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 September 30, 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.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1803915
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Clinton Street, Defiance, Ohio 43512
- --------------------------------------- ------------
(Address or principal executive office) (Zip Code)
Registrant's telephone number, including area code: (419) 782-5015
---------------
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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 -
6,889,752 shares outstanding at November 3, 2000.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
Page
Number
------
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - September 30, 2000 and December 31, 1999 1
Consolidated Condensed Statements of Income - Three
months ended September 30, 2000 and 1999;
Nine months ended September 30, 2000 and 1999 3
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Nine months ended
September 30, 2000 4
Consolidated Condensed Statements of Cash Flows
- Nine months ended September 30, 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 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 31
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
- --------------------------------------------------------------------------------
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 10,758 $ 13,102
Interest-bearing deposits 10,843 3,134
------------ ----------
21,601 16,236
Securities:
Available-for-sale, carried at fair value 52,997 53,946
Trading, carried at fair value 235 29,805
Held-to-maturity, carried at amortized cost
(approximate fair value $8,311 and $9,953
at September 30, 2000 and December 31,
1999, respectively) 8,262 9,895
----------- ----------
61,494 93,646
Loans held for sale (at lower of cost or fair value,
approximate fair value $204,129 and $237,622
at September 30, 2000 and December 31,1999,
respectively) 204,129 237,622
Loans receivable, net 526,474 465,321
Mortgage servicing rights 125,790 97,519
Accrued interest receivable 6,226 3,868
Federal Home Loan Bank stock 14,969 14,181
Office properties and equipment 22,057 21,311
Real estate, mobile homes and other
assets held for sale 713 2,557
Goodwill, net 14,172 14,699
Other assets 23,684 21,034
----------- ----------
Total assets $ 1,021,309 $ 987,994
=========== ==========
See accompanying notes.
1
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
- --------------------------------------------------------------------------------
September 30, 2000 December 31, 1999
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 533,746 $ 502,969
Advances from Federal Home Loan Bank 253,614 265,410
Warehouse and term notes payable 38,843 53,504
Advance payments by borrowers for taxes and insurance 82,652 61,542
Deferred taxes 1,824 2,232
Other liabilities 13,998 12,921
----------- ----------
Total liabilities 924,677 898,578
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; 6,890,000 and
6,814,000 shares outstanding at September 30, 2000
and December 31,1999, respectively 69 68
Additional paid-in capital 53,600 53,181
Stock acquired by ESOP (3,238) (3,664)
Deferred compensation (266) (458)
Accumulated other comprehensive income,
net of income taxes of $(592)
and $(565), respectively (602) (1,096)
Retained earnings 47,069 41,385
----------- ----------
Total stockholders' equity 96,632 89,416
----------- ----------
Total liabilities and stockholders' equity $ 1,021,309 $ 987,994
=========== ==========
See accompanying notes
2
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
Interest Income
Loans $ 15,838 $ 12,885 $ 44,352 $ 36,375
Investment securities 985 783 3,458 2,357
Interest-bearing deposits 88 33 290 96
-------- -------- -------- --------
Total interest income 16,911 13,701 48,100 38,828
Interest Expense
Deposits 6,848 4,964 18,623 14,495
FHLB advances and other 3,830 2,706 9,560 6,796
Notes payable and warehouse loans 1,009 600 3,371 858
-------- -------- -------- --------
Total interest expense 11,687 8,270 31,554 22,149
-------- -------- -------- --------
Net interest income 5,224 5,431 16,546 16,679
Provision for loan losses 539 429 2,528 1,140
-------- -------- -------- --------
Net interest income after provision for loan losses 4,685 5,002 14,018 15,539
Noninterest Income
Mortgage banking income 9,292 7,199 25,995 20,317
Loan service fees and other charges 627 378 1,536 1,069
Dividends on stock 278 268 792 686
Gain on sale of loans 2,697 1,710 7,228 4,878
Gain on sale of mortgage servicing rights - - - 479
Gain (loss) on sale of securities (29) 15 (29) 1
Trust income 163 10 199 18
Other noninterest income 1,003 683 3,271 1,625
-------- -------- -------- --------
Total noninterest income 14,031 10,263 38,992 29,073
Noninterest Expense
Compensation and benefits 5,636 5,113 17,071 14,106
Occupancy 1,167 1,068 3,580 2,922
SAIF deposit insurance premiums 30 124 88 262
State franchise tax 269 259 851 702
Data processing 307 296 955 923
Amortization of mortgage servicing rights 3,744 3,025 10,987 9,378
Amortization of goodwill and other intangibles 434 586 1,655 1,738
Other noninterest expense 2,357 1,563 5,820 4,678
-------- -------- -------- --------
Total noninterest expense 13,944 12,034 41,007 34,709
-------- -------- -------- --------
Income before income taxes 4,772 3,231 12,003 9,903
Federal income taxes 1,604 1,139 4,176 3,502
-------- -------- -------- --------
Net income $ 3,168 $ 2,092 $ 7,827 $ 6,401
======== ======== ======== ========
Earnings per share (Note 4)
Basic $ 0.50 $ 0.33 $ 1.24 $ 0.98
======= ======= ======= =======
Diluted $ 0.49 $ 0.32 $ 1.22 $ 0.95
======= ======= ======= =======
Dividends declared per share (Note 3) $ 0.11 $ 0.10 $ 0.33 $ 0.30
======= ======= ======= =======
Average shares outstanding (Note 4)
Basic 6,367 6,447 6,301 6,561
======= ======= ======= =======
Diluted 6,451 6,627 6,411 6,768
======= ======= ======= =======
See accompanying notes
3
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
2000
----
Stock Acquired By
-----------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
Balance at January 1 $68 $53,181 $(3,664) $(458)
Comprehensive income:
Net income
Change in unrealized gains (losses)
net of income taxes of $255 and
$392 for 2000 and 1999, respectively
Total comprehensive income
ESOP shares released 71 426
Amortization of deferred compensation
of Management Recognition Plan 192
Shares issued under stock option plan 1 364
Purchase of common stock for
treasury (16)
Dividends declared (Note 3)
---------------------------------------------------------------
Balance at September 30 $69 $53,600 $(3,238) $(266)
===============================================================
See accompanying notes
4
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
2000 1999
---------------------------------------------------- ---------------
Net Unrealized
gains (losses) on Total Total
available-for- Retained Stockholders' Stockholder's
sale securities Earnings Equity Equity
----------------- -------- ------ ------
Balance at January 1 $(1,096) $41,385 $89,416 $93,710
Comprehensive income:
Net income 7,826 7,826 6,401
Change in unrealized gains (losses)
net of income taxes of $255 and
$392 for 2000 and 1999, respectively 494 494 (764)
------- -------
Total comprehensive income 8,320 5,637
ESOP shares released 497 622
Amortization of deferred compensation
of Management Recognition Plan 192 304
Shares issued under stock option plan 365 276
Purchase of common stock for
treasury (13) (29) (8,279)
Dividends declared (Note 3) (2,129) (2,129) (1,984)
--------------------------------------------- -------
Balance at September 30 $(602) $47,069 $96,632 $90,286
============================================= =======
See accompanying notes
5
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Nine Months
Ended September 30,
2000 1999
-------------------------
Operating Activities
Net income $ 7,827 $ 6,401
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,528 1,140
Provision for depreciation 1,479 1,308
Net securities amortization 35 94
Amortization of mortgage servicing rights 10,987 9,378
Amortization of goodwill 527 464
Gain on sale of loans (7,228) (4,878)
Gain on sale of mortgage servicing rights - (479)
Amortization of Management Recognition Plan
deferred compensation 192 304
Release of ESOP Shares 497 622
(Gain) loss on disposal of office properties and equipment (60) 3
Loss on sale on securities 29 1
Deferred federal income tax credit (663) (21)
Proceeds from sale of loans 1,827,007 1,139,094
Proceeds from sale of mortgage servicing rights - 2,610
Origination of mortgage servicing rights, net (39,258) (23,068)
Origination of loans held for sale (1,786,286) (1,250,014)
Increase in interest receivable and other assets (5,008) (4,423)
Net repurchase of loans serviced for others (8,922) (10,806)
Increase in other liabilities 1,069 478
---------- ----------
Net cash provided by (used in) operating activities 4,752 (131,792)
Investing Activities
Proceeds from maturities of held-to-maturity securities 1,611 2,953
Proceeds from maturities of available-for-sale securities 3,946 16,895
Proceeds from sale of available-for-sale securities 1,046 2,000
Proceeds from sale of trading securities 29,568 -
Proceeds from sales of real estate, mobile homes, and
other assets held for sale 2,640 1,242
Proceeds from sales of office properties and equipment 338 8
Purchases of available-for-sale securities (3,334) (19,158)
Purchases of Federal Home Loan Bank stock (788) (2,433)
Purchases of office properties and equipment (2,503) (3,601)
Adjustment of acquisition of First Insurance - (126)
Acquisition of Insurance and Risk Management Co. office - (1,918)
Acquisition of Moreland Greens, net of cash received - 217
Net increase in loans receivable (55,555) (8,362)
---------- -----------
Net cash used in investing activities (23,031) (12,283)
6
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
2000 1999
---- ----
Financing Activities
Net increase in deposits and advance payments by borrowers
for taxes and insurance 51,887 26,408
Repayment of Federal Home Loan Bank long-term advances (100,546) (964)
Repayment of term notes payable (309) (79)
Net increase in Federal Home Loan Bank
short-term advances 88,750 66,605
Proceeds from federal funds purchased - 2,000
Proceeds from short term line of credit 13,000 -
Increase (decrease) in warehouse loans (27,352) 49,655
Purchase of common stock for treasury (29) (8,279)
Cash dividends paid (2,122) (2,042)
Proceeds from exercise of stock options 365 276
--------- ---------
Net cash provided by financing activities 23,644 133,580
--------- ---------
Increase (decrease) in cash and cash equivalents 5,365 (10,495)
Cash and cash equivalents at beginning of period 16,236 20,506
--------- ---------
Cash and cash equivalents at end of period $ 21,601 $ 10,011
========= =========
Supplemental cash flow information:
Interest paid $ 31,845 $ 21,969
========= =========
Income taxes paid $ 4,500 $ 4,925
========= =========
Transfers from loans to real estate, mobile homes
and other assets held for sale $ 390 $ 2,108
========= =========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ (255) $ 392
========= =========
Noncash investing activities:
Decrease in net unrealized gain or loss on
available-for-sale securities $ (494) $ (1,156)
========= =========
Exchange of debt for equity position in Moreland Greens $ - $ 3,701
========= =========
Noncash financing activities:
Cash dividends declared but not paid $ 711 $ 652
========= =========
See accompanying notes.
7
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at September 30, 2000 and 1999)
- --------------------------------------------------------------------------------
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 ("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
September 30, 2000 and for the three-month and nine-month periods ending
September 30, 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 10-K 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 and nine-month periods ended September 30,
2000 are not necessarily indicative of the results that may be expected for
the entire year.
3. Dividends on Common Stock
As of September 30, 2000, First Defiance had declared a quarterly cash
dividend of $.11 per share for the third quarter of 2000, payable October
27, 2000.
8
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 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 and nine-month periods ended September 30, 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 and nine-months
ended September 30, 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
earnings per share (in thousands except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator for basic and diluted
earnings per share - net income $3,168 $2,092 $7,827 $6,401
====== ====== ====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,367 6,447 6,301 6,561
Effect of dilutive securities:
Employee stock options 30 105 41 121
Unvested Management Recognition
Plan stock 54 75 69 86
------ ------ ------ ------
Dilutive potential common shares 84 180 110 207
====== ====== ====== ======
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,451 6,627 6,411 6,768
====== ====== ====== ======
Basic earnings per share $ .50 $ .33 $ 1.24 $ .98
====== ====== ====== ======
Diluted earnings per share $ .49 $ .32 $ 1.22 $ .95
====== ====== ====== ======
9
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 2000)
- --------------------------------------------------------------------------------
5. Loans Receivable
Loans receivable consist of the following:
September 30, December 31,
2000 1999
---- ----
(in thousands)
Mortgage loans:
Secured by one-to-four family residences $ 210,362 $ 220,390
Secured by other properties 20,186 21,502
Construction loans 10,040 7,808
Other mortgage loans 1,717 2,156
----------- ------------
242,305 251,856
Other Loans:
Commercial and commercial real estate 213,074 138,125
Automobile 47,418 55,673
Home equity and improvement 29,376 22,781
Other 8,067 8,699
---------- ----------
297,935 225,278
-------- ---------
Total mortgage and other loans 540,240 477,134
Deduct:
Undisbursed loan funds 4,014 3,291
Net deferred loan origination fees and costs 951 764
Allowance for loan loss 8,801 7,758
-------- ----------
Totals $ 526,474 $ 465,321
========= =========
6. Mortgage Servicing Rights
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows
(in thousands):
Nine Months
Ended Year Ended
September 30, December 31,
2000 1999
----- ----
Balance at beginning of period $ 97,519 $ 76,452
Additions 39,258 35,909
Sale of servicing rights, net - (2,610)
Loans sold servicing retained - 479
Amortization (10,987) (12,711)
---------- -------
Balance at end of period $125,790 $97,519
======== =======
Accumulated amortization of mortgage servicing rights aggregated
approximately $28.5 million and $17.5 million at September 30, 2000 and
December 31, 1999, respectively.
10
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 2000)
- --------------------------------------------------------------------------------
6. Mortgage Servicing Rights - Continued
The Company's servicing portfolio (excluding subserviced loans) is
comprised of the following as of September 30, 2000 (dollars in thousands):
Principal
Number Balance
of Loans Outstanding
-------- -----------
GNMA 81,146 $5,499,110
FNMA 12,988 838,957
FHLMC 2,417 106,793
Other VA, FHA and
Conventional loans 20,939 1,066,021
---------- ----------
117,490 $7,510,881
========== ==========
7. Deposits
A summary of deposit balances is as follows (in thousands):
September 30, December 31,
2000 1999
---- ----
Noninterest-bearing checking accounts $ 26,392 $ 19,971
Interest-bearing checking accounts 29,881 31,998
Savings accounts 39,291 49,217
Money market demand accounts 71,802 46,692
Certificates of deposit 366,380 355,091
-------- --------
$ 533,746 $ 502,969
========= ==========
11
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 2000 and 1999)
- --------------------------------------------------------------------------------
8. 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 in the secondary market and the subsequent
servicing of these sold loans. The channels through which the product or
service is delivered identify the business units. 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 eliminations and unallocated expenses. Selected
segment information in the following table includes only the three and
nine-months ended September 30, 2000 and 1999.
Three-Months Ended September 30, 2000
--------------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
--------------------------------------------------------------
Total interest income $ 16,911 $ (5,586) $ 17,714 $ 4,783
Total interest expense 11,687 (5,463) 12,401 4,749
----------------------------------------------------------
Net interest income 5,224 (123) 5,313 34
Provision for loan losses 539 - 73 466
------------------------------------------------------------
Net interest income after
provision 4,685 (123) 5,240 (432)
Non-interest income 14,031 520 1,170 12,341
Non-interest expense 13,944 757 4,328 8,859
----------------------------------------------------------
Income before income taxes 4,772 (360) 2,082 3,050
Income taxes 1,604 (109) 666 1,047
-----------------------------------------------------------
Net income $ 3,168 $ (251) $ 1,416 $ 2,003
===========================================================
Total assets $1,021,309 $(345,190) $985,420 $381,079
============================================================
12
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 2000 and 1999)
- --------------------------------------------------------------------------------
8. Line of Business Reporting - Continued
Nine-Months Ended September 30, 2000
-------------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
------------------------------------------------------------
Total interest income $ 48,100 $ (14,415) $ 48,358 $ 14,157
Total interest expense 31,554 (14,317) 32,647 13,224
-----------------------------------------------------------
Net interest income 16,546 (98) 15,711 933
Provision for loan losses 2,528 - 384 2,144
------------------------------------------------------------
Net interest income after
provision 14,018 (98) 15,327 (1,211)
Non-interest income 38,992 1,786 3,153 34,053
Non-interest expense 41,007 2,164 12,989 25,854
----------------------------------------------------------
Income before income taxes 12,003 (476) 5,491 6,988
Income taxes 4,176 (118) 1,758 2,536
-----------------------------------------------------------
Net income $ 7,827 $ (358) $ 3,733 $ 4,452
===========================================================
Total assets $1,021,309 $(345,190) $985,420 $381,079
============================================================
Three-Months Ended September 30, 1999
--------------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
Total interest income $ 13,701 $ (3,739) $ 13,869 $ 3,571
Total interest expense 8,270 (4,037) 9,173 3,134
-----------------------------------------------------------
Net interest income 5,431 298 4,696 437
Provision for loan losses 429 - 105 324
-----------------------------------------------------------
Net interest income after
provision 5,002 298 4,591 113
Non-interest income 10,263 214 923 9,126
Non-interest expense 12,034 314 4,213 7,507
-----------------------------------------------------------
Income before income taxes 3,231 198 1,301 1,732
Income taxes 1,139 93 406 640
-----------------------------------------------------------
Net income $ 2,092 $ 105 $ 895 $ 1,092
===========================================================
Total assets $932,076 $(286,301) $830,694 $387,683
===========================================================
13
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 2000 and 1999)
- --------------------------------------------------------------------------------
8. Line of Business Reporting - Continued
Nine-Months Ended September 30, 1999
------------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
------------------------------------------------------------
Total interest income $ 38,828 $ (9,576) $ 39,706 $ 8,698
Total interest expense 22,149 (10,675) 25,759 7,065
------------------------------------------------------------
Net interest income 16,679 1,099 13,947 1,633
Provision for loan losses 1,140 - (11) 1,151
------------------------------------------------------------
Net interest income after
provision 15,539 1,099 13,958 482
Non-interest income 29,073 532 3,008 25,533
Non-interest expense 34,709 894 12,061 21,754
------------------------------------------------------------
Income before income taxes 9,903 737 4,905 4,261
Income taxes 3,502 341 1,559 1,602
------------------------------------------------------------
Net income $ 6,401 $ 396 $ 3,346 $ 2,659
============================================================
Total assets $932,076 $(286,301) $830,694 $387,683
============================================================
9. 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.
14
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at September 30, 2000 and 1999)
- --------------------------------------------------------------------------------
10. New Accounting Pronouncement
The FASB has released Statement of Financial Accounting Standards ("FAS")
No. 133, Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities, as amended by FAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. These statements
establish accounting and reporting standards for derivative financial
instruments and require all derivatives to be measured at fair value and to
be recognized as either assets or liabilities in the statement of financial
position. These standards become effective for First Defiance for quarterly
and annual reporting beginning January 1, 2001 and are not expected to have
a material impact on the Company's financial statements.
15
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, Defiance Ohio
("First Federal") and First Insurance & Investments ("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 eight 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 and providing a broad range of depository and 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 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") bonds. First Insurance is an
insurance agency that does business in the Defiance, Ohio area. First Insurance
offers property and casualty, group health, and life insurance products as well
as certain uninsured 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 Federal 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 $8.3 million
at September 30, 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 $53.0 million at September 30, 2000. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($19.5 million), corporate bonds ($11.8
million), certain municipal obligations ($5.4 million), adjustable-rate mortgage
backed security mutual funds ($7.6 million), CMOs and REMICs ($6.5 million),
preferred stock ($1.9 million), and corporate equities ($306,000). 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 $913,000 at
September 30, 2000, or $592,000 after considering the related deferred tax
benefit.
16
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 ("FHLB") advances, and other borrowings. The Company's non-interest income
includes mortgage loan servicing income, other loan administration fees, gains
on sales of mortgage loans, and 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 its 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 September 30, 2000, First Defiance's total assets, deposits (including
customer's escrow deposits) and stockholders' equity amounted to $1.021 billion,
$616.4 million and $96.6 million, respectively, compared to $988.0 million,
$564.5 million and $89.4 million, respectively, at December 31, 1999.
Net loans receivable have increased to $526.5 million at September 30, 2000 from
$465.3 million at December 31, 1999. During the same period, loans held-for-sale
decreased to $204.1 million at September 30, 2000 from $237.6 million at
December 31, 1999. The reduction in the held-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.
Mortgage servicing rights increased to $125.8 million at September 30, 2000 from
$97.5 million at December 31, 1999. Mortgage servicing rights are recorded when
loans available for sale are securitized and the value is based on the servicing
fees earned on the underlying mortgage loan being serviced, management's
estimate of future prepayments and a number of other factors. At September 30,
2000 the weighted average coupon rate of the mortgage servicing portfolio was
6.95% compared to 6.83% at December 31, 1999. The Company has an independent
appraisal prepared annually as of June 30 and estimates the fair value each
month based upon the results of the appraisal. The approximate fair market value
of the mortgage servicing rights was $172.8 million at September 30, 2000
compared to $136.0 million at December 31, 1999. The actual value of servicing
may vary significantly from the estimated fair value given changes in interest
rates or other market conditions.
Securities decreased to $61.5 million at September 30, 2000 from $93.6 million
at December 31, 1999 as a result of a $29.6 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 par. 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 FHLB. Deposits increased to $533.7 million as of September 30,
2000 from $503.0 million at December 31, 1999. This increase was primarily the
result a $29.8 million increase in retail deposits to $472.7 million as of
September 30, 2000. As a result of the decline in loans held-for-sale and
increase in deposits, FHLB advances and warehouse and term notes payable
decreased to $253.6 million and $38.8 million, respectively, as of September 30,
2000 from $265.4 million and $53.5 million, respectively, at December 31, 1999.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
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.
18
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 the nine-month period
ended September 30, 2000 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 September 30,
------------------------------------------------------------------
(in thousands)
2000 1999
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $758,019 $15,838 8.36% $674,680 $12,885 7.64%
Securities 61,655 1,073 6.96 57,287 816 5.70
FHLB stock 14,695 278 7.57 14,699 268 7.29
-------- ------- -------- -------
Total interest-earning assets 834,369 17,189 8.24 746,666 13,969 7.48
Non-interest-earning assets 206,267 149,550
-------- --------
Total assets $1,040,636 $896,216
========== ========
Interest-bearing liabilities:
Deposits $542,468 $6,848 5.05% $470,494 $4,964 4.22%
FHLB advances and other 251,344 3,830 6.10 211,624 2,706 5.11
Notes payable 55,477 1,009 7.28 40,086 600 5.99
--------- ------- ---------- --------
Total interest-bearing liabilities 849,289 11,687 5.50 722,204 8,270 4.58
------- ---- ------ ----
Non-interest-bearing liabilities 96,646 83,611
-------- --------
Total liabilities 945,935 805,815
Stockholders' equity 94,701 90,401
-------- ---------
Total liabilities and stock-
holders' equity $1,040,636 $896,216
========== ========
Net interest income; interest
rate spread $5,502 2.74% $5,699 2.90%
====== ===== ====== =====
Net interest margin (2) 2.64% 3.05%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 98% 103%
==== ====
- ----------------------------
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
19
Nine Months Ended September 30,
----------------------------------------------------------------
(in thousands)
2000 1999
----------------------------- -----------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $721,073 $44,352 8.20% $634,028 $36,375 7.65%
Securities 70,270 3,748 7.11 56,076 2,453 5.83
FHLB stock 14,436 792 7.32 12,566 686 7.28
-------- ------ -------- --------
Total interest-earning assets 805,779 48,892 8.09 702,670 39,514 7.50
Non-interest-earning assets 190,670 139,315
--------- --------
Total assets $996,449 $841,985
======== ========
Interest-bearing liabilities:
Deposits $526,052 $18,623 4.72% $467,774 $14,495 4.13%
FHLB advances and other 224,248 9,560 5.68 182,570 6,796 4.96
Notes payable 68,546 3,371 6.56 19,089 858 5.99
--------- --------- --------- -------
Total interest-bearing liabilities 818,846 31,554 5.14 669,433 22,149 4.41
------- ---- ------- ----
Non-interest-bearing liabilities 85,402 81,853
-------- ---------
Total liabilities 904,248 751,286
Stockholders' equity 92,201 90,699
-------- ---------
Total liabilities and stock-
holders' equity $996,449 $841,985
======== ========
Net interest income; interest
rate spread $17,338 2.95% $17,365 3.09%
======= ===== ======= =====
Net interest margin (2) 2.87% 3.30%
===== =====
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.
Results of Operations
Three Months Ended September 30, 2000 compared to Three Months Ended
September 30, 1999
On a consolidated basis, First Defiance had net income of $3.2 million for the
three months ended September 30, 2000 compared to $2.1 million for the same
period in 1999. On a per share basis, basic and diluted earnings per share were
$.50 and $.49, respectively, for the 2000 third quarter compared to $.33 and
$.32 basic and diluted per share earnings for the 1999 third quarter.
Cash earnings for the third quarter of 2000 were $3.4 million or $.52 per
diluted share compared to $2.3 million or $.34 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
decreased to $5.2 million for the three-month period ending September 30, 2000
from $5.4 million for the same period in 1999. The Company's net interest margin
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
decreased to 2.64% for the quarter ended September 30, 2000 compared to 3.05%
for the quarter ended September 30, 1999. The Company's interest rate spread
(the difference between the yield on average interest earning assets and the
interest rate on average interest-bearing liabilities) for the 2000 third
quarter was 2.74%, which was 16 basis points lower than the 1999 third quarter
level of 2.90%.
The reductions in net interest income and net interest margin result primarily
from the necessary funding to support the growth in mortgage servicing rights,
which increased from an average of $84.8 million for the third quarter of 1999
to $120.3 million for the same period in 2000. The increase in average mortgage
servicing rights reflects the growth in loan production at The Leader and
results in increases in both gain on sale of loans and mortgage banking income.
Total interest income increased by $3.2 million, or 23.4%, from $13.7 million
for the three months ended September 30, 1999 to $16.9 million for the three
months ended September 30, 2000. The increase was primarily due to a $83.3
million increase in the average balance of loans outstanding for the third
quarter of 2000 when compared to the same period in 1999. Additionally, the
yield on those loans increased to 8.36% in 2000 versus 7.64% in 1999. The
increase in yield was attributable to increases in the average balance of loans
held-for-sale at The Leader and commercial loans at First Federal. Loans
held-for-sale increased from an average balance of $197.5 million for the third
quarter of 1999 to $234.7 million for the same period in 2000. The recent
increasing rate environment, which has caused an increase in volume in the
first-time homebuyer programs that The Leader specializes in, along with a
planned expansion of The Leader's mortgage banking operations has resulted in
the increase in the average balance in loans held-for-sale. For the 2000 third
quarter, The Leader originated 9,659 loans with balances of $671.8 million
compared to production of 7,505 loans with balances of $521.0 million during the
same period of 1999. During that same period, commercial and commercial real
estate loans increased from an average balance of $119.6 million for the
three-month period ended September 30, 1999 to $207.1 million for the same
period in 2000.
Interest earnings from the investment portfolio and interest-bearing deposits
increased to $1.1 million for the three months ended September 30, 2000 compared
to $816,000 for the same period in 1999. The increase in interest income was the
result of a $4.4 million increase in the average balance of investment
securities from $57.3 million for the third quarter of 1999 to $61.7 million for
the same period in 2000. Additionally, due to the increasing rate environment of
the last several quarters, the average yield on the investment portfolio
increased from 5.70% for the three-month period ended September 30, 1999 to
6.96% for the same period in 2000.
Interest expense increased by $3.4 million, or 41.3%, to $11.7 million for the
third quarter of 2000 compared to $8.3 million for the same period in 1999. The
increase is primarily due to funding the $87.7 million increase in average
interest-earning assets and the $56.7 million increase in average non-interest
earning assets which increased from $149.6 million for the third quarter of 1999
to $206.3 million for the same period in 2000. As previously noted, this
increase in average non-interest earning assets was primarily the result in
increases in mortgage servicing rights resulting from The Leader's increased
production. To fund this growth, the average balance of FHLB advances increased
to $251.3 million for the three months ended September 30, 2000 from $211.6
million for the comparable period in 1999 and the average balance of outside
debt increased from $40.1 million to $55.5 million during the same period.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
Interest expense also increased because of an increase in the average balance of
deposits outstanding and the average cost of those deposits. Average deposits
increased to $542.5 million for the three months ended September 30, 2000
compared to $470.5 million for the three months ended September 30, 1999. The
average cost of those deposits increased by 83 basis points in the third quarter
of 2000, to 5.05% from 4.22% for the same period in 1999.
The average cost of advances also increased, to 6.10% from 5.11% for the three
months ended September 30, 2000 and 1999, respectively. Additionally, the
average cost of outside debt increased from 5.99% for the three months ended
September 30, 1999 to 7.28% for the same period in 2000. The increase in the
cost of FHLB advances and outside debt was the result of several increases to
the targeted Fed Funds rate initiated by the Federal Reserve throughout 1999 and
continuing in 2000.
Provision for Loan Losses. The provision for loan losses for the quarter ended
September 30, 2000 was $539,000 compared to $429,000 during the same period in
1999. 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. The increased provision reflects the shift in
First Federal's portfolio to a larger concentration of commercial loans. It also
includes increased provision for losses associated with both the cost of
servicing foreclosed loans in the servicing portfolio and the anticipated
increase in foreclosed loans because of the rapid growth in the total servicing
portfolio.
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets totaled $2.2 million at September 30,
2000, which is .22% of total assets. Non-performing loans and repossessed assets
reported do not include $7.4 million of 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
September 30, 2000 was $8.8 million compared to $8.1 million at September 30,
1999 and $7.8 million at December 31, 1999. For the quarter ended September 30,
2000, First Defiance charged off $337,000 of loans against its allowance and
realized recoveries of $168,000 from loans previously charged off. During the
same quarter in 1999, First Defiance charged off $566,000 in loans and realized
recoveries of $52,000.
Non-Interest Income. Non-interest income increased substantially in the third
quarter of 2000, from $10.3 million for the quarter ended September 30, 1999 to
$14.0 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 $9.3 million for the three-month period
ended September 30, 2000 compared to $7.2 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 $5.9 billion as of September 30, 1999
to $7.5 billion at September 30, 2000.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
Gain on Sale of Loans. Gain on sale of loans increased from $1.7 million for the
quarter ended September 30, 1999 to $2.7 million for the same period of 2000.
The increased gain on sale of loans is associated with increased secondary
market activities at The Leader. For the 2000 second quarter, The Leader had
$657 million in loan settlements compared to $460 million in settlements during
the same period in 1999.
Other Non-Interest Income. Other non-interest income, including dividends on
Federal Home Loan Bank stock, gains on sale of securities, insurance commission
income, trust income and other miscellaneous charges, increased to $2.0 million
for the quarter ended September 30, 2000 from $1.4 million for the same period
in 1999. Commission revenue increases at First Insurance, due to the September
1, 1999 acquisition of the Defiance, Ohio office of Insurance and Risk
Management, accounted for $323,000 of the increase from the quarter ended
September 30, 1999 to the quarter ended September 30, 2000. Additionally, trust
revenue increased by $153,000 for the 2000 third quarter compared to the same
period in 1999.
Non-Interest Expense. Total non-interest expense increased $1.9 million from
$12.0 million for the quarter ended September 30, 1999 to $13.9 million for the
same period in 2000. Significant individual components of the increase are as
follows:
Compensation and Benefits. Compensation and benefits increased $523,000 from
$5.1 million for the quarter ended September 30, 1999 to $5.6 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 the expansion of the branch network, and the additional
staff at First Insurance acquired through the acquisition of the Insurance and
Risk Management office.
Occupancy. Occupancy expense increased to $1.2 million for the three-month
period ended September 30, 2000 from $1.1 million for the three months ended
September 30, 1999. This increase was the result of the branch expansions at
First Federal, office renovation and expansion at The Leader, and the expansion
at First Insurance.
Amortization of Mortgage Servicing Rights. Amortization of mortgage servicing
rights (MSRs) increased to $3.7 million for the quarter ended September 30, 2000
from $3.0 million for the same period in 1999. This increase was due to the
growth in the mortgage-servicing portfolio from $5.9 billion as of September 30,
1999 to $7.5 billion as of September 30, 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 4.62% for the third quarter of 2000, annualized, compared to
5.80% for the same period in 1999, annualized.
Amortization of Goodwill and Other Acquisition Related Costs. Amortization of
goodwill and other acquisition costs amounted to $434,000 in the third quarter
of 2000 compared to $576,000 during the same period in 1999. The decrease in the
third quarter of 2000 resulted from the expiration of certain non-compete
agreements related to The Leader acquisition.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $2.9 million for the quarter ended September 30, 2000 from $2.2 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 34.3% for the
quarter ended September 30, 2000 compared to 35.3% for the same period in 1999.
The lower rate for the 2000 third quarter resulted from increased balances in
tax-exempt securities and commercial loans.
As a result of the above factors, net income for the quarter ended September 30,
2000 was $3.2 million compared to $2.1 million for the comparable period in
1999. On a per share basis, basic and diluted earnings per share for the three
months ended September 30, 2000 were $.50 and $.49, respectively, compared to
$.33 and $.32, respectively, for the same period in 1999. Average shares
outstanding for the basic and diluted calculations were 6,367,000 and 6,451,000,
respectively, for the quarter ended September 30, 2000 compared to 6,447,000 and
6,627,000, respectively, for the quarter ended September 30, 1999.
First Defiance's board of directors declared a dividend of $.11 per common share
as of September 30, 2000. The dividend amounted to $757,855, including dividends
on unallocated ESOP shares. It was paid on October 27, 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.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
Nine Months Ended September 30, 2000 compared to Nine Months Ended
September 30, 1999
On a consolidated basis, First Defiance had net income of $7.8 million for the
nine months ended September 30, 2000 compared to $6.4 million for the same
period in 1999. On a per share basis, basic and diluted earnings per share were
$1.24 and $1.22, respectively, compared to $.98 and $.95 basic and diluted per
share earnings for the same period in 1999. The 1999 year-to-date results
included a one-time gain on sale of certain non-core servicing rights of
$479,000 (or $.05 per share).
Cash earnings for the nine-months ended September 30, 2000 were $8.4 million or
$1.32 per diluted share compared to $7.0 million or $1.03 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
decreased to $16.5 million for the nine-month period ending September 30, 2000
compared to $16.7 million for the same period in 1999. The Company's
year-to-date net interest margin through September 30, 2000 decreased to 2.87%
compared to 3.30% for the same period in 1999. Interest rate spread also
decreased to 2.95% for the nine-month period ended September 30, 2000 from 3.09%
for the same period in 1999. The net interest margin was favorably impacted by a
first quarter 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. This change in estimate of interest
receivable resulted in a 13 basis point increase in the yield on
interest-earning assets for the nine-month period ended September 30, 2000.
Without that change, the year-to-date net interest margin would have been 2.74%.
In addition, management enhanced 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 adjustment to provision for loan losses of $693,000. The net
impact of these two items essentially offset each other and without these
adjustments earnings for the year would still be $1.22 per diluted share.
Excluding the estimate change, total interest income increased by $8.6 million,
or 22.1%, from $38.8 million for the nine months ended September 30, 1999 to
$47.4 million for the same period in 2000. The increase was due to a $103.1
million increase in the average balance of interest-earning assets for the nine
months ended September 30, 2000 when compared to the same period in 1999. The
yield on interest earning assets increased from 7.50% for the year-to-date
period ended September 30, 1999 to 7.96% for the same period in 2000 excluding
the impact of the change in estimate noted above (8.09% including the change in
estimate). Excluding the estimate change, interest earnings on the loan
portfolio increased $7.3 million from $36.4 million for the nine months ended
September 30, 1999 to $43.7 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 $634.0 million and 7.65% for the nine-month period ended
September 30, 1999, respectively, to $721.1 million and 8.07%, respectively, for
the same period in 2000.
Interest earnings from the investment portfolio increased to $3.5 million for
the nine months ended September 30, 2000 compared to $2.4 million for the same
period in 1999. The increase in interest income was primarily the result of a
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
$14.2 million increase in the average balance of investment securities, from
$56.1 million for the first nine months of 1999 to $70.3 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 nine months ended September 30, 2000 was 7.11%
compared to 5.83% for the same period in 1999.
Interest expense increased by $9.4 million, or 42.5%, to $31.6 million for the
nine months ended September 30, 2000 compared to $22.2 million for the same
period in 1999. The increase is primarily due to the funding of the $103.1
million increase in average interest earning assets noted above combined with
the funding of the $51.4 million increase in average non-interest earning
assets, from $139.3 million for the first nine months of 1999 to $190.7 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 $80.8 million for the year-to-date period ended
September 30, 1999 to $110.3 million for the same period in 2000. These
increased funding requirements resulted in a $149.4 million increase in the
average balance of total interest-bearing liabilities from $669.4 million for
the nine months ended September 30, 1999 to $818.8 million for the same period
of 2000.
Interest expense also increased due to an increase in the average cost of funds
during the first nine months of 2000 to 5.14% from 4.41% for the comparable
period in 1999. This increase resulted from increases in the average costs of
deposits, FHLB advances, and notes payable of 59 basis points, 72 basis points,
and 57 basis points, respectively, from 4.13%, 4.96%, and 5.99%, respectively
for the nine-months ended September 30, 1999, to 4.72%, 5.68%, and 6.56%,
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 through the third quarter of 2000.
Provision for Loan Losses. The provision for loan losses increased to $2.5
million for the nine-months ended September 30, 2000 compared to $1.1 million
for the same period in 1999. As noted above, $693,000 of this increase was the
result of the change in accounting estimate on foreclosure loans at The Leader.
First Defiance charged off $1.9 million of loans against its allowance for loan
losses for the nine-month period ended September 30, 2000 and realized
recoveries of $418,000 from loans previously charged off. During the same period
in 1999, First Defiance charged off $2.9 million in loans and realized
recoveries of $218,000.
Non-Interest Income. Non-interest income increased $9.9 million for the
nine-month period ended September 30, 2000 from $29.1 million to $30.0 million
for the 1999 and 2000 periods, respectively. 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 $26.0 million for the nine-month period
ended September 30, 2000 from $20.3 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 noted in the Results of Operations section for
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
the third quarter of 2000. The Leader now services a total of 117,000 loans with
a balance of $7.5 billion.
Gain on Sale of Loans. Gain on sale of loans increased from $4.9 million for the
nine months ended September 30, 1999 to $7.2 million for the same period in
2000. The increase in gains on sale of loans is a result of continued strong
production levels at The Leader. Year-to-date the number of loans acquired under
the first-time home-buyer programs has increased by 50% over 1999 from 17,017
for the first nine months of 1999 to 25,462 for the same period in 2000. The
dollar balance of loans acquired has increased by 53% over that same period,
from $1.156 billion during the first nine months of 1999 compared to $1.766
billion during the same period in 2000.
Other Non-Interest Income. Other non-interest income, including insurance
commission income, dividends on Federal Home Loan Bank stock, gains on sale of
securities, trust revenues, and other miscellaneous charges, increased to $5.8
million for the nine-month period ended September 30, 2000 from $3.9 million for
the same period in 1999. Commission revenue increases at First Insurance and
trust revenue at First Federal accounted for $1.8 million and $181,000,
respectively, of the year over year increase due to the 1999 third quarter
acquisition of the Insurance and Risk Management office and expansion of trust
operations. Non-interest income in 1999 included a one-time $479,000 gain on
sale of non-core servicing rights by The Leader realized during the second
quarter of 1999.
Non-Interest Expense. Total non-interest expense increased $6.3 million from
$34.7 million for the nine-month period ended September 30, 1999 to $41.0 for
the same period in 2000. Significant individual components of the increase are
as follows:
Compensation and Benefits. Compensation and benefits increased $3.0 million from
$14.1 million for the year-to-date period ended September 30, 1999 to $17.1
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 acquisition of the
Insurance and Risk Management office.
Occupancy. Occupancy expense increased to $3.6 million for the nine-month period
ended September 30, 2000 from $2.9 million for the same period in 1999. This
increase was a result of expansions throughout the Company.
Amortization of Mortgage Servicing Rights. Amortization of mortgage servicing
rights increased to $11.0 million for the nine-month period ended September 30,
2000 from $9.4 million for the same period in 1999 due to the growth in the
mortgage servicing portfolio.
Amortization of Goodwill and Other Acquisition Costs. $1.66 million in
amortization of goodwill and other acquisition costs was recognized for the
nine-month period ended September 30, 2000 compared to $1.74 million for the
same period in 1999, due to the purchase of The Leader and the First Insurance.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $7.7 million for the nine-month period ended September 30, 2000 compared to
$6.6 million for the same period in 1999.
The effective tax rate utilized for the nine months ended September 30, 2000 was
34.8% compared to 36.0% for the nine months ended September 30, 1999.
As a result of the above factors, net income for the nine month period ended
September 30, 2000 increased to $7.8 million from $6.4 million for the
nine-months ended September 30, 1999. On a per share basis, basic and diluted
earnings per share for the nine months ended September 30, 2000 were $1.24 and
$1.22 respectively compared to $.98 and $.95, respectively, for the same period
in 1999. As stated above the results for the nine months ended September 30,
1999 were favorably impacted by the $479,000 gain realized on the sale of
certain non-core mortgage servicing rights. The after tax gain resulting from
the sale of the servicing was $316,000 or $.05 per basic and diluted share.
Average shares outstanding for the basic and diluted calculations were 6,301,000
and 6,411,000, respectively, for the nine-months ended September 30, 2000
compared to 6,561,000 and 6,768,000, respectively, for the same period in 1999.
Through September 30, 2000, First Defiance has declared dividends totaling $.33
per share.
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 exceeded applicable liquidity requirements throughout
the nine-month period ended September 30, 2000.
First Defiance generated $4.8 million in cash for operating activities during
the first nine months of 2000. The Company's cash flow from operating activities
include 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 held 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 September 30, 2000, First Defiance had $37.8 million in outstanding mortgage
loan commitments and loans in process to be funded generally within the next
nine months and an additional $49.7 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 $200.2 million of loans held-for-sale and
it also had commitments to acquire $2.3 billion of mortgage loans under active
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
or pending 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 September 30, 2000, the total amount of certificates of
deposit that are scheduled to mature by September 30, 2001 is $323.1 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, additional advances from the
FHLB of Cincinnati and other financial institutions are available.
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 September 30, 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.
The following table sets forth First Federal's compliance with each of the
capital requirements at September 30, 2000.
Tangible Core Risk-Based
Capital Capital Capital
-------- -------- ----------
(Dollars in Thousands)
Regulatory capital $60,379 $60,379 $68,559
Minimum required regulatory
capital 14,618 38,982 52,319
------- ------- --------
Excess regulatory capital $45,761 $21,397 $16,240
======= ======= =======
Regulatory capital as a
percentage of assets (1) 6.2% 6.2% 10.5%
Minimum capital required as
a percentage of assets 1.5% 4.0% 8.0%
------- ------- -------
Excess regulatory capital as a
percentage in excess of
requirement 4.7% 2.2% 2.5%
====== ==== ====
- ------------------------
(1) Tangible capital and core capital are computed as a percentage of adjusted
total assets of $989.3 million. Risk-based capital is computed as a
percentage of total risk-weighted assets of $654.0 million.
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
-------------------------
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
attain and 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.
30
Item 3. Qualitative and Quantitative Disclosure About Market Risk
As discussed in detail in the 1999 Annual Report in 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 monetary 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
September 30, 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 September 30, 2000, a 100 basis
point decrease in interest rate would not materially impact the valuation
reserve for mortgage servicing rights.
31
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
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
32
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: November 14, 2000 By: /s/ William J. Small
---------------- ------------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ John C. Wahl
---------------- ---------------------------------
John C. Wahl
Executive Vice President, Chief
Financial Officer and
Treasurer
33