 91,310 89,416
--------- ---------
Total liabilities and stockholders' equity $ 930,790 $ 987,994
========= =========
See accompanying notes
2
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
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Three Months Ended
March 31
2000 1999
--------- --------
Interest income:
Loans $14,309 $11,622
Investment securities 1,470 814
Other 51 45
------- -------
Total interest income 15,830 12,481
Interest expense:
Deposits 5,623 4,682
Federal Home Loan Bank advances 2,887 1,982
Notes payable 1,132 93
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Total interest expense 9,642 6,757
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Net interest income 6,188 5,724
Provision for loan losses 1,408 512
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Net interest income after provision
for loan losses 4,780 5,212
Non-interest income:
Mortgage banking income 8,104 6,509
Gain on sale of loans 1,945 1,563
Other non-interest income 1,794 921
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Total non-interest income 11,843 8,993
Non-interest expense 13,249 11,115
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Income before income taxes 3,374 3,090
Income taxes 1,173 1,132
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Net income $ 2,201 $ 1,958
======= =======
Earnings per share: (Note 4)
Basic $ .35 $ .29
======= =======
Diluted $ .35 $ .28
======= =======
Dividends declared per share (Note 3) $ .11 $ .10
======= =======
Average number of shares
Outstanding: (Note 4)
Basic 6,232 6,705
======= =======
Diluted 6,376 6,925
======= =======
See accompanying notes
3
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
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2000
----------------------------------------------------
Stock Acquired By
-------------------------
Additional Management
Common Paid-in Recognition
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Stock Capital ESOP Plan
Balance at December 31, 1999 $68 $53,181 $(3,664) $ (458)
Comprehensive income:
Net income
Change in unrealized gains (losses)
net of income taxes of $22
Total comprehensive income
ESOP shares released 61 213
Amortization of deferred compensation
of Management Recognition Plan 67
Shares issued under stock option plan 107
Purchase of common stock for
treasury (5)
Dividends declared (Note 3)
Balance at March 31, 2000 $ 68 $53,344 $(3,451) $(391)
==== ======= ======= =====
See accompanying notes
4
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
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2000 1999
-------------------------------------------------- --------------
Net Unrealized
gains (losses) on Total Total
available-for- Retained Stockholders' Stockholder's
sale securities Earnings Equity Equity
--------------- -------- ------ ------
Balance at December 31, 1999 $(1,096) $41,385 $89,416 $93,710
Comprehensive income:
Net income 2,201 2,201 1,958
Change in unrealized gains (losses)
net of income taxes of $22 (41) (41) (59)
---- ----
Total comprehensive income 2,160 1,899
ESOP shares released 274 328
Amortization of deferred compensation
of Management Recognition Plan 67 100
Shares issued under stock option plan 107 233
Purchase of common stock for
treasury (4) (9) (6,163)
Dividends declared (Note 3) (705) (705) (669)
------- ------- ------- -------
Balance at March 31, 2000 $(1,137) $42,877 $91,310 $89,438
======= ======= ======= =======
See accompanying notes
5
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
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Three Months
Ended March 31,
2000 1999
--------- ---------
Operating Activities
Net income $ 2,201 $ 1,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,408 512
Provision for depreciation 488 410
Net securities amortization 16 13
Amortization of mortgage servicing rights 3,539 3,257
Amortization of goodwill 184 183
Gain on sale of loans (1,945) (1,563)
Amortization of Management Recognition Plan
deferred compensation 68 100
Release of ESOP Shares 274 328
Gain on disposal of office properties and equipment -- (1)
Deferred federal income tax (credit) provision (96) 393
Proceeds from sale of loans 569,752 312,593
Origination of mortgage servicing rights, net (10,704) (6,157)
Origination of loans held for sale (519,547) (303,118)
Increase in interest receivable and other assets (3,555) (520)
Net repurchase of loans held for sale (4,738) (8,853)
Increase in other liabilities 593 681
--------- ---------
Net cash provided by operating activities 37,938 216
Investing Activities
Proceeds from maturities of held-to-maturity securities 458 1,172
Proceeds from maturities of available-for-sale securities 2,691 11,944
Proceeds from sale of trading securities 25,874 --
Proceeds from sales of real estate, mobile homes, and
other assets held for sale 544 404
Proceeds from sales of office properties and equipment -- 1
Purchases of available-for-sale securities (2,079) (7,189)
Purchases of Federal Home Loan Bank stock (247) (918)
Purchases of office properties and equipment (426) (1,082)
Adjustment of acquisition of Insurance Center -- (126)
Net increase in loans receivable (9,577) (8,198)
--------- ---------
Net cash (used in) provided by investing activities 17,238 (3,992)
6
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
- -----------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2000 1999
-------- --------
Financing Activities
Net increase in deposits and advance payments by borrowers
for taxes and insurance 15,538 45,820
Repayment of Federal Home Loan Bank long-term advances (10,340) (725)
Repayment of term notes payable (290) (40)
Net decrease in Federal Home Loan Bank
short-term advances (71,500) (50,645)
Proceeds from short-term line of credit 6,800 --
Increase in mortgage warehouse loans 216 --
Purchase of common stock for treasury (9) (6,163)
Cash dividends paid (703) (710)
Proceeds from exercise of stock options 107 233
-------- --------
Net cash used in financing activities (60,181) (12,230)
-------- --------
Decrease in cash and cash equivalents (5,005) (16,006)
Cash and cash equivalents at beginning of period 16,236 20,506
-------- --------
Cash and cash equivalents at end of period $ 11,231 $ 4,500
======== ========
Supplemental cash flow information:
Interest paid $ 9,550 $ 6,884
======== ========
Income taxes paid $ -- $ 425
======== ========
Transfers from loans to real estate, mobile homes
and other assets held for sale $ 113 $ 307
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ 22 $ (30)
======== ========
Noncash investing activities:
Decrease in net unrealized gain or loss on
available-for-sale securities $ (63) $ (59)
======== ========
Noncash financing activities:
Cash dividends declared but not paid $ 705 $ 669
======== ========
See accompanying notes.
7
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at March 31, 2000 and 1999)
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1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance" or "the Company"), its two
wholly owned subsidiaries, First Federal Bank of the Midwest ("First
Federal"), and First Insurance and Investments, Inc. ("First Insurance")
and First Federal's wholly owned mortgage banking company, The Leader
Mortgage Company, LLC ("The Leader"). In the opinion of management, all
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. Basis of Presentation
The consolidated condensed statement of financial condition at December 31,
1999 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, 2000 and for the three-month period ending March 31, 2000 and 1999 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 generally accepted accounting principles. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in First Defiance's 1999
annual report on Form 10K for the year ended December 31, 1999. 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 of operations for the three-month
period ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the entire year.
3. Dividends on Common Stock
As of March 31, 2000, First Defiance had declared a quarterly cash dividend
of $.11 per share for the first quarter of 2000, payable April 28, 2000.
8
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2000 and 1999)
- --------------------------------------------------------------------------------
4. Earnings Per Share
Basic earnings per share as disclosed under Statement of Financial
Accounting Standard ("FAS") No. 128 has been calculated by dividing net
income by the weighted average number of shares of common stock outstanding
for the three month-month periods ended March 31, 2000 and 1999. First
Defiance accounts for the shares issued to its Employee Stock Ownership
Plan ("ESOP") in accordance with Statement of Position 93-6 of the American
Institute of Certified Public Accountants ("AICPA"). As a result, shares
controlled by the ESOP are not considered in the weighted average number of
shares of common stock outstanding until the shares are committed for
allocation to an employee's individual account. In the calculation of
diluted earnings per share for the three-months ended March 31, 2000 and
1999, the effect of shares issuable under stock option plans and unvested
shares under the Management Recognition Plan have been accounted for using
the Treasury Stock method.
The following table sets forth the computation of basic and diluted earning
per share (in thousands except per share data):
Three Months Ended
March 31,
2000 1999
------- -------
Numerator for basic and diluted
earnings per share - net income $ 2,201 $ 1,958
======= =======
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,232 6,705
Effect of dilutive securities:
Employee stock options 56 157
Unvested Management Recognition
Plan stock 88 63
------- -------
Dilutive potential common shares 144 220
====== =======
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,376 6,925
====== ======
Basic earnings per share $ .35 $ .29
===== =====
Diluted earnings per share $ .35 $ .28
===== =====
9
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2000 and 1999)
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5. Mortgage Servicing Rights
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows
(in thousands):
Three Months
Ended Year Ended
March 31, December 31,
2000 1999
-------- -------
Balance at beginning of period $97,519 $76,452
Loans sold, servicing retained 10,704 35,909
Proceeds from sale of MSR's - (2,610)
Gain on sale of MSR's - 479
Amortization (3,539) (12,711)
-------- -------
Balance at end of period $104,684 $97,519
======== =======
Accumulated amortization of mortgage servicing rights aggregated
approximately $21.0 million and $17.5 million at March 31, 2000 and
December 31, 1999, respectively.
The Company's servicing portfolio (excluding subserviced loans) is
comprised of the following as of March 31, 2000 (dollars in thousands):
Principal
Number Balance
of Loans Outstanding
GNMA 70,838 $4,622,582
FNMA 12,108 770,057
FHLMC 2,126 100,457
Other VA, FHA and
Conventional loans 16,889 940,774
------ -----------
101,961 $6,433,870
======== ==========
10
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2000 and 1999)
- --------------------------------------------------------------------------------
6. Line of Business Reporting
First Defiance operates two major lines of business. Retail banking, which
consists of the operations of First Federal, includes direct and indirect
lending, deposit-gathering, small business services and consumer finance.
Mortgage banking, which consists of the operations of The Leader, includes
buying and selling mortgages to the secondary market and the subsequent
servicing of these sold loans. The business units are identified by the
channels through which the product or service is delivered. The
retail-banking unit funds the mortgage-banking unit and an
investment/funding unit within the retail-banking unit centrally manages
interest rate risk. Transactions between business units are primarily
conducted at fair value, resulting in profits that are eliminated for
reporting consolidated results of operations.
The parent unit is comprised of the operations of First Insurance and
inter-segment income elininations and unallocated expenses.
Three-Months Ended March 31, 2000
(In Thousands)
Retail Mortgage
Consolidated Parent Banking Banking
------------------------------------------------------------
Total interest income $ 15,830 $ (4,298) $ 14,904 $ 5,224
Total interest expense 9,642 (4,371) 9,720 4,293
-----------------------------------------------------------
Net interest income 6,188 73 5,184 931
Provision for loan losses 1,408 - 236 1,172
-----------------------------------------------------------
Net interest income after
provision 4,780 73 4,948 (241)
Non-interest income 11,843 637 918 10,288
Non-interest expense 13,249 688 4,329 8,232
-----------------------------------------------------------
Income before income taxes 3,374 22 1,537 1,815
Income taxes 1,173 29 478 666
-----------------------------------------------------------
Net income $2,201 $ (7) $ 1,059 $ 1,149
==========================================================
Total assets $930,790 $(287,648) $865,811 $352,627
==========================================================
11
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2000 and 1999)
- --------------------------------------------------------------------------------
6. Line of Business Reporting-Continued
Three-Months Ended March 31, 1999
(In Thousands)
Retail Mortgage
Consolidated Parent Banking Banking
------------------------------------------------------------
Total interest income $ 12,481 $ (2,599) $ 12,721 $ 2,359
Total interest expense 6,757 (3,084) 8,165 1,676
-----------------------------------------------------------
Net interest income 5,724 485 4,556 683
Provision for loan losses 512 2 121 389
------------------------------------------------------------
Net interest income after
provision 5,212 483 4,435 294
Non-interest income 8,993 191 1,144 7,658
Non-interest expense 11,115 214 3,922 6,979
-----------------------------------------------------------
Income before income taxes 3,090 460 1,657 973
Income taxes 1,132 196 535 401
-----------------------------------------------------------
Net income $1,958 $ 264 $ 1,122 $ 572
==========================================================
Total assets $776,540 $(257,923) $780,249 $254,214
==========================================================
7. Acquisitions
On December 24, 1998, First Defiance completed the acquisition of First
Insurance in a stock transaction valued at $2.1 million. The acquisition
has been accounted for as a purchase. First Defiance could be subject to
additional contingent consideration of up to $400,000 if certain earnings
criteria are met.
On September 1, 1999, First Insurance completed the asset acquisition of
the Defiance office of Insurance and Risk Management in a cash transaction
valued at $1.9 million. The acquisition has been accounted for as a
purchase.
On July 1, 1998, First Federal completed the acquisition of The Leader, in
a cash transaction. At the date of acquisition, The Leader had assets of
$197.3 million and equity of $14.0 million. The cash price of $34.9
million, including $2 million held in escrow for indemnifiable claims,
exceeded fair value of net assets acquired by approximately $11.3 million,
which was recorded as goodwill. The goodwill is amortized over 15 years.
On May 1, 1999, The Leader exchanged a debt position in a partnership that
owned a Cleveland area apartment complex for a 100% ownership position.
12
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2000 and 1999)
- --------------------------------------------------------------------------------
8. New Accounting Pronouncement
The FASB has released FAS No. 133, "Accounting for Derivative and Similar
Financial Instruments and for Hedging Activities". This statement
establishes accounting and reporting standards for derivative financial
instruments and it requires all derivatives to be measured at fair value
and to be recognized as either assets or liabilities in the statement of
financial position. The standard becomes effective for First Defiance for
quarterly and annual reporting beginning January 1, 2001 and is not
expected to have a material impact on the Company's financial statements.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
General
- -------
First Defiance is a holding company which conducts business through its two
wholly owned subsidiaries, First Federal Bank of the Midwest ("First Federal")
and First Insurance and Investments, Inc. ("First Insurance") and First
Federal's wholly owned subsidiary, The Leader Mortgage Company, LLC ("The
Leader"). First Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans primarily in the seven counties in which its offices
are located and in contiguous Putnam County. The Company's traditional banking
activities include originating and servicing residential, commercial and
consumer loans; providing a broad range of depository services; and providing
trust services. First Federal is subject to the regulations of certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
The Leader is a mortgage banking company which specializes in servicing mortgage
loans originated under first-time home-buyer programs sponsored by various
state, county and municipal governmental entities. The Company's mortgage
banking activities consist primarily of originating or purchasing residential
mortgage loans for either direct resale into secondary markets or to be
securitized under various Government National Mortgage Association ("GNMA")
mortgage backed securities. First Insurance is an insurance agency that does
business in the Defiance, Ohio area. First Insurance offers property and
casualty, life insurance, group health, and investment products.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to hold the security to maturity. Held-to-maturity
securities are stated at amortized cost and had a recorded value of $9.4 million
at March 31, 2000. Loans held-for-sale securitized in the normal course of The
Leader's operations have been classified as trading securities, reported at fair
market value. The Leader has committed to sell these securities at their
carrying value. Securities not classified as held-to-maturity or trading are
classified as available-for-sale, which are stated at fair value and had a
recorded value of $53.3 million at March 31, 2000. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($18.2 million), corporate bonds ($12.7
million), certain municipal obligations ($5.0 million), adjustable-rate mortgage
backed security mutual funds ($8.7 million), CMOs and REMICs ($6.7 million), and
preferred stock and other equity investments ($2.0 million). In accordance with
FASB Statement No. 115, unrealized holding gains and losses on
available-for-sale securities are reported in a separate component of
stockholders' equity and are not reported in earnings until realized. Net
unrealized holding losses on available-for-sale securities were $1.7 million at
March 31, 2000, or $1.1 million after considering the related deferred tax
benefit.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
The profitability of First Defiance is primarily dependent on its net interest
income and non-interest income. Net interest income is the difference between
interest and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits, Federal Home Loan
Bank advances, and other borrowings. The Company's non-interest income includes
loan administration fees, loan servicing fees, and gains on sales of mortgage
loans, which includes the recognition of mortgage servicing rights generated by
The Leader and First Federal. First Defiance's earnings also depend on the
provision for loan losses and non-interest expenses, such as employee
compensation and benefits, occupancy and equipment expense, deposit insurance
premiums, and miscellaneous other expenses, as well as federal income tax
expense.
Changes in Financial Condition
- ------------------------------
At March 31, 2000, First Defiance's total assets, deposits (including customer's
escrow deposits) and stockholders' equity amounted to $930.8 million, $580.0
million and $91.3 million, respectively, compared to $988.0 million, $564.5
million and $89.4 million, respectively, at December 31, 1999.
Net loans receivable have increased from $465.3 million at December 31, 1999 to
$477.9 million at March 31, 2000. During the same period, loans held-for-sale
decreased from $237.6 million at December 31, 1999 to $189.4 million at March
31, 2000. The reduction in the available for sale loans is a result of efforts
by management to reduce the time between loan purchases and settlements on
securitizations, thereby reducing overall funding costs.
Securities decreased from $93.6 million at December 31, 1999 to $66.6 million at
March 31, 2000 as a result of a $25.9 million decrease in trading securities.
Trading securities represent low coupon GNMA securities issued by the Company
but not yet delivered to the bond trustee who is obligated to purchase the
securities at a set price. This reduction in trading securities is related to
management's efforts to securitize loans and deliver the securities to the
trustees on a more timely basis, thereby reducing funding requirements. Proceeds
from the sale of trading securities were used to fund loan growth and pay down
advances from the Federal Home Loan Bank ("FHLB"). In addition, deposits
increased from $503.0 million at December 31, 1999 to $511.1 million as of March
31, 2000. $3.9 million of the increase was the result of obtaining brokered
certificates of deposit, with the remainder of the increase due to acquiring
additional retail certificates of deposit. As a result of the decline in the
loans held-for-sale and increase in deposits, FHLB advances decreased from
$265.4 million at December 31, 1999 to $183.6 million at March 31, 2000.
Forward-Looking Information
- ---------------------------
Certain statements contained in this quarterly report that are not historical
facts, including but not limited to statements that can be identified by the use
of forward-looking terminology such as "may", "will", "expect", "anticipate", or
"continue" or the negative thereof or other variations thereon or comparable
terminology are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21B of the Securities Act
of 1934, as amended. Actual results could differ materially from those indicated
in such statements due to risks, uncertainties and changes with respect to a
variety of market and other factors.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
Average Balances, Net Interest Income and Yields Earned and Rates Paid
- ----------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based upon daily balances. See Results
of Operations section for a discussion of the impact on loan yields resulting
from a change in the estimated income on loans 90 days or more past due which
have FHA insurance or VA guarantees.
Three Months Ended March 31,
-------------------------------------------------------------------
2000 1999
----------------------------- --------------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
Interest-earning assets:
Loans receivable $677,957 $14,309 8.44% $593,604 $11,622 7.83%
Securities 84,594 1,521 7.19 56,300 859 6.10
FHLB stock 14,184 247 6.97 11,410 197 6.91
-------- ------- -------- -------
Total interest-earning assets 776,735 16,077 8.28 661,314 12,678 7.67
Non-interest-earning assets 175,831 129,862
-------- --------
Total assets $952,566 $791,176
======== ========
Interest-bearing liabilities:
Deposits $505,507 $5,623 4.45% $457,111 $4,682 4.10%
FHLB advances and other 217,869 2,887 5.30 163,715 1,982 4.84
Notes payable 67,172 1,132 6.74 6,069 93 6.13
-------- ------ -------- ------
Total interest-bearing liabilities 790,548 9,642 4.88 626,895 6,757 4.31
------ ---- ------ ----
Non-interest-bearing liabilities 71,967 71,731
-------- ---------
Total liabilities 862,515 698,626
Stockholders' equity 90,051 92,550
-------- ---------
Total liabilities and stock-
holders' equity $952,566 $ 791,176
======== =========
Net interest income; interest
rate spread $6,435 3.40% $5,921 3.36%
====== ===== ====== =====
Net interest margin (2) 3.31% 3.58%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 98% 105%
=== ====
- --------------
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Three Months Ended March 31, 2000 compared to Three Months Ended March 31, 1999
- -------------------------------------------------------------------------------
On a consolidated basis, First Defiance had net income of $2.2 million for the
three months ended March 31, 2000 compared to $2.0 million for the same period
in 1999. On a per share basis, basic and diluted earnings per share were $.35
for the 2000 first quarter compared to $.29 and $.28 basic and diluted per share
earnings for the 1999 first quarter. The 25% increase in diluted earnings per
share is due both to the $243,000 increase in net income for the three-month
period ended March 31, 2000 compared to the same period in 1999, and to a
reduction in the weighted average diluted shares outstanding resulting from a
series of stock repurchases completed during 1999.
Cash earnings for the first quarter of 2000 were $2.4 million or $.38 per
diluted share compared to $2.1 million or $.31 per diluted share for the same
period in 1999. Cash earnings are calculated by excluding the net income impact
of amortization of goodwill.
Net Interest Income. Net interest income before provision for loan losses
increased to $6.2 million for the three-month period ending March 31, 2000 from
$5.7 million for the same period in 1999. The Company's net interest margin
decreased to 3.31% for the quarter ended March 31, 2000 as compared to 3.58% for
the quarter ended March 31, 1999. The Company's interest rate spread (the
difference between yield on average interest earning assets and the interest
rate on average interest-bearing liabilities) for the 2000 first quarter was
3.40%, which was 4 basis points higher than the 1999 first quarter level of
3.36%.
The net interest margin was favorably impacted by a change in the estimate of
interest receivable on certain loans that are more than 90 days delinquent which
have been repurchased out of the servicing portfolio by The Leader. Despite the
existence of FHA insurance or VA guarantees, management previously did not take
those guarantees into account when estimating the amount of interest receivable
related to those loans. This change in the estimate of interest receivable
resulted in a one-time boost in the yield on interest-earning assets of 36 basis
points for the 2000 first quarter. Without that revised estimate, the net
interest margin would have been 2.96%. This change impacts the comparability of
interest rate yields, interest rate spreads, and net interest margins discussed
elsewhere in this document.
In addition to this estimate revision, management also changed its method of
estimating the required reserve for potential losses on foreclosure loans to
more accurately reflect the total risk inherent in the servicing and loan
portfolios at The Leader. This resulted in a one time charge to provision for
losses of $693,000. The net impact of these two estimate changes essentially
offset each other and without the two items earnings for the 2000 first quarter
would have still been $.35 per share.
Excluding the estimate change, total interest income increased by $2.7 million,
or 20.8%, from $12.5 million for the three months ended March 31, 1999 to $15.1
million for the three months ended March 31, 2000. The increase was due to a
$115.4 million increase in the average balance of interest-earning assets for
the first quarter of 2000 when compared to the first quarter of 1999. The yield
on interest-earning assets increased from 7.67% for the three-month period ended
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
March 31, 1999 to 7.92% for the same period in 2000 excluding the impact of the
change in estimate noted above (8.28% including the change in estimate).
Excluding the estimate change, interest earnings from the loan portfolio
increased $2.0 million from $11.6 million for the three months ended March 31,
1999 to $13.6 million for the same period in 2000. This increase was due to
increases in the average balance of loans receivable and the yield on these
loans from $593.6 million and 7.83% for the three-month period ended March 31,
1999, respectively, to $678.0 million and 8.03%, respectively, for the same
period in 2000.
Interest earnings from the investment portfolio increased to $1.5 million for
the three months ended March 31, 2000 compared to $814,000 for the same period
in 1999. The increase in interest income was primarily the result of a $28.3
million increase in the average balance of investment securities, from $56.3
million for the first quarter of 1999 to $84.6 million for the same period in
2000. This increase resulted from including loans that were securitized pending
delivery to the bond trustees in trading securities beginning in late December
of 1999. These trading securities were delivered to the trustee during the first
quarter of 2000. Additionally, the yield on the average portfolio balance for
the three months ended March 31, 2000 was 7.19% compared to 6.10% for the same
period in 1999.
Interest expense increased by $2.8 million, or 41.1%, to $9.6 million for the
first quarter of 2000 compared to $6.8 million for the same period in 1999. The
increase is primarily due to the funding of the $115.4 million increase in
average interest earning assets noted above combined with a $45.9 million
increase in average non-interest earning assets, from $129.9 million for the
first quarter of 1999 to $175.8 million for the same period in 2000. This
increase in average non-interest earning assets was primarily a result of the
growth in The Leader's mortgage servicing assets from an average of $77.9
million for the three-months ended March 31, 1999 to $101.5 million for the same
period in 2000. These increased funding requirements resulted in a $163.6
million increase in the average balance of total interest-bearing liabilities
from $626.9 million for the first quarter of 1999 to $790.5 million for the same
period of 2000.
Interest expense also increased due to an increase in the average cost of funds
for the first quarter of 2000 to 4.88% from 4.31% for the first quarter of 1999.
This increase resulted from increases in the average costs of deposits, FHLB
advances, and notes payable of 35 basis points, 46 basis points, and 61 basis
points, respectively, from 4.10%, 4.84%, and 6.13%, respectively for the
three-months ended March 31, 1999, to 4.45%, 5.30%, and 6.74%, respectively for
the same period in 2000. These increases were the result of several increases to
the targeted Fed Funds rate initiated by the Federal Reserve throughout 1999 and
continuing in the first quarter of 2000.
Provision for Loan Losses. The provision for loan losses increased $896,000 over
the first quarter of 1999, from $512,000 for the three-months ended March 31,
1999 to $1.4 million for the same period in 2000. As noted above, $693,000 of
this increase was the result of the change in accounting estimate on foreclosure
loans at The Leader. Provisions for loan losses are charged to earnings to bring
the total allowance for loan losses to the level deemed appropriate by
management based on historical experience, the volume and type of lending
conducted by First Defiance, industry standards, the amount of non-performing
assets and loan charge-off activity, general economic conditions, particularly
as they relate to First Defiance's market area, and other factors related to the
collectibility of First Defiance's loan portfolio.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets, totaled $2.6 million at March 31, 2000,
which is .28% of total assets. Non-performing loans and repossessed assets
reported do not include $11.8 million for mortgage loans 90 days or more past
due which have FHA insurance or VA guarantees. The risk of loss on these loans
is generally limited to the administrative cost of foreclosure actions, which is
provided for in the allowance for loan losses. The allowance for loan losses at
March 31, 2000 was $8.2 million compared to $9.6 million at March 31, 1999 and
$7.8 million at December 31, 1999. For the quarter ended March 31, 2000, First
Defiance charged off $978,000 of loans against its allowance and realized
recoveries of $53,000 from loans previously charged off. During the same quarter
in 1999, First Defiance charged off $796,000 in loans and realized recoveries of
$70,000.
Non-Interest Income. Non-interest income increased substantially in the first
quarter of 2000, from $9.0 million for the quarter ended March 31, 1999 to $11.8
million for the same period in 2000. Individual components of non-interest
income are as follows:
Mortgage Banking Income. Mortgage banking income, which includes servicing fees
and late charge income, increased to $8.1 million for the three-month period
ended March 31, 2000 compared to $6.5 million for the same period in 1999. This
increase in mortgage banking income was primarily the result of the growth in
the mortgage servicing portfolio from $5.0 billion as of March 31, 1999 to $6.4
billion at March 31, 2000.
Gain on Sale of Loans. Gain on sale of loans increased from $1.6 million for the
quarter ended March 31, 1999 to $1.9 million for the same period of 2000. The
increase in gains on sale of loans is a result of continued strong production
levels, especially in the first-time homebuyer programs. Total production in the
first-time homebuyer programs increased by 81.8% in the 2000 first quarter
compared to the same period in 1999.
Other Non-Interest Income. Other non-interest income, including insurance
commission income, dividends on Federal Home Loan Bank stock, and other
miscellaneous charges, increased to $1.8 million for the quarter ended March 31,
2000 from $1.0 for the same period in 1999. Commission revenue increases at
First Insurance accounted for $444,000 of the increase.
Non-Interest Expense. Total non-interest expense increased $2.1 million from
$11.1 million for the quarter ended March 31, 1999 to $13.2 million for the same
period in 2000. Significant individual components of the increase are as
follows:
Compensation and Benefits. Compensation and benefits increased $1.2 million from
$4.3 million for the quarter ended March 31, 1999 to $5.5 million for the same
period in 2000. This increase was the result of planned expansions of The
Leader's operations, increases at First Federal to support the growth in
commercial lending and expansion of the branch network, and the additional staff
at First Insurance acquired through the September 1999 acquisition of the
Defiance, Ohio office of Insurance and Risk Management.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
Occupancy. Occupancy expense increased to $1.2 million for the three-month
period ended March 31, 2000 from $842,000 for the three months ended March 31,
1999. This increase was a result of expansions throughout the Company.
Amortization of Mortgage Servicing Rights. Amortization of mortgage servicing
rights (MSRs) increased to $3.5 million for the quarter ended March 31, 2000
from $3.3 for the same period in 1999. This increase was due to the growth in
the mortgage servicing portfolio from $5.0 billion as of March 31, 1999 to $6.5
billion at March 31, 2000. Due to increases in interest rates, management has
concluded that there are no impairment issues with the servicing portfolio. The
loan prepayments of The Leader's servicing portfolio have fallen to 3.3% for the
first quarter of 2000, annualized, compared to 9.3% for the same period in 1999,
annualized.
Amortization of Goodwill and Other Acquisition Related Costs. Amortization of
goodwill and other acquisition costs amounted to $609,000 in the first quarter
of 2000 compared to $576,000 during the same period in 1999. This increase was
due to First Insurance's acquisition of the Defiance office of Insurance and
Risk Management in the third quarter of 1999.
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $2.4 million for the quarter ended March 31, 2000 from $2.1 million for the
same period in 1999.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 34.8% for the
quarter ended March 31, 2000 compared to 36.6% for the same period in 1999.
As a result of the above factors, net income for the quarter ended March 31,
2000 was $2.2 million compared to $2.0 million for the comparable period in
1999. On a per share basis, basic and diluted earnings per share for the three
months ended March 31, 2000 was $.35 compared to $.29 and $.28, respectively,
for the same period in 1999. Average shares outstanding for the basic and
diluted calculations were 6,232,000 and 6,376,000, respectively, for the quarter
ended March 31, 2000 compared to 6,705,000 and 6,925,000, respectively, for the
quarter ended March 31, 1999.
First Defiance's board of directors declared a dividend of $.11 per common share
as of March 31, 2000. The dividend amounted to $752,016, including dividends on
unallocated ESOP shares. It was paid on April 28, 2000. Dividends are subject to
determination and declaration by the board of directors, which will take into
account First Defiance's financial condition and results of operations, economic
conditions, industry standards and regulatory restrictions which affect First
Defiance's ability to pay dividends.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three-month period ended March 31, 2000.
First Defiance generated $37.9 million of cash from operating activities during
the first three months of 2000. The Company's cash from operating activities
results from net income for the period, adjusted for various non-cash items,
including the provision for loan losses, depreciation and amortization,
including amortization of mortgage servicing rights, ESOP expense related to
release of shares, and changes in loans available for sale, interest receivable
and other assets, and other liabilities. The primary investing activity of First
Defiance is the origination of loans (both for sale in the secondary market and
to be held in portfolio), which is funded with cash provided by operations,
proceeds from the amortization and prepayments of existing loans, the sale of
loans, proceeds from the sale or maturity of securities, borrowings from the
FHLB, and customer deposits.
At March 31, 2000, First Defiance had $31.5 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $43.9 million committed under existing consumer and
commercial lines of credit and standby letters of credit. Also at that date,
First Defiance had commitments to sell $189.4 million of loans held-for-sale and
it also had commitments to acquire $221.8 million of mortgage loans under
first-time homebuyer programs, all of which have offsetting commitments for sale
into the secondary market as GNMA or FNMA mortgage-backed securities. Also as of
March 31, 2000, the total amount of certificates of deposit that are scheduled
to mature by March 31, 2001 is $312.1 million. First Defiance believes that it
has adequate resources to fund commitments as they arise and that it can adjust
the rate on savings certificates to retain deposits in changing interest rate
environments. If First Defiance requires funds beyond its internal funding
capabilities, advances from the FHLB of Cincinnati are available as an
additional source of borrowings.
Currently First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities include REMIC and CMO investments. Such investments are not
classified as high risk at March 31, 2000 and do not present risk significantly
different than other mortgage-backed or agency securities. First Defiance does
not invest in off-balance sheet derivative securities.
First Federal is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible capital
requirement, a core capital requirement, and a risk-based capital requirement.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
- --------------------------------------------------------------------------------
The following table sets forth First Federal's compliance with each of the
capital requirements at March 31, 2000.
Tangible Core Risk-Based
Capital Capital Capital (1)
------- ------- -----------
(Dollars in Thousands)
Regulatory capital $59,769 $59,769 $65,656
Minimum required regulatory
capital 13,443 35,849 46,527
------- ------- --------
Excess regulatory capital $46,326 $10,798 $14,234
======= ======= =======
Regulatory capital as a
percentage of assets (2) 6.7% 6.7% 11.3%
Minimum capital required as
a percentage of assets 1.5% 4.0% 8.0%
------- ------- ------
Excess regulatory capital as a
percentage in excess of
requirement 5.2% 2.7% 3.3%
====== ===== =====
- ----------
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, discussed above.
(2) Tangible and core capital are computed as a percentage of adjusted total
assets of $896.2 million.
Risk-based capital is computed as a percentage of total risk-weighted
assets of $581.6 million.
FDIC Insurance
The Deposits of First Federal are currently insured by the Savings Association
Insurance Fund("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
to commercial bank depositors. Both the SAIF and BIF are required by law to
maintain a reserve ratio of 1.25% of insured deposits. First Federal's deposit
insurance premiums for 2000 are approximately $0.0052 per $100 of deposits.
22
Item 3. Qualitative and Quantitative Disclosure About Market Risk
- -----------------------------------------------------------------
As discussed in detail in the 1999 Annual Report on Form 10-K, First Defiance's
ability to maximize net income is dependent on management's ability to plan and
control net interest income through management of the pricing and mix of assets
and liabilities. Because a large portion of assets and liabilities of First
Defiance are monitory in nature, changes in interest rates and monetary or
fiscal policy affect its financial condition and can have significant impact on
the net income of the Company. First Defiance does not use off balance sheet
derivatives to enhance its risk management, nor does it engage in trading
activities beyond the sale of mortgage loans.
First Defiance monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyses the effect of a
presumed 100 basis point shift in interest rates (which is consistent with
management's estimate of the range of potential interest rate fluctuations) and
takes into account prepayment speeds on amortizing financial instruments, loan
and deposit volumes and rates, nonmaturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise or fall 100 basis points over a 12 month period, using
March 2000 amounts as a base case, First Defiance's net interest income would be
impacted by less than the board mandated guidelines of 10%.
The simulation model used by First Defiance measures the impact of rising and
falling interest rates on net interest income only. The Company also monitors
the potential change in the value of its mortgage-servicing portfolio given the
same 100 basis point shift in interest rates. At March 31, 2000, a 100 basis
point decrease in interest rate would not require a material adjustment to First
Defiance's reserve for impairment of MSRs.
23
FIRST DEFIANCE FINANCIAL CORP.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a material
nature.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 18, 2000, in
Defiance, Ohio the shareholders elected three directors to three-year
terms. The following is a tabulation of all votes timely cast in
person or by proxy by shareholders of First Defiance for the annual
meeting:
NOMINEE FOR WITHHELD
Douglas A. Burgei 5,389,484 62,287
Gerald W. Monnin 5,389,454 62,257
Don C. Van Brackel 5,385,191 66,550
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
24
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: May 12, 2000 By: /s/ William J. Small
------------ ---------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: May 12, 2000 By: /s/ John C. Wahl
------------ ----------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer
25