SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year Ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26850
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FIRST DEFIANCE FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
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OHIO 34-1803915
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Clinton Street, Defiance, Ohio 43512
- ---------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (419) 782-5015
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
---------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 9, 2001, there were issued and outstanding 6,863,684
shares of the Registrant's common stock.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant computed by reference to the average bid and
ask price of such stock as of March 9, 2001 was approximately $89.2 million.
---------------
Documents Incorporated by Reference
Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 24, 2001 are incorporated by reference into
Part III thereof.
PART I
Item 1. Business
First Defiance Financial Corp. ("First Defiance" or the "Company")
is a unitary thrift holding company that, through its subsidiaries (the
"Subsidiaries") focuses on traditional banking, mortgage banking, and property
and casualty, life and group health insurance products. The Company's
traditional banking activities include originating and servicing residential,
commercial, and consumer loans and providing a broad range of depository
services. The Company's mortgage banking activities consist primarily of
purchasing and selling residential mortgage loans, originating residential
mortgages, and servicing residential mortgage portfolios for investors. The
Company's insurance activities consist primarily of commissions relating to the
sale of property and casualty, life and group health insurance and investment
products.
At December 31, 2000, the Company had consolidated assets of $1.1
billion, consolidated deposits of $545.9 million, and consolidated stockholder's
equity of $99.5 million. The Company was incorporated in Ohio in June of 1995.
Its principal executive offices are located at 601 N. Clinton Street, Defiance,
Ohio 43512, and its telephone number is (419) 782-5015.
The Subsidiaries
The Company's core business operations are conducted through the
following Subsidiaries:
First Federal Bank of the Midwest: First Federal Bank of the Midwest
("First Federal") is a federally chartered stock savings bank headquartered in
Defiance, Ohio. It conducts operations through its main office and fourteen full
service branch offices in Defiance, Fulton, Hancock, Henry, Paulding, Seneca,
Williams and Wood Counties in northwest Ohio. First Federal's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). First Federal is a member of the Federal
Home Loan Bank ("FHLB") System.
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 secured by single-family residences
(one-to-four-family units) primarily located in the eight counties in which its
offices are located and in adjacent Putnam County. First Federal also originates
other real estate loans secured by nonresidential and multi-family residential
real estate and construction loans. First Federal also holds a significant
number of non-real estate loans including commercial, home improvement and
equity and consumer finance, primarily automobile loans. In addition, First
Federal invests in U.S. Treasury and federal government agency obligations,
obligations of the State of Ohio and its political subdivisions, mortgage-backed
securities which are issued by federal agencies, commercial paper, and corporate
bonds.
2
The Leader Mortgage Company: The Leader Mortgage Company LLC ("The
Leader") is a wholly owned subsidiary of First Federal. The Leader is a mortgage
banking company which specializes in servicing mortgage loans under various
first-time homebuyer programs sponsored by various state, county and municipal
governmental entities. The Leader'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 & Investments: First Insurance & Investments ("First
Insurance") is a wholly owned subsidiary of First Defiance. First Insurance is
an insurance agency that does business in the Defiance, Ohio area. First
Insurance offers property and casualty insurance, life insurance, group health
insurance, and investment products.
Securities
Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities are classified as
held-to-maturity when First Defiance has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity and equity securities
are classified as available-for-sale. Available-for-sale securities are stated
at fair value. 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 securities have been committed to sell at their carrying
value.
First Defiance's securities portfolio is managed in accordance with
a written policy adopted by the Board of Directors and administered by the
Investment Committee. The Chief Financial Officer, the Chief Operating Officer,
and the Chief Executive Officer of First Federal can each approve transactions
up to $1 million. Two of the three officers are required to approve transactions
between $1 million and $5 million. All transactions in excess of $5 million must
be approved by the Board of Directors.
First Defiance's investment portfolio includes seven CMO and REMIC
issues totaling $6.5 million, all of which are fully amortizing securities. All
such investments are considered derivative securities. None of First Defiance's
investments are considered to be high risk and management does not believe the
risks associated with these investments are significantly different from risks
associated with other pass-through mortgage-backed securities. First Defiance
does not invest in off-balance sheet derivative securities.
3
The amortized cost and fair value of securities at December 31, 2000
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Money market mutual
funds and other mutual funds are not due at a single maturity date. For purposes
of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Contractually Maturing Total
----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average
Year Rate Years Rate Years Rate Years Rate Amount Yield
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage-backed
securities $ 20 9.05% $ 429 8.63% $ 56 10.06% $ 8,856 7.37% $ 9,361 7.45%
Corporate bonds 2,500 6.39 9,297 6.64 -- -- -- -- 11,797 6.59
REMICs and CMOs -- -- 1,519 7.00 4,501 6.26 447 7.78 6,467 6.54
U.S. Government and
federal agency
obligations -- -- 17,672 6.03 -- -- -- -- 17,672 6.03
Obligations of states and
political subdivisions
140 5.96 2,494 5.84 2,964 4.93 1,238 4.85 6,836 5.26
Trust preferred stock -- -- -- -- -- -- 2,000 9.13 2,000 9.13%
--------- -------- --------- --------- ---------
Total $ 2,660 $ 31,411 $ 7,521 $ 12,541 54,133
========= ======== ========= ========
Mutual funds 6,606
Equity securities 343
Unrealized gain on
securities available
for sale 25
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Total $ 61,107
==========
The carrying value of investment securities is as follows:
December 31
2000 1999 1998
-----------------------------------------
(In thousands)
Available-for-Sale Securities:
Corporate bonds $11,884 $14,746 $11,196
U. S. Treasury and other U. S. Government agencies and corporations
17,934 16,374 7,063
Obligations of state and political
subdivisions 6,018 5,381 5,286
Other 17,340 17,445 24,009
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Total $53,176 $53,946 $47,554
======= ======= =======
Trading Securities:
U.S. Treasury and other U.S.
Government agencies and corporations $ 234 $29,805 $ --
------- ------- -------
$ 234 $29,805 $ --
======= ======= =======
4
December 31
2000 1999 1998
-----------------------------------------
(In thousands)
Held-to-Maturity Securities:
U. S. Treasury and other U. S. Government agencies and corporations
$ 6,928 $ 8,997 $12,531
Obligations of state and political
subdivisions 769 898 1,010
------- ------- -------
Total $ 7,697 $ 9,895 $13,541
======= ======= =======
For additional information regarding First Defiance's investment portfolio refer
to Note 4 to the consolidated financial statements.
Interest-Bearing Deposits
First Defiance had interest-bearing deposits in the FHLB of
Cincinnati amounting to $4.9 million and $1.8 million at December 31, 2000 and
l999, respectively.
Residential Loan Servicing Activities
Residential Mortgage Loan Servicing: First Federal and The Leader
each has its own mortgage servicing portfolio. At December 31, 2000, First
Federal serviced approximately $78.8 million of mortgage loans, while The
Leader's servicing portfolio amounted to approximately $7.9 billion.
Servicing mortgage loans involves a contractual right to receive a
fee for processing and administering loan payments. This processing involves
collecting monthly mortgage payments on behalf of investors, reporting
information to those investors on a monthly basis and maintaining custodial
escrow accounts for the payment of principal and interest to investors and
property taxes and insurance premiums on behalf of borrowers. These payments are
held in custodial escrow accounts at First Federal, where the money can be
invested by the Company in interest-earning assets at returns that historically
have been greater than could be realized by the Company using the custodial
escrow deposits as compensating balances to reduce the effective borrowing cost
on the Company's warehouse credit facilities.
As compensation for its mortgage servicing activities, the Company
receives servicing fees usually ranging from 0.25% to 0.44% per annum of the
loan balances serviced, plus any late charges collected from delinquent
borrowers and other fees incidental to the services provided. At December 31,
2000, the Company's weighted-average servicing fee was .43%. In the event of a
default by the borrower, the Company receives no servicing fees until the
default is cured.
5
Servicing is provided on mortgage loans on a recourse or
non-recourse basis. The Company's policy is to accept only a limited number of
servicing assets on a recourse basis. As of December 31, 2000, on the basis of
outstanding principal balances, only .05% of the mortgage servicing contracts
owned by the Company involved recourse servicing. To the extent that servicing
is done on a recourse basis, the Company is exposed to credit risk with respect
to the underlying loan in the event of a repurchase. Additionally, many of the
non-recourse mortgage servicing contracts owned by the Company require the
Company to advance all or part of the scheduled payments to the owner of the
mortgage loan in the event of a default by the borrower. Many owners of mortgage
loans also require the servicer to advance insurance premiums and tax payments
on schedule even though sufficient escrow funds may not be available. The
Company, therefore, must bear the funding costs associated with making such
advances. If the delinquent loan does not become current, these advances are
typically recovered at the time of the foreclosure sale. Foreclosure expenses
are generally not fully reimbursable by the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
GNMA, for whom the Company provides significant amounts of mortgage loan
servicing. As of December 31, 2000 and 1999, the Company had advanced
approximately $10.0 million and $5.6 million, respectively, in funds on behalf
of third-party investors.
Mortgage servicing rights represent a contractual right to service,
and not a beneficial ownership interest in, underlying mortgage loans. Failure
to service the loans in accordance with contract or other applicable
requirements may lead to the termination of the servicing rights and the loss of
future servicing fees. There have been no terminations of mortgage servicing
rights by any mortgage loan owners because of the Company's failure to service
the loans in accordance with its obligations during the three year period ended
December 31, 2000.
The following table sets forth certain information regarding the
composition of the Company's mortgage servicing portfolio (excluding loans
subserviced for others) as of the dates indicated:
As of December 31
2000 1999 1998
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(In thousands)
FHA insured/VA guaranteed loans $ 6,271,122 $ 4,641,778 $ 3,616,245
Conventional loans 1,284,535 1,205,908 1,086,575
Other loans 435,163 191,377 153,049
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Total mortgage servicing portfolio $ 7,990,820 $ 6,039,063 $ 4,855,869
===============================================
Fixed rate loans $ 7,985,351 $ 6,032,886 $ 4,847,764
Adjustable rate loans 5,469 6,177 8,105
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Total mortgage servicing portfolio $ 7,990,820 $ 6,039,063 $ 4,855,869
===============================================
6
The following table shows the delinquency statistics for the
mortgage loans serviced by the Company (excluding loans subserviced for others)
compared with national average delinquency rates as of the dates presented:
As of December 31
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2000 1999 1998
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National National National
Company Average(1) Company Average(1) Company Average(1)
-----------------------------------------------------------------------------------------------------------
Number Percentage Percentage Number Percentage Percentage Number Percentage Percentage
of of Servicing of of of Servicing of of of Servicing of
Loans Portfolio (2) Loans Loans Portfolio (2) Loans Loans Portfolio (2) Loans
-----------------------------------------------------------------------------------------------------------
Loans delinquent for:
30-59 days 8,749 7.05% 2.84% 5,102 5.28% 2.74% 5,155 6.23% 2.96%
60-89 days 2,200 1.77 .64 1,425 1.47 .63 1,435 1.73 .68
90 days and over 1,754 1.41 .56 1,007 1.04 .56 818 .99 .60
-----------------------------------------------------------------------------------------------------------
Total delinquencies 12,703 10.23% 4.04% 7,534 7.79% 3.93% 7,408 8.95% 4.24%
===========================================================================================================
Foreclosures 1,383 1.11% 2,167 2.24% 2,161 2.61%
===========================================================================================================
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1 to 4 Unit
Residential Mortgage Loans" (Seasonally Adjusted) (Data as of September 30,
2000 and December 31, 1999 and 1998, respectively).
(2) Delinquencies and foreclosures generally exceed the national average due to
historically higher rates of delinquencies and foreclosures on FHA insured
and VA guaranteed residential mortgage loans.
The following table sets forth certain information regarding the number
and aggregate principal balance of the mortgage loans serviced by the Company,
including both fixed and adjustable rate loans (excluding loans subserviced for
others), at various mortgage interest rates:
As of December 31
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2000 1999 1998
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Percentage Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance
---- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Less than 5.00% 949 $ 51,062 .64% 697 $ 32,872 .54% 1,144 $ 33,215 .68%
5.00% - 5.99% 19,635 1,301,249 16.28 18,326 1,238,781 20.51 9,510 565,162 11.64
6.00% - 6.99% 45,122 3,165,465 39.61 35,221 2,427,105 40.19 29,068 1,818,721 37.45
7.00% - 7.99% 39,032 2,329,968 29.16 31,094 1,721,873 28.51 30,383 1,718,098 35.38
8.00% - 8.99% 13,516 757,174 9.48 9,713 501,155 8.30 12,310 480,142 9.89
9.00% and over 5,854 385,902 4.83 1,640 117,277 1.95 355 240,531 4.96
----------------------------------------------------------------------------------------------------------------
Total 124,108 $ 7,990,820 100.00% 96,691 $6,039,063 100.00% 82,770 $4,855,869 100.00%
================================================================================================================
7
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown.
As of December 31
---------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------- -
Percent of Percent of
Number Percent Unpaid Unpaid Number Percent Unpaid Unpaid
of of Number Principal Principal of of Number Principal Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount
-------- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1-5 years 3,119 2.51% $ 111,295 1.39% 4,102 4.24% $ 121,250 2.01%
6-10 years 6,843 5.51 107,507 1.35 5,823 6.02 120,517 2.00
11-15 years 1,410 1.14 90,667 1.13 1,457 1.51 99,207 1.64
16-20 years 10,528 8.48 337,449 4.22 4,894 5.06 209,012 3.46
21-25 years 12,076 9.73 788,008 9.86 12,702 13.14 745,418 12.34
More than 25 years 90,132 72.63 6,555,894 82.05 67,713 70.03 4,743,659 78.55
---------------------------------------------------------------------------------------------------------------
Total 124,108 100.00% $ 7,990,820 100.00% 96,691 100.00% $6,039,063 100.00%
===============================================================================================================
As of December 31
----------------------------------------------------------------
1998
----------------------------------------------------------------
Percent of
Number Percent Unpaid Unpaid
of of Number Principal Principal
Maturity Loans of Loans Amount Amount
-------- ----------------------------------------------------------------
(Dollars in thousands)
1-5 years 5,843 7.06% $ 147,446 3.04%
6-10 years 5,053 6.10 147,092 3.03
11-15 years 1,756 2.12 104,796 2.16
16-20 years 6,643 8.03 288,755 5.95
21-25 years 16,136 19.49 960,928 19.79
More than 25 years 47,339 57.20 3,206,852 66.03
----------------------------------------------------------------
Total 82,770 100.00% $4,855,869 100.00%
================================================================
The following table sets forth the geographic distribution of the mortgage loans
(including delinquencies) serviced by the Company (excluding loans subserviced
for others) by state:
As of December 31
-----------------------------------------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent
of of of of
Number Aggregate Aggregate Total Number Aggregate Aggregate Total
of Principal Principal Delinqs. of Principal Principal Delinqs.
State Loans Balance Balance by State(1) Loans Balance Balance by State(1)
- ----- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Ohio 37,169 $2,425,207 30.35% 24.44% 35,336 $2,230,168 36.93% 31.46%
Florida 24,900 1,653,828 20.70 20.29 19,245 1,259,712 20.86 22.07
Louisiana 12,396 829,013 10.37 14.92 10,226 679,799 11.26 16.30
Washington 7,100 488,675 6.12 4.37 5,458 374,580 6.20 4.67
Other (2) 42,543 2,594,097 32.46 35.98 26,426 1,494,804 24.75 25.50
-----------------------------------------------------------------------------------------------------------
Total 124,108 $7,900,820 100.00% 100.00% 96,691 $6,039,063 100.00% 100.00%
===========================================================================================================
As of December 31
----------------------------------------------------------------
1998
----------------------------------------------------------------
Percent Percent
of of
Number Aggregate Aggregate Total
of Principal Principal Delinqs.
State Loans Balance Balance by State(1)
- ----- ----------------------------------------------------------------
(Dollars in thousands)
Ohio 36,761 $2,153,287 44.34% 38.12%
Florida 14,688 955,047 19.67 19.74
Louisiana 6,836 443,228 9.13 10.96
Washington 3,531 248,738 5.12 3.93
Other (2) 20,954 1,055,569 21.74 27.25
----------------------------------------------------------------
Total 82,770 $4,855,869 100.00% 100.00%
================================================================
(1) In terms of number of loans outstanding.
(2) No other state accounted for greater than 6.00%, based on aggregate
principal balances of the Company's mortgage loan servicing portfolio as of
December 31, 2000.
8
Lending Activities
General. A savings bank generally may not make loans to one borrower
and related entities in an amount which exceeds 15% of its unimpaired capital
and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. See "Regulation - Lending Limits." At
December 31, 2000, First Federal's limit on loans-to-one borrower was $10.34
million and its five largest loans or groups of loans to one borrower, including
related entities, were $10.26 million, $9.27 million, $8.26 million, $7.29
million and $5.65 million. All of these loans or groups of loans were performing
in accordance with their terms at December 31, 2000.
9
Loan Portfolio Composition. Loan volume continues to be strong. The
net increase in net loans outstanding over the prior year was $70.6 million,
$134.4 million, and $126.6 million in 2000, 1999, and 1998, respectively. The
loan portfolio contains no foreign loans nor any concentrations to identified
borrowers engaged in the same or similar industries exceeding 10% of total
loans.
The following table sets forth the composition of the Company's loan
portfolio by type of loan at the dates indicated.
December 31
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate:
One to four family residential $441,959 56.2% $458,442 64.1% $365,116 62.7% $255,428 57.0% $241,787 57.1%
Five or more family residential (1) 44,700 5.7 11,427 1.6 13,763 2.4 9,363 2.1 9,175 2.2
Non-residential real estate (1) 125,479 16.0 11,801 1.7 16,436 2.8 20,159 4.5 21,348 5.0
Construction 9,627 1.1 7,808 1.1 8,258 1.4 10,148 2.2 11,412 2.7
--------------------------------------------------------------------------------------------
Total real estate loans 621,765 79.0 489,478 68.5 403,573 69.3 295,098 65.8 283,722 67.0
Other:
Consumer finance 52,114 6.6 64,326 9.0 87,168 15.0 81,111 18.1 74,019 17.5
Commercial (1) 81,138 10.3 138,125 19.3 70,109 12.0 29,758 6.6 26,674 6.3
Home equity and improvement 31,836 4.1 22,781 3.2 18,168 3.2 16,940 3.8 13,570 3.2
Mobile home 29 -- 46 -- 3,117 .5 25,424 5.7 25,199 6.0
--------------------------------------------------------------------------------------------
Total non-real estate loans 165,117 21.0 225,278 31.5 178,562 30.7 153,233 34.2 139,462 33.0
--------------------------------------------------------------------------------------------
Total loans 786,882 100.0% 714,756 100.0% 582,135 100.0% 448,331 100.0% 423,184 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 3,415 3,291 3,250 3,087 4,474
Deferred loan origination fees 1,041 764 612 646 568
Allowance for loan losses 8,904 7,758 9,789 2,686 2,217
-------- -------- -------- -------- --------
Net loans $773,522 $702,943 $568,484 $441,912 $415,925
======== ======== ======== ======== ========
(1) Prior to December 31, 2000, most non-residential real estate loans were
reported with all other commercial loans.
Included above, First Defiance had $232.3 million, $237.6 million,
$119.9 million, $87,500 and $558,600 million in loans classified as held for
sale at December 31, 2000, 1999, 1998, 1997, and 1996, respectively. The fair
value of such loans, which are all single-family residential mortgage loans,
approximated their carrying value for all years presented.
10
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 2000 regarding the dollar
amount of gross loans maturing in First Defiance's portfolio, based on the
contractual terms to maturity. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.
Due 3-5 Due 5-10 Due 10-15 Due 15+
Due Due Years Years Years Years
Before Before After After After After
12/31/01 12/31/02 12/31/00 12/31/00 12/31/00 12/31/00 Total
-------------------------------------------------------------------------------
(In thousands)
Real estate $285,213 $24,510 $ 68,661 $130,566 $48,513 $64,302 $621,765
Non-real estate:
Commercial 38,679 14,466 19,467 6,840 1,655 31 81,138
Home equity and
improvement 2,031 749 2,107 2,002 414 24,533 31,836
Mobile home 6 5 14 4 - - 29
Consumer finance 21,537 14,271 15,902 268 65 71 52,114
-------------------------------------------------------------------------------
Total $347,466 $54,001 $106,151 $139,680 $50,647 $88,937 $786,882
===============================================================================
The schedule above does not reflect the actual life of the Company's
loan portfolio. The average life of loans is substantially less than their
contractual terms because of prepayments and due-on-sale clauses, which give
First Defiance the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid.
The following table sets forth the dollar amount of gross loans due
after one year from December 31, 2000 which have fixed interest rates or which
have floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
-----------------------------------------
(In thousands)
Real estate $ 172,322 $ 164,230 $ 336,552
Commercial 23,416 19,043 42,459
Other 35,264 25,141 60,405
-----------------------------------------
$ 231,003 $ 208,413 $ 439,416
=========================================
Originations, Purchases and Sales of Loans. The lending activities
of First Defiance are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Board of Directors
and management. Loan originations are obtained from a variety of sources,
including referrals from real estate brokers, developers, builders, and existing
customers; newspapers and radio advertising; and walk-in customers.
11
First Defiance's loan approval process for all types of loans is
intended to assess the borrowers ability to repay the loan, the viability of the
loan, and the adequacy of the value of the collateral that will secure the loan.
A commercial loan application is first reviewed and underwritten by
one of the commercial loan officers, who may approve credits within their
lending limit. Credits exceeding an individual's lending limit may be approved
by another loan officer with limits sufficient to cover the exposure. All
credits which exceed $100,000 in aggregate exposure must be presented for
approval to the Senior Loan Committee comprised of senior lending personnel.
Credits which exceed $250,000 in aggregate exposure must be presented for
approval to the Executive Loan Committee, a sub-committee of the Board of
Directors.
A mortgage loan is initially reviewed by a mortgage loan originator.
Approval for conforming mortgage loans which are sold to the secondary market
occurs centrally by the Chief Underwriter or the Vice President of Mortgage
Lending. Non-conforming mortgage loans must be approved by either the Vice
President of Mortgage Lending or the Chief Operating Officer.
Consumer loan officer underwrite and may approve direct consumer
credits within their lending limits. Credits exceeding an officer's lending
limits may be approved by another loan officer with limits sufficient to cover
the exposure. All indirect consumer credits are underwritten and approved by a
centralized underwriting department.
First Defiance offers adjustable-rate loans in order to decrease the
vulnerability of its operations to changes in interest rates. The demand for
adjustable-rate loans in First Defiance's primary market area has been a
function of several factors, including customer preference, the level of
interest rates, the expectations of changes in the level of interest rates and
the difference between the interest rates offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
Adjustable rate loans represented 8.96% of First Defiance's total
originations of mortgage loans in 2000 compared to 5.87% and 14.0% during 1999
and 1998, respectively. First Defiance continues to hold adjustable-rate
securities in order to further reduce its interest-rate risk.
Adjustable-rate loans decrease the risks associated with changes in
interest rates, but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.
12
The following table shows total loans originated, loan reductions,
and the net increase in First Defiance's total loans during the periods
indicated:
Year Ended December 31
2000 1999 1998
----------------------------------------
(In thousands)
Loan originations:
Single family residential $ 95,404 $ 154,142 $ 163,355
Multi-family residential (1) 31,118 313 2,168
Non-residential real estate (1) 47,937 476 4,025
Construction 12,665 10,699 13,852
Commercial 87,858 149,819 98,148
Mobile home - - 3,083
Home equity and improvement 13,832 10,223 15,381
Consumer finance 22,846 21,122 60,068
----------------------------------------
Total loans originated 311,660 346,794 360,080
Loans acquired through purchase of The Leader:
Single family residential - - 127,170
Multi-family residential - - 4,302
----------------------------------------
- - 131,472
Purchase of single family residential 2,322,165 1,797,959 596,681
Loan reductions:
Loan pay-offs 143,275 188,128 185,793
Mortgage loans sold 2,360,174 1,746,386 674,066
Periodic principal repayments 58,250 77,618 94,570
----------------------------------------
2,561,699 2,012,132 954,429
----------------------------------------
Net increase in total loans $ 72,126 $ 132,621 $ 133,804
========================================
(1) In years prior to 2000, the breakdown between commercial real estate and
non-real estate commercial loans was not available. As a result, all
commercial real estate originations were reported in the commercial
classification.
13
Asset Quality
First Defiance's credit policy establishes guidelines to manage
credit risk and asset quality. These guidelines include loan review and early
identification of problem loans to ensure sound credit decisions. First
Defiance's credit policies and review procedures are meant to minimize the risk
and uncertainties inherent in lending. In following the policies and procedures,
management must rely on estimates, appraisals and evaluations of loans and the
possibility that changes in these could occur because of changing economic
conditions.
Delinquent Loans. The following table sets forth information
concerning delinquent loans at December 31, 2000, in dollar amount and as a
percentage of First Defiance's total loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts which are past due.
30 to 59 Days 60 to 89 Days 90 Days and Over Total
------------------- -------------------- ---------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------------------- -------------------- ---------------------- ----------------------
(Dollars in thousands)
Single-family residential $ 962 .12% $ 332 .04% $ 671 .09% $ 1,965 .25%
Non-residential and multi-family
residential 1,733 .22 364 .05 572 .07 2,669 .34
Home equity and improvement 241 .03 -- -- 9 - 250 .03
Consumer finance 1,048 .13 257 .03 57 .01 1,362 .17
Commercial 416 .05 -- -- 140 .02 556 .07
---------------------------------------------------------------------------------------------
4,400 .55 953 .12 1,449 .19 6,802 .86
Single-family residential backed by
government guarantees 194 .03 39 -- 8,072 1.03 8,305 1.06
---------------------------------------------------------------------------------------------
Total $ 4,594 .58% $ 992 .12% $ 9,521 1.22% $ 15,107 1.92%
=============================================================================================
14
Non-Performing Assets. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collectibility of additional interest is deemed insufficient to warrant further
accrual. Generally, First Defiance places all loans more than 90 days past due
on non-accrual status. When a loan is placed on non-accrual status, total unpaid
interest accrued to date is reserved. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. First Defiance
considers that a loan is impaired when, based on current information and events,
it is probable that it will be unable to collect all amounts due (both principal
and interest) according to the contractual terms of the loan agreement. First
Defiance measures impairment based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral, if collateral dependent. If
the measure of the impaired loan is less than the recorded investment, First
Defiance will recognize an impairment by creating a valuation allowance. This
policy excludes large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment such as residential mortgage, consumer
installment, and credit card loans. Impairment of loans having recorded
investments of $95,000, $570,000 and $570,000 has been recognized as of December
31, 2000, 1999 and 1998, respectively. There was no interest received and
recorded in income during 2000 related to impaired loans including interest
received and recorded in income prior to such impaired loan designation. The
amounts recorded in 1999 and 1998 were $36,000 and $155,000, respectively.
Unrecorded interest income on these and all non-performing loans in 2000, 1999
and 1998 was $80,000, $154,000, and $36,000, respectively. The average recorded
investment in impaired loans during 2000, 1999 and 1998 was $135,000, $570,000,
and $570,000, respectively. The total allowance for loan losses related to these
loans was $95,000, $402,000 and $402,000 at December 31, 2000, 1999 and 1998,
respectively.
Real estate acquired by foreclosure is classified as real estate
owned until such time as it is sold. In addition, First Defiance also
repossesses other assets securing loans, consisting primarily of automobiles and
mobile homes. When such property is acquired it is recorded at the lower of the
restated loan balance, less any allowance for loss, or fair value. Costs
relating to development and improvement of property are capitalized, whereas
costs relating to holding the property are expensed. Valuations are periodically
performed by management and an allowance for losses is established by a charge
to operations if the carrying value of property exceeds its estimated net
realizable value.
As of December 31, 2000, First Defiance's total non-performing loans
amounted to $1.4 million or .18% of total loans, compared to $1.0 million or
.14% of total loans, at December 31, 1999.
15
The following table sets forth the amounts and categories of First
Defiance's nonperforming assets and troubled debt restructurings at the dates
indicated.
December 31
2000 1999 1998 1997 1996
------------------------------------------------------------
(Dollars in thousands)
Non-performing loans:
Single-family residential $ 671 $ 146 $ 171 $ 313 $ 88
Non-residential and multi-family residential real
estate 572 -- -- -- 19
Commercial 140 737 1,330 570 1,561
Mobile home -- -- 180 315 193
Consumer finance 66 147 171 167 111
----------------------------------------------------------
Total non-performing loans 1,449 1,030 1,852 1,365 1,972
Real estate owned 271 2,465 1,337 18 --
Other repossessed assets 41 92 180 523 267
----------------------------------------------------------
Total repossessed assets 312 2,557 1,517 541 267
----------------------------------------------------------
Total non-performing assets $1,761 $3,587 $3,369 $1,906 $2,239
==========================================================
Troubled debt restructurings $ -- $ -- $ -- $ -- $ --
==========================================================
Total non-performing assets as a percentage of total
assets .16% .36% .43% .33% .41%
==========================================================
Total non-performing loans and troubled debt
restructurings as a percentage of total loans
.18% .14% .33% .43% .53%
==========================================================
Total non-performing assets and troubled debt
restructurings as a percentage of total assets
.16% .36% .43% .33% .41%
==========================================================
Allowance for loan losses as a percent of total
non-performing assets
505.62% 216.3% 290.6% 140.9% 99.0%
==========================================================
16
Allowance for Loan Losses. First Defiance maintains an allowance for
loan losses based upon an assessment of prior loss experience, the volume and
type of lending conducted by First Defiance, industry standards, past due loans,
general economic conditions and other factors related to the collectibility of
the loan portfolio. Although management believes that it uses the best
information available to make such determinations, future adjustments to
allowances may be necessary, and net earnings could be significantly affected,
if circumstances differ substantially from the assumptions used in making the
initial determinations.
At December 31, 2000, First Defiance's allowance for loan losses
amounted to $8.9 million compared to $7.8 million at December 31, 1999. As of
December 31, 2000 and 1999, $316,000 and $1.0 million, respectively, constituted
an allowance with respect to specific loans or assets held for sale. Charge-offs
in non-real estate loans increased $664,000 for the year ended December 31, 1999
over 1998 due to increases in lending and delinquencies in this area.
The following table sets forth the activity in First Defiance's
allowance for loan losses during the periods indicated.
Year Ended December 31
2000 1999 1998 1997 1996
--------------------------------------------------------------
(Dollars in thousands)
Allowance at beginning of year $7,758 $9,789 $2,686 $2,217 $1,817
Provisions 3,147 1,925 7,769 1,613 1,020
Acquired allowance of The Leader -- -- 1,194 -- --
Charge-offs:
Single-family real estate 1,550 1,843 352 -- --
Non-residential and multi-family
residential real estate 182 -- -- -- --
Non-real estate:
Consumer finance 692 1,231 1,053 1,078 430
Mobile home 2 1,054 620 259 334
Commercial 155 107 55 4 12
--------------------------------------------------------------
Total non-real estate 849 2,392 1,728 1,341 776
--------------------------------------------------------------
Total charge-offs 2,581 4,235 2,080 1,341 776
Recoveries:
Single-family real estate 348 -- -- -- --
Consumer finance 232 279 220 195 152
Commercial -- -- -- -- 4
Mobile home -- -- -- 2 --
--------------------------------------------------------------
Total 580 279 220 197 156
--------------------------------------------------------------
Allowance at end of year $8,904 $7,758 $9,789 $2,686 $2,217
==============================================================
Allowance for loan losses to total non-
performing loans at end of year 614.5% 753.2% 528.6% 196.8% 112.4%
Allowance for loan losses to total loans
at end of year 1.62 1.10 1.68 .60 .52
Allowance for loan losses to net
charge-offs for the year 444.98 196.11 470.63 234.79 357.58
Net charge-offs for the year to average
loans .27 .60 .36 .27 .16
17
The following table sets forth information concerning the allocation
of First Defiance's allowance for loan losses by loan categories at the dates
indicated. For information about the percent of total loans in each category to
total loans, see "Lending Activities-Loan Portfolio Composition."
December 31
2000 1999 1998
----------------------------------------------------------------------------------------
Percent of Percent of Percent of
total loans total loans total loans
Amount by category Amount by category Amount by category
----------------------------------------------------------------------------------------
(Dollars in thousands)
Single family residential $ 2,970 57.3% $1,964 68.5% $1,654 69.3%
Non-residential and
Multi-family residential Real
estate (1) 2,310 21.7 - - - -
Other:
Commercial loans (1) 1,355 10.3 2,317 19.3 1,760 12.0
Mobile home loans 1 - 10 - 1,309 .5
Consumer and home equity and
improvement loans
2,268 10.7 3,467 12.2 5,066 18.2
----------------------------------------------------------------------------------------
$ 8,904 100.0% $7,758 100.0% $9,789 100.0%
========================================================================================
(1) In years prior to 2000, the breakdown between commercial real estate and
non-real estate commercial loans was not available. As a result, all commercial
real estate loans were reported in the commercial classification.
Sources of Funds
General. Deposits are the primary source of First Defiance's funds
for lending and other investment purposes. In addition to deposits, First
Defiance derives funds from loan principal repayments. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings from the FHLB may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. First Defiance's deposits are attracted principally from
within First Defiance's primary market area through the offering of a broad
selection of deposit instruments, including checking accounts, money market
accounts, regular savings accounts, and term certificate accounts. Included
among these deposit products are individual retirement account certificates of
approximately $53.1 million at December 31, 2000. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
To supplement its funding needs, First Defiance also utilizes
brokered Certificates of Deposit. Such deposits are acquired with maturities
ranging from three months to one year. The total balance of brokered
Certificates of Deposit were $57.5 million and $58.1 million at December 31,
2000 and 1999 respectively.
18
Average balances and average rates paid on deposits are as follows:
Year Ended December 31
2000 1999 1998
------------------------ --------------------------- --------------------------
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------------------
(Dollars in thousands)
Non-interest bearing demand
deposits $ 25,318 --% $13,165 --% $ 2,547 --%
Interest bearing
demand deposits 91,992 3.65 73,377 2.97 66,806 2.65
Savings deposits 43,818 1.69 53,247 1.65 56,135 1.95
Time deposits 368,077 5.81 333,115 5.06 283,766 5.44
--------------------------------------------------------------------------------------
Totals $ 529,205 4.82% $472,904 4.21% $409,254 4.48%
======================================================================================
The following table sets forth the maturities of First Defiance's
certificates of deposit having principal amounts of $100,000 or more at December
31, 2000.
(In thousands)
Certificates of deposit maturing in quarter ending:
March 31, 2001 $ 18,605
June 30, 2001 15,201
September 30, 2001 9,009
December 31, 2001 11,287
After December 31, 2001 7,813
-----------
Total certificates of deposit with
balances of $100,000 or more $ 61,915
===========
The following table details the deposit accrued interest payable as of December
31:
2000 1999
-------------------------
(In thousands)
Interest bearing demand deposits and money
market accounts $ 88 $ 92
Savings Accounts 3 5
Certificates 889 1,242
-------------------------
$ 980 $ 1,339
=========================
For additional information regarding First Defiance's deposits see Note 9 to the
financial statements.
Borrowings. First Defiance may obtain advances from the FHLB of
Cincinnati upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities.
19
In addition, First Defiance has utilized funding from banks and
other sources. As of December 31, 2000, First Defiance has $225 million under
revolving warehouse loan agreements with two banks. One agreement is an
uncommitted repurchase line of $150 million secured by mortgage loans available
for sale at the federal funds rate plus 40 basis points. The other agreement is
a $75 million committed line of credit secured by mortgage loans available for
sale at the lower of the federal funds rate plus 125 basis points or the LIBOR
index plus 100 basis points. These funding facilities had $102.3 million
outstanding against them as of December 31, 2000 with a weighted average rate of
7.37%.
The following table sets forth certain information as to First
Defiance's FHLB advances and other borrowings at the dates indicated.
December 31
2000 1999 1998
--------------------------------------------
(Dollars in thousands)
Long-term:
FHLB advances $ 116,758 $ 187,410 $ 98,497
Weighted average interest rate 6.06% 5.28% 4.93%
Notes 6,147 6,461 368
Weighted average interest rate 4.96% 4.31% 6.26%
Short-term:
FHLB advances $ 106,500 $ 78,000 $ 69,645
Weighted average interest rate 6.50% 5.00% 5.18%
Warehouse and other revolving borrowings $ 114,278 $ 47,043 --
Weighted average interest rate 7.45% 6.64% --
20
The following table sets forth the maximum month-end balance and
average balance of First Defiance's FHLB advances and other borrowings during
the periods indicated.
Year Ended December 31
2000 1999 1998
------------------------------------------------
(Dollars in thousands)
Long-term:
Maximum balance - FHLB $187,371 $187,410 $ 98,497
Average balance - FHLB 155,146 107,319 21,829
Weighted average interest rate
of long-term FHLB advances 5.49% 4.83% 5.87%
Maximum balance - Term $ 6,309 $ 6,472 $ 40,283
Average balance - Term 6,206 4,449 25,879
Weighted average interest rate of term borrowings 4.67% 4.02% 6.50%
Short-term:
Maximum balance - FHLB $106,500 $136,250 $ 69,645
Average balance - FHLB 72,384 88,247 49,462
Weighted average interest rate
of short-term FHLB advances 6.53% 5.29% 5.43%
Maximum balance - Warehouse and revolving credit agreements $114,278 $ 49,632 $147,165
Average balance - Warehouse
and revolving credit agreements 56,422 25,272 61,789
Weighted average interest rate
of warehouse and revolving credit agreements 7.60% 6.47% 4.46%
The FHLB made a series of fixed rate long-term advances to First
Defiance during 1992 and a long-term fixed rate advance under the FHLB
Affordable Housing Program in 1995. Additionally, as of December 31, 2000, there
was $115.0 million outstanding under various long-term FHLB advance programs.
First Defiance utilizes short-term advances from the FHLB to meet cash flow
needs and for short-term investment purposes. There were $106.5 million and $78
million in short-term advances outstanding at December 31, 2000 and 1999,
respectively. First Defiance borrows funds under a variety of programs at the
FHLB. At December 31, 2000, $106.5 million was outstanding under First
Defiance's advance line of credit. The total available under the line is $175.0
million. Amounts are generally borrowed under this line on an overnight basis.
As a member of the FHLB of Cincinnati, First Federal must maintain
an investment in the capital stock of that FHLB in an amount equal to the
greater of 1.0% of the aggregate outstanding principal amount of First Federal's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. First Federal
is in compliance with this requirement with an investment in stock of the FHLB
of Cincinnati of $15.3 million at December 31, 2000.
21
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
For additional information regarding First Defiance's FHLB advances,
warehouse and term debt see Notes 10 and 11 to the financial statements.
Employees
First Defiance had 441 employees at December 31, 2000. None of these
employees are represented by a collective bargaining agent, and First Defiance
believes that it enjoys good relations with its personnel.
Competition
The industries in which the Company operates are highly competitive.
The Company competes for the acquisition of mortgage loan servicing rights and
bulk loan portfolios mainly with mortgage companies, savings associations,
commercial banks and other institutional investors. The Company believes that it
has competed successfully for the acquisition of mortgage loan servicing rights
and bulk loan portfolios by relying on the advantages provided by its unique
corporate structure and the secondary marketing expertise of the employees in
each Subsidiary.
Competition in originating mortgage loans arises mainly from other
mortgage companies, savings associations and commercial banks. The distinction
among market participants is based primarily on price and, to a lesser extent,
the quality of customer service and name recognition. Aggressive pricing
policies of the Company's competitors, especially during a declining period of
mortgage loan originations, could in the future result in a decrease in the
Company's mortgage loan origination volume and/or a decrease in the
profitability of the Company's loan originations, thereby reducing the Company's
revenues and net income. The Company competes for loans by offering competitive
interest rates and product types and by seeking to provide a higher level of
personal service to mortgage brokers and borrowers than is furnished by
competitors. However, First Federal does have a significant market share of the
lending markets in which it conducts operations.
Management believes that First Federal's most direct competition for
deposits comes from local financial institutions. The distinction among market
participants is based primarily on price and, to a lesser extent, the quality of
customer service and name recognition. First Federal's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities, as well as from money market mutual funds.
First Federal competes for conventional deposits by emphasizing quality of
service, extensive product lines and competitive pricing.
22
Regulation
General. First Defiance, First Federal and Leader, as an operating
subsidiary of First Federal, are subject to regulation, examination and
oversight by the OTS. Because First Federal's deposits are insured by the FDIC,
First Federal is also subject to examination and regulation by the FDIC. First
Defiance and First Federal must file periodic reports with the OTS and
examinations are conducted periodically by the OTS and the FDIC to determine
whether First Federal is in compliance with various regulatory requirements and
is operating in a safe and sound manner First Federal and Leader are subject to
various consumer protection and fair lending laws. These laws govern, among
other things, truth-in-lending disclosure, equal credit opportunity, and, in the
case of First Federal, fair credit reporting and community reinvestment. Failure
to abide by federal laws and regulations governing community reinvestment could
limit the ability of First Federal to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent First Federal lends and invests in its designated service area, with
particular emphasis on low-to-moderate income communities and borrowers in such
areas.
First Defiance is also subject to various Ohio laws which restrict
takeover bids, tender offers and control-share acquisitions involving public
companies which have significant ties to Ohio.
Regulatory Capital Requirements. First Federal, on a consolidated
basis with Leader, is required by OTS regulations to meet certain minimum
capital requirements. Current capital requirements call for tangible capital of
1.5% of adjusted total assets, core capital of 4.0% of adjusted total assets,
except for associations with the highest examination rating and acceptable
levels of risk, and risk-based capital of 8% of risk-weighted assets.
23
The following table sets forth the amount and percentage level of
regulatory capital of First Federal at December 31, 2000, and the amount by
which it exceeds the minimum capital requirements. Tangible and core capital are
reflected as a percentage of adjusted total assets. Total (or risk-based)
capital, which consists of core and supplementary capital, is reflected as a
percentage of risk-weighted assets. Assets are weighted at percentage levels
ranging from 0% to 100% depending on their relative risk.
At December 31, 2000
Amount Percent
--------------- -----------
(In thousands)
Tangible capital $ 62,569 6.10%
Requirement 15,381 1.50
--------------- -----------
Excess $ 47,188 4.60%
=============== ===========
Core capital $ 62,569 6.10%
Requirement 41,016 4.00
--------------- -----------
Excess $ 21,553 2.10%
=============== ===========
Total capital $ 71,210 10.28%
Risk-based requirement 55,410 8.00
--------------- -----------
Excess $ 15,800 2.28%
=============== ===========
The OTS has adopted regulations governing prompt corrective action
to resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. An undercapitalized association must submit a
capital restoration plan to the OTS and is subject to increased monitoring and
growth restrictions. Critically undercapitalized institutions must be placed in
conservatorship or receivership within 90 days of reaching that capitalization
level, except under limited circumstances.
First Federal's capital at December 31, 2000, meets the standards
for a well-capitalized institution, although its risk-based capital is just
slightly over the threshold for well-capitalized status. Leader has had a
significant effect on First Federal's risk-based capital, due to the treatment
under OTS regulations of mortgage servicing rights, which comprise a majority of
Leaders' assets. For risk-based capital calculations, OTS regulations limit the
amount of mortgage servicing rights that generally can be included in risk-based
capital to the lesser of (i) the amount of First Federal's core capital, or (ii)
90% of the fair value of the servicing assets. As Leader's mortgage servicing
portfolio has grown at a faster rate than First Federal's core capital, First
Federal's risk-based capital level has been adversely affected. First Federal is
pursuing ways to permit Leader to continue to grow without jeopardizing First
Federal's qualification as a well-capitalized institution, but no assurance can
be given that First Federal will retain its well-capitalized classification. If
24
First Federal does not remain well-capitalized, its use of brokered deposits
could be adversely affected. Federal law requires that an institution which is
adequately capitalized must obtain FDIC approval to utilize brokered deposits.
First Federal has used brokered deposits to fund certain aspects of Leader's
mortgage banking activities.
The OTS has adopted an interest rate risk component to the
risk-based capital requirement. Pursuant to that requirement, a savings
association must measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio, as determined under the
methodology established by the OTS. If the measured interest rate risk is above
the level deemed normal under the regulation, the association will be required
to deduct one-half of that excess exposure from its total capital when
determining its level of risk-based capital. (See Asset/Liability Management
Section of Management's Discussion and Analysis).
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The amount of such guarantee is limited to the lesser of (a) an
amount equal to 5% of the association's total assets at the time the institution
became undercapitalized or (b) the amount that is necessary to bring the
association into compliance with all capital standards applicable to such
association at the time the association fails to comply with its capital
restoration plan.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions include, without limitation, payments of
cash dividends, repurchases and certain other acquisitions by an association of
its shares and payments to stockholders of another association in an acquisition
of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for that year to date plus the retained net income for the preceding
two years; (ii) if the savings association will not be at least adequately
capitalized following the capital distribution; or (iii) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the savings association and the OTS (or the
FDIC), or a condition imposed on the savings association in an OTS-approved
application or notice. If a savings association subsidiary of a holding company
is not required to file an application, it must file a notice of the proposed
capital distribution with the OTS. First Federal did not pay any dividends to
First Defiance during 2000.
25
Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (such as cash, certain time
deposits, bankers' acceptances and specified United States Government, state or
federal agency obligations) of not less than 4% of its net withdrawable savings
deposits plus borrowings payable in one year or less computed as of the end of
the prior quarter or based on the average daily balance during the prior
quarter. Monetary penalties may be imposed upon associations failing to meet
liquidity requirements. The eligible liquidity of First Federal, as computed
under current regulations, at December 31, 2000, was $32.1 million, or 5.29% and
exceeded the 4.0% liquidity requirement by approximately $10.8 million.
Qualified Thrift Lender Test. Savings associations must meet one of
two tests in order to be a qualified thrift lender ("QTL"). The first test
requires a savings association to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTIs"). Generally,
QTIs are assets related to domestic residential real estate and manufactured
housing, although they also include credit card, student and small business
loans and stock issued by any FHLB, the FHLMC or the FNMA. Under the QTL test,
65% of an institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) must
consist of QTI on a monthly average basis in nine out of every 12 months. The
second test permits a savings association to qualify as a QTL by meeting the
definition of "domestic building and loan association" under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for an institution to
meet the definition of a "domestic building and loan association" under the
Code, at least 60% of its assets must consist of specified types of property,
including cash, loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL tests under certain circumstances. If a savings
association fails to meet either one of the QTL tests, the association and its
holding company become subject to certain operating and regulatory restrictions.
At December 31, 2000, First Federal met the QTL Test.
Lending Limits. OTS regulations generally limit the aggregate amount
that a savings association may lend to one borrower (the "Lending Limit") to an
amount equal to 15% of the savings association's total capital under the
regulatory capital requirements plus any additional loan reserve not included in
total capital (the "Lending Limit Capital"). A savings association may loan to
one borrower an additional amount not to exceed 10% of total capital plus
additional reserves if the additional loan amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to these limits.
In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At December 31, 2000, First Federal was in
compliance with this lending limit.
Transactions with Insiders and Affiliates. Loans to executive
officers, directors and principal shareholders and their related interests must
conform to the Lending Limit, and the total of such loans cannot exceed the
association's Lending Limit Capital. Most loans to directors, executive officers
and principal shareholders must be approved in advance by a majority of the
"disinterested" members of board of directors of the association with any
"interested" director not participating. All loans to directors, executive
officers and principal shareholders must be made on terms substantially the same
26
as offered in comparable transactions with the general public or as offered to
all employees in a company-wide benefit program. Loans to executive officers are
subject to additional restrictions. First Federal was in compliance with such
restrictions at December 31, 2000.
All transactions between savings associations and their affiliates
must comport with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. First
Defiance is an affiliate of First Federal. Generally, Sections 23A and 23B of
the FRA (i) limit the extent to which a savings association or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, (ii) limit the aggregate
of all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. First Federal was
in compliance with these requirements and restrictions at December 31, 2000.
Federal Deposit Insurance Corporation Regulations. The FDIC has
examination authority over all insured depository institutions, including First
Federal, and has authority to initiate enforcement actions if the FDIC does not
believe the OTS has taken appropriate action to safeguard safety and soundness
and the deposit insurance fund.
The FDIC administers two separate insurance funds, the Bank
Insurance Fund ("BIF") for commercial banks and state savings banks and the
Savings Association Insurance Fund ("SAIF") for savings associations. The FDIC
is required to maintain designated levels of reserves in each fund. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
FRB Reserve Requirements. FRB regulations currently require reserves
of 3% of net transaction accounts (primarily NOW accounts) up to $42.8 million
(subject to an exemption of up to $5.5 million), and of 10% of net transaction
accounts in excess of $42.8 million. At December 31, 2000, First Federal was in
compliance with its reserve requirements.
27
Holding Company Regulation. First Defiance is a unitary thrift
holding company and is subject to OTS regulations, examination, supervision and
reporting requirements.
There are generally no restrictions on the activities of unitary
thrift holding companies. The broad latitude to engage in activities under
current law can be restricted if the OTS determines that there is reasonable
cause to believe that the continuation of an activity by a thrift holding
company constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association. The OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary thrift holding company, if the savings association subsidiary of a
holding company fails to meet the QTL Test, then its unitary holding company
would become subject to the activities restrictions applicable to multiple
holding companies. At December 31, 2000, First Federal met the QTL Test.
Federal law generally prohibits a thrift holding company from
controlling any other savings association or thrift holding company, without
prior approval of the OTS, or from acquiring or retaining more than 5% of the
voting shares of a savings association or holding company thereof, which is not
a subsidiary. If First Defiance were to acquire control of another savings
institution, other than through a merger or other business combination with
First Federal, First Defiance would become a multiple thrift holding company and
its activities would thereafter be limited generally to those activities
authorized by the FRB as permissible for bank holding companies.
28
TAXATION
Federal Taxation
The Company and its subsidiaries are each subject to the federal tax
laws and regulations which apply to corporations generally. Prior to 1996,
certain thrift institutions, including First Federal, were allowed deductions
for bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions could compute deductions for bad debts
using either the specific charge off method of Section 166 of the Code, or the
reserve method of Section 593 of the Code under which a thrift institution
annually could elect to deduct bad debts under either (i) the "percentage of
taxable income" method applicable only to thrift institutions, or (ii) the
"experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax year 1995, First Federal used the
percentage of taxable income method.
Effective for taxable years beginning after 1995, thrift
institutions that would be treated as small banks are allowed to utilize the
experience method applicable to such institutions, but thrift institutions that
are treated as large banks are required to use only the specific charge off
method. First for purposes of this method, First Federal was treated as a large
bank. The percentage of taxable income method of accounting for bad debts is no
longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt treated such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. First Defiance's applicable excess reserves are taken into income for
Federal tax purposes ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1997.
In addition to the regular income tax, the Company and its
subsidiaries are subject to the alternative minimum tax, which is imposed at a
minimum tax rate of 20% on "alternative minimum taxable income" (which is the
sum of a corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
29
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by First Federal to the Company is deemed paid out of its pre-1988 reserves
under these rules, the pre-1988 reserves would be reduced and First Federal's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of December 31, 2000, First Federal's pre-1988 reserves for tax purposes
totaled approximately $9.52 million.
The tax returns of First Defiance have been audited or closed
without audit through the tax year ended December 31, 1996. The tax returns for
The Leader have been closed through their tax year ended September 30, 1996. In
the opinion of management, any examination of open returns would not result in a
deficiency which would have a material adverse effect on the financial condition
of First Defiance.
Ohio Taxation
The Company is subject to the Ohio corporation franchise tax, which,
as applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.4% times taxable net worth.
As a holding company, the Company may be entitled to various
deductions in computing taxable net worth that are not generally available to
operating companies. Effective for the 1999 tax year, a corporation that
qualifies as a "qualifying holding company" is exempt from tax on the net worth
basis. To be considered a qualifying holding company, a corporation must satisfy
certain criteria and must make an annual election to be treated as a qualified
holding company for tax purposes. Generally, to qualify as a qualifying holding
company, a large portion of a corporation's assets and income must be
attributable to holdings in other corporations or business organizations.
A special litter tax is also applicable to all corporations,
including the Company, subject to the Ohio corporation franchise tax other than
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable
income and .22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to .014%
times taxable net worth.
30
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of First
Federal's book net worth determined in accordance with GAAP. Effective for the
2000 tax year, the tax rate is 1.3% of book net worth. As a "financial
institution," First Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio. On December 31, 1998, The Leader was
converted to a single-member limited liability corporation. As such, its
operations are not subject to state taxation as a separate entity.
Item 2. Properties
At December 31, 2000, First Federal conducted its business from its
main office at 601 Clinton Street, Defiance, Ohio, and fourteen other full
service branches in northwestern Ohio. At December 31, 2000, The Leader
conducted its business from leased office space at 1015 Euclid Avenue,
Cleveland, Ohio, and through a branch location at 709 Brookpark Rd., Brooklyn
Heights, OH. First Insurance conducted its business from leased office space at
419 5th Street, Suite 1200, Defiance, Ohio.
First Defiance maintains its headquarters in the main office of
First Federal at 601 Clinton Street, Defiance, Ohio.
31
The following table sets forth certain information with respect to
the office and other properties of the Company at December 31, 2000. See Note 8
to the Consolidated Financial Statements.
Leased/ Net book value
Description/address owned of property Deposits
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office, First Federal
601 Clinton Street, Defiance, OH Owned $ 6,253 $253,383
Branch Offices, First Federal
204 E. High Street, Bryan, OH Owned 1,139 83,998
211 S. Fulton Street, Wauseon, OH Owned 812 37,441
625 Scott Street, Napoleon, OH Owned 1,632 62,986
1050 East Main Street, Montpelier, OH Owned 609 18,439
926 East High Street, Bryan, OH Owned 116 7,533
1333 Woodlawn, Napoleon, OH Owned 79 16,610
825 N. Clinton Street, Defiance, OH Owned 401 9,834
Inside Super K-Mart Leased 106 5,695
190 Stadium Dr., Defiance, OH
905 N. Williams St., Paulding, OH Owned 1,119 14,701
201 E. High St., Hicksville, OH Owned 596 8,338
3900 N. Main St., Findlay, OH Owned 1,474 19,457
11694 N. Countyline St., Fostoria, OH Leased 938 6,803
1204 W. Wooster, Bowling Green, OH Leased - 681
Main Office, The Leader
1015 Euclid Avenue, Cleveland, OH Leased 1,010 N/A
Branch Office, The Leader
709 Brookpark Rd., Brooklyn Heights, OH Leased 50 N/A
First Insurance & Investments
419 5th Street, Site 1200, Defiance, OH Leased 225 N/A
-----------------------------
$16,509 $545,899
=============================
32
Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of First Defiance.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of securities holders during the
fourth quarter of 2000.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock trades on The Nasdaq Stock Market under
the symbol "FDEF." As of March 9, 2001, the Company had 1,740 shareholders of
record. The table below shows the reported high and low sales prices of the
common stock and cash dividends declared per share of common stock during the
periods indicated in 2000 and 1999.
December 31, 2000 December 31, 1999
High Low Dividend High Low Dividend
---------------------------------------------------------------------------------
Quarter Ended:
March 31 $ 12.50 $ 8.00 $ .11 $ 14.50 $ 10.13 $ .10
June 30 9.38 7.63 .11 12.13 10.25 .10
September 30 9.63 8.00 .11 12.31 10.00 .10
December 31 11.12 8.38 .12 11.81 9.88 .11
For information regarding restriction on the payment of dividends,
see "Item 1. Business - Regulation - Limitations on Capital Distributions" in
this report.
33
Item 6. Selected Financial Data
The following table sets forth certain summary consolidated
financial data at or for the periods indicated. This information should be read
in conjunction with the Consolidated Financial Statements and notes thereto
included herein. See "Item 8. Financial Statements and Supplementary Data."
At or For Year Ended December 31,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Selected Consolidated Financial Data:
Total assets $1,072,194 $ 987,994 $ 785,399 $ 579,698 $ 543,411
Loans held-to maturity, net 541,208 465,321 448,574 441,824 415,366
Loans held-for-sale 232,314 237,622 119,910 88 559
Allowance for loan losses 8,904 7,758 9,789 2,686 2,217
Non-performing assets 1,761 3,587 3,369 1,906 2,239
Securities available-for-sale 53,176 53,946 47,554 82,536 77,407
Trading securities 234 29,805 -- -- --
Securities held-to maturity 7,697 9,895 13,541 20,953 25,937
Mortgage servicing rights 134,760 97,519 76,452 188 121
Deposits and borrowers' escrow balances 613,881 564,511 511,313 395,983 383,139
FHLB advances 223,258 265,410 168,142 71,665 40,821
Stockholders' equity 99,473 89,416 93,710 106,884 116,565
Selected Consolidated Operating Results:
Total interest income $ 65,185 $ 53,379 $ 49,056 $ 43,858 $ 41,257
Total interest expense 43,502 31,582 26,946 21,387 19,459
Net interest income 21,683 21,797 22,110 22,471 21,798
Provision for loan losses 3,147 1,925 7,769 1,613 1,020
Non-interest income 53,246 40,794 17,528 1,627 1,328
Non-interest expense 54,905 47,414 26,940 14,093 15,958
Income before income taxes 16,877 13,252 4,929 8,392 6,148
Income taxes 5,914 4,629 1,818 2,985 1,997
Net income 10,963 8,623 3,111 5,407 4,151
Basic earnings per share (1) (2) 1.74 1.33 0.42 0.65 0.43
Diluted earnings per share (1) (2) 1.71 1.29 0.40 0.62 0.42
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets 1.09% 0.99% 0.45% 0.78% 0.96%
Return on average equity 11.71% 9.52% 2.99% 4.69% 3.26%
Interest rate spread (3) 2.89% 2.95% 3.25% 3.39% 3.22%
Net interest margin (3) 2.80% 3.12% 3.62% 4.24% 4.31%
Ratio of operating expense to
Average total assets (1) 5.44% 5.44% 3.85% 2.51% 3.02%
34
At or For Year Ended December 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Selected Financial Ratios and Other Data (continued):
Quality Ratios:
Non-performing assets to total assets
at end of period (4) 0.16% 0.36% 0.43% 0.33% 0.41%
Allowance for loan losses to
non-performing assets (4) 505.62% 216.28% 209.56% 140.92% 99.02%
Allowance for loan losses to total
loans receivable 1.14% 1.09% 1.69% 0.60% 0.52%
Capital Ratios:
Equity to total assets at end of period 9.28% 9.05% 11.93% 18.44% 21.45%
Tangible equity to tangible assets
at end of period 8.08% 7.68% 10.41% 18.44% 21.45%
Average equity to average assets 9.27% 10.40% 14.86% 20.55% 24.07%
Book value per share $ 14.49 $ 13.12 $ 12.37 $ 12.53 $ 12.31
Tangible book value per share $ 12.46 $ 10.97 $ 10.61 $ 12.53 $ 12.31
Ratio of average interest-earning assets
to average interest-bearing liabilities 98.36% 104.52% 108.43% 121.45% 128.53%
Cash Earnings:
Cash earnings (1) $ 11,786 $ 9,382 $ 3,393 $ 5,407 $ 4,151
Basic cash earnings per share (1) 1.87 1.44 0.45 0.65 0.43
Diluted cash earnings per share (1) 1.84 1.40 0.43 0.62 0.42
Cash return on average assets (1) 1.18% 1.09% 0.49% 0.96% 0.78%
Cash return on average equity (1) 14.87% 11.99% 3.44% 4.69% 3.26%
Stock Price and Dividend Information:
High $ 11.75 $ 14.50 $ 15.875 $ 16.25 $ 12.50
Low 7.63 9.875 11.00 11.75 9.875
Close 10.88 10.50 14.25 16.00 12.375
Cash dividends declared per share .45 0.41 0.37 0.33 0.29
Dividend payout ratio (5) 25.86% 30.83% 88.10% 50.77% 48.33%
(1). Non-interest expense for 1996 includes a one-time charge of $2.461
million to recapitalize the Savings Association Insurance Fund (SAIF).
Without the SAIF charge, net income for 1996 would have been $5.775
million, or $.60 basic earnings per share ($.59 on a diluted basis),
return on average assets would have been 1.09%, return on equity would
have been 4.54% and the ratio of operating expense to total assets
would have been 2.55%.
(2) Earnings per share for 1996 have been restated for FASB Statement 128.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earnings assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earnings assets.
(4) Non-performing assets consist of non-accrual loans that are
contractually past due 90 days or more; loans that are deemed impaired
under the criteria of FASB Statement No. 114; and real estate, mobile
homes and other assets acquired by foreclosure or deed-in-lieu thereof.
(5) Dividends payout ratio was calculated using basic earnings per share.
35
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
First Defiance is a unitary thrift holding company which conducts
business through its subsidiaries, First Federal, The Leader and First
Insurance.
First Federal is a federally chartered savings bank that provides
financial services to communities based in northwest Ohio where it operates 14
full-service branches, including a branch in Bowling Green, Ohio that opened in
December 2000. First Federal provides a broad range of financial services
including checking accounts, savings accounts, certificates of deposit,
individual retirement accounts, real estate mortgage loans, commercial loans,
consumer loans, home equity loans, and trust services.
The Leader is a mortgage banking company that specializes in
servicing loans originated under first-time homebuyer programs. Under these
programs, first-time homebuyers are able to obtain loans at rates generally
below market at the time of closing. The funds for the loans are available as a
result of bond issues through various state and local governmental units. The
Leader, as master servicer under the bond programs, purchases the loans from the
originator, principally other financial institutions or mortgage brokers. Once
purchased by The Leader, the loans under the specific bond programs are packaged
and GNMA securities are issued to the bond trustees under the programs. As of
December 31, 2000, The Leader services approximately 92,200 bond program loans
with balances of $6.1 billion. Because the loans under the first-time homebuyer
programs are issued at below market rates, they generally have significantly
lower pre-payments than conventional mortgage loans. The Leader also collects a
significant amount of ancillary fees, including late charges. At December 31,
2000, total loans serviced by Leader, including bond program loans, conventional
loans and loans serviced for various third parties, consisted of 124,800 loans
with a total balance of $8.0 billion.
First Insurance sells a variety of property and casualty group
health and life insurance products and investment and annuity products. Because
the First Insurance acquisition occurred at the end of December 1998, only the
results of operations for the fiscal year Ended December 31, 2000 and 1999 are
impacted by this transaction.
36
Financial Condition
Total assets at December 31, 2000 were $1.072 billion, an increase
of 8.5% from December 31, 1999's total of $988 million.
As a result of increased secondary market activity at The Leader,
mortgage-servicing rights increased to $134.8 million, as of December 31, 2000,
from $97.5 million, at December 31, 1999. Due to the Company's efforts to reduce
the outstanding balance of loans held for sale, the December 31, 2000 balance of
loans held for sale was $232.3 million compared to $237.6 million at December
31, 1999. Additionally, loans held for sale which have been securitized in the
normal course of The Leader's operations and reported as trading securities
decreased to $234,000 at December 31, 2000 from $29.8 million at December 31,
1999. The growth in The Leader's secondary marketing activities, and the
corresponding growth in mortgage servicing rights, necessitated increased
funding from outside banks. Warehouse and term notes payable increased to $120.4
million as of December 31, 2000 from $53.5 million as of December 31, 1999.
Excluding The Leader's operations, gross loans receivable increased
$80.4 million, to $536.2 million at December 31, 2000, from $455.8 million as of
December 31, 1999. This increase was the result of increases in the
non-residential real estate and commercial and home equity portfolios, partially
offset by decreases in the single-family residential and consumer portfolios.
Non-residential real estate and commercial loans increased $85.0 million to
$246.0 million at December 31, 2000 from $161.4 million as of December 31, 1999.
Home equity and improvement loans increased to $31.8 million from $22.8 million
as of December 31, 2000 and 1999, respectively. Single-family residential loans
decreased to $196.2 million as of December 31, 2000 from $204.1 million at
December 31, 1999. Additionally, consumer loans decreased $12.2 million, to
$52.1 million from $64.3 million as of December 31, 2000 and 1999, respectively.
Management believes that the Company will continue to achieve increases in the
non-residential and commercial real estate loan portfolios due to an increased
emphasis on this type of lending. The 19% year over year decrease in the
consumer portfolios was anticipated by the Company as a result of stricter
underwriting standards that were implemented as a result of credit quality
issues noted in December of 1998. The decrease in the mortgage portfolio
resulted from decreased mortgage loan production, regular pay-downs of the
existing portfolio and sales of all qualifying fixed rate production into the
secondary market.
37
First Defiance also had growth in deposits for the year of $42.9
million, to $545.9 million at December 31, 2000 from $503.0 million at December
31, 1999. The most significant increases were in money market demand accounts
and noninterest-bearing deposits. Money market demand accounts increased to
$79.0 million at December 31, 2000 from $46.7 million at December 31, 1999.
Noninterest-bearing deposits increased to $33.3 million at December 31, 2000
from $20.0 million at December 31, 1999. Interest-bearing checking accounts and
certificates of deposit increased to $32.6 million and $363.5 million,
respectively, at December 31, 2000 from $32.0 million and $355.1 million,
respectively, at December 31, 1999. Savings accounts decreased to $37.6 million
at December 31, 2000 from $46.7 million at December 31, 1999.
Investment securities, which include available for sale, trading,
and held to maturity securities, decreased by $32.5 million to $61.1 million at
December 31, 2000 from $93.6 million at December 31, 1999. As discussed above,
the decrease was primarily the result of carrying $29.8 million in trading
securities as of December 31, 1999 related to the securitization of certain
available for sale mortgage loans.
38
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar amounts
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 dollars and rates, and the net interest margin. Dividends received on
FHLB stock are included as interest income. The table does not reflect the
effect of income taxes.
Year Ended December 31,
----------------------------------------------------------------------------------
2000 1999
-------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate
-------------------------------------- -----------------------------------------
(Dollars in thousands)
Interest-Earning Assets
Loans receivable $ 730,264 $ 60,382 8.27% $657,009 $49,927 7.60%
Securities 67,868 4,803 7.08 56,668 3,452 6.09
Interest bearing deposits -- -- -- -- -- --
Dividends on FHLB stock 14,570 1,075 7.38 12,157 861 7.08
-------------------------------------- -----------------------------------------
Total interest-earning assets 812,702 66,260 8.15 725,834 54,240 7.47
Non-interest-earning assets 196,589 145,667
------------- ----------
Total assets $ 1,009,291 $871,501
============= ==========
Interest-Bearing Liabilities
Deposits $ 529,205 $ 25,501 4.82 $472,904 $19,889 4.21
FHLB advances 228,055 13,297 5.83 195,566 9,872 5.05
Warehouse and term notes payable 68,993 4,704 6.82 29,721 1,821 6.13
-------------------------------------- -----------------------------------------
Total interest-bearing liabilities 826,253 43,502 5.26 698,191 31,582 4.52
Non-interest-bearing liabilities 89,418 82,691
------------- ----------
Total liabilities 915,671 780,882
Stockholders' equity 93,620 90,619
------------- ----------
Total liabilities and stockholders' equity $ 1,009,291 $871,501
============= ==========
Net interest income; interest rate spread $ 22,758 2.89% $22,658 2.95%
================ ===================
Net interest margin (2) 2.80% 3.12%
======= =======
Average interest-earning assets to average
interest-bearing liabilities 98% 104%
======= =======
Year Ended December 31,
----------------------------------
1998
----------------------------------
Average Yield/
Balance Interest Rate
----------------------------------
(Dollars in thousands)
Interest-Earning Assets
Loans receivable $521,968 $43,369 8.31%
Securities 81,320 5,082 6.25
Interest bearing deposits 12,259 605 4.94
Dividends on FHLB stock 4,669 334 7.15
----------------------------------
Total interest-earning assets 620,216 49,390 7.96
Non-interest-earning assets 78,706
----------
Total assets $698,922
==========
Interest-Bearing Liabilities
Deposits $409,254 18,340 4.48
FHLB advances 75,062 4,171 5.56
Warehouse and term notes payable 87,668 4,435 5.06
----------------------------------
Total interest-bearing liabilities 571,984 26,946 4.71
Non-interest-bearing liabilities 23,046
----------
Total liabilities 595,030
Stockholders' equity 103,892
----------
Total liabilities and stockholders' equity $698,922
==========
Net interest income; interest rate spread $22,444 3.25%
=================
Net interest margin (2) 3.62%
=======
Average interest-earning assets to average
interest-bearing liabilities 108%
=======
(1) At December 31, 2000, the yields earned and rates paid were as follows:
loans receivable, 8.41%; securities, 6.75%; FHLB stock, 7.50%; total
interest-earning assets, 8.28%; deposits, 5.12%; FHLB advances, 6.28%;
warehouse and term notes payable, 7.29%; total interest-bearing
liabilities, 5.46%; and interest rate spread, 2.82%.
(2) Net interest margin is net interest income divided by average interest-
earning assets.
39
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected First
Defiance's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) change in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
Year Ended December 31,
--------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
--------------------------------------------------------------------------------
Increase Increase Increase Increase
(decrease) (decrease) Total (decrease) (decrease) Total
due to due to increase due to due to increase
rate volume (decrease) rate volume (decrease)
--------------------------------------------------------------------------------
(In thousands)
Interest-Earning Assets
Loans $ 4,888 $ 5,567 $ 10,455 $ (4,662) $ 11,220 $ 6,558
Securities 669 682 1,351 (89) (1,541) (1,630)
Interest bearing deposits -- -- -- -- (605) (605)
FHLB stock 43 171 214 (9) 536 527
-------- -------- -------- -------- -------- --------
Total interest-earning assets $ 5,600 $ 6,420 $ 12,020 $ (4,760) $ (9,610) $ 4,850
======== ======== ======== ======== ======== ========
Interest-Bearing Liabilities
Deposits $ 3,244 $ 2,368 $ 5,612 $ (1,303) $ 2,852 $ 1,549
FHLB advances 1,785 1,640 3,425 (995) 6,696 5,701
Warehouse and term notes payable 477 2,406 2,883 317 (2,931) (2,614)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 5,506 $ 6,414 $ 11,920 $ (1,981) $ 6,617 $ 4,636
======== ======== ======== ======== ======== ========
Increase (decrease) in net interest income $ 100 $ 214
======== ========
Year Ended December 31,
--------------------------------------
1998 vs. 1997
--------------------------------------
Increase Increase
(decrease) (decrease) Total
due to due to increase
rate volume (decrease)
--------------------------------------
(In thousands)
Interest-Earning Assets
Loans $ (2,064) $ 8,131 $ 6,067
Securities (79) (1,395) (1,474)
Interest bearing deposits -- 605 605
FHLB stock (3) 95 92
-------- -------- --------
Total interest-earning assets $ (2,146) $ 7,436 $ 5,290
======== ======== ========
Interest-Bearing Liabilities
Deposits $ (907) $ 1,255 $ 348
FHLB advances (214) 991 777
Warehouse and term notes payable -- 4,435 4,435
-------- -------- --------
Total interest-bearing liabilities $ (1,121) $ 6,681 $ 5,560
======== ======== ========
Increase (decrease) in net interest income $ (270)
========
40
Results of Operations
General - First Defiance reported net income of $10.96 million for
the year ended December 31, 2000 compared to $8.62 million and $3.11 million for
the years ended December 31, 1999 and December 31, 1998 respectively. Net income
for 1998 was negatively impacted by a $5.4 million pre-tax ($3.6 million
after-tax and $.46 on a diluted per share basis) fourth quarter adjustment to
the reserve for loan losses. See "Provision for Loan Losses".
On a diluted per share basis, First Defiance's net income was $1.71,
$1.29, and $.40 for the years ended December 31, 2000, 1999 and 1998,
respectively. Earnings per share have been favorably impacted in both 2000 and
1999 by a reduction in average shares outstanding as a result of a number of
share repurchase programs. On a diluted basis, the average shares outstanding
have declined from 7.8 million in 1998 to 6.7 million in 1999 and 6.4 million in
2000.
Net interest income was $21.7 million for the year ended December
31, 2000, compared to $21.8 million and $22.1 million for the years ended
December 31, 1999 and 1998, respectively. Net interest margin was 2.80%, 3.12%,
and 3.62% for the years ended December 31, 2000, 1999 and 1998, respectively.
The decrease in net interest margin in 2000 is primarily a result of the
financing required to support the $50.9 million increase in average non-interest
earning assets from $145.7 million for 1999 to $196.6 million for 2000. The
increase in average non-interest earning assets was primarily the result of
increases in the average balances in mortgage servicing rights and prepaid
expenses and other assets. Mortgage servicing rights increased from an average
of $83.9 million for 1999 to $115.5 million for 2000. The increase in average
mortgage servicing rights corresponded with an increase in loan sales from $1.8
billion during 1999 to $2.4 billion for the year ended December 31, 2000. The
decrease in the net interest margin in 1999 compared to 1998 resulted from
similar downward pressures corresponding to the increase in average non-interest
earning assets which grew from $78.7 million for 1998 to $145.7 million for
1999.
The yield on interest earning assets was 8.15% for the year ended
December 31, 2000, an increase from the years ended December 31, 1999 and 1998
when the yields on interest earning assets were 7.47% and 7.96%, respectively.
The increase in yields on interest-earning assets from 1999 to 2000 was due to
the increased non-residential real estate and commercial loan production as well
as general interest rate increases. The decline in yields between 1998 and 1999
was primarily due to the addition of The Leader's mortgage loans available for
sale during the second half of 1998 and the subsequent increases in the average
balance on these loans.
The Company's cost of funds increased to 5.26% for the year ended
December 31, 2000 compared to 4.52% and 4.71% for the years ended December 31,
1999 and 1998, respectively. The increase in the Company's cost of funds was the
result of several increases in the targeted federal funds rate as well as
increased usage of external funding sources to finance the growth in mortgage
banking activities. As a result of the increase in the cost of funds outpacing
41
the increase in average earning assets, the interest rate spread decreased to
2.89% for the year ended December 31, 2000 compared to 2.95% for 1999 and 3.25%
for 1998.
The provision for loan losses for the year ended December 31, 2000
was $3.1 million, compared to $1.9 million for 1999 and $7.8 million for
1998.
For the year ended December 31, 2000 non-interest income was $53.2
million compared to $40.8 million for 1999 and only $17.9 million for 1998.
Non-interest expense for the year ended December 31, 2000 was $54.9 million
compared to $47.4 million for 1999 and $26.9 million for 1998.
Income for The Leader for the twelve months ended December 31, 2000
and 1999 and the six months ended December 31, 1998 included in First Defiance's
results was $6.5 million, $4.1 million and $1.4 million, respectively.
The growth in the balance of mortgage servicing rights at The Leader
has a negative impact on First Federal's regulatory capital levels because the
regulations require First Federal to subtract the amount that mortgage-servicing
rights exceed core capital (excluding this adjustment) from core capital. These
disallowed mortgage-servicing rights totaled $33.6 million at December 31, 2000.
This regulatory requirement has limited First Defiance's ability to grow its
core businesses and also repurchase common stock. Management is exploring a
number of options to address this issue including the restructuring of its
corporate organization, restructuring of certain assets on the balance sheet
including the mortgage-servicing rights, and the issuance of additional capital,
either in the form of common equity or trust preferred securities.
Implementation of any of these alternatives could decrease non-interest income
or increase interest expense or non-interest expense.
Net Interest Income - First Defiance's net interest income is
determined by its interest rate spread (i.e., the difference between the yields
on its interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
Total interest income increased by $11.8 million, or 22.1%, to $65.2
million for the year ended December 31, 2000 from $53.4 million for the year
ended December 31, 1999. The increase was due to a $73.3 million increase in the
average balance of loans outstanding for 2000 compared to 1999. The yield on
those loans increased to 8.27% in 2000 from 7.60% in 1999. The increase in loans
receivable was primarily attributable to the growth in the average balance of
non-residential real estate and commercial loans and The Leader's loans held for
sale. The average balance of non-residential real estate and commercial loans
grew to $209.8 million for 2000 from $143.0 million for 1999. The average
balance of loans held for sale increased to $219.6 million for 2000 from $186.8
million for 1999. The increases in loans held for sale and commercial loans were
partially offset by a $25.7 million decrease in the average balance on
single-family residential real estate loans, and a $8.5 million decrease in the
average balance on all consumer loans. As discussed above, conventional mortgage
loan production for 2000 was lower than 1999 due to the higher interest rate
environment experience during 2000 and subsequent sale into the secondary market
of all qualifying longer term fixed rate originations. The decrease in the
42
average balance on consumer loans was anticipated as underwriting standards were
strengthened in response to credit quality problems noted in the portfolio in
1998. See "Provision for Loan Losses".
In 1999, total interest income increased by $4.3 million, or 8.8%,
to $53.4 million for the year ended December 31, 1999 from $49.1 million for the
year ended December 31, 1998. The increase was due to a $135.1 million increase
in the average balance of loans outstanding for 1999 when compared to 1998. The
increase was primarily attributable to the growth of The Leader's loans
available for sale. The average balance of these loans grew to $186.8 million
for 1999 from $65.8 million for 1998. The yield on those loans declined to 7.60%
in 1999 versus 8.31% in 1998 because of the low coupon on The Leader's available
for sale portfolio.
Interest earnings from the investment portfolio and other
interest-bearing deposits increased to $4.8 million in 2000 compared to $3.5
million in 1999 and $5.7 million in 1998. The increase in 2000 was due to an
increase in the average balance of securities and other interest-bearing
deposits from $56.7 million in 1999 to $67.9 million in 2000. The increase in
average balance was primarily due to a $6.1 million increase in the average
outstanding balance on loans securitized and classified as trading securities
from 1999 to 2000. The yield on the average portfolio balance in 2000 was 7.08%.
In 1999, the portfolio had a yield of 6.09% with an average balance of $56.7
million while in 1998 the investment portfolio had a yield of 6.08% with an
average balance of $93.6 million.
Interest expense increased by $11.9 million, or 37.7%, to $43.5
million in 2000 compared to $31.6 million for 1999. This increase is due to the
increase in the average interest bearing liabilities to $826.3 million in 2000
from $698.2 million in 1999. Additionally, the average cost of funds on
interest-bearing liabilities increased to 5.26% during 2000 from 4.58% during
1999. The increase in average interest bearing liabilities was the result of
increased funding requirements relating to the loans held for sale and mortgage
servicing rights at The Leader and the increased non-residential real estate and
commercial loan balances at First Federal, net of the increase in average escrow
deposits (which are included in non-interest bearing liabilities) which
increased to $75.9 million in 2000 from $70.9 million in 1999. The increase in
the average cost of funds was the result of several Federal Reserve increases in
the targeted Federal Funds rate during 2000 as well as increased usage of
outside funding sources to finance The Leader's mortgage banking activities. The
cost of the $69.0 million average bank financing in 2000 was 6.82% compared to
the cost of the $29.7 million average bank financing in 1999 of 6.13%. First
Defiance maintains warehouse lines of credit with financial institutions
totaling $225.0 million as of December 31, 2000 to supplement its other funding
sources.
In 1999, interest expense increased by $4.7 million, or 17.2%, to
$31.6 million compared to $26.9 million for 1998. The increase is primarily due
to the financing requirements of The Leader's operations acquired in July of
1998. The average balance of interest bearing liabilities increased to $698.2
million during 1999 from $572.0 million for 1998, while the average cost of
these borrowings only slightly decreased to 4.52% from 4.71% over that same time
period.
As a result of the foregoing, First Defiance's net interest income
was $21.7 million for the year ended December 31, 2000 compared to $21.8 million
for the year ended December 31, 1999 and $22.1 million for the year ended
43
December 31, 1998. Net interest margin for the year ended December 31, 2000
declined to 2.80% from 3.12% for 1999 and 3.62% for 1998. The decline was due to
the financing of The Leader, particularly the financing of mortgage servicing
rights and goodwill, which are both non-interest earning assets. The balance of
mortgage servicing rights at December 31, 2000 was $134.8 million and the
balance of goodwill at that date was $14.0 million.
Provision for Loan Losses - First Defiance's provision for loan
losses was $3.1 million for the year ended December 31, 2000, compared to $1.9
million and $7.8 million for the years ended December 31, 1999 and 1998,
respectively. Provisions for loan losses are charged to earnings to bring the
total allowance for loan losses to a level that is deemed appropriate by
management. Factors considered by management include identifiable risk in the
portfolios, historical experience, the volume and type of lending conducted by
First Defiance, industry standards, the amount of non-performing assets,
including loans which meet the FASB Statement No. 114 definition of impaired,
general economic conditions, particularly as they relate to First Defiance's
market areas, and other factors related to the collectibility of First
Defiance's loan portfolio.
The growth in non-residential real estate and commercial loans and a
change in The Leader's method of estimating the required reserve for potential
losses on foreclosure loans contributed to the increased provision for the year
ended December 31, 2000 as compared to 1999. The growth in commercial and
commercial real estate loans of $85 million during 2000 resulted in a provision
for loan losses of $1.4 million on all non-residential real estate and
commercial loans, compared to $663,000 during the year ended December 31, 1999.
During the first quarter of 2000, management 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 increase in the provision for loan
losses of $693,000. The consolidated allowance for loan losses at December 31,
2000 was $8.9 million, compared to $7.8 million at December 31, 1999 and $9.8
million at December 31, 1998.
In 1998, four factors combined to require the large increase in the
loan loss provision: an increase in charge-offs and delinquencies within First
Federal's consumer loan portfolio, rapid growth in First Federal's non
residential real estate and commercial loan portfolio, the status of First
Federal's mobile home loan portfolio, and the acquisition of The Leader. During
1998, in response to the level of charge-offs and internal and external reviews
of the consumer loan portfolio, management increased the allowance for consumer
loans by approximately $3.6 million. Additionally, during 1998 when the balance
of non residential real estate and commercial loans increased from $29.8 million
to $70.1 million, the related allowance for loan losses increased by $932,000.
First Federal also reserved 40% against the then remaining mobile home loan
balances not already classified as doubtful or loss. This adjustment resulted in
increasing the mobile home loan loss allowance to $1.3 million at December 31,
1998. In May of 1999, First Federal sold the remaining mobile home portfolio,
which had a net book value (after deducting the related reserve) of $1.8
million, for $2.1 million. Finally, during the last six months of 1998, there
was a $351,000 increase in the provision for loan losses as a result of the
acquisition of The Leader.
44
During the year ended December 31, 2000, The Leader recorded a
provision for loan losses of $1.8 million, excluding the one-time charge
discussed above. Most of the loans that are originated or acquired by The Leader
have FHA insurance or VA guarantees. As a result, the risk of loss on those
loans is limited to the legal costs associated with foreclosure on the loan,
which has averaged approximately $1,500 per loan in foreclosure. This is a cost
that The Leader incurs whether the loan is included in Leader's own portfolio or
serviced for others. The Leader reserves for the foreclosure losses when the
loan goes to foreclosure. Management also records an estimated loss reserve to
provide for potential losses as loans become delinquent based on The Leader's
historical loss experience on similar loans. The Leader recorded a provision of
$1.8 million and $351,000 in 1999 and 1998, respectively.
Total non-performing loans were $1.4 million, or .18% of total
loans, as of December 31, 2000, compared with $1.0 million, or .14% of total
loans, as of December 31, 1999, and $1.9 million, or .33% of total loans, as of
December 31, 1998. Total charge-offs were $2.6 million, $4.2 million, and $2.1
million for the periods ended December 31, 2000, 1999, and 1998, respectively.
Over the same periods, recoveries amounted to $580,000, $279,000, and $220,000,
respectively.
Non-interest Income - The margin reductions were more than offset by
growth in non-interest income, which increased by $12.4 million to $53.2 million
for the year ended December 31, 2000 from $40.8 million for the year ended
December 31, 1999. Non-interest income for the year ended December 31, 1998 was
only $17.5 million. For the year ended December 31, 2000, the Company recognized
$36.1 million in mortgage banking income compared to $28.2 million and $12.1
million for the years ended December 31, 1999 and 1998, respectively. The growth
in mortgage banking income is directly related to the growth in the loan
servicing portfolio. The total principal balance outstanding on loans serviced
for others (excluding loans subserviced for others) was $7.9 billion, $6.0
billion, and $4.9 billion as of December 31, 2000, 1999, and 1998, respectively.
Because of increased demand for first-time homebuyer loans in the rising
interest rate environment exprienced in 2000, loans purchased and sold increased
to $2.4 billion in 2000 from $1.7 billion in 1999. This increased activity
resulted in increased gains on sale of mortgage loans, which increased to $9.5
million for 2000 from $7.1 million in 1999 and $3.4 million in 1998 primarily
due to increased loan production and sales. The Leader also realized a one-time
gain on the sale of non-core mortgage servicing rights totaling $479,000 in
1999.
The 2000 results also include the revenue associated with First
Insurance, which was formed from the merger of the Stauffer Mendenhall Agency
(acquired December 24, 1998) and the Defiance, Ohio Office of Insurance and Risk
Management (acquired September 1, 1999). Total revenues for First Insurance were
$2.6 million and $1.4 million for the years ended December 31, 2000, and 1999,
respectively. The growth in this revenue was due to the acquisition of the
second agency during the 1999 third quarter.
Non-interest Expense - Total non-interest expense for 2000 was $54.9
million compared to $47.4 million for the year ended December 31, 1999 and $26.9
million for the year ended December 31, 1998. As with non-interest income, the
addition of The Leader in July 1998 significantly increased the consolidated
level of non-interest expense. For the six months from July 1 to December 31,
1998, The Leader's total non-interest expense was $12.2 million compared to
45
$29.6 million for the year ended December 31, 1999 and $34.8 million for the
year ended December 31, 2000.
The increase from 1999 to 2000 was primarily due to compensation and
benefit expense that increased by $3.3 million over 1999. Of this increase, $1.3
million related to compensation and benefits at The Leader, $1.0 million related
to compensation and benefits for First Insurance and $1.0 million related to
increases in compensation and benefits at First Federal. The increase in
compensation and benefits at The Leader were driven by increases in staff and in
sales commissions to reflect the increased production and portfolio levels. The
First Federal increase was due to increases in staffing levels resulting from
branch and commercial expansions, including the opening of de novo branches in
Findlay, Ohio in February 1999, Fostoria, Ohio in November 1999 and Bowling
Green, Ohio in December 2000. The First Insurance increase was the result of the
September 1999 acquisition of the Defiance, Ohio office of Insurance and Risk
Management.
In addition to compensation expense, amortization of mortgage
servicing rights increased by $2.3 million, from $12.7 million for the year
ended December 31, 1999 to $15.0 million for 2000. The increase in amortization
of mortgage servicing rights related to the $1.9 billion increase in loans
serviced for others during 2000. Finally, in 2000, occupancy expense increased
$779,000 over the 1999 expense, due to expansion at all of the Subsidiaries.
The comparability of the years ended December 31, 1999 and 1998 is
greatly impacted by the July 1998 acquisition of The Leader. The Leader
acquisition was accounted for as a purchase and resulted in the inclusion of
Leader's results only for the six months from the acquisition date to the end of
the year. Included in the 1999 non-interest expenses for The Leader are $10.1
million in compensation and benefits ($3.8 million for the second half of 1998),
$1.6 million in occupancy costs ($489,000 for the second half of 1998), $12.6
million in amortization of mortgage servicing rights ($5.3 million for the
second half of 1998), and $2.1 million in amortization of goodwill and other
acquisition costs, including non-compete and employment agreements ($1.1 million
for the second half of 1998).
Income Taxes - Income tax amounted to $5.9 million in 2000 compared
to $4.6 million in 1999 and $1.8 million in 1998. The effective tax rates for
the three years were 35.0%, 34.9%, and 36.9%, respectively. The decrease in the
effective tax rate from 1998 to 1999 is the result of the increase in
non-taxable interest income and a reduction of income at the holding company
level that is subject to state income tax.
46
Cash Earnings
The selected financial data presented in the following table
highlights the performance of First Defiance on a cash basis for each of the
three years in the period ended December 31, 2000. The data has been adjusted to
exclude the amortization of goodwill and the related tax benefit of tax
deductible goodwill. This goodwill resulted from the acquisitions of The Leader,
and the insurance agencies which were combined to form First Insurance. All
three acquisitions were recorded using the purchase method of accounting. The
amortization of goodwill does not result in a cash expense and has essentially
no economic impact on liquidity and funds management activity. Cash basis
financial data provide an additional basis for measuring a company's ability to
support future growth, pay dividends, and repurchase shares. The cash basis data
presented in the table below has not been adjusted to exclude the impact of
other noncash items such as depreciation, the provision for loan losses, and
amortization of MRP and ESOP expense.
2000 1999 1998
--------- --------- --------
(Dollars in thousands, except per share amounts)
Year Ended December 31
Non-interest expense $ 54,031 $ 46,639 $ 26,658
Income before income taxes 17,751 14,027 5,211
Net income 11,786 9,382 3,393
Per Common Share
Net income per basic share $1.87 $1.44 $.45
Net income per diluted share 1.84 1.40 .43
Weighted average common shares
(000s) 6,318 6,502 7,491
Weighted average diluted common
shares (000s) 6,423 6,700 7,811
Performance Ratios
Return on average assets 1.18% 1.09% .49%
Return on average equity 14.87 11.99 3.44
Ratio of cash operating expense to
tangible assets 5.43 5.43 3.84
Goodwill
Goodwill average balance $ 14,372 $ 12,519 $5,115
Goodwill amortization (after tax) 823 759 282
47
Concentrations of Credit Risk
Financial institutions such as First Defiance generate income
primarily through lending and investing activities. The risk of loss from
lending and investing activities includes the possibility that losses may occur
from the failure of another party to perform according to the terms of the loan
or investment agreement. This possibility is known as credit risk.
Credit risk is increased by lending or investing activities that
concentrate a financial institution's assets in a way that exposes the
institution to a material loss from any single occurrence or group of related
occurrences. Diversifying loans and investments to prevent concentrations of
risks is one manner a financial institution can reduce potential losses due to
credit risk. Examples of asset concentrations would include multiple loans made
to a single borrower, and loans of inappropriate size relative to the total
capitalization of the institution. Management believes adherence to its loan and
investment policies allows it to control its exposure to concentrations of
credit risk at acceptable levels.
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 Treasury, agency and other investments having maturities of five years or
less. OTS regulations require that savings institutions maintain liquid assets
not less than 4% of their average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. First Federal's liquidity
exceeded applicable requirements at December 31, 2000.
Cash used in operating activities was $34.1 million and $165.4
million for the years ended December 31, 2000, and 1999, respectively. Cash
provided by operations was $51.3 million for the year ended December 31, 1998.
Cash was generated by First Defiance's operating activities during the year
ended December 31, 1998 primarily as a result of net income. In 1999 and 2000,
the Company used more cash in operating activities than was provided. This
resulted from the net growth in the held-for-sale loan portfolio which was
funded through financing activities. The adjustments to reconcile net income to
cash provided by or used in operations during the periods presented consist
primarily of proceeds from the sale of loans (less the origination of loans held
for sale), the provision for loan losses, depreciation expense, goodwill
amortization, ESOP expense related to the release of ESOP shares in accordance
with AICPA SOP 93-6, the origination of mortgage servicing rights and increases
and decreases in other assets and liabilities.
The primary investing activity of First Defiance is lending, which
is funded with cash provided from operations and financing activities, as well
as proceeds from payments on existing loans and proceeds from maturities of
securities. In 2000 cash provided from the sale and maturity of investment
securities totaled $41.1 million, while $7.0 million in additional securities
were purchased.
Principal financing activities include the gathering of deposits and
advance payments from loan servicing customers, the utilization of FHLB
advances, and borrowings from other bank sources. For the year ended December
31, 2000, FHLB advances decreased by $42.2 million, warehouse and term notes
48
payable increased by $66.9 million, and deposits increased by $42.9 million. For
additional information about cash flows from First Defiance's operating,
investing and financing activities, see the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements.
At December 31, 2000, First Defiance had an aggregate of $84.2
million in unfunded commitments to originate loans (including unused portions of
lines of credit and letters of credit) and no commitments to purchase
securities. At the same date, First Defiance had commitments to sell $190.1
million of loans held for sale. At that date First Defiance had commitments to
acquire $215.5 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 December 31, 2000, the total
amount of certificates of deposit that were scheduled to mature by December 31,
2001 was $319.3 million. First Defiance believes that it has adequate resources
to fund commitments as they arise. It can adjust the rate on savings
certificates to retain deposits in changing interest rate environments; it can
sell or securitize mortgage or non-mortgage loans; and it can turn to other
sources of financing including FHLB advances. Because the FHLB requires that the
collateral must exceed 135% of the outstanding advance balance, First Defiance
may also from time-to-time be required to utilize other sources of financing,
including brokered certificates of deposit and bank advances. At December 31,
2000 First Defiance had $240.0 million of lines available from other financial
institutions, of which $114.3 million is being utilized.
Stockholders' equity increased by $10.1 million, or 11.2%, at
December 31, 2000 compared to December 31, 1999. Net income for 2000 was $11.0
million, of which $2.9 million was returned to shareholders in the form of
declared dividends ($.45 per share). The increase in the market value of
available for sale securities increased equity by $1.1 million. The vesting of
MRP shares and release of ESOP shares increased equity by $219,000 and $497,000,
respectively. Stock option exercises increased equity by approximately $470,000.
The purchase of 30,000 shares of stock for treasury reduced equity by $328,000.
The book value of First Defiance's common stock was $14.49 per share at December
31, 2000, compared to $13.12 per share at December 31, 1999. The tangible book
value (excluding goodwill) per share was $12.46 and $10.97 at December 31, 2000
and 1999.
First Federal is subject to various capital requirements of the
Office of Thrift Supervision. At December 31, 2000, First Federal had capital
ratios that exceeded the minimum regulatory requirements. For additional
information about First Federal's capital requirements, see Note 12 to the
Consolidated Financial Statements.
49
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Asset/Liability Management
A significant portion of the Company's revenues and net income is
derived from net interest income and, accordingly, the Company strives to manage
its interest-earning assets and interest-bearing liabilities to generate what
management believes to be an appropriate contribution from net interest income.
Asset and liability management seeks to control the volatility of the Company's
performance due to changes in interest rates. The Company attempts to achieve an
appropriate relationship between rate sensitive assets and rate sensitive
liabilities. First Defiance does not presently use off balance sheet derivatives
to enhance its risk management.
First Defiance monitors interest rate risk on a monthly basis
through simulation analysis that measures the impact changes in interest rates
can have on net interest income. The simulation technique analyzes 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, non-maturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise 100 basis points over a 12 month period, using 2001
projected amounts as a base case, First Defiance's net interest income would
decrease by 6.8%. Were interest rates to fall by 100 basis points during the
same 12-month period, the simulation indicates that net interest income would
increase by 6.8%.
The acquisition of The Leader provided First Defiance with a
significant source of non-interest income. The mortgage banking operations also
serve as a countermeasure against the decline in the value of mortgage loans
during a rising rate environment because increases in interest rates tend to
increase the value of mortgage servicing rights because of the resulting
decrease in prepayment rates on the underlying loans. Conversely, in a
decreasing interest rate environment, the value of the mortgage servicing
portfolio tends to decrease due to increased prepayments on the underlying
loans. However, because The Leader's portfolio is comprised primarily of below
market-rate loans, the prepayments on the loans it services have been much lower
than industry averages. The Leader averaged 4.06% prepayments for the year ended
December 31, 2000, which is lower than the prepayment speeds for the mortgage
industry as a whole and lower than the 7.6% and 11.1% rates experienced by The
Leader during 1999 and 1998, respectively. 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 December 31, 2000, a 100 basis point decrease in interest
rates would require First Defiance to establish additional reserves for
impairment of mortgage servicing rights of approximately $92,000.
First Defiance, through The Leader, has significantly increased its
origination capabilities, on both a retail and wholesale basis. Loan production
at The Leader was $2.4 billion for the year ended December 31, 2000, compared to
$1.9 billion for the year-ended December 31, 1999. Mortgage servicing rights
50
increased from $97.5 million as of December 31, 1999 to $134.8 million as of
December 31, 2000. To protect themselves from the risk of changing interest
rates, mortgage banking companies frequently use off balance sheet financial
instruments to hedge the exposure of the mortgage loan pipeline. The Leader does
not need to hedge its mortgage loan pipeline because the trustees under the
various first-time homebuyer programs are required to fund the issuance of the
GNMA securities backed by the mortgages in The Leader's pipeline at a guaranteed
price.
First Defiance also has increased its lending activities in the
non-residential real estate and commercial loan area. While such loans carry
higher credit risk than residential mortgage lending they tend to be more rate
sensitive than residential mortgage loans. The balance of First Defiance's
non-residential real estate and commercial loan portfolio increased to $251.3
million, which is split between $54.4 million of fixed-rate loans and $196.9
million of adjustable-rate loans at December 31, 2000. Certain of the loans
classified as adjustable have fixed rates for an initial term that may be as
long as five years. The maturities on fixed rate loans are generally less than 7
years. First Defiance also has significant balances of consumer loans ($52.1
million at December 31, 2000) which tend to have a shorter duration than
residential mortgage loans, and home equity and improvement loans ($31.8 million
at December 31, 2000) which fluctuate with changes in the prime lending rate.
Also, to limit its interest rate risk, First Federal has been selling fixed-rate
mortgage loans with a maturity of 15 years or greater in the secondary market.
Historically, loans with maturities less than 20 years have been retained in
portfolio although First Federal began selling its 15 year fixed-rate mortgage
loans in the secondary market beginning in January 1999.
In addition to the simulation analysis, First Federal also utilizes
the "market value of net portfolio equity" ("NPV") methodology adopted by the
OTS. Under the NPV methodology, interest rate risk exposure ("IRR") is assessed
by reviewing the estimated changes in First Federal's net interest income
("NII") and NPV that would hypothetically occur if interest rates simultaneously
rise or fall along the yield curve. Projected values of NII and NPV at both
higher and lower regulatory defined scenarios are compared to base case values
(no change in rates) to determine the sensitivity to changing interest rates.
Presented in the following table, as of December 31, 2000, is an analysis of
estimated interest rate risk of First Federal and The Leader as measured by
changes in NPV for instantaneous and sustained parallel shifts in interest rates
up and down 300 basis points in 100 point increments. Assumptions used in
calculating the amounts in this table are generally those assumptions utilized
by the OTS in assessing the interest rate risk of the thrifts it regulates.
However, First Defiance utilizes a model that evaluates the market value of
mortgage servicing rights on a loan-by-loan basis, and management believes that
the results generated by that model are more accurate than the generic OTS
assumptions. For purposes of this table, management's valuation of mortgage
servicing rights have been substituted for OTS' results. NPV is calculated by
the OTS for the purposes of interest rate risk assessment and should not be
considered as an indicator of value of First Federal.
51
December 31, 2000
- -------------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
------------------------------------- -----------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------
+ 300 bp 135,704 (11,171) (8) 12.77% (47) bp
+ 200 bp 146,166 (709) 0 13.50% 26 bp
+ 100 bp 150,210 3,335 2 13.66% 42 bp
0 bp 146,875 -- -- 13.24% --
-100 bp 134,855 (12,020) (8) 12.70% (107) bp
-200 bp 112,988 (33,887) (23) 10.33% (291) bp
-300 bp 95,515 (51,360) (35) 8.81% (443) bp
In the event of a 300 basis point change in interest rates based
upon estimates as of December 31, 2000, First Federal would experience a 35%
decrease in NPV in a declining rate environment and a 8% decrease in NPV in a
rising rate environment. During periods of rising rates, the value of monetary
assets declines. Conversely, during periods of falling rates, the value of
monetary assets increases. Mortgage-servicing rights act as a natural hedge to
these changes in value of other monetary assets as mortgage-servicing rights
generally rise in value in a rising rate environment and decline in value in a
falling rate environment because of the prepayments of the underlying mortgage
loans. It should be noted that the amount of change in value of specific assets
and liabilities due to changes in rates is not the same in a rising rate
environment as in a falling rate environment. Based on the NPV methodology, the
decline in NPV in a rising rate environment is because First Federal has used
FHLB advances and deposits with shorter terms than the assets in which it
invests. The decline in NPV in a falling rate environment is because of the
reduction in value in mortgage servicing rights. The analysis indicates that
increases or decreases in monetary assets and increases or decreases in mortgage
servicing rights generally offset each other in both rising and falling rate
environments.
In evaluating First Federal's exposure to interest rate risk,
certain shortcomings inherent in the each of the methods of analysis presented
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
rates while interest rates on other types of financial instruments may lag
behind current changes in market rates. Furthermore, in the event of changes in
rates, prepayments and early withdrawal levels could differ significantly from
the assumptions in calculating the table and the results therefore may differ
from those presented.
52
Forward Looking Information
Forward looking statements in this report are made in reliance upon
the safe harbor provisions of the private Securities Litigation Reform Act of
1995. The statements in this report which are not historical fact are forward
looking statements and they include, among other statements, projections about
growth in the Financial Condition section and projections about interest rate
risk simulations included in the Asset/Liability Management section. Actual
results may differ from expectations contained in such forward looking
information as a result of factors including but not limited to the interest
rate environment, economic policy or conditions, federal and state banking and
tax regulations, and competitive factors in the marketplace. Each of these
factors could affect estimates, assumptions, uncertainties and risks considered
in the development of forward looking information and could cause actual results
to differ materially from management's expectation regarding future performance.
53
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition.............................55
Consolidated Statements of Income..........................................57
Consolidated Statements of Stockholders' Equity............................58
Consolidated Statements of Cash Flows......................................59
Notes to Consolidated Financial Statements.................................61
Report of Independent Auditors............................................103
54
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
December 31
2000 1999
------------------------
(In thousands)
Assets Cash and cash equivalents:
Cash and amounts due from depository institutions $ 7,320 $ 13,102
Interest-bearing deposits 13,634 3,134
------------------------
20,954 16,236
Investment securities:
Available-for-sale, carried at fair value 53,176 53,946
Trading, carried at fair value 234 29,805
Held-to-maturity, carried at amortized cost
(fair value $7,770 and $9,953
at December 31, 2000 and 1999, respectively) 7,697 9,895
------------------------
61,107 93,646
Loans receivable, net of allowance of $8,904
and $7,758 at December 31, 2000 and 1999,
respectively 541,208 465,321
Loans held for sale (fair value $232,314 and
$237,622 at December 31, 2000 and 1999,
respectively) 232,314 237,622
Mortgage servicing rights 134,760 97,519
Accrued interest receivable 5,976 3,868
Federal Home Loan Bank stock 15,251 14,181
Premises and equipment 22,203 21,311
Real estate and other assets held for sale 312 2,557
Goodwill, net of accumulated amortization of
$1,918 and $1,057 at December 31, 2000
and 1999, respectively 13,983 14,699
Other assets 24,126 21,034
------------------------
Total assets $1,072,194 $ 987,994
========================
55
December 31
2000 1999
-----------------------------
(In thousands)
Liabilities and stockholders' equity
Liabilities:
Deposits $ 545,899 $ 502,969
Advances from the Federal Home Loan Bank 223,258 265,410
Warehouse and term notes payable 120,425 53,504
Accrued expenses and other liabilities 12,546 12,921
Deferred taxes 2,611 2,232
Advance payments by borrowers for
taxes and insurance 67,982 61,542
-----------------------------
Total liabilities 972,721 898,578
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 6,863,541
and 6,814,156 shares outstanding, respectively 69 68
Additional paid-in capital 53,512 53,181
Stock acquired by ESOP (3,238) (3,664)
Deferred compensation (204) (458)
Accumulated other comprehensive income,
net of tax of $(22) and $565, respectively 47 (1,096)
Retained earnings 49,287 41,385
-----------------------------
Total stockholders' equity 99,473 89,416
-----------------------------
Total liabilities and stockholders' equity $ 1,072,194 $ 987,994
=============================
See accompanying notes.
56
First Defiance Financial Corp.
Consolidated Statements of Income
Years Ended December 31
2000 1999 1998
-------------------------------------------------------
(In thousands, except per share amounts)
Interest income:
Loans $ 60,382 $ 49,927 $ 43,369
Investment securities 4,441 3,307 5,082
Other 362 145 605
-------------------------------------------------------
Total interest income 65,185 53,379 49,056
Interest expense:
Deposits 25,501 19,889 18,340
Federal Home Loan Bank advances and other 13,297 9,872 4,171
Warehouse and term notes payable 4,704 1,821 4,435
-------------------------------------------------------
Total interest expense 43,502 31,582 26,946
-------------------------------------------------------
Net interest income 21,683 21,797 22,110
Provision for loan losses 3,147 1,925 7,769
-------------------------------------------------------
Net interest income after provision for loan losses 18,536 19,872 14,341
Non-interest income:
Mortgage banking income 36,129 28,156 12,071
Service fees and other charges 2,047 1,411 1,314
Gain on sale of loans 9,546 7,081 3,405
Gain on sale of mortgage servicing rights - 479 -
Federal Home Loan Bank stock dividends 1,075 861 334
Net (loss) gain on sale of available-for-sale securities (58) 1 -
Trust fees 238 43 -
Other 4,269 2,762 404
-------------------------------------------------------
53,246 40,794 17,528
Non-interest expense:
Compensation and benefits 22,685 19,401 10,985
Occupancy 4,907 4,128 2,394
Deposit insurance premiums 120 380 243
Franchise tax 1,123 983 1,273
Data processing 1,277 1,239 981
Mortgage servicing rights amortization 14,984 12,711 5,385
Goodwill and other intangibles amortization 2,090 2,348 1,068
Other 7,719 6,224 4,611
-------------------------------------------------------
54,905 47,414 26,940
-------------------------------------------------------
Income before income taxes 16,877 13,252 4,929
Income taxes 5,914 4,629 1,818
-------------------------------------------------------
Net income $ 10,963 $ 8,623 $ 3,111
=======================================================
Earnings per share:
Basic $ 1.74 $ 1.33 $ .42
=======================================================
Diluted $ 1.71 $ 1.29 $ .40
=======================================================
Dividends declared per share $ .45 $ .41 $ .37
=======================================================
See accompanying notes.
57
First Defiance Financial Corp.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands)
Stock Acquired By
-----------------------
Common Stock Additional Management
----------------- Paid-In Recognition
Shares Amount Capital ESOP Plan
-----------------------------------------------------------
Balance at January 1, 1998 8,528 $ 85 $ 65,726 $ (4,534) $ (1,388)
Comprehensive income:
Net income
Change in net unrealized gains and losses on available-for-sale
securities, net of income taxes of $108
Total comprehensive income
ESOP shares released 331 445
Amortization of deferred compensation of Management Recognition Plan 66 545
Stock issued in acquisition 146 2 2,090
Shares issued under stock option plan 96 1 867
Acquisition of common stock for treasury (1,195) (12) (10,399)
Dividends declared
-----------------------------------------------------------
Balance at December 31, 1998 7,575 76 58,681 (4,089) (843)
Comprehensive income:
Net income
Change in net unrealized gains and losses on available-for-sale
securities, net of income taxes of $648
Total comprehensive income
ESOP shares released 197 425
Amortization of deferred compensation of Management Recognition Plan (4) 385
Shares issued under stock option plan 55 417
Acquisition of common stock for treasury (816) (8) (6,110)
Dividends declared
-----------------------------------------------------------
Balance at December 31, 1999 6,814 68 53,181 (3,664) (458)
Comprehensive income:
Net income
Change in net unrealized gains and losses on available-for-sale
securities, net of income taxes of $542
Total comprehensive income
ESOP shares released 71 426
Amortization of deferred compensation of Management Recognition Plan (35) 254
Shares issued under stock option plan 80 1 469
Acquisition of common stock for treasury (30) (174)
Dividends declared
-----------------------------------------------------------
Balance at December 31, 2000 6,864 $ 69 $ 53,512 $ (3,238) $ (204)
===========================================================
Accumulated
Other Total
Comprehensive Retained Stockholders'
Income Earnings Equity
-------------------------------------------------
Balance at January 1, 1998 $ (50) $ 47,045 $ 106,884
Comprehensive income:
Net income 3,111 3,111
Change in net unrealized gains and losses on available-for-sale
securities, net of income taxes of $108 212 212
--------------
Total comprehensive income 3,323
ESOP shares released 776
Amortization of deferred compensation of Management Recognition Plan 611
Stock issued in acquisition 2,092
Shares issued under stock option plan 868
Acquisition of common stock for treasury (7,662) (18,073)
Dividends declared (2,771) (2,771)
-------------------------------------------------
Balance at December 31, 1998 162 39,723 93,710
Comprehensive income:
Net income 8,623 8,623
Change in net unrealized gains and losses on available-for-sale
securities, net of income taxes of $648 (1,258) (1,258)
--------------
Total comprehensive income 7,365
ESOP shares released 622
Amortization of deferred compensation of Management Recognition Plan 381
Shares issued under stock option plan 417
Acquisition of common stock for treasury (4,276) (10,394)
Dividends declared (2,685) (2,685)
-------------------------------------------------
Balance at December 31, 1999 (1,096) 41,385 89,416
Comprehensive income:
Net income 10,963 10,963
Change in net unrealized gains and losses on available-for-sale
securities, net of income taxes of $542 1,143 1,143
--------------
Total comprehensive income 12,106
ESOP shares released 497
Amortization of deferred compensation of Management Recognition Plan 219
Shares issued under stock option plan 470
Acquisition of common stock for treasury (154) (328)
Dividends declared (2,907) (2,907)
-------------------------------------------------
Balance at December 31, 2000 $ 47 $ 49,287 $ 99,473
=================================================
See accompanying notes.
58
First Defiance Financial Corp.
Consolidated Statements of Cash Flows
Years Ended December 31
2000 1999 1998
------------------------------------------------------
(In thousands)
Operating activities
Net income 10,963 $ 8,623 $ 3,111
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 3,147 1,925 7,769
Provision for depreciation 1,888 1,745 1,278
Amortization of deferred compensation expense 219 484 545
Amortization of mortgage servicing rights 14,984 12,711 5,385
Amortization of goodwill 716 775 282
Release of ESOP shares 497 622 776
(Gain) loss on sale of office properties and equipment (60) 31 (2)
Net securities (gains) losses 58 (1) --
Gain on sale of loans (9,546) (7,081) (3,405)
Gain on sale of mortgage servicing rights -- (479) --
Net securities amortization 37 110 73
Deferred federal income tax (credit) (163) 58 (1,785)
(Increase) decrease in interest receivable and other assets (5,200) (4,499) 29
Proceeds from sale of loans 2,369,720 1,753,467 677,925
Proceeds from sale of mortgage servicing rights -- 2,610 --
Servicing rights on loans sold with servicing retained (52,225) (35,909) (12,428)
Origination of loans held for sale (2,354,866) (1,895,505) (623,241)
Net repurchase of loans held for sale (13,810) (8,521) (3,143)
(Decrease) increase in accrued interest and other liabilities (450) 3,465 (1,823)
-------------------------------------------------
Net cash (used in) provided by operating activities (34,091) (165,369) 51,346
Investing activities
Proceeds from sale of trading securities 29,568 -- --
Proceeds from maturities of available-for-sale securities 7,071 20,039 56,155
Proceeds from sale of available-for-sale securities 2,317 2,001 --
Purchases of available-for-sale securities (6,996) (30,395) (20,967)
Proceeds from maturities of held-to-maturity securities 2,169 3,594 7,354
Proceeds from sale of real estate and other assets held for sale 3,325 3,079 1,805
Proceeds from sale of office properties and equipment
and investment properties 485 416 19
Purchase of mortgage servicing rights -- -- (3,417)
Acquisition of The Leader Mortgage Co., net of cash received -- -- (30,142)
Acquisition of The Insurance Center of Defiance,
net of cash received -- (1,918) (45)
Adjustment of acquisition of First Insurance & Investments -- (274) --
Acquisition of Moreland Greens -- 217 --
Purchases of Federal Home Loan Bank stock (1,070) (3,355) (7,062)
Purchases of premises and equipment (3,205) (4,417) (2,595)
Net increase in mortgage and other loans (66,304) (12,668) (53,171)
-------------------------------------------------
Net cash used in investing activities (32,640) (23,681) (52,066)
59
First Defiance Financial Corp.
Consolidated Statements of Cash Flows (continued)
Years Ended December 31
2000 1999 1998
------------------------------------------------------
(In thousands)
Financing activities
Net increase in deposits and advance payments by
borrowers for taxes and insurance 49,370 53,198 115,329
Proceeds from short-term line of credit 12,000 - -
Net increase in Federal Home Loan Bank short-term advances 83,500 8,355 2,510
Proceeds from Federal Home Loan Bank long-term advances - 105,000 95,000
Repayment of Federal Home Loan Bank long-term advances (125,652) (16,087) (1,033)
Repayment of long term notes (314) (60) (54,101)
Increase (decrease) in mortgage warehouse loans 55,235 47,043 (125,490)
Purchase of common stock for treasury (328) (10,394) (18,073)
Cash dividends paid (2,832) (2,692) (2,781)
Proceeds from exercise of stock options 470 417 868
------------------------------------------------------
Net cash provided by financing activities 71,449 184,780 12,229
------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,718 (4,270) 11,509
Cash and cash equivalents at beginning of period 16,236 20,506 8,997
------------------------------------------------------
Cash and cash equivalents at end of period $ 20,954 $ 16,236 $ 20,506
======================================================
Supplemental cash flow information:
Interest paid $ 43,790 $ 30,482 $ 28,041
======================================================
Income taxes paid $ 6,400 $ 5,325 $ 2,567
======================================================
Transfers from loans to real estate, mobile homes
and other assets held for sale $ 607 $ 2,533 $ 2,109
======================================================
Noncash operating activities:
Change in deferred taxes on net unrealized gains or
losses on available-for-sale securities $ (542) $ 648 $ (108)
======================================================
Noncash investing activities:
Change in net unrealized gain (loss) on available-for-sale
securities $ 1,685 $ (1,906) $ 320
======================================================
Securitization of loans held for sale $ - $ 29,805 $ -
======================================================
Acquisition of The Insurance Center of Defiance for stock $ - $ - $ 2,092
======================================================
Noncash financing activities:
Cash dividends declared but not paid $ 778 $ 703 $ 710
======================================================
See accompanying notes.
60
First Defiance Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2000
1. Basis of Presentation
First Defiance Financial Corp. ("First Defiance") is a holding company that
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 ("The Leader"). All significant intercompany
transactions and balances are eliminated in consolidation.
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 counties in which its offices are located.
First Federal'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 that specializes in servicing mortgage
loans under first-time home-buyer programs sponsored by various state, county
and municipal governmental entities. The Leader's mortgage banking activities
consist primarily of originating or purchasing residential mortgage loans for
either direct resale into secondary markets or to be securitized through
Government National Mortgage Association ("GNMA") or Fannie Mae. The Leader
generally retains the servicing on these loans.
First Insurance & Investments is an insurance agency that does business in the
Defiance, Ohio area offering property and casualty, group health, and life
insurance and investment and annuity products.
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Most significantly, First Defiance uses estimates in determining the
value of the allowance for loan losses and in the valuation of mortgage
servicing rights.
61
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Earnings Per Share
Earnings per share are based on the weighted average number of shares of common
stock. Basic earnings per share excludes any dilutive effects of options and
unvested stock grants.
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from banks and overnight
investments with the Federal Home Loan Bank ("FHLB"). Cash and amounts due from
depository institutions includes required balances at the FHLB and Federal
Reserve of approximately $364,000 and $100,000, respectively, at December 31,
2000.
Investment Securities
Management determines the appropriate classification of debt securities at the
time of purchase and evaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to hold the securities to maturity and are reported
at cost, adjusted for premiums and discounts that are recognized in interest
income using the interest method over the period to maturity.
Debt securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity until realized.
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. These
securities have been committed to sell at their carrying value.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gains (losses) on sale of securities. The
cost of mutual funds sold is based on the average cost method. The cost of all
other securities sold is based on the specific identification method.
62
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Currently, First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities are disclosed in Note 4 and include REMIC and CMO investments. Such
investments are not classified as high risk at December 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.
Investments Required by Regulations
As a member of the FHLB System, First Federal is required to own stock of the
FHLB of Cincinnati in an amount principally equal to the greater of 1% of its
net home mortgage loans or 5% of FHLB advances, subject to periodic redemption
at par if the stock owned is over the minimum requirement. FHLB stock is a
restricted equity security that does not have a readily determinable fair value
and is carried at cost.
Loans Receivable
Investment in real estate mortgage loans consists principally of long-term
conventional loans collateralized by first mortgages on single-family
residences, other residential property, and commercial and industrial property.
Such loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.
Nonrefundable fees and related costs associated with originating or acquiring
real estate mortgage and other loans are capitalized and recognized as an
adjustment of the yield of the related loan.
Interest receivable is accrued on loans and credited to income as earned. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is fully reserved.
Interest income is subsequently recognized only to the extent cash payments are
received.
63
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio and is based
on the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans, actual and anticipated loss experience,
current economic events in specific industries and geographical areas, and other
pertinent factors including regulatory guidance and general economic conditions.
Determination of the allowance is inherently subjective as it requires
significant estimates, including the amounts and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience and consideration of economic trends, all of which
may be susceptible to significant change. Loan losses are charged off against
the allowance, while recoveries of amounts previously charged off are credited
to the allowance. A provision for loan losses is charged to operations based on
management's periodic evaluation of the factors previously mentioned, as well as
other pertinent factors.
There is no unallocated component of the allowance for loan loss.
Mortgage Servicing Rights
The total cost of loans originated or purchased is allocated between loans and
servicing rights based on the relative fair values of each. The servicing rights
capitalized are amortized in proportion to and over the period of estimated
servicing income.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type (fixed or adjustable rate) and interest rate.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance.
Fair values for individual strata are based on the present value of estimated
future cash flows using a discount rate (10.5%) commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment (145%
PSA), default and interest rates, and other factors which are subject to change
over time. Changes in these underlying assumptions could cause the fair value of
mortgage servicing rights, and the related valuation allowance, to change
significantly in the future.
64
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Real Estate and Other Assets Held for Sale
Assets held for sale are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair value at time of foreclosure or
in-substance foreclosure. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method over the following
estimated useful lives:
Buildings and improvements 20 to 50 years
Furniture, fixtures and equipment 5 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles
are evaluated for impairment using the guidance provided by Statement of
Financial Account Standard ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The provisions of
this statement establish when an impairment loss should be recognized and how it
should be measured.
Income Taxes
Deferred income taxes reflect the temporary tax consequences on future years of
differences between the tax basis and financial statement amounts of assets and
liabilities at each year-end.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
An effective tax rate of 35% is used to determine after-tax components of other
comprehensive income included in the statements of stockholders' equity.
65
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Business Combinations
Business combinations, which have been accounted for under the purchase method
of accounting, include the results of operations of the acquired business from
the date of acquisition. Net assets of the companies acquired were recorded at
their estimated fair value as of the date of acquisition.
Intangibles
The excess of the purchase price over the net identifiable tangible assets
acquired in purchase business combinations is recorded as goodwill. Goodwill
relating to The Leader acquisition is being amortized over a twenty-year period.
Goodwill relating to First Insurance & Investments is being amortized over a
fifteen-year period. Amounts paid for non-compete and employment agreements in
conjunction with the acquisition of The Leader have been capitalized and are
being amortized over the life of the agreements. On a periodic basis, management
reviews goodwill and other intangible assets to determine if events or changes
in circumstances indicate the carrying value of such assets is not recoverable,
in which case an impairment charge would be recorded.
Accounting for Derivative Instruments and Hedging Activities
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, requires all derivative instruments to be carried at fair value on the
balance sheet. The Statement continues to allow derivative instruments to be
used to hedge various risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. The Statement also provides for
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are to be recognized in earnings as they occur.
66
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
On January 1, 2001, First Defiance adopted the Statement. After-tax adjustments
associated with establishing the fair values of derivative instruments on the
balance sheet reduced net income by approximately $11,000. The transition
amounts were determined based on the interpretive guidance issued by the
Financial Accounting Standards Board to date. The FASB continues to issue
interpretive guidance which could require changes in First Defiance's
application of the Statement and adjustments to the transition amount.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
--------------------------------------------
(In thousands, except per share amounts)
Numerator for basic and diluted earnings
per share-net income $ 10,963 $ 8,623 $ 3,111
============================================
Denominator:
Denominator for basic earnings per
share-weighted-average shares 6,318 6,502 7,491
Effect of dilutive securities:
Employee stock options 39 113 223
Unvested Management Recognition
Plan stock 66 85 97
--------------------------------------------
Dilutive potential common shares 105 198 320
--------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted-average shares 6,423 6,700 7,811
============================================
Basic earnings per share $ 1.74 $ 1.33 $ .42
============================================
Diluted earnings per share $ 1.71 $ 1.29 $ .40
============================================
67
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
4. Investment Securities
The following is a summary of available-for-sale and held-to-maturity
securities:
December 31, 2000
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
---------------------------------------------------------
(In thousands)
U.S. Treasury securities and obligations
of U.S. Government corporations and agencies
$ 17,672 $ 263 $ 1 $ 17,934
Corporate bonds 11,797 97 10 11,884
Adjustable rate mortgage-backed security mutual funds
6,606 -- 238 6,368
Adjustable rate mortgage-backed securities 2,200 5 -- 2,205
REMICs 1,519 16 -- 1,535
Collateralized mortgage obligations 4,948 12 25 4,935
Trust preferred stock 2,000 -- 135 1,865
Equity securities 343 89 -- 432
Obligations of state and political subdivisions 6,066 37 85 6,018
---------------------------------------------------------
Totals $ 53,151 $ 519 $ 494 $ 53,176
=========================================================
Held-to-Maturity Securities
FHLMC certificates $ 2,670 $ 27 $ 18 $ 2,679
FNMA certificates 3,009 19 77 2,951
GNMA certificates 1,249 18 3 1,264
Obligations of states and political subdivisions 769 107 - 876
---------------------------------------------------------
Totals $ 7,697 $ 171 $ 98 $ 7,770
=========================================================
68
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
4. Investment Securities (continued)
December 31, 1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
---------------------------------------------------------
(In thousands)
U.S. Treasury securities and obligations
of U.S. Government corporations and agencies $ 16,778 $ - $ 404 $ 4
Corporate bonds 14,865 - 119 6
Adjustable rate mortgage-backed security mutual funds 8,981 - 319 2
REMICs 1,807 - 22 5
Collateralized mortgage obligations 5,185 12 94 3
Trust preferred stock 2,000 - 408 2
Equity securities 343 - 42 1
Obligations of state and political subdivisions 5,646 - 263 3
---------------------------------------------------------
Totals $ 55,605 $ 12 $ 1,671 $ 6
=========================================================
Held-to-Maturity Securities
FHLMC certificates $ 3,416 $ 35 $ 8 $ 3
FNMA certificates 4,075 26 114 7
GNMA certificates 1,506 28 3 1
Obligations of states and political subdivisions 898 94 - 2
---------------------------------------------------------
Totals $ 9,895 $ 183 $ 125 $ 3
=========================================================
The amortized cost and fair value of securities at December 31, 2000 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Mutual funds are not
due at a single maturity date. For purposes of the maturity table,
mortgage-backed securities, which are not due at a single maturity date, have
been allocated over maturity groupings based on the weighted-average contractual
maturities of the underlying collateral. The mortgage-backed securities may
mature earlier than their weighted-average contractual maturities because of
principal prepayments.
69
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
4. Investment Securities (continued)
Available-for-Sale Held-to-Maturity
---------------------------- --------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------------------------- --------------------------
(In thousands)
Due in one year or less $ 2,500 $ 2,501 $ 160 $ 164
Due after one year through
five years 31,759 32,132 699 738
Due after five years through
ten years 6,518 6,455 395 463
Due after ten years 5,425 5,288 6,443 6,405
-------------------------------------------------------
46,202 46,376 7,697 7,770
Adjustable rate mortgage-
backed security mutual
funds
6,606 6,368 -- --
Equity securities 343 432 -- --
-------------------------------------------------------
Totals $53,151 $53,176 $ 7,697 $ 7,770
=======================================================
5. Loan Commitments and Delinquencies
Loan commitments are made to accommodate the financial needs of First Defiance's
customers. The associated credit risk is essentially the same as that involved
in extending loans to customers and is subject to First Defiance's normal credit
policies. Collateral such as mortgages on property and equipment, receivables
and inventory is obtained based on management's credit assessment of the
customer. At December 31, 2000, First Defiance's outstanding commitments to fund
long-term mortgage loans amounted to approximately $3.5 million comprised of
approximately 97% fixed rate and 3% adjustable rate loans with rates ranging
from 6.75% to 9.50%. First Defiance's commitment to sell long-term mortgage
loans amounted to $190.1 million as of December 31, 2000. First Defiance's
maximum exposure to credit loss for loan commitments (unfunded loans, unused
lines of credit and letters of credit) was $84.2 million at December 31, 2000.
70
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
5. Loan Commitments and Delinquencies (continued)
Unpaid balances of mortgage and installment loans with contractual payments
delinquent 90 days or more totaled $9.5 million at December 31, 2000 and $13.8
million at December 31, 1999. First Federal does not anticipate any significant
losses in the collection of these delinquent loans in excess of the allowance
for loan losses.
Impaired loans having recorded investments of $95,000 at December 31, 2000 and
$570,000 at December 31, 1999 have been recognized in conformity with FASB
Statement No. 114, as amended by FASB Statement No. 118. The average recorded
investment in impaired loans during 2000 and 1999 was $135,000 and $570,000,
respectively. The total allowance for loan losses related to these loans was
$95,000 and $402,000 at December 31, 2000 and 1999. There was no interest
received and recorded in income during 2000 on impaired loans including interest
received and recorded in income prior to such impaired loan designation. The
amounts recorded in 1999 and 1998 were $36,000 and $155,000, respectively.
Loans having carrying values of $600,000 and $2.5 million were transferred to
real estate and other assets held for sale in 2000 and 1999, respectively.
First Defiance is not committed to lend additional funds to debtors whose loans
have been modified.
71
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Loans Receivable
December 31
2000 1999
---------------------------
(In thousands)
Loans receivable consist of the following at December 31:
Real estate loans:
Secured by single family residences $209,645 $220,390
Secured by multi-family residences 44,700 21,502
Secured by non-residential real estate 125,479 2,156
Construction 9,627 7,808
--------------------------
389,451 251,856
Other loans:
Automobile 43,610 55,673
Mobile home 29 46
Commercial 81,138 138,125
Home equity and improvement 31,836 22,781
Other 8,504 8,653
--------------------------
165,117 225,278
--------------------------
Total loans 554,568 477,134
Deduct:
Undisbursed loan funds 3,415 3,291
Net deferred loan origination fees and costs 1,041 764
Allowance for loan losses 8,904 7,758
--------------------------
Totals $541,208 $465,321
==========================
Prior to December 31, 2000, certain loans secured by commercial real estate were
reported with commercial loans rather than with non-residential real estate
loans.
72
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Loans Receivable (continued)
Changes in the allowance for mortgage and other loan losses were as follows:
Year Ended December 31
2000 1999 1998
--------------------------------------------
(In thousands)
Balance at beginning of year $ 7,758 $ 9,789 $ 2,686
Charge-offs (2,581) (4,235) (2,080)
Recoveries 580 279 220
--------------------------------------------
Net charge-offs (2,001) (3,956) (1,860)
Acquired allowance of The Leader -- -- 1,194
Provision charged to income 3,147 1,925 7,769
--------------------------------------------
Balance at end of year $ 8,904 $ 7,758 $ 9,789
============================================
Interest income on mortgage and other loans is as follows:
Year Ended December 31
2000 1999 1998
-----------------------------------------------
(In thousands)
Mortgage loans $ 35,731 $ 32,453 $ 28,695
Other loans 24,651 17,474 14,674
-----------------------------------------------
Totals $ 60,382 $ 49,927 $ 43,369
===============================================
73
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
7. Mortgage Banking
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows:
Year Ended December 31
2000 1999 1998
------------------------------------
(In thousands)
Balance at beginning of period $ 97,519 $ 76,452 $ 188
Acquired in purchase of The Leader -- -- 65,804
Loans sold, servicing retained 52,225 35,909 12,428
Purchased MSRs -- -- 3,417
Proceeds from sale of MSRs -- (2,610) --
Gain on sale of MSRs -- 479 --
Amortization of MSRs (14,984) (12,711) (5,385)
-----------------------------------
Balance at end of period $ 134,760 $ 97,519 $ 76,452
===================================
Accumulated amortization of MSRs aggregated approximately $32.4 million, $17.5
million, and $5.4 million at December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, the estimated fair value of the MSRs was $184.9 million,
as determined using a mortgage servicing rights valuation model.
The Company's servicing portfolio (excluding subserviced loans) is comprised of
the following:
December 31
2000 1999
---------------------------------- -------------------------------
Number of Principal Number of Principal
Loans Outstanding Loans Outstanding
-------------------------------------------------------------------
(Dollars in thousands)
GNMA 85,379 $ 5,885,531 66,587 $ 4,292,854
FNMA 13,463 874,399 11,572 725,372
FHLMC 2,504 115,296 2,463 103,618
Other VA, FHA, and conventional loans 22,762 1,115,594 16,069 917,219
-------------------------------------------------------------------
Totals 124,108 $ 7,990,820 96,691 $ 6,039,063
===================================================================
74
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
7. Mortgage Banking (continued)
The components of mortgage banking income, net of amortization are as follows:
Year Ended December 31
2000 1999 1998
---------------------------------------
(In thousands)
Loan servicing fee income $ 31,869 $ 25,040 $ 10,697
Late charges 4,260 3,116 1,374
---------------------------------------
Total mortgage banking income 36,129 28,156 12,071
Gain on sale of loans 9,546 7,081 3,405
Gain on sale of MSRs - 479 -
Amortization of MSRs (14,984) (12,711) (5,385)
---------------------------------------
Totals $ 30,691 $ 23,005 $ 10,091
=======================================
8. Premises and Equipment
Premises and equipment are summarized as follows:
December 31
2000 1999
--------------------------
(In thousands)
Cost:
Land $ 2,771 $ 2,570
Buildings 15,602 14,774
Leasehold improvements 851 466
Furniture, fixtures and equipment 10,945 9,309
Construction in process 82 331
--------------------------
30,251 27,450
Less allowances for depreciation and
amortization 8,048 6,139
--------------------------
$ 22,203 $ 21,311
==========================
75
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
8. Premises and Equipment (continued)
There was no interest capitalized on construction projects during 2000.
Approximately $22,300 was capitalized during 1999.
The Leader leases office space from a partnership whose controlling partners
include officers of The Leader. The five-year lease agreement provides for
annual base rents of $436,000 plus additional rents based on increases in
operating expenses and taxes. There were no outstanding amounts payable under
the lease agreement as of December 31, 2000.
9. Deposits
The following schedule sets forth interest expense by type of savings deposit:
Years Ended December 31
2000 1999 1998
---------------------------------
(In thousands)
Checking and money market accounts $ 3,361 $ 2,180 $ 1,770
Savings accounts 740 879 1,096
Certificates 21,400 16,852 15,486
---------------------------------
25,501 19,911 18,352
Less interest capitalized -- 22 12
---------------------------------
Totals $ 25,501 $ 19,889 $ 18,340
=================================
At December 31, 2000, accrued interest payable amounted to $980,000 which was
comprised of $889,000, $88,000 and $3,000 for certificates, checking and money
market accounts, and savings accounts, respectively.
76
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
9. Deposits (continued)
A summary of deposit balances is as follows:
December 31
2000 1999
------------------------
(In thousands)
Savings accounts $ 37,551 $ 49,217
Checking accounts 65,901 51,969
Money market demand accounts 78,961 46,692
Certificates of deposit 363,486 355,091
-------------------------
$ 545,899 $ 502,969
=========================
Scheduled maturities of certificates of deposit are as follows:
December 31,
2000
---------------
(In thousands)
2001 $ 319,301
2002 36,250
2003 4,736
2004 1,531
2005 1,165
2006 and thereafter 503
---------------
Total $ 363,486
===============
At December 31, 2000 and 1999, deposits of $98.9 million and $125.0 million,
respectively, were in excess of the $100,000 Federal Deposit Insurance
Corporation limit. At December 31, 2000 and 1999, $20.2 million and $20.9
million, respectively, in investment securities were pledged as collateral
against public deposits for certificates in excess of $100,000.
77
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
10. Advances from Federal Home Loan Bank
First Federal has the ability to borrow funds from the FHLB. First Federal
pledges its single-family residential mortgage loan portfolio and certain
securities in its investment portfolio as security for these advances. At
December 31, 2000, the total available for collateral amounted to approximately
$315.9 million. Advances secured by mortgages must have collateral to exceed
borrowings by 135%. Advances secured by investment securities must have 100%
collateral. The total level of borrowing is also limited to 50% of total assets.
First Federal has a maximum potential to acquire advances of approximately
$234.1 million from the FHLB.
The FHLB has made a series of advances totaling $65.0 million to First Defiance
that have a fixed maturity dates but are callable at the option of the FHLB on a
specified date and quarterly thereafter. The terms of these advances are as
follows (in thousands):
Balance Interest Rate Call Date Maturity Date
-------------------------------------------------------------------
$ 10,000 4.70% 12/18/03 12/18/08
15,000 5.64% 03/18/01 10/26/09
10,000 5.84% 03/01/01 09/01/10
20,000 5.83% 04/20/01 10/20/05
10,000 5.95% 05/07/01 11/07/05
When called, First Defiance has the option of paying off these advances, or
converting them to variable rate advances priced at the three month LIBOR rate.
First Defiance has an additional $50.0, million of advances which have been
called by the FHLB and which have been converted to three month LIBOR advances.
First Defiance can prepay these advances on the quarterly repricing dates.
First Defiance has an additional $1.8 million outstanding on a series of
fixed-rate long-term advances taken out during 1992 and a long-term fixed rate
advance under the FHLB Affordable Housing Program in 1995. The total FHLB
long-term advances bear a weighted average interest rate of 6.06% at December
31, 2000.
78
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
10. Advances from Federal Home Loan Bank (continued)
Future minimum payments by fiscal year are as follows:
(In thousands)
--------------
2001 $ 7,520
2002 7,192
2003 7,082
2004 36,952
2005 34,762
Thereafter 69,892
--------------
Total minimum payments 163,400
Less amounts representing interest 46,642
--------------
Totals $ 116,758
==============
First Defiance also utilizes short-term advances from the FHLB to meet cash flow
needs and for short-term investment purposes. There were $106.5 million in
short-term advances outstanding at December 31, 2000 ($78.0 million at December
31, 1999). First Defiance borrows short-term advances under a variety of
programs. At December 31, 2000, $106.5 million was outstanding under First
Defiance's REPO Advance line of credit. The total available under the REPO line
is $175.0 million. Amounts are generally borrowed under the REPO line on an
overnight basis. Other advances may be borrowed under the FHLB's short-term
fixed rate or LIBOR based programs, however there were no outstanding balances
at December 31, 2000. Information concerning short-term advances is summarized
as follows:
Year Ended December 31
2000 1999
--------------------------
(Dollars in thousands)
Average balance during the year $ 72,384 $ 88,247
Maximum month-end balance during the year 140,250 136,250
Average interest rate during the year 6.53% 5.29%
79
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
11. Notes Payable
Total mortgage warehouse, revolving and term debt is summarized as follows:
December 31
2000 1999
----------------------------
(In thousands)
Mortgage warehouse and revolving loans:
$150,000 uncommitted repurchase line of credit
with a bank, secured by mortgage loans held for sale,
interest at federal funds rate plus 0.40% (6.93% at
December 31, 2000); $119,384 available at December 31, 2000 $ 30,616 $ --
$75,000 committed revolving warehouse loan agreement
with a bank ($160,000 with several banks in 1999) secured by
mortgage loans held for sale, interest at lower of LIBOR plus
1.00% or federal funds rate plus 1.25% (7.563% at December
2000); $3,338 available at December 31, 2000 71,662 47,043
$5,000 revolving line of credit facility, secured by investment
securities, interest at 10 day LIBOR plus 1.30%; (7.875%
at December 31, 2000) $3,000 available at December 31, 2000 2,000 --
$10,000 revolving line of credit facility, unsecured, interest at 90 day
LIBOR plus 1.30% (7.995% at December 31, 2000), $0 available at
December 31, 2000 10,000 --
-------------------------
Total mortgage warehouse and revolving loans 114,278 47,043
Term notes payable:
Industrial Development Revenue Bonds payable to Cuyahoga County,
secured by real estate and a letter of credit, interest is
calculated using a tax exempt rate applicable for the prescribed
adjustment period, currently weekly. During 2000 the interest
rate ranged from 2.90% to 5.25%. The issue matures March 1, 2019 4,890 5,025
Notes payable to the City of Cleveland, recorded at discounted
value, secured by real estate with interest at 0% per annum
Balance due at maturity on March 1, 2009 is $928,450 569 569
Note payable to City of Cleveland Housing Trust Fund, secured
by real estate, interest at 2% per annum, maturing March 1, 2009 392 498
Note payable to bank, secured by real estate, interest at 7% per
annum, maturing March 1, 2019 71 82
Note payable to related party, unsecured with interest at 5%
per annum, maturing October 1, 2004 139 169
Note payable to bank, secured by business assets, interest at
7.5% per annum, maturing March 1, 2003 86 118
-------------------------
Total term notes payable 6,147 6,461
-------------------------
Total borrowed money $120,425 $ 53,504
==========================
80
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
11. Notes Payable (continued)
As of December 31, 2000 the maturities of term notes payable during the next
five years and thereafter are as follows (in thousands):
2001 $ 224
2002 239
2003 230
2004 253
2005 233
Thereafter 4,968
--------------
$ 6,147
==============
12. Postretirement Benefits
First Federal sponsors a defined benefit postretirement plan that is intended to
supplement Medicare coverage for certain retirees who meet minimum years of
service requirements. Persons who retired prior to April 1, 1997 who completed
20 years of service after age 40 receive full medical coverage at no cost. Such
coverage continues for surviving spouses of those participants for one year,
after which coverage may be continued provided the spouse pays 50% of the
average cost. Persons retiring after April 1, 1997 are provided medical benefits
at a cost based on their combined age and years of service at retirement.
Surviving spouses are also eligible for continued coverage after the retiree is
deceased at a subsidy level that is 10% less than what the retiree is eligible
for. Persons who retired before July 1, 1997 receive dental and vision care in
addition to medical coverage. Persons who retire after July 1, 1997 are not
eligible for dental or vision care, but those retirees and their spouses each
receive up to $200 annually in a medical spending account. Funds in that account
may be used for payment of uninsured medical expenses.
81
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. Postretirement Benefits (continued)
The plan is not currently funded. The following table summarizes benefit
obligation and asset activity for the plan:
December 31
2000 1999
-----------------------
(In thousands)
Change in fair value of plan assets:
Balance at beginning of measurement period $ -- $ --
Employer contribution 67 55
Participant contribution 4 4
Benefits paid (71) (59)
---------------------
Balance at end of measurement period -- --
Change in benefit obligation:
Balance at beginning of measurement period 752 852
Service cost 34 34
Interest costs 47 45
Participant contribution 4 4
Actuarial losses (gains) 23 (125)
Benefits paid (71) (58)
---------------------
Balance at end of measurement period 789 752
---------------------
Funded status 789 752
Unrecognized prior service cost (47) (51)
Unrecognized net gain 111 137
---------------------
Accrued postretirement benefit obligation
included in accrued interest and other expenses
in consolidated statement of financial condition $ 853 $ 838
=====================
82
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. Postretirement Benefits (continued)
Net periodic postretirement benefit cost includes the following components:
Year Ended December 31
2000 1999 1998
---------------------------------
(In thousands)
Service cost-benefits attributable to service
during the period $ 34 $ 34 $ 40
Interest cost on accumulated postretirement
benefit obligation 47 45 55
Net amortization and deferral 1 -- 11
---------------------------------
Net periodic postretirement benefit cost $ 82 $ 79 $106
=================================
For measurement purposes, 4.25% annual rates of increase in the per capita cost
of covered health care benefits were assumed for 2000, 1999 and 1998. The health
care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by 1
percentage point for each year would increase the accumulated postretirement
benefit obligation as of December 31, 2000 by $156,000 and the aggregate of the
service and interest cost for the year then ended by $20,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% for 2000, 1999 and 1998.
13. Regulatory Matters
First Defiance and First Federal are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the consolidated financial statements. Under capital
guidelines and the regulatory framework for prompt corrective action, First
Federal must meet specific capital guidelines that involve quantitative measures
of First Federal's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. First Federal's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
83
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
13. Regulatory Matters (continued)
Quantitative measures established by regulation to ensure capital adequacy
require First Federal to maintain minimum amounts and ratios of Tier I and total
capital to risk-weighted assets and of Tier I capital to average assets. As of
December 31, 2000 and 1999, First Federal meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Office of Thrift Supervision categorized
First Federal as well capitalized under the regulatory framework.
The following schedule presents First Federal's regulatory capital ratios:
Regulatory Capital Standards
----------------------------------------------------------
Actual Required
------------------------ ------------------------
Amount Ratio Amount Ratio
----------------------------------------------------------
(Dollars in thousands)
As of December 31, 2000:
Tangible Capital $ 62,569 6.10% $ 15,381 1.5%
Core Capital 62,569 6.10% 41,016 4.0%
Risk-Based Capital 71,210 10.28% 55,410 8.0%
As of December 31, 1999:
Tangible Capital $ 51,641 5.41% $ 14,312 1.5%
Core Capital 51,641 5.41% 38,165 4.0%
Risk-Based Capital 57,594 10.09% 45,668 8.0%
84
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes
The components of income tax expense are as follows:
Years Ended December 31
2000 1999 1998
--------------------------------------
(In thousands)
Current:
Federal $ 6,077 $ 4,571 $ 3,584
State -- -- 19
Deferred (credit) (163) 58 (1,785)
--------------------------------------
$ 5,914 $ 4,629 $ 1,818
======================================
The provision for income taxes differs from that computed at the statutory
corporate tax rate as follows:
Years Ended December 31
2000 1999 1998
-------------------------------------------
(In thousands)
Tax expense at statutory rate $ 5,906 $ 4,507 $ 1,676
Increases (decreases) in taxes from:
Goodwill amortization 256 249 96
State income tax,net of federal tax benefit -- -- 13
Tax exempt interest income (119) (103) (84)
Other (129) (24) 117
-------------------------------------------
Totals $ 5,914 $ 4,629 $ 1,818
===========================================
85
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of First Defiance's deferred federal income tax assets and
liabilities are as follows:
December 31
2000 1999
------------------------
(In thousands)
Deferred federal income tax assets:
Net unrealized losses on available-for-sale securities $ 22 $ 565
Allowance for loan losses 3,227 2,518
Postretirement benefit costs 299 285
Deferred compensation and management recognition plans 723 757
State income tax 22 23
Other 167 224
------------------------
Total deferred federal income tax assets 4,460 4,372
Deferred federal income tax liabilities:
Mortgage servicing rights 5,081 5,114
FHLB stock dividends 1,423 1,019
Deferred loan origination fees and costs (net) 116 134
Fixed assets 358 243
Other 93 94
------------------------
Total deferred federal income tax liabilities 7,071 6,604
------------------------
Net deferred federal income tax liability $ (2,611) $ (2,232)
========================
No valuation allowance was required at December 31, 2000 or 1999.
86
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Income Taxes (continued)
Retained earnings at December 31, 2000 include financial statement tax bad debt
reserves of $10.14 million. The Small Business Job Protection Act of 1996 passed
on August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of First Federal's reserve over its base year reserve as of December 31,
1987. The recapture tax is due in six equal annual installments beginning after
December 31, 1996. However, deferral of those payments was permitted for up to
two years, contingent upon satisfying a specified mortgage origination test for
1997 and 1998 (which was met). At December 31, 2000, First Federal had $623,000
in excess of the base year reserves. Deferred taxes have been provided related
to this item. No provision is required to be made for the $9.52 million of base
year reserves.
15. Employee Benefit Plans
Employees of First Defiance are eligible to participate in the First Defiance
Financial Corp. 401(k) Employee Savings Plan ("First Defiance 401(k)") if they
meet certain age and service requirements. Under the First Defiance 401(k),
First Defiance matches 50% of the participants' contributions, to a maximum of
3% of compensation. The First Defiance 401(k) also provides for a discretionary
First Defiance contribution in addition to the First Defiance matching
contribution. For the year ended December 31, 2000, First Defiance's matching
contribution was $274,000 and the discretionary company contribution was
$709,000. For the year ended December 31, 1999, First Defiance's matching
contribution was $171,000 and the discretionary company contribution was
$419,000. For the year ended December 31, 1998, First Defiance's matching
contribution was $92,400 and there was no discretionary company contribution.
87
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
15. Employee Benefit Plans (continued)
The Leader sponsored The Leader Mortgage Company Savings and Investment Plan and
Trust ("The Leader 401(k)"). All employees of The Leader who met certain age and
eligibility requirements were eligible to participate. The Leader matched
employee contributions to The Leader 401(k) 100% up to federally prescribed
limits. Matching contributions to The Leader 401(k) from January 1, 1999 to
March 31, 1999 amounted to $70,000. Effective April 1, 1999, The Leader 401(k)
was merged into the First Defiance 401(k), with all assets and liabilities of
The Leader 401(k) becoming assets and liabilities of the First Defiance 401(k).
First Insurance and Investments sponsored the Stauffer-Mendenhall Agency
Employees Retirement Savings Plan. ("First Insurance 401(k)"). All employees who
met certain age and eligibility requirements were eligible to participate. First
Insurance matched employee contributions to the First Insurance 401(k) 10% up to
federally prescribed limits. Matching contributions to the First Insurance
401(k) from January 1, 1999 to September 30, 1999 amounted to $3,000. Effective
October 1, 1999, the First Insurance 401(k) was merged into the First Defiance
401(k), with all assets and liabilities of the First Insurance 401(k) becoming
assets and liabilities of the First Defiance 401(k).
First Defiance also has established an Employee Stock Ownership Plan ("ESOP")
covering all employees of First Defiance age 21 or older who have at least one
year of credited service. Contributions to the ESOP are made by First Defiance
and are determined by First Defiance's Board of Directors at their discretion.
The contributions may be made in the form of cash or First Defiance common
stock. The annual contributions may not be greater than the amount deductible
for federal income tax purposes and cannot cause First Federal to violate
regulatory capital requirements.
To fund the plan, the ESOP borrowed funds from First Defiance for the purpose of
purchasing shares of First Defiance common stock. The ESOP acquired a total of
863,596 shares in 1993 and 1995. The loan outstanding at December 31, 2000 was
$4,008,000. Principal and interest payments on the loan are due in equal
quarterly installments through June of 2008. The loan is collateralized by the
shares of First Defiance's common stock and is repaid by the ESOP with funds
from the Company's contributions to the ESOP, dividends on unallocated shares
and earnings on ESOP assets.
88
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
15. Employee Benefit Plans (continued)
As principal and interest payments on the loan are paid, shares are released
from collateral and committed for allocation to active employees, based on the
proportion of debt service paid in the year. Shares held by the ESOP which have
not been released for allocation are reported as stock acquired by the ESOP in
the statement of financial condition. As shares are released, First Defiance
records compensation expense equal to the average fair value of the shares over
the period in which the shares were earned. Also, the shares released for
allocation are included in the average shares outstanding for earnings per share
computations. Dividends on allocated shares are recorded as a reduction of
retained earnings and dividends on unallocated shares are recorded as additional
ESOP expense. ESOP compensation expense was $328,000, $470,000 and $579,000 for
2000, 1999 and 1998, respectively. As of December 31, 2000, 499,433 ESOP shares
have been released for allocation of which 487,235 were allocated to
participants. The 364,163 unreleased shares have a fair value of $4.0 million at
December 31, 2000.
The Shareholders of First Defiance approved and established Management
Recognition Plans ("MRP") in 1993 and 1996 to provide directors, officers and
employees with a proprietary interest in First Defiance as incentive to
contribute to its success. Cash was contributed to the MRP in the form of
deferred compensation amounting to $800,000 in 1993 and $2,817,452 in 1996. The
$800,000 contributed in 1993 was used to purchase 172,722 shares of First
Defiance common stock. All shares acquired in 1993 were granted on July 19,
1993. A total of 255,876 of the shares acquired in 1996 have been granted as of
December 31, 2000, not including 46,877 shares forfeited by participants who
terminated before their shares vested. The shares vest at a rate of 20% per year
over five years. First Defiance is amortizing the deferred compensation and
recording additions to stockholder's equity as the shares vest. Compensation
expense attributable to the MRP amounted to $255,000, $385,000 and $545,000 in
2000, 1999 and 1998 respectively.
First Federal had previously sponsored a defined benefit pension plan that
covered substantially all First Federal employees. During 1997, First Federal
amended the plan to eliminate all benefits for future service in connection with
a termination of the plan, which occurred in 1998. In conjunction with the
termination of the plan, all accumulated plan benefits became fully vested and
were distributed to participants in August, 1998.
89
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
16. Stock Option Plans
First Defiance has established incentive stock option plans for its directors
and its employees and has reserved 1,033,485 shares of common stock for issuance
under the plans. A total of 773,204 shares are reserved for employees and
260,281 shares are reserved for directors. As of December 31, 2000, 787,888
options (595,217 for employees and 192,671 for directors) have been granted and
remain outstanding at option prices based on the market value of the underlying
shares on the date the options were granted. There are 196,703 options granted
under the 1993 plan that are currently exercisable while there are 591,185
options granted under the 1996 plan that vest at 20% per year beginning in 1997.
All options expire ten years from date of grant. Vested options of retirees
expire on the earlier of the scheduled expiration date or five years after the
retirement date for the 1993 plan and on the earlier of the scheduled expiration
date or twelve months after the retirement date for the 1996 plan.
FASB Statement No. 123, Accounting for Stock-Based Compensation, defines a fair
value-based method of accounting for stock-based employee compensation plans.
Under the fair value-based method, compensation cost is measured at the grant
date based upon the value of the award and is recognized over the service
period. While the standard encourages entities to adopt this method of
accounting for employee stock compensation plans, it also allows an entity to
continue to measure compensation costs for its plans as prescribed in APB
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. First
Defiance has elected to continue to apply APB 25.
The following pro forma information regarding net income and earnings per share
assumes the adoption of Statement No. 123 for stock options. The estimated fair
value of the option is amortized to expense over the option and vesting period.
The fair value was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
December 31
2000 1999 1998
---------------------------------------------
Risk free interest rate 6.00% 5.56% 5.92%
Dividend yield 4.80% 2.49% 2.70%
Volatility factors of expected market
price of stock 0.281% 0.267% 0.282%
Weighted average expected life 7.48 years 7.49 years 8.15 years
Weighted average grant date fair value
of options granted $ 3.47 $ 3.48 $ 3.38
90
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
16. Stock Option Plans (continued)
Based upon the above assumptions, pro forma net income and earnings per share
are as follows:
Years Ended December 31
2000 1999 1998
----------------------------------------
Pro forma net income $ 10,616 $ 8,310 $ 2,815
========================================
Pro forma earnings per share:
Basic $ 1.68 $ 1.28 $ .38
========================================
Diluted $ 1.65 $ 1.25 $ .36
========================================
The pro forma effects for 2000, 1999, and 1998 are not likely to be
representative of the pro forma effects for future years.
Because Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, options granted prior to December 31, 1994 do not have fair
value pro forma information provided.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
First Defiance's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
91
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
16. Stock Option Plans (continued)
The following table summarizes stock option activity for 2000 and 1999:
2000 1999
---------------------------------------- -------------------------------------
Range of Range of
Option Option Option Option
Shares Prices Shares Prices
-------------------------------------------------------------------------------
Outstanding at January 1 871,426 $4.63 to $15.50 929,247 $4.63 to $15.50
Granted 2,543 $8.25to $10.516 49,386 $11.25 to $11.75
Exercised (80,081) $ 4.63 (55,219) $4.63 to $10.50
Expired or canceled (6,000) $10.50 to $15.50 (51,988) $10.50 to $15.50
-------------------------------------------------------------------------------
Outstanding at December 31 787,888 $4.63 to $15.50 871,426 $4.63 to $15.50
===============================================================================
Exercisable to:
2001 500 $11.75 26,209 $4.63 to $10.6575
2002 26,000 $ 4.63 26,000 $4.63
2003 53,697 $ 4.63 110,569 $4.63
2004 21,590 $ 6.95 21,590 $6.95
2006 430,504 $10.375 to $10.6875 430,504 $10.375 to $10.687
2007 68,966 $12.625 to $13.00 68,966 $12.625 to $13.00
2008 137,202 $12.25 to $15.50 138,202 $12.25 to $15.50
2009 46,886 $11.25 to $11.75 49,386 $11.25 to $11.75
2010 2,543 $8.25 to $10.516
-------------------------------------------------------------------------------
787,888 $4.63 to $15.50 871,426 $4.63 to $15.50
===============================================================================
Available for future grant
at December 3l 14,364 10,907
===============================================================================
17. Parent Company and Regulatory Restrictions
Dividends paid by First Federal to First Defiance are subject to various legal
and regulatory restrictions. First Federal can initiate dividend payments in
2000, without prior regulatory approval, of $8.5 million, plus an additional
amount equal to its net profits for 2000, as defined by statute, up to the date
of any such dividend declaration. Dividends of $750,000 were declared in 2000.
92
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
17. Parent Company and Regulatory Restrictions (continued)
Condensed parent company financial statements, which include transactions with
subsidiaries, follow:
December 31
Statements of Financial Condition 2000 1999
------------------------
(In thousands)
Assets
Cash and cash equivalents $ 1,056 $ 137
Investment securities, available for sale,
carried at fair value 106 67
Premises and equipment -- 552
Investment in subsidiaries 110,237 85,684
Loan receivable from ESOP 4,008 4,357
Other assets 102 111
-------------------------
Total assets $ 115,509 $ 90,908
=========================
Liabilities and stockholders' equity
Notes payable $ 15,000 $ --
Accrued liabilities 1,036 1,492
Stockholders' equity 99,473 89,416
-------------------------
Total liabilities and stockholders' equity $ 115,509 $ 90,908
=========================
93
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
17. Parent Company and Regulatory Restrictions (continued)
Year Ended December 31
2000 1999 1998
------------------------------------
(In thousands)
Statements of income
Interest on subordinated debt $ -- $ 895 $ 1,063
Interest on loan to ESOP 362 392 419
Interest expense on notes payable (624) (5) --
Other income 20 25 --
Noninterest expense (629) (758) (350)
------------------------------------
Income (loss) before income
taxes and equity in earnings (871) 549 1,132
of subsidiaries
Income tax expense (credit) (316) 343 399
------------------------------------
Income (loss) before equity in
earnings of subsidiaries (555) 206 733
Equity in earnings of subsidiaries 11,518 8,417 2,378
------------------------------------
Net income $ 10,963 $ 8,623 $ 3,111
====================================
94
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
17. Parent Company and Regulatory Restrictions (continued)
Year Ended December 31
2000 1999 1998
-------------------------------------------------
(In thousands)
Statements of cash flows Operating activities:
Net income $ 10,963 $ 8,623 $ 3,111
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for depreciation 6 7 --
(Gain) loss on sale of office properties and equipment (6) 29 --
Deferred federal income taxes (credit) 28 (19) (86)
Equity in earnings of subsidiaries (11,518) (8,417) (2,378)
Dividends received from subsidiary 750 -- 20,000
Change in other assets and liabilities (563) 825 (8,401)
----------------------------------------------
Net cash (used in) provided by operating activities (340) 1,048 12,246
Investing activities:
Loan to subsidiary -- -- (20,000)
Proceeds from sale of office properties and equipment 569 416 --
Principal payments received for subordinated debt -- 22,400 27,600
Purchase of Insurance Center of Defiance -- -- (50)
Principal payments received on ESOP loan 349 321 294
Purchase of available-for-sale securities -- (70) --
Purchase of premises and equipment (17) (1,004) --
----------------------------------------------
Net cash provided by investing activities 901 22,063 7,844
Financing activities:
Proceeds from short term notes payable 15,000 -- --
Stock options exercised 470 417 868
Purchase of common stock for treasury (328) (10,394) (18,073)
Capital contribution to subsidiaries (11,952) (11,080) --
Cash dividends paid (2,832) (2,692) (2,781)
----------------------------------------------
Net cash provided by (used in) financing activities 358 (23,749) (19,986)
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 919 (638) 104
Cash and cash equivalents at beginning of year 137 775 671
----------------------------------------------
Cash and cash equivalents at end of year $ 1,056 $ 137 $ 775
==============================================
Non cash operating activities--change in deferred taxes
on net unrealized gains (losses) on available-for-sale securities $ (13) $ 1 $ --
==============================================
Non cash investing activities--change in
net unrealized gain (loss) on available-for-sale securities $ 39 $ (3) $ --
==============================================
Non cash financing activities--cash
dividends declared but not paid $ 778 $ 703 $ 710
==============================================
95
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
18. Fair Value Statement of Consolidated Financial Condition
The following is a comparative condensed consolidated statement of financial
condition based on carrying and estimated fair values of financial instruments
as of December 31, 2000 and 1999. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of First Defiance.
December 31, 2000 December 31, 1999
------------------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Value Fair Values Value Fair Values
---------------------------------------------------------------------
(In thousands)
Assets:
Cash and cash equivalents $ 20,954 $ 20,954 $ 16,236 $ 16,236
Investment securities 61,107 61,180 93,646 93,704
Loans, net 773,522 766,476 702,943 699,987
---------------------------------------------------------------------
855,583 $ 848,610 812,825 $ 809,927
============ =============
Other assets 216,611 175,169
---------------- ----------
Total assets $ 1,072,194 $ 987,994
================ ==========
Liabilities and stockholders'
equity:
Deposits $ 545,899 $ 545,607 $ 502,969 $ 502,800
Advances from FHLB 223,258 221,976 265,410 265,169
Warehouse and term notes payable 120,425 120,425 53,504 53,504
Advance payments by
borrowers for taxes and
insurance 67,982 67,982 61,542 61,542
---------------------------------------------------------------------
957,564 $ 955,990 883,425 $ 883,015
============ =============
Other liabilities 15,157 15,153
------------- ----------
972,721 898,578
Stockholders' equity 99,473 89,416
------------- ----------
Total liabilities and
stockholders' equity $ 1,072,194 $ 987,994
============= ===========
96
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
19. Acquisitions
On December 24, 1998, First Defiance completed the acquisition of the Insurance
Center of Defiance 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 the fair value of
net assets acquired by approximately $11.3 million, which was recorded as
goodwill.
On May 31, 1999, The Leader exchanged a debt position in a partnership that
owned a Cleveland area apartment complex for a 100% ownership position.
Unaudited pro forma revenues, net income, basic and diluted earnings per share
for the year ended December 31, 1998 had the purchase business combinations been
completed on January 1, 1998 were as follows (In thousands, except per share
amounts):
Revenues $ 85,386
Net income $ 3,449
Basic net income per share $ .46
Diluted net income per share $ .44
On a pro forma basis, the First Insurance, Insurance and Risk Management, and
The Cleveland partnership transactions were not considered to have a material
impact and were therefore excluded from this disclosure.
97
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
19. Acquisitions (continued)
Net assets acquired in the acquisitions are as follows:
1999 1998
-------------------------------
Assets:
Loans held for sale $ -- $ 116,672
Mortgage servicing rights -- 65,804
Loans receivable -- 14,800
Goodwill 1,867 13,615
Cash 217 4,431
Property 29 --
Other assets 6,274 12,037
Liabilities assumed:
Warehouse and term notes 6,153 179,958
Other 316 10,691
-------------------------------
$ 1,918 $ 36,710
===============================
20. 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, commercial lending 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 accounting
policies of the individual business units are the same as those of First
Defiance as described in Note 2. 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.
98
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
20. Line of Business Reporting (continued)
The parent unit is comprised of the operations of First Insurance and
inter-segment income eliminations and unallocated expenses.
2000
----------------------------------------------------------------------
Retail Mortgage
Consolidated Parent Banking Banking
----------------------------------------------------------------------
(In thousands)
Total interest income $ 65,185 $ (19,566) $ 66,022 $ 18,729
Total interest expense 43,502 (19,292) 45,110 17,684
---------------------------------------------------------------------
Net interest income 21,683 (274) 20,912 1,045
Provision for loan losses 3,147 -- 635 2,512
---------------------------------------------------------------------
Net interest income after provision 18,536 (274) 20,277 (1,467)
Non-interest income 53,246 2,300 4,252 46,694
Non-interest expense 54,905 2,840 17,226 34,839
---------------------------------------------------------------------
Income before income taxes 16,877 (814) 7,303 10,388
Income taxes 5,914 (241) 2,285 3,870
---------------------------------------------------------------------
Net income $ 10,963 $ (573) $ 5,018 $ 6,518
=====================================================================
Total assets $ 1,072,194 $ (310,186) $ 958,607 $ 423,773
=====================================================================
99
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
20. Line of Business Reporting (continued)
1999
----------------------------------------------------------------------
Retail Mortgage
Consolidated Parent Banking Banking
----------------------------------------------------------------------
(In thousands)
Total interest income $ 53,379 $ (13,960) $ 54,388 $ 12,951
Total interest expense 31,582 (15,231) 35,657 11,156
----------------------------------------------------------------------
Net interest income 21,797 1,271 18,731 1,795
Provision for loan losses 1,925 6 149 1,770
----------------------------------------------------------------------
Net interest income after provision 19,872 1,265 18,582 25
Non-interest income 40,794 1,039 3,747 36,008
Non-interest expense 47,414 1,824 16,023 29,567
----------------------------------------------------------------------
Income before income taxes 13,252 480 6,306 6,466
Income taxes 4,629 374 1,850 2,405
----------------------------------------------------------------------
Net income $ 8,623 $ 106 $ 4,456 $ 4,061
======================================================================
Total assets $ 987,994 $(362,172) $ 926,139 $ 424,027
======================================================================
1998
---------------------------------------------------------------------
Retail Mortgage
Consolidated Parent Banking Banking
---------------------------------------------------------------------
(In thousands)
Total interest income $ 49,056 $ (510) $ 44,688 $ 4,878
Total interest expense 26,946 (1,992) 24,685 4,253
---------------------------------------------------------------------
Net interest income 22,110 1,482 20,003 625
Provision for loan losses 7,769 -- 7,418 351
---------------------------------------------------------------------
Net interest income after provision 14,341 1,482 12,585 274
Non-interest income 17,528 (144) 3,410 14,262
Non-interest expense 26,940 206 14,536 12,198
---------------------------------------------------------------------
Income before income taxes 4,929 1,132 1,459 2,338
Income taxes 1,818 399 513 906
---------------------------------------------------------------------
Net income $ 3,111 $ 733 $ 946 $ 1,432
=====================================================================
Total assets $ 785,399 $(231,950) $ 785,282 $ 232,067
=====================================================================
100
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
20. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
Three Months Ended
-------------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
-------------------------------------------------------------------
(In thousands, except per share amounts)
Interest income $ 15,830 $ 15,359 $ 16,911 $ 17,085
Interest expense 9,642 10,225 11,687 11,948
-------------------------------------------------------------------
Net interest income 6,188 5,134 5,224 5,137
Provision for loan losses 1,408 581 539 619
-------------------------------------------------------------------
Net interest income after provision for loan
losses 4,780 4,553 4,685 4,518
Loss on sale of securities -- -- (29) (29)
Non-interest income 11,843 13,118 14,060 14,283
Non-interest expense 13,249 13,814 13,944 13,898
-------------------------------------------------------------------
Income before income taxes 3,374 3,857 4,772 4,874
Income taxes 1,173 1,399 1,604 1,738
-------------------------------------------------------------------
Net income $ 2,201 $ 2,458 $ 3,168 $ 3,136
===================================================================
Earnings per share:
Basic $ 0.35 $ 0.39 $ 0.50 $ 0.49
==================================================================
Diluted $ 0.35 $ 0.38 $ 0.49 $ 0.49
==================================================================
Average shares outstanding:
Basic 6,232 6,305 6,367 6,373
==================================================================
Diluted 6,376 6,407 6,451 6,465
==================================================================
101
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
21. Quarterly Consolidated Results of Operations (Unaudited) (continued)
Three Months Ended
-------------------------------------------------------------
1999 March 31 June 30 September 30 December 31
-------------------------------------------------------------
(In thousands, except per share amounts)
Interest income $12,481 $12,678 $13,732 $14,488
Interest expense 6,757 7,122 8,270 9,433
-------------------------------------------------------------
Net interest income 5,724 5,556 5,462 5,055
Provision for loan losses 512 202 429 782
-------------------------------------------------------------
Net interest income after
provision for loan
losses 5,212 5,354 5,033 4,273
Gain on sale of securities -- -- 1 --
Non-interest income 8,993 9,814 10,231 11,755
Non-interest expense 11,115 11,556 12,034 12,709
-------------------------------------------------------------
Income before income taxes 3,090 3,612 3,231 3,319
Income taxes 1,132 1,241 1,139 1,117
-------------------------------------------------------------
Net income $ 1,958 $ 2,371 $ 2,092 $ 2,202
=============================================================
Earnings per share:
Basic $ 0.29 $ 0.37 $ 0.32 $ 0.35
=============================================================
Diluted $ 0.28 $ 0.36 $ 0.32 $ 0.34
=============================================================
Average shares outstanding:
Basic 6,705 6,489 6,447 6,324
=============================================================
Diluted 6,925 6,670 6,627 6,497
=============================================================
102
Report of Independent Auditors
To the Stockholders and the Board of Directors
First Defiance Financial Corp.
We have audited the consolidated statements of financial condition of First
Defiance Financial Corp. as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Defiance
Financial Corp. at December 31, 2000 and 1999, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Cleveland, Ohio
January 18, 2001
103
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from
pages 6 through 12 of the definitive proxy statement dated March 21, 2001.
Item 11. Executive Compensation
The information required herein is incorporated by reference from
the Executive Compensation section beginning on page 18, the Stock Options
section on page 20, the Directors' Compensation section on page 23, and the
Employment Agreements section on pages 23 and 24 of the definitive proxy
statement dated March 21, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference from
the Beneficial Ownership section beginning on page 3 of the definitive proxy
statement dated March 21, 2001.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from
the Indebtedness of Management section on page 25 of the definitive proxy
statement dated March 21, 2001.
104
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements are filed as a
part of this document under "Item 8. Financial Statements and
Supplementary Data."
Consolidated Statements of Financial Condition as of December 31,
2000 and 1999
Consolidated Statements of Income for the years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years Ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditor's Report
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are included in the Notes to
Financial Statements incorporated herein by reference and therefore have been
omitted.
105
(3) Exhibits
The following exhibits are either filed as a part of this report or are
incorporated herein by reference to documents previously filed as
indicated below:
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation *
3.2 Code of Regulations *
3.2 Bylaws *
10.1 1996 Stock Option Plan **
10.2 1996 Management Recognition Plan and Trust ***
10.4 1993 Stock Incentive Plan *
10.5 1993 Directors' Stock Option Plan *
10.6 Employment Agreement with William J. Small ****
21.1 List of Subsidiaries of the Company ****
23.1 Consent of Independent Auditors ****
* Incorporated herein by reference to the like numbered exhibit in the
Registrant's Form S-1 (File No. 33-93354).
** Incorporated herein by reference to Appendix A to the 1996 Proxy
Statement.
*** Incorporated herein by reference to Appendix B to the 1996 Proxy
Statement.
**** Included herein.
(b) Reports on Form 8-K
None
106
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST DEFIANCE FINANCIAL CORP.
March 21, 2001 By: /s/ William J. Small
-------------------------
William J. Small
Chairman, President, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 21, 2001.
Signature Title
- -------------------------------- -------------------------------------
/s/ William J. Small Chairman of the Board, President and
- --------------------------------
William J. Small CEO
/s/ John C. Wahl Executive Vice President and CFO
- --------------------------------
John C. Wahl
/s/ Don C. Van Brackel Director, Vice Chairman
- --------------------------------
Don C. Van Brackel
/s/ Stephen L. Boomer Director
- --------------------------------
Stephen L. Boomer
/s/ Dr. Douglas A. Burgei Director
- --------------------------------
Dr. Douglas A. Burgei
/s/ Peter A. Diehl Director
- --------------------------------
Peter A. Diehl
/s/ Dr. John U. Fauster, III Director
- --------------------------------
Dr. John U. Fauster, III
/s/ Dr. Marvin J. Ludwig Director
- --------------------------------
Dr. Marvin J. Ludwig
/s/ Gerald W. Monnin Director
- --------------------------------
Gerald W. Monnin
/s/ Thomas A. Voigt Director
- --------------------------------
Thomas A. Voigt
107