UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 2001
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Transition Period from ___________to__________
Commission file number 0-26850
-------
First Defiance Financial Corp.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1803915
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification) Number)
601 Clinton Street, Defiance, Ohio 43512
------------------------------------------------ ------------
(Address or principal executive office) (Zip Code)
Registrant's telephone number, including area code: (419) 782-5015
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value -
6,839,795 shares outstanding at May 11, 2001.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
Page Number
-----------
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - March 31, 2001 and December 31, 2000 1
Consolidated Condensed Statements of Income -
Three months ended March 31, 2001 and 2000 3
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Three months ended
March 31, 2001 4
Consolidated Condensed Statements of Cash Flows
- Three months ended March 31, 2001 and 2000 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 25
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
- --------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 10,217 $ 7,320
Interest-bearing deposits 24,128 13,634
------------ -----------
34,345 20,954
Securities:
Available-for-sale, carried at fair value 52,735 53,176
Trading, carried at fair value -- 234
Held-to-maturity, carried at amortized cost
(approximate fair value $7,475 and $7,770
at March 31, 2001 and December 31,
2000, respectively) 7,349 7,697
------------ ------------
60,084 61,107
Loans held for sale (cost equals fair value) 172,427 232,314
Loans receivable, net 545,508 541,208
Mortgage servicing rights 142,833 134,760
Accrued interest receivable 5,790 5,976
Federal Home Loan Bank stock 15,524 15,251
Office properties and equipment 21,980 22,203
Real estate and other assets held for sale 227 312
Goodwill, net 13,785 13,983
Other assets 23,774 24,126
------------ ------------
Total assets $1,036,277 $1,072,194
========== ==========
See accompanying notes.
1
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
- --------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
-------------- -----------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 28,110 $ 33,256
Interest-bearing deposits 554,415 512,643
----------- -----------
Total deposits 582,525 545,899
Advances from Federal Home Loan Bank 206,599 223,258
Warehouse and term notes payable 22,997 120,425
Escrow funds and advance payments by borrowers 105,489 67,982
Deferred taxes 2,906 2,611
Other liabilities 13,328 12,546
----------- -----------
Total liabilities 933,844 972,721
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; 6,863,177
and 6,863,541 shares outstanding, respectively 69 69
Additional paid-in capital 53,511 53,512
Stock acquired by ESOP (3,026) (3,238)
Deferred compensation (176) (204)
Accumulated other comprehensive income,
net of income taxes of $318
and $(22), respectively 592 47
Retained earnings 51,463 49,287
----------- -----------
Total stockholders' equity 102,433 99,473
----------- -----------
Total liabilities and stockholders' equity $ 1,036,277 $ 1,072,194
=========== ===========
See accompanying notes
2
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
- --------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2001 2000
---- ----
Interest Income
Interest on Loans $ 15,424 $ 14,309
Investment securities 946 1,470
Interest-bearing deposits 61 51
-------- --------
Total interest income 16,431 15,830
Interest Expense
Deposits 7,081 5,623
FHLB advances and other 3,239 2,887
Notes payable and warehouse loans 818 1,132
-------- --------
Total interest expense 11,138 9,642
-------- --------
Net interest income 5,293 6,188
Provision for loan losses 773 1,408
-------- --------
Net interest income after provision for loan losses 4,520 4,780
Noninterest Income
Mortgage banking income 11,095 8,104
Loan service fees and other charges 584 428
Dividends on stock 273 247
Gain on sale of loans 2,164 1,945
Loss on sale of securities (45) --
Trust income 29 17
Other noninterest income 1,166 1,102
-------- --------
Total noninterest income 15,266 11,843
Noninterest Expense
Compensation and benefits 5,889 5,515
Occupancy 1,358 1,208
SAIF deposit insurance premiums 30 29
State franchise tax 364 295
Data processing 342 333
Amortization of mortgage servicing rights 4,455 3,539
Amortization of goodwill and other intangibles 435 609
Other noninterest expense 2,234 1,721
-------- --------
Total noninterest expense 15,107 13,249
-------- --------
Income before income taxes 4,679 3,374
Federal income taxes 1,624 1,173
-------- --------
Net income $ 3,055 $ 2,201
======== ========
Earnings per share (Note 4)
Basic $ 0.48 $ 0.35
======== ========
Diluted $ 0.47 $ 0.35
======== ========
Dividends declared per share (Note 3) $ 0.12 $ 0.11
======== ========
Average shares outstanding (Note 4)
Basic 6,366 6,232
======== ========
Diluted 6,536 6,376
======== ========
See accompanying notes
3
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
2001
----------------------------------------
Stock Acquired By
-----------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
Balance at December 31, 2000 $69 $53,512 $(3,238) $ (204)
Comprehensive income:
Net income
Change in unrealized gains (losses)
net of income taxes of $340
Total comprehensive income
ESOP shares released 36 212
Amortization of deferred compensation
of Management Recognition Plan 28
Shares issued under stock option plan 71
Purchase of common stock for
treasury (108)
Dividends declared (Note 3)
Balance at March 31, 2001 $ 69 $53,511 $(3,026) $(176)
=============================================================
See accompanying notes
4
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
2001 2000
------------------------------------------------ --------------
Net Unrealized
gains (losses) on Total Total
available-for- Retained Stockholders' Stockholder's
sale securities Earnings Equity Equity
--------------- -------- ------ ------
Balance at December 31, 2000 $ 47 $ 49,287 $ 99,473 $ 89,416
Comprehensive income:
Net income 3,055 3,055 2,201
Change in unrealized gains (losses)
net of income taxes of $340 545 545 (41)
--------- ---------
Total comprehensive income 3,600 2,160
ESOP shares released 248 273
Amortization of deferred compensation
of Management Recognition Plan 28 68
Shares issued under stock option plan 71 107
Purchase of common stock for
treasury (99) (207) (9)
Dividends declared (Note 3) (780) (780) (705)
----------------------------------------- ---------
Balance at March 31, 2001 $ 592 $ 51,463 $ 102,433 $ 91,310
========= =========
See accompanying notes
5
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
2001 2000
--------- ---------
Operating Activities
Net income $ 3,055 $ 2,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 773 1,408
Provision for depreciation 545 488
Net securities amortization 4 16
Amortization of mortgage servicing rights 4,455 3,539
Amortization of goodwill 198 184
Gain on sale of loans (2,164) (1,945)
Amortization of Management Recognition Plan
deferred compensation 28 68
Release of ESOP Shares 248 274
Net securities losses 45 --
Deferred federal income tax credit (45) (96)
Proceeds from sale of loans 620,618 569,752
Origination of mortgage servicing rights, net (12,528) (10,704)
Origination of loans held for sale (558,567) (519,547)
Increase in interest receivable and other assets 538 (3,555)
Net repurchase of loans held for sale (9,245) (4,738)
Increase in other liabilities 782 593
--------- ---------
Net cash provided by operating activities 48,740 37,938
Investing Activities
Proceeds from maturities of held-to-maturity securities 340 458
Proceeds from maturities of available-for-sale securities 1,210 2,691
Proceeds from sale of available-for-sale securities 1,512 --
Proceeds from sale of trading securities 233 25,874
Proceeds from sales of real estate, mobile homes, and
other assets held for sale 287 544
Proceeds from sales of office properties and equipment 27 --
Purchases of available-for-sale securities (1,436) (2,079)
Purchases of Federal Home Loan Bank stock (273) (247)
Purchases of office properties and equipment (349) (426)
Net increase in loans receivable 3,970 (9,577)
--------- ---------
Net cash provided by investing activities 5,521 17,238
6
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2001 2000
---- ----
Financing Activities
Net increase in deposits and advance payments by borrowers
for taxes and insurance 74,133 15,538
Repayment of Federal Home Loan Bank long-term advances (159) (10,340)
Repayment of term notes payable (150) (290)
Net decrease in Federal Home Loan Bank
short-term advances (76,500) (71,500)
Proceeds from short-term line of credit 5,000 6,800
Proceeds from Federal Home Loan Bank long term notes 60,000 --
(Decrease) increase in mortgage warehouse loans (102,278) 216
Purchase of common stock for treasury (207) (9)
Cash dividends paid (780) (703)
Proceeds from exercise of stock options 71 107
--------- ---------
Net cash used in financing activities (40,870) (60,181)
--------- ---------
Increase (decrease) in cash and cash equivalents 13,391 (5,005)
Cash and cash equivalents at beginning of period 20,954 16,236
--------- ---------
Cash and cash equivalents at end of period $ 34,345 $ 11,231
========= =========
Supplemental cash flow information:
Interest paid $ 10,884 $ 9,550
========= =========
Income taxes paid $ -- $ --
========= =========
Transfers from loans to real estate
and other assets held for sale $ 116 $ 113
========= =========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ (340) $ 22
========= =========
Noncash investing activities:
Increase (decrease) in net unrealized gain or loss on
available-for-sale securities $ 885 $ (63)
========= =========
Noncash financing activities:
Cash dividends declared but not paid $ 778 $ 705
========= =========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at March 31, 2001 and 2000)
- --------------------------------------------------------------------------------
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance" or "the Company"), its
two wholly owned subsidiaries, First Federal Bank of the Midwest ("First
Federal"), and First Insurance and Investments, Inc. ("First Insurance")
and First Federal's wholly owned mortgage banking company, The Leader
Mortgage Company, LLC ("The Leader"). In the opinion of management, all
significant intercompany accounts and transactions have been eliminated
in consolidation.
2. Basis of Presentation
The consolidated condensed statement of financial condition at December
31, 2000 has been derived from the audited financial statements at that
date, which were included in First Defiance's Annual Report on Form
10-K.
The accompanying consolidated condensed financial statements as of March
31, 2001 and for the three-month periods ending March 31, 2001 and 2000
have been prepared by First Defiance without audit and do not include
information or footnotes necessary for the complete presentation of
financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. It is suggested that
these consolidated condensed financial statements be read in conjunction
with the financial statements and notes thereto included in First
Defiance's 2000 annual report on Form 10-K for the year ended December
31, 2000. However, in the opinion of management, all adjustments,
consisting of only normal recurring items, necessary for the fair
presentation of the financial statements have been made. The results of
operations for the three-month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the
entire year.
3. Dividends on Common Stock
As of March 31, 2001, First Defiance had declared a quarterly cash
dividend of $.12 per share for the first quarter of 2001, payable April 27,
2001.
8
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2001 and 2000)
- --------------------------------------------------------------------------------
4. Earnings Per Share
Basic earnings per share as disclosed under Statement of Financial
Accounting Standard ("FAS") No. 128 has been calculated by dividing net
income by the weighted average number of shares of common stock
outstanding for the three-month periods ended March 31, 2001 and 2000.
First Defiance accounts for the shares issued to its Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 of
the American Institute of Certified Public Accountants ("AICPA"). As a
result, shares controlled by the ESOP are not considered in the weighted
average number of shares of common stock outstanding until the shares
are committed for allocation to an employee's individual account. In the
calculation of diluted earnings per share for the three-months ended
March 31, 2001 and 2000, the effect of shares issuable under stock
option plans and unvested shares under the Management Recognition Plan
have been accounted for using the Treasury Stock method.
The following table sets forth the computation of basic and diluted
earning per share (in thousands except per share data):
Three Months Ended
March 31,
------------
2001 2000
---- ----
Numerator for basic and diluted
earnings per share - net income $3,055 $2,201
====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,366 6,232
Effect of dilutive securities:
Employee stock options 111 56
Unvested Management Recognition
Plan stock 59 88
------ ------
Dilutive potential common shares 170 144
------ ------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,536 6,376
====== ======
Basic earnings per share $ .48 $ .35
====== ======
Diluted earnings per share $ .47 $ .35
====== ======
9
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2001 and 2000)
- --------------------------------------------------------------------------------
5. Loans
Loans receivable and held for sale consist of the following:
March 31, December 31,
2001 2000
---- ----
(in thousands)
Real Estate:
One-to-four family residential real estate $413,050 $478,221
Construction loans 7,507 9,628
Commercial real estate 149,268 132,204
-------- --------
569,825 620,053
Other Loans:
Commercial 81,501 82,851
Consumer finance 47,566 52,142
Home equity and improvement 31,928 31,836
-------- --------
160,995 166,829
-------- --------
Total mortgage and other loans 730,820 786,882
Deduct:
Loans in process 2,502 3,415
Net deferred loan origination fees and costs 1,087 1,041
Allowance for loan loss 9,296 8,904
-------- --------
Totals $717,935 $773,522
======== ========
6. Mortgage Servicing Rights
The activity in Mortgage Servicing Rights ("MSRs") is summarized as
follows (in thousands):
Three Months
Ended Year Ended
March 31, December 31,
2001 2000
-------- --------
Balance at beginning of period $134,760 $97,519
Loans sold, servicing retained 12,528 52,225
Amortization (4,455) (14,984)
-------- --------
Balance at end of period $142,833 $134,760
======== ========
10
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2001 and 2000)
- --------------------------------------------------------------------------------
6. Mortgage Servicing Rights - Continued
Accumulated amortization of mortgage servicing rights aggregated
approximately $36.9 million and $32.4 million at March 31, 2001 and
December 31, 2000, respectively.
The Company's mortgage servicing portfolio (excluding subserviced loans)
is comprised of the following as of March 31, 2001 (dollars in
thousands):
Number Principal Balance
of Loans Outstanding
-------- -----------
GNMA 88,914 $6,200,866
FNMA 13,803 899,871
FHLMC 2,461 117,923
Other VA, FHA and
Conventional loans 23,885 1,122,199
---------- ----------
129,033 $8,340,859
========== ==========
7 Deposits
A summary of deposit balances is as follows (in thousands):
March 31, December 31,
2001 2000
---- ----
Noninterest-bearing checking accounts $ 28,110 $ 33,256
Interest-bearing checking accounts 32,743 32,645
Savings accounts 37,420 37,551
Money market demand accounts 92,017 78,961
Certificates of deposit 392,235 363,486
-------- --------
$582,525 $545,899
======== ========
11
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2001 and 2000)
- --------------------------------------------------------------------------------
8. Line of Business Reporting
First Defiance operates two major lines of business. Retail banking,
which consists of the operations of First Federal, includes direct and
indirect lending, deposit-gathering, small business services and
consumer finance. Mortgage banking, which consists of the operations of
The Leader, includes buying and selling mortgages to the secondary
market and the subsequent servicing of these sold loans. The business
units are identified by the channels through which the product or
service is delivered. The retail-banking unit funds the mortgage-banking
unit and an investment/funding unit within the retail-banking unit
centrally manages interest rate risk. Transactions between business
units are primarily conducted at fair value, resulting in profits that
are eliminated for reporting consolidated results of operations.
The parent unit is comprised of the operations of First Insurance and
inter-segment income elininations and unallocated expenses.
Three-Months Ended March 31, 2001
(In Thousands)
Retail Mortgage
Consolidated Parent Banking Banking
------------------------------------------------------------
Total interest income $ 16,431 $ (4,757) $ 16,935 $ 4,253
Total interest expense 11,138 (4,549) 11,844 3,843
-----------------------------------------------------------
Net interest income 5,293 (208) 5,091 410
Provision for loan losses 773 - 134 639
-----------------------------------------------------------
Net interest income after
provision 4,520 (208) 4,957 (229)
Non-interest income 15,266 539 1,446 13,281
Non-interest expense 15,107 674 4,526 9,907
-----------------------------------------------------------
Income before income taxes 4,679 (343) 1,877 3,145
Income taxes 1,624 (105) 610 1,119
-----------------------------------------------------------
Net income $ 3,055 $ (238) $ 1,267 $ 2,026
===========================================================
Total assets $1,036,277 $(360,820) $1,021,047 $376,050
===========================================================
12
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2001 and 2000)
- --------------------------------------------------------------------------------
9. Line of Business Reporting-Continued
Three-Months Ended March 31, 2000
(In Thousands)
Retail Mortgage
Consolidated Parent Banking Banking
-----------------------------------------------------------------
Total interest income $ 15,830 $ (4,298) $ 14,904 $ 5,224
Total interest expense 9,642 (4,371) 9,720 4,293
-----------------------------------------------------------------
Net interest income 6,188 73 5,184 931
Provision for loan losses 1,408 - 236 1,172
-----------------------------------------------------------------
Net interest income after
provision 4,780 73 4,948 (241)
Non-interest income 11,843 637 918 10,288
Non-interest expense 13,249 688 4,329 8,232
-----------------------------------------------------------------
Income before income taxes 3,374 22 1,537 1,815
Income taxes 1,173 29 478 666
-----------------------------------------------------------------
Net income $2,201 $ (7) $ 1,059 $ 1,149
================================================================
Total assets $930,790 $(287,648) $865,811 $352,627
================================================================
10. 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.
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.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First Defiance is a holding company which conducts business through its two
wholly owned subsidiaries, First Federal Bank of the Midwest ("First Federal")
and First Insurance and Investments, Inc. ("First Insurance") and First
Federal's wholly owned subsidiary, The Leader Mortgage Company, LLC ("The
Leader"). First Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans primarily in the areas in which its offices are
located. First Federal's traditional banking activities include originating and
servicing residential, commercial and consumer loans; providing a broad range of
depository services; and providing trust services. First Federal is subject to
the regulations of certain federal agencies and undergoes periodic examinations
by those regulatory authorities. The Leader is a mortgage banking company which
specializes in servicing mortgage loans originated under first-time home-buyer
programs sponsored by various state, county and municipal governmental entities.
The 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") mortgage backed securities. First Insurance is an insurance
agency that does business in the Defiance, Ohio area. First Insurance offers
property and casualty, life insurance, group health, and investment products.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to hold the security to maturity. Held-to-maturity
securities are stated at amortized cost and had a recorded value of $7.3 million
at March 31, 2001. Loans held-for-sale securitized in the normal course of The
Leader's operations have been classified as trading securities, reported at fair
market value. The Leader has committed to sell these securities at their
carrying value. Securities not classified as held-to-maturity or trading are
classified as available-for-sale, which are stated at fair value and had a
recorded value of $52.7 million at March 31, 2001. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($18.3 million), corporate bonds ($11.0
million), certain municipal obligations ($6.7 million), adjustable-rate mortgage
backed security mutual funds ($4.9 million), CMOs and REMICs ($6.9 million),
mortgage backed securities ($2.5 million), and preferred stock and other equity
investments ($2.4 million). In accordance with FASB Statement No. 115,
unrealized holding gains and losses on available-for-sale securities are
reported in a separate component of stockholders' equity and are not reported in
earnings until realized. Net unrealized holding gains on available-for-sale
securities were $910,000 at March 31, 2001, or $592,000 after considering the
related deferred tax liability.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
The profitability of First Defiance is primarily dependent on its net interest
income and non-interest income. Net interest income is the difference between
interest and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits, Federal Home Loan
Bank advances, and other borrowings. The Company's non-interest income includes
mortgage loan servicing income, other loan administration fees, gains on sales
of mortgage loans, and the recognition of mortgage servicing rights generated by
The Leader and First Federal. First Defiance's earnings also depend on the
provision for loan losses and non-interest expenses, such as employee
compensation and benefits, occupancy and equipment expense, deposit insurance
premiums, and miscellaneous other expenses, as well as federal income tax
expense.
Changes in Financial Condition
At March 31, 2001, First Defiance's total assets, deposits (including customer's
escrow deposits) and stockholders' equity amounted to $1.036 billion, $688.0
million and $102.4 million, respectively, compared to $1.072 billion, $613.9
million and $99.5 million, respectively, at December 31, 2000.
Net loans receivable have increased to $545.5 million at March 31, 2001 from
$541.2 million at December 31, 2000. During the same period, loans held-for-sale
decreased to $172.4 million at March 31, 2001 from $232.3 million at December
31, 2000. The reduction in the available for sale loans is a result of decreased
production in The Leader's bond programs as well as efforts by management to
more efficiently manage this lower yielding asset.
Mortgage servicing rights increased to $142.8 million at March 31, 2001 from
$134.8 at December 31, 2000. Mortgage servicing rights are recorded when loans
available for sale are securitized and the value is based on the servicing fees
earned on the underlying mortgage loan being serviced, management's estimate of
future prepayments and a number of other factors. At March 31, 2001 the weighted
average coupon rate of the mortgage servicing portfolio was 7.03% compared to
7.00% at December 31, 2000. The Company has an independent appraisal prepared
annually as of June 30 and estimates the fair value each month based upon the
results of the appraisal. The approximate fair market value of the mortgage
servicing rights was $170.6 million at March 31, 2001 compared to $184.9 million
at December 31, 2000. The actual value of servicing may vary significantly from
the estimated fair value given changes in interest rates or other market
conditions. See Non-Interest Expense discussion included in Management's
Discussion and Analysis and Item 3 - Qualitative and Quantitative Disclosure
About Market Risk.
Securities decreased from $61.1 million at December 31, 2000 to $60.1 million at
March 31, 2001. In addition, deposits increased from $545.9 million at December
31, 2000 to $582.5 million as of March 31, 2001. This increase was the result of
a $29.4 million increase in brokered certificates of deposit and a $13.2 million
increase in interest-bearing checking and money market accounts net of decreases
in non-interest bearing demand deposit accounts and local certificates of
deposit of $5.1 million and $900,000, respectively. Escrow funds increased from
$68.0 million at December 31, 2000 to $105.5 million at March 31, 2001 due to
increases in prepayments in The Leader's loan servicing portfolio and continued
growth in the servicing portfolio. Additionally, warehouse and term notes
payable decreased from $120.4 million as of December 31, 2000 to $23.0 million
due to the decline in the loans held-for-sale, increase in deposits, and
increase in customer's escrow deposits.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
Forward-Looking Information
Certain statements contained in this quarterly report that are not historical
facts, including but not limited to statements that can be identified by the use
of forward-looking terminology such as "may", "will", "expect", "anticipate", or
"continue" or the negative thereof or other variations thereon or comparable
terminology are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21B of the Securities Act
of 1934, as amended. Actual results could differ materially from those indicated
in such statements due to risks, uncertainties and changes with respect to a
variety of market and other factors.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based upon daily balances. See Results
of Operations section for a discussion of the impact on loan yields resulting
from a change in the estimated income on loans 90 days or more past due which
have FHA insurance or VA guarantees.
Three Months Ended March 31,
2001 2000
-------------------------------------- -----------------------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
(Dollars in $000s)
Interest-earning assets:
Loans receivable $ 747,232 $ 15,424 8.26% $ 677,957 $ 14,309 8.44%
Securities 60,528 1,007 6.65 84,594 1,521 7.19
FHLB stock 15,254 273 7.16 14,184 247 6.97
---------- ---------- ---------- ----------
Total interest-earning assets 823,014 16,704 8.12 776,735 16,077 8.28
Non-interest-earning assets 225,791 175,831
---------- ----------
Total assets $1,048,805 $ 952,566
========== ==========
Interest-bearing liabilities:
Deposits $ 569,998 $ 7,081 4.97% $ 505,507 $ 5,623 4.45%
FHLB advances and other 231,186 3,239 5.60 217,869 2,887 5.30
Notes payable 48,399 818 6.76 67,172 1,132 6.74
---------- ---------- ---------- ----------
Total interest-bearing liabilities 849,583 11,138 5.24 790,548 9,642 4.88
---------- ----------
Non-interest-bearing liabilities 98,556 71,967
---------- ----------
Total liabilities 948,139 862,515
Stockholders' equity 100,666 90,051
----------
Total liabilities and stock-
holders' equity $1,048,805 $95,256
========== ==========
Net interest income; interest
rate spread $ 5,566 2.87% $ 6,435 3.40%
========== ===== ========== =====
Net interest margin (2) 2.71% 3.31%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 97% 98%
===== ====
- ---------------------
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
Results of Operations
Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000
On a consolidated basis, First Defiance had net income of $3.1 million for the
three months ended March 31, 2001 compared to $2.2 million for the same period
in 2000. On a per share basis, basic and diluted earnings per share were $.48
and $.47, respectively, for the 2001 first quarter compared to $.35 basic and
diluted per share earnings for the 2000 first quarter.
Cash earnings for the first quarter of 2001 were $3.3 million or $.50 per
diluted share compared to $2.4 million or $.38 per diluted share for the same
period in 2000. Cash earnings are calculated by excluding the net income impact
of amortization of goodwill.
Net Interest Income. Net interest income for the quarter ended March 31, 2001
was $5.3 million compared to $6.2 million for the same period in 2000. However,
the 2000 first quarter results included a one time adjustment of $690,000 for
interest on certain loans that were more than 90 days delinquent which had been
purchased out of the servicing portfolio by The Leader and which had FHA
insurance or VA guarantees. Net interest margin for the 2001 first quarter was
2.71% compared to 3.31% for the same period in 2000 (2.96% excluding the one
time adjustment noted above).
In addition to the 2000 first quarter revision to the estimate for interest on
FHA/VA loans noted above, management also changed its method of estimating the
required reserve for potential losses on foreclosure loans to more accurately
reflect the total risk inherent in the servicing and loan portfolios at The
Leader. This resulted in a one time charge to provision for losses of $693,000
which also was recorded during the 2000 first quarter. The net impact of these
two estimate changes essentially offset each other and without the two items
earnings for the 2000 first quarter would have still been $.35 per share.
Excluding the 2000 first quarter estimate change, total interest income
increased by $1.3 million, or 8.5%, from $15.1 million for the three months
ended March 31, 2000 to $16.4 million for the three months ended March 31, 2001.
The increase was due to a $46.3 million increase in the average balance of
interest-earning assets for the first quarter of 2001 when compared to the first
quarter of 2000. The yield on interest-earning assets increased to 8.12% for the
three-month period ended March 31, 2001 from 7.92% for the same period in 2000
excluding the impact of the change in estimate noted above (8.28% including the
change in estimate). Excluding the estimate change, interest earnings from the
loan portfolio increased $1.8 million from $13.6 million for the three months
ended March 31, 2000 to $15.4 million for the same period in 2001. This increase
was due to increases in the average balance of loans receivable and the yield on
these loans to $747.2 million and 8.26% for the three-month period ended March
31, 2001, respectively, from $678.0 million and 8.03%, respectively, for the
same period in 2000.
Interest earnings from the investment portfolio decreased to $1.0 million for
the three months ended March 31, 2001 compared to $1.5 million for the same
period in 2000. The decrease in interest income was primarily the result of a
$24.1 million decrease in the average balance of investment securities, from
$84.6 million for the first quarter of 2000 to $60.5 million for the same period
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
in 2001. This decrease was due to the inclusion in the first quarter of 2000 of
interest on loans that were securitized pending delivery to the bond trustees in
trading securities. These trading securities were delivered to the trustee
during the first quarter of 2000. Additionally, the yield on the average
portfolio balance for the three months ended March 31, 2001 was 6.65% compared
to 7.19% for the same period in 2000.
Interest expense increased by $1.5 million, or 15.5%, to $11.1 million for the
first quarter of 2001 compared to $9.6 million for the same period in 2000. The
increase is primarily due to the funding of a $46.3 million increase in average
interest earning assets noted above combined with a $50.0 million increase in
average non-interest earning assets, from $175.8 million for the first quarter
of 2000 to $225.8 million for the same period in 2001. This increase in average
non-interest earning assets was primarily a result of the growth in The Leader's
mortgage servicing assets from an average of $101.5 million for the three-months
ended March 31, 2000 to $140.0 million for the same period in 2001. These
increased funding requirements resulted in a $59.1 million increase in the
average balance of total interest-bearing liabilities from $790.5 million for
the first quarter of 2000 to $849.6 million for the same period of 2001. The
growth in the average balance of assets was partially funded by a $26.6 million
increase in the average balance of non-interest-bearing liabilities, from $72.0
million for the three-months ended March 31, 2000 to $98.6 million for the same
period in 2001. The growth in the average balance of non-interest-bearing
liabilities was primarily the result of a $23.8 million increase in the average
balance of escrow balances from $59.9 million for the first quarter of 2000 to
$83.7 million for the same period in 2001. The increase in escrow balances
resulted from increases in the number and balance of mortgage loans serviced at
The Leader as well as increases in prepayments on these loans. Proceeds from
prepayments are held by The Leader for a period of up to forty-five days prior
to being remitted to the investors.
Interest expense also increased due to an increase in the average cost of funds
for the first quarter of 2001 to 5.24% from 4.88% for the first quarter of 2000.
This increase resulted from increases in the average costs of deposits, FHLB
advances, and notes payable of 52 basis points, 30 basis points, and 2 basis
points, respectively, to 4.97%, 5.60%, and 6.76%, respectively for the
three-months ended March 31, 2001 from 4.45%, 5.30%, and 6.74%, respectively for
the same period in 2000. These increases were the result of the rising interest
rate environment experienced throughout 2000. This increase in borrowing costs
began to reverse with the three 50 basis point reductions to the targeted
federal funds rate implemented by the Federal Reserve during the first quarter
of 2001. First Defiance's total cost of interest-bearing liabilities decreased
39 basis points from the fourth quarter of 2000 when the average cost was 5.63%.
Provision for Loan Losses. The provision for loan losses decreased $635,000,
from $1.4 million for the three-months ended March 31, 2000 to $773,000 for the
same period in 2001. As noted above, the March 31, 2000 provision amount
included the $693,000 related to the change in accounting estimate on
foreclosure loans at The Leader. Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to the level deemed
appropriate by management based on historical experience, the volume and type of
lending conducted by First Defiance, industry standards, the amount of
non-performing assets and loan charge-off activity, general economic conditions,
particularly as they relate to First Defiance's market area, and other factors
related to the collectibility of First Defiance's loan portfolio.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets, totaled $2.5 million at March 31, 2001,
which is .25% of total assets compared to $2.6 million (.28% of total assets) at
March 31, 2000 and $1.8 million (.16% of total assets) at December 31, 2000.
Non-performing loans and repossessed assets reported as of March 31, 2001 do not
include $16.2 million for mortgage loans 90 days or more past due which have FHA
insurance or VA guarantees. The risk of loss on these loans is generally limited
to the administrative cost of foreclosure actions, which is provided for in the
allowance for loan losses. The allowance for loan losses at March 31, 2001 was
$9.3 million compared to $8.3 million at March 31, 2000 and $8.9 million at
December 31, 2000. For the quarter ended March 31, 2001, First Defiance charged
off $547,000 of loans against its allowance and realized recoveries of $166,000
from loans previously charged off. During the same quarter in 2000, First
Defiance charged off $978,000 in loans and realized recoveries of $53,000.
Non-Interest Income. Non-interest income increased substantially in the first
quarter of 2001, from $11.8 million for the quarter ended March 31, 2000 to
$15.3 million for the same period in 2001. Individual components of non-interest
income are as follows:
Mortgage Banking Income. Mortgage banking income, which includes servicing fees
and late charge income, increased to $11.1 million for the three-month period
ended March 31, 2001 compared to $8.1 million for the same period in 2000, an
increase of $3.0 million or 36.9%. This increase in mortgage banking income was
primarily the result of the growth in the mortgage servicing portfolio from $6.4
billion as of March 31, 2000 to $8.3 billion at March 31, 2001.
Gain on Sale of Loans. Gain on sale of loans increased from $1.9 million for the
quarter ended March 31, 2000 to $2.2 million for the same period of 2001. The
increase in gains on sale of loans is a result of increases in gains on sale of
conventional loans originated both at First Federal Bank and by The Leader's
retail loan origination staff. Gains on sale of conventional loans increased to
$661,000 for the first quarter of 2001, compared to $138,000 for the same period
in 2000. This increase offset a reduction in gains on sale in the first-time
homebuyer programs. In a falling interest rate environment like the industry
experienced during the 2001 first quarter, demand for the first-time homebuyer
loans declines initially, resulting in lower loan production levels. Over time,
the housing finance agencies generally react to lower market rates with lower
program rates.
Other Non-Interest Income. Other non-interest income, including insurance
commission income, dividends on Federal Home Loan Bank stock, loan servicing
fees and other charges, and other miscellaneous charges, increased to $2.0
million for the quarter ended March 31, 2001 from $1.8 for the same period in
1999. Deposit fees and other related charges at First Federal increased
$186,000, to $450,000 for the three-months ended March 31, 2001 from $264,000
for the same period in 2000.
Non-Interest Expense. Total non-interest expense increased $1.9 million from
$13.2 million for the quarter ended March 31, 2000 to $15.1 million for the same
period in 2001. Significant individual components of the increase are as
follows:
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
Amortization of Mortgage Servicing Rights. Amortization of mortgage servicing
rights (MSRs) increased to $4.5 million for the quarter ended March 31, 2001
from $3.5 for the same period in 2000. This increase was due to the growth in
the mortgage servicing portfolio from $6.4 billion as of March 31, 2000 to $8.3
billion at March 31, 2001 and increases in prepayments on this portfolio during
the first quarter of 2001 compared to the same period in 2000. The lower
interest rate environment of the first quarter of 2001 has increased prepayments
on The Company's servicing portfolio to 5.58%, annualized, compared to 3.30% for
the first quarter of 2000, annualized. Adjustments for impairment to the value
of mortgage servicing rights are included in amortization expense and were less
than $15,000 for the first quarter of 2001. Based on the trend of continued
lower interest rates and higher prepayment speeds, management believes that it
is likely that First Defiance will have to record additional impairment expense
in the second quarter of 2001 of as much as $500,000. Also see Item 3,
Qualitative and Quantitative Disclosure About Market Risk.
Compensation and Benefits. Compensation and benefits increased $374,000 from
$5.5 million for the quarter ended March 31, 2000 to $5.9 million for the same
period in 2001. This increase was the result of staffing increases to handle
greater volumes of loans serviced at The Leader and the addition of a full
service branch in Bowling Green, Ohio in the fourth quarter of 2000.
Occupancy. Occupancy expense increased to $1.4 million for the three-month
period ended March 31, 2001 from $1.2 for the three months ended March 31, 2000.
This increase was a result of expansions throughout the Company.
Amortization of Goodwill and Other Acquisition Related Costs. Amortization of
goodwill and other acquisition costs amounted to $435,000 in the first quarter
of 2001 compared to $609,000 during the same period in 2000. This decrease was
due to the expiration of certain contractual payments that ended June 30, 2000.
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $2.9 million for the quarter ended March 31, 2001 from $2.4 million for the
same period in 2000. The increase in other non-interest expenses was primarily
the result of expenses at The Leader relating to increases in the mortgage
loan-servicing portfolio. These expenses included postage, examination fees,
real estate inspection fees, and collateral handling fees.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 34.7% for the
quarter ended March 31, 2001 compared to 34.8% for the same period in 2000.
As a result of the above factors, net income for the quarter ended March 31,
2001 was $3.1 million compared to $2.2 million for the comparable period in
2000. On a per share basis, basic and diluted earnings per share for the three
months ended March 31, 2001 were $.48 and $.47, respectively, compared to $.35
for the same period in 2000. Average shares outstanding for the basic and
diluted calculations were 6,366,000 and 6,536,000, respectively, for the quarter
ended March 31, 2001 compared to 6,232,000 and 6,376,000, respectively, for the
quarter ended March 31, 2000.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
First Defiance's board of directors declared a dividend of $.12 per common share
as of March 31, 2001. The dividend amounted to $823,581, including dividends on
unallocated ESOP shares. It was paid on April 27, 2001. Dividends are subject to
determination and declaration by the board of directors, which will take into
account First Defiance's financial condition and results of operations, economic
conditions, industry standards and regulatory restrictions which affect First
Defiance's ability to pay dividends.
Liquidity and Capital Resources
As a regulated financial institution, First Federal is required to maintain
appropriate levels of "liquid" assets to meet short-term funding requirements.
First Defiance believes it has adequate liquid assets and other sources to meet
its funding obligations. OTS regulations which required savings institutions to
maintain a specific level of liquid assets were repealed during the 2001 first
quarter.
First Defiance generated $48.7 million of cash from operating activities during
the first three months of 2001. The Company's cash from operating activities
results from net income for the period, adjusted for various non-cash items,
including the provision for loan losses, depreciation and amortization,
including amortization of mortgage servicing rights, ESOP expense related to
release of shares, and changes in loans available for sale, interest receivable
and other assets, and other liabilities. The primary investing activity of First
Defiance is the origination of loans (both for sale in the secondary market and
to be held in portfolio), which is funded with cash provided by operations,
proceeds from the amortization and prepayments of existing loans, the sale of
loans, proceeds from the sale or maturity of securities, borrowings from the
FHLB, and customer deposits.
At March 31, 2001, First Defiance had $50.1 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $57.8 million committed under existing consumer and
commercial lines of credit and standby letters of credit. Also at that date,
First Defiance had commitments to sell $159.0 million of loans held-for-sale and
it also had commitments to acquire $2.6 billion of mortgage loans under active
or pending first-time homebuyer programs, all of which have offsetting
commitments for sale into the secondary market as GNMA or FNMA mortgage-backed
securities. Also as of March 31, 2001, the total amount of certificates of
deposit that are scheduled to mature by March 31, 2002 is $347.8 million. First
Defiance believes that it has adequate resources to fund commitments as they
arise and that it can adjust the rate on savings certificates to retain deposits
in changing interest rate environments. If First Defiance requires funds beyond
its internal funding capabilities, advances from the FHLB of Cincinnati and
other financial institutions are available.
First Defiance, through The Leader, utilizes forward purchase and forward sale
agreements to meet the needs of its customers and manage its exposure to
fluctuations in the fair value of mortgage loans held for sale and its pipeline.
These forward purchase and forward sale agreements are considered to be
derivatives as defined by FAS 133, Accounting for Derivatives and Hedging
Instruments. The change in value in the forward purchase and forward sale
agreements is approximately equal to the change in value in the loans held for
sale and the effect of this accounting treatment is not material to the
financial statements.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
First Defiance also invests in derivative securities as part of the overall
asset and liability management process. Such derivative securities include REMIC
and CMO investments. Such investments are not classified as high risk at March
31, 2001 and do not present risk significantly different than other
mortgage-backed or agency securities.
First Federal is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible capital
requirement, a core capital requirement, and a risk-based capital requirement.
The following table sets forth First Federal's compliance with each of the
capital requirements at March 31, 2001.
Tangible Core Risk-Based
Capital Capital Capital
------- ------- --------
(Dollars in Thousands)
Regulatory capital $ 61,826 $ 61,826 $ 70,102
Minimum required regulatory
capital 14,710 39,227 52,907
--------- --------- ---------
Excess regulatory capital $ 47,116 $ 22,599 $ 17,195
========= ========= =========
Regulatory capital as a
percentage of assets (1) 6.3% 6.3% 10.6%
Minimum capital required as
a percentage of assets 1.5% 4.0% 8.0%
--------- --------- ---------
Excess regulatory capital as a
percentage in excess of
requirement 4.8% 2.3% 2.6%
========= ========= =========
- -------------------
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $980.7 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $661.3 million.
First Federal's capital at March 31, 2001 meets the standards for a
well-capitalized institution. The Leader has had a significant effect on First
Federal's capital due to the treatment under OTS regulations of mortgage
servicing rights, which comprise a substantial portion of The Leader's assets.
For purposes of the capital calculations, mortgage servicing rights that can be
included in core and risk-based capital are limited 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 The Leader's mortgage servicing portfolio has grown at a
faster rate than First Federal's core capital, First Federal's capital levels
have been adversely affected. First Federal is pursuing ways to permit The
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 First Federal does not
remain well-capitalized, its use of brokered deposits could be adversely
affected. Federal law requires than an institution which is adequately
capitalized must obtain FDIC approval to utilize brokered deposits. First
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -Continued
Federal has used brokered deposits to fund certain aspects of The Leader's
mortgage banking activities.
FDIC Insurance
The Deposits of First Federal are currently insured by the Savings Association
Insurance Fund("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
to commercial bank depositors. Both the SAIF and BIF are required by law to
maintain a reserve ratio of 1.25% of insured deposits. First Federal's annual
deposit insurance premiums for 2001 are approximately $0.019 per $100 of
deposits.
24
Item 3. Qualitative and Quantitative Disclosure About Market Risk
As discussed in detail in the 2000 Annual Report on Form 10-K, First Defiance's
ability to maximize net income is dependent on management's ability to plan and
control net interest income through management of the pricing and mix of assets
and liabilities. Because a large portion of assets and liabilities of First
Defiance are monetary in nature, changes in interest rates and monetary or
fiscal policy affect its financial condition and can have significant impact on
the net income of the Company. Other than forward purchase and forward sale
agreements utilized by First Defiance as part of its mortgage banking operations
at The Leader, First Defiance does not use derivatives to enhance its risk
management, nor does it engage in trading activities beyond the sale of mortgage
loans.
First Defiance monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyses the effect of a
presumed 100 basis point shift in interest rates (which is consistent with
management's estimate of the range of potential interest rate fluctuations) and
takes into account prepayment speeds on amortizing financial instruments, loan
and deposit volumes and rates, nonmaturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise or fall 100 basis points over a 12 month period, using
March 2001 amounts as a base case, First Defiance's net interest income would be
impacted by less than the board mandated guidelines of 10%.
The simulation model used by First Defiance measures the impact of rising and
falling interest rates on net interest income only. The Company also monitors
the potential change in the value of its mortgage-servicing portfolio given the
same 100 basis point shift in interest rates. At March 31, 2001, a 100 basis
point decrease in interest rates would require a $4.5 million adjustment to
First Defiance's reserve for impairment of MSRs.
25
FIRST DEFIANCE FINANCIAL CORP.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a
material nature.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 24, 2001,
in Defiance, Ohio the shareholders elected three directors to
three-year terms. The following is a tabulation of all votes
timely cast in person or by proxy by shareholders of First
Defiance for the annual meeting:
I. Nominees for Director with Three-year Terms Expiring in 2004:
NOMINEE FOR WITHHELD
William J. Small 5,736,546 88,610
Stephen L. Boomer 5,733,025 92,131
Peter A. Diehl 5,668,093 157,063
II. Proposal to Adopt the 2001 Stock Option and Incentive Plan
FOR AGAINST ABSTAIN
4,882,978 852,691 89,487
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Not Applicable
26
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: May 11, 2001 By: /s/ William J. Small
------------ --------------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: May 11, 2001 By: /s/ John C. Wahl
------------ ------------------------------------
John C. Wahl
Executive Vice President, Chief
Financial Officer and
Treasurer
27