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 June 30, 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 -
6,834,959 shares outstanding at August 10, 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 - June 30, 2001 and December 31, 2000 1
Consolidated Condensed Statements of Income -
Three and six months ended June 30, 2001 and 2000 3
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Six months ended
June 30, 2001 4
Consolidated Condensed Statements of Cash Flows
- Six months ended June 30, 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 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 31
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in thousands, except for share data)
- ------------------------------------------------------------------------------------------
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 12,304 $ 7,320
Interest-bearing deposits 14,417 13,634
---------- ----------
26,721 20,954
Securities:
Available-for-sale, carried at fair value 51,700 53,176
Trading, carried at fair value -- 234
Held-to-maturity, carried at amortized cost
(approximate fair value $6,904 and $7,770
at June 30, 2001 and December 31,
2000, respectively) 6,786 7,697
---------- ----------
58,486 61,107
Loans held for sale (at lower of cost or fair value,
approximate fair value $218,693 and $232,314 at
June 30, 2001 and December 31, 2000, respectively) 218,693 232,314
Loans receivable, net 544,828 541,208
Mortgage servicing rights 145,379 134,760
Accrued interest receivable 6,098 5,976
Federal Home Loan Bank stock 15,804 15,251
Office properties and equipment 21,754 22,203
Real estate and other assets held for sale 508 312
Goodwill, net 13,596 13,983
Other assets 26,654 24,126
---------- ----------
Total assets $1,078,521 $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)
- ----------------------------------------------------------------------------------------------
June 30, 2001 December 31, 2000
------------- -----------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 41,964 $ 33,256
Interest-bearing deposits 538,000 512,643
----------- -----------
Total deposits 579,964 545,899
Advances from Federal Home Loan Bank 256,251 223,258
Warehouse and term notes payable 22,591 120,425
Advance payments by borrowers for taxes and insurance 101,356 67,982
Deferred taxes 2,251 2,611
Other liabilities 12,157 12,546
----------- -----------
Total liabilities 974,570 972,721
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; 6,834,956
and 6,863,541 shares outstanding, respectively 68 69
Additional paid-in capital 53,359 53,512
Stock acquired by ESOP (2,919) (3,238)
Deferred compensation (146) (204)
Accumulated other comprehensive income,
net of income taxes of $333
and $(22), respectively 546 47
Retained earnings 53,043 49,287
----------- -----------
Total stockholders' equity 103,951 99,473
----------- -----------
Total liabilities and stockholders' equity $ 1,078,521 $ 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 For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Interest income
Loans $ 15,228 $ 14,206 $ 30,652 $ 28,514
Investment securities 917 1,003 1,863 2,474
Interest-bearing deposits 149 150 210 201
-------- -------- -------- --------
Total interest income 16,294 15,359 32,725 31,189
Interest expense
Deposits 6,458 6,153 13,539 11,776
FHLB advances and other 2,874 2,842 6,114 5,729
Notes payable and warehouse loans 417 1,230 1,235 2,362
-------- -------- -------- --------
Total interest expense 9,749 10,225 20,888 19,867
-------- -------- -------- --------
Net interest income 6,545 5,134 11,837 11,322
Provision for loan losses 631 581 1,404 1,989
-------- -------- -------- --------
Net interest income after provision for
loan losses 5,914 4,553 10,433 9,333
Noninterest income
Mortgage banking income 11,032 8,599 22,127 16,703
Loan service fees and other charges 641 481 1,195 872
Dividends on stock 282 266 556 514
Gain on sale of loans 1,691 2,587 3,855 4,531
Loss on sale of securities (15) -- (61) --
Trust income 26 19 55 37
Other noninterest income 1,176 1,166 2,372 2,304
-------- -------- -------- --------
Total noninterest income 14,833 13,118 30,099 24,961
Noninterest expense
Compensation and benefits 5,904 5,921 11,793 11,435
Occupancy 1,263 1,205 2,621 2,413
SAIF deposit insurance premiums 30 30 60 58
State franchise tax 313 287 677 582
Data processing 266 315 608 648
Amortization of mortgage servicing rights 5,109 3,699 9,535 7,240
Net impairment of mortgage servicing rights 1,358 5 1,387 3
Amortization of goodwill 222 219 442 435
Other noninterest expense 2,218 2,133 4,666 4,249
-------- -------- -------- --------
Total noninterest expense 16,683 13,814 31,789 27,063
-------- -------- -------- --------
Income before income taxes 4,064 3,857 8,743 7,231
Federal income taxes 1,478 1,399 3,102 2,573
-------- -------- -------- --------
Net income $ 2,586 $ 2,458 $ 5,641 $ 4,658
======== ======== ======== ========
Earnings per share (Note 4)
Basic $ 0.40 $ 0.39 $ 0.88 $ 0.74
======== ======== ======== ========
Diluted $ 0.39 $ 0.38 $ 0.86 $ 0.73
======== ======== ======== ========
Dividends declared per share (Note 3) $ 0.12 $ 0.11 $ 0.24 $ 0.22
======== ======== ======== ========
Average shares outstanding (Note 4)
Basic 6,394 6,305 6,381 6,272
======== ======== ======== ========
Diluted 6,603 6,407 6,571 6,394
======== ======== ======== ========
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 $69 $53,512 $(3,238) $ (204)
Comprehensive income:
Net income
Change in unrealized gains (losses)
net of income taxes of $355
Total comprehensive income
ESOP shares released 92 319
Amortization of deferred compensation
of Management Recognition Plan 58
Shares issued under stock option plan 97
Purchase of common stock for
treasury (1) (342)
Dividends declared (Note 3)
---- ------- ------- -----
Balance at June 30 $ 68 $53,359 $(2,919) $(146)
==== ======= ======= =====
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 $ 47 $49,287 $99,473 $89,416
Comprehensive income:
Net income 5,641 5,641 4,658
Change in unrealized gains (losses)
net of income taxes of $355 499 499 (55)
--- ----
Total comprehensive income 6,140 4,603
ESOP shares released 411 389
Amortization of deferred compensation
of Management Recognition Plan 58 129
Shares issued under stock option plan 97 364
Purchase of common stock for
treasury (325) (668) (9)
Dividends declared (Note 3) (1,560) (1,560) (1,418)
---- ------- -------- -------
Balance at June 30 $546 $53,043 $103,951 $93,474
==== ======= ======== =======
See accompanying notes
5
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in thousands)
- --------------------------------------------------------------------------------------------
Six Months
Ended June 30,
2001 2000
----------- -----------
Operating Activities
Net income $ 5,641 $ 4,658
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 1,404 1,989
Provision for depreciation 1,098 998
Net securities amortization 11 31
Amortization of mortgage servicing rights 9,535 7,240
Net impairment of mortgage servicing rights 1,387 3
Amortization of goodwill 442 435
Gain on sale of loans (3,855) (4,531)
Amortization of Management Recognition Plan
deferred compensation 58 129
Release of ESOP Shares 411 389
Gain on disposal of office properties and equipment -- (60)
Net securities losses 61 --
Deferred federal income tax credit (715) (602)
Proceeds from sale of loans 989,156 1,171,145
Origination of mortgage servicing rights, net (21,541) (24,028)
Origination of loans held for sale (971,680) (1,126,699)
Increase in interest receivable and other assets (2,705) (4,274)
Net repurchase of loans (14,877) (6,151)
(Decrease) increase in other liabilities (389) 815
----------- -----------
Net cash (used in) provided by operating activities (6,558) 21,487
Investing Activities
Proceeds from maturities of held-to-maturity securities 896 1,220
Proceeds from maturities of available-for-sale securities 2,915 2,817
Proceeds from sale of available-for-sale securities 1,894 --
Proceeds from sale of trading securities 233 29,563
Proceeds from sales of real estate, mobile homes, and
other assets held for sale 324 1,967
Proceeds from sales of office properties and equipment 27 323
Purchases of available-for-sale securities (2,535) (2,392)
Purchases of Federal Home Loan Bank stock (553) (511)
Purchases of office properties and equipment (676) (1,377)
Net decrease (increase) in loans receivable 9,333 (42,443)
----------- -----------
Net cash provided by (used in) investing activities 11,858 (10,833)
6
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in thousands)
- ----------------------------------------------------------------------------------------
Six Months Ended
June 30,
2001 2000
--------- ---------
Financing Activities
Net increase in deposits and advance payments by borrowers
for taxes and insurance 67,439 69,305
Repayment of Federal Home Loan Bank long-term advances (257) (100,443)
Repayment of term notes payable (156) (305)
Net (decrease) increase in Federal Home Loan Bank
short-term advances (56,750) 56,000
Proceeds from short-term line of credit 4,600 10,000
Proceeds from Federal Home Loan Bank long term notes 90,000 --
Decrease in mortgage warehouse loans (102,278) (47,043)
Purchase of common stock for treasury (668) (9)
Cash dividends paid (1,560) (1,408)
Proceeds from exercise of stock options 97 364
--------- ---------
Net cash provided by (used in) financing activities 467 (13,539)
--------- ---------
Increase (decrease) in cash and cash equivalents 5,767 (2,885)
Cash and cash equivalents at beginning of period 20,954 16,236
--------- ---------
Cash and cash equivalents at end of period $ 26,721 $ 13,351
========= =========
Supplemental cash flow information:
Interest paid $ 21,119 $ 19,558
========= =========
Income taxes paid $ 3,440 $ 3,200
========= =========
Transfers from loans to real estate
and other assets held for sale $ 161 $ 234
========= =========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ (355) $ 27
========= =========
Noncash investing activities:
Increase (decrease) in net unrealized gain or loss on
available-for-sale securities $ 854 $ (82)
========= =========
Noncash financing activities:
Cash dividends declared but not paid $ 782 $ 713
========= =========
See accompanying notes.
7
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at June 30, 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 June 30,
2001 and for the three-month and six-month periods ending June 30, 2001 and
2000 have been prepared by First Defiance without audit and do not include
certain information or footnotes necessary for the complete presentation of
financial condition, results of operations, and cash flows in conformity
with accounting principles generally accepted in the United States. 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 and six-month periods ended June 30, 2001
are not necessarily indicative of the results that may be expected for the
entire year.
3. Dividends on Common Stock
As of June 30, 2001, First Defiance had declared a quarterly cash dividend
of $.12 per share for the second quarter of 2001, payable July 27, 2001.
8
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 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 and six-month periods ended June 30, 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 and six-month periods ended June
30, 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 Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
------ ------ ------ ------
Numerator for basic and diluted
earnings per share - net income $2,586 $2,458 $5,641 $4,658
====== ====== ====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,394 6,305 6,381 6,272
Effect of dilutive securities:
Employee stock options 177 38 144 47
Unvested Management Recognition
Plan stock 32 64 46 75
------ ------ ------ ------
Dilutive potential common shares 209 102 190 122
------ ------ ------ ------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,603 6,407 6,571 6,394
====== ====== ====== ======
Basic earnings per share $ .40 $ .39 $ .88 $ .74
====== ====== ====== ======
Diluted earnings per share $ .39 $ .38 $ .86 $ .73
====== ====== ====== ======
9
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2001 and 2000)
- --------------------------------------------------------------------------------
5. Loans
Loans receivable and held for sale consist of the following (in thousands):
June 30, December 31,
2001 2000
-------- --------
Real Estate:
One-to-four family residential real estate $443,803 $478,221
Construction loans 9,311 9,628
Commercial real estate 155,906 132,204
-------- --------
609,020 620,053
Other Loans:
Commercial 90,766 82,851
Consumer finance 45,409 52,142
Home equity and improvement 33,400 31,836
-------- --------
169,575 166,829
-------- --------
Total mortgage and other loans 778,595 786,882
Deduct:
Loans in process 4,590 3,415
Net deferred loan origination fees and costs 1,093 1,041
Allowance for loan loss 9,391 8,904
-------- --------
Totals $763,521 $773,522
======== ========
6. Mortgage Servicing Rights
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows
(in thousands):
Six Months
Ended Year Ended
June 30, December 31,
2001 2000
------- --------
Balance at beginning of period $134,760 $97,519
Loans sold, servicing retained 21,541 52,225
Net impairment charge (1,387) (21)
Amortization (9,535) (14,963)
------- --------
Balance at end of period $145,379 $134,760
======== ========
10
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2001 and 2000)
- --------------------------------------------------------------------------------
6. Mortgage Servicing Rights - Continued
Accumulated amortization of mortgage servicing rights aggregated
approximately $42.0 million and $32.4 million at June 30, 2001 and December
31, 2000, respectively. Additionally, the accumulated reserve for
impairment aggregated approximately $1.4 million and $11,000 at June 30,
2001 and December 31, 2000, respectively.
The Company's mortgage servicing portfolio (excluding subserviced loans) is
comprised of the following as of June 30, 2001 (dollars in thousands):
Number Principal Balance
of Loans Outstanding
-------- -----------
GNMA 89,739 $6,303,766
FNMA 13,901 909,266
FHLMC 2,397 120,271
Other VA, FHA and
Conventional loans 25,764 1,222,463
------- ----------
131,801 $8,555,766
======= ==========
7. Deposits
A summary of deposit balances is as follows (in thousands):
June 30, December 31,
2001 2000
--------- ----------
Noninterest-bearing checking accounts $ 41,964 $ 33,256
Interest-bearing checking accounts 31,215 32,645
Savings accounts 37,051 37,551
Money market demand accounts 98,064 78,961
Certificates of deposit 371,670 363,486
--------- ----------
$ 579,964 $ 545,899
========= ==========
11
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 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 June 30, 2001
(in thousands)
Retail Mortgage
Consolidated Parent Banking Banking
---------- --------- ---------- --------
Total interest income $ 16,294 $ (4,081) $ 16,081 $ 4,294
Total interest expense 9,749 (3,912) 10,904 2,757
---------- --------- ---------- --------
Net interest income 6,545 (169) 5,177 1,537
Provision for loan losses 631 - 253 378
---------- --------- ---------- --------
Net interest income after
provision 5,914 (169) 4,924 1,159
Non-interest income 14,833 570 1,852 12,411
Non-interest expense 16,683 763 4,246 11,674
---------- --------- ---------- --------
Income before income taxes 4,064 (362) 2,530 1,896
Income taxes 1,478 (97) 798 777
---------- --------- ---------- --------
Net income $ 2,586 $ (265) $ 1,732 $ 1,119
========== ========= ========== ========
Total assets $1,078,521 $(417,467) $1,065,780 $430,208
========== ========= ========== ========
12
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2001 and 2000)
- --------------------------------------------------------------------------------
8. Line of Business Reporting-Continued
Six-Months Ended June 30, 2001
(in thousands)
Retail Mortgage
Consolidated Parent Banking Banking
---------- --------- ---------- --------
Total interest income $ 32,725 $ (8,838) $ 33,016 $ 8,547
Total interest expense 20,888 (8,460) 22,748 6,600
---------- --------- ---------- --------
Net interest income 11,837 (378) 10,268 1,947
Provision for loan losses 1,404 - 387 1,017
---------- --------- ---------- --------
Net interest income after
provision 10,433 (378) 9,881 930
Non-interest income 30,099 1,109 3,298 25,692
Non-interest expense 31,789 1,436 8,772 21,581
---------- --------- ---------- --------
Income before income taxes 8,743 (705) 4,407 5,041
Income taxes 3,102 (202) 1,408 1,896
---------- --------- ---------- --------
Net income $ 5,641 $ (503) $ 2,999 $ 3,145
========== ========= ========== ========
Total assets $1,078,521 $(417,467) $1,065,780 $430,208
========== ========= ========== ========
Three-Months Ended June 30, 2000
(in thousands)
Retail Mortgage
Consolidated Parent Banking Banking
---------- --------- ---------- --------
Total interest income $ 15,359 $ (4,532) $ 15,741 $ 4,150
Total interest expense 10,225 (4,484) 10,527 4,182
---------- --------- ---------- --------
Net interest income 5,134 (48) 5,214 (32)
Provision for loan losses 581 - 75 506
---------- --------- ---------- --------
Net interest income after
provision 4,553 (48) 5,139 (538)
Non-interest income 13,118 629 1,066 11,423
Non-interest expense 13,814 720 4,332 8,762
---------- --------- ---------- --------
Income before income taxes 3,857 (139) 1,873 2,123
Income taxes 1,399 (38) 614 823
---------- --------- ---------- --------
Net income $ 2,458 $ (101) $ 1,259 $ 1,300
========== ========= ========== ========
Total assets $ 979,762 $(352,625) $966,219 $366,168
========== ========= ========== ========
13
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2001 and 2000)
- --------------------------------------------------------------------------------
8. Line of Business Reporting-Continued
Six-Months Ended June 30, 2000
(in thousands)
Retail Mortgage
Consolidated Parent Banking Banking
---------- --------- ---------- --------
Total interest income $ 31,189 $ (8,830) $ 30,645 $ 9,374
Total interest expense 19,867 (8,854) 20,246 8,475
---------- --------- ---------- --------
Net interest income 11,322 24 10,399 899
Provision for loan losses 1,989 - 311 1,678
---------- --------- ---------- --------
Net interest income after
provision 9,333 24 10,088 (779)
Non-interest income 24,961 1,266 1,983 21,712
Non-interest expense 27,063 1,407 8,661 16,995
---------- --------- ---------- --------
Income before income taxes 7,231 (117) 3,410 3,938
Income taxes 2,573 (9) 1,092 1,490
---------- --------- ---------- --------
Net income $ 4,658 $ (108) $ 2,318 $ 2,448
========== ========= ========== ========
Total assets $ 979,762 $(352,625) $ 966,219 $366,168
========== ========= ========== ========
9. 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. 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.
14
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2001 and 2000)
- --------------------------------------------------------------------------------
10. Accounting Pronouncements Pending Adoption
Business Combinations. In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 114,
"Business Combinations" (SFAS 141), which replaces Accounting Principles
Board Opinion No. 16. SFAS 141 eliminates the pooling-of-interests method
of accounting for business combinations initiated after June 30, 2001.
Subsequent to June 30, 2001, First Defiance has not initiated any business
combinations that would have qualified for the pooling-of-interest method
of accounting.
Goodwill and Other Intangible Assets. In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which takes effect for fiscal years beginning after December 15, 2001.
SFAS 142 replaces Accounting Principles Board Opinion No. 17 and
eliminates the amortization of goodwill and intangible assets deemed to
have indefinite lives. Goodwill and certain intangible assets are subject
to impairment tests which must be conducted at least annually. Impairment
losses that result from the initial application of SFAS 142 will be
accounted for as a "cumulative effect of accounting change" on First
Defiance's income statement. First Defiance will adopt SFAS 142 as of
January 1, 2001. Management is currently reviewing SFAS and has not yet
determined the extent to which it will impact First Defiance's financial
condition and results of operations.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
General
- -------
First Defiance is a holding company which conducts business through its two
wholly owned subsidiaries, First Federal Bank of the Midwest ("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. The Company's traditional banking activities include originating and
servicing residential, commercial and consumer loans; providing a broad range of
depository services; and providing trust services. First Federal is subject to
the regulations of certain federal agencies and undergoes periodic examinations
by those regulatory authorities. The Leader is a mortgage banking company which
specializes in servicing mortgage loans originated under first-time home-buyer
programs sponsored by various state, county and municipal governmental entities.
The Company's mortgage banking activities consist primarily of originating or
purchasing residential mortgage loans for either direct resale into secondary
markets or to be securitized under various Government National Mortgage
Association ("GNMA") mortgage backed securities. First Insurance is an insurance
agency that does business in the Defiance, Ohio area. First Insurance offers
property and casualty, life insurance, group health, and investment products.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies and, to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to hold the security to maturity. Held-to-maturity
securities are stated at amortized cost and had a recorded value of $6.8 million
at June 30, 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 $51.7 million at June 30, 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 ($10.1
million), certain municipal obligations ($7.8 million), adjustable-rate
mortgage-backed security mutual funds ($4.5 million), CMOs and REMICs ($6.4
million), mortgage-backed securities ($2.3 million), and preferred stock and
other equity investments ($2.3 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 $879,000 at June 30, 2001, or $546,000 after considering the
related deferred tax liability.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
The profitability of First Defiance is primarily dependent on its net interest
income and non-interest income. Net interest income is the difference between
interest and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits, Federal Home Loan
Bank 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 June 30, 2001, First Defiance's total assets, deposits (including customer's
escrow deposits) and stockholders' equity amounted to $1.079 billion, $681.3
million and $104.0 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 $544.8 million at June 30, 2001 from
$541.2 million at December 31, 2000. During the same period, loans held-for-sale
decreased to $218.7 million at June 30, 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
minimize the balance of this lower yielding asset.
Mortgage servicing rights increased to $145.4 million at June 30, 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 June 30, 2001 the weighted
average coupon rate of the mortgage servicing portfolio was 7.02% compared to
7.00% at December 31, 2000. The Company has an independent appraisal prepared
annually and estimates the fair value each month based upon the results of the
appraisal. The most recent independent appraisal was completed as of May 31,
2001. The approximate fair market value of the mortgage servicing rights was
$167.8 million at June 30, 2001 compared to $184.9 million at December 31, 2000.
The actual value of servicing may vary significantly from the estimated fair
value due to 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.
Deposits increased from $545.9 million at December 31, 2000 to $580.0 million as
of June 30, 2001. This increase was the result of a $19.1 million increase in
money market demand accounts and a $8.7 million increase in non-interest-bearing
checking and a $8.2 million increase in certificates of deposit, net of
decreases in interest bearing demand deposit accounts and savings accounts of
$1.4 million and $500,000, respectively. The increase in deposits was due to a
combination of favorable rates and marketing of the Company's money market
demand accounts, increased commercial deposits due to increased activity in both
loans and deposits with commercial customers, and the addition and continued
growth of recently opened branches.
Customer's escrow deposits increased from $68.0 million at December 31, 2000 to
$101.4 million at June 30, 2001 due to increases in prepayments in The Leader's
loan servicing portfolio. The
17
Leader holds proceeds from prepayments for a period of up to forty-five days
prior to being remitted to the investors. Additionally, advances from the
Federal Home Loan Bank increased to $256.3 million as of June 30, 2001 from
$223.3 million as of December 31, 2000. As a result of the increases in internal
sources of funds and increased borrowing capacity at the Federal Home Loan Bank,
warehouse and term notes payable decreased from $120.4 million as of December
31, 2000 to $22.6 million.
Forward-Looking Information
- ---------------------------
Certain statements contained in this quarterly report that are not historical
facts, including but not limited to statements that can be identified by the use
of forward-looking terminology such as "may", "will", "expect", "anticipate", or
"continue" or the negative thereof or other variations thereon or comparable
terminology are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21B of the Securities Act
of 1934, as amended. Actual results could differ materially from those indicated
in such statements due to risks, uncertainties and changes with respect to a
variety of market and other factors.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
Average Balances, Net Interest Income and Yields Earned and Rates Paid
- ----------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based upon daily balances. See Results
of Operations section for a discussion of the impact on 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 June 30,
----------------------------------------------------------------------------------------
2001 2000
----------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $ 745,205 $ 15,228 8.17% $ 727,245 $ 14,206 7.81%
Securities 59,988 1,066 7.11 64,562 1,153 7.14
FHLB stock 15,530 282 7.26 14,431 266 7.37
---------- ---------- ---------- ----------
Total interest-earning assets 820,723 16,576 8.08 806,238 15,625 7.75
Non-interest-earning assets 245,050 189,907
---------- ----------
Total assets $1,065,773 $ 996,145
========== ==========
Interest-bearing liabilities:
Deposits $ 572,687 $ 6,458 4.51% $ 530,179 $ 6,153 4.64%
FHLB advances and other 230,435 2,874 4.99 203,530 2,842 5.59
Notes payable 27,698 417 6.02 82,990 1,230 5.93
---------- ---------- ---------- ----------
Total interest-bearing liabilities 830,820 9,749 4.69 816,699 10,225 5.01
---------- ---------- ---------- ----------
Non-interest-bearing liabilities 132,006 87,595
---------- ----------
Total liabilities 962,826 904,294
Stockholders' equity 102,947 91,851
---------- ----------
Total liabilities and stock-
holders' equity $1,065,773 $ 996,145
========== ==========
Net interest income; interest
rate spread $ 6,827 3.39% $ 5,400 2.74%
========== ==== ========== ====
Net interest margin (2) 3.33% 2.68%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 99% 99%
== ==
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
Six Months Ended June 30,
----------------------------------------------------------------------------------------
2001 2000
----------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $ 746,219 $ 30,652 8.22% $ 702,601 $ 28,514 8.12%
Securities 60,258 2,073 6.68 74,578 2,675 7.17
FHLB stock 15,392 556 7.22 14,307 514 7.19
---------- ---------- ---------- ----------
Total interest-earning assets 821,869 33,281 8.10 791,486 31,703 8.01
Non-interest-earning assets 235,420 182,870
---------- ----------
Total assets $1,057,289 $ 974,356
========== ==========
Interest-bearing liabilities:
Deposits $ 571,343 $ 13,539 4.74% $ 517,843 $ 11,776 4.55%
FHLB advances and other 230,811 6,114 5.30 210,699 5,729 5.44
Notes payable 38,049 1,235 6.49 75,081 2,362 6.29
---------- ---------- ---------- ----------
Total interest-bearing liabilities 840,203 20,888 4.97 803,623 19,867 4.94
Non-interest-bearing liabilities 115,279 79,782
---------- ----------
Total liabilities 955,482 883,405
Stockholders' equity 101,807 90,951
---------- ----------
Total liabilities and stock-
holders' equity $1,057,289 $ 974,356
========== ==========
Net interest income; interest
rate spread $ 12,393 3.13% $ 11,836 3.07%
========== ==== ========== ====
Net interest margin (2) 3.02% 2.99%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 98% 98%
== ==
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000
- -----------------------------------------------------------------------------
On a consolidated basis, First Defiance had net income of $2.6 million for the
three months ended June 30, 2001 compared to $2.5 million for the same period in
2000. On a per share basis, basic and diluted earnings per share were $.40 and
$.39, respectively, for the 2001 second quarter compared to $.39 and $.38,
respectively, for the 2000 second quarter.
The results for the quarter included a pre-tax charge of nearly $1.4 million to
write down the value of certain segments of the Company's mortgage servicing
rights portfolio managed by The Leader. These write-downs were necessitated by
increased prepayments as a result of the current lower interest rate
environment. This adjustment resulted in an after-tax reduction in earnings of
$.14 per share.
Cash earnings for the second quarter of 2001 were $2.8 million or $.42 per
diluted share compared to $2.7 million or $.42 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 June 30, 2001 was
$6.5 million compared to $5.1 million for the same period in 2000. Net interest
margin for the 2001 second quarter was 3.33% compared to 2.68% for the same
period in 2000, an increase of 65 basis points.
Total interest income increased by $935,000, or 6.1%, from $15.4 million for the
three months ended June 30, 2000 to $16.3 million for the three months ended
June 30, 2001. The increase was due to a $14.5 million increase in the average
balance of interest-earning assets for the second quarter of 2001 when compared
to the first quarter of 2000. Additionally, the yield on interest-earning assets
increased to 8.08% for the three-month period ended June 30, 2001 from 7.75% for
the same period in 2000. Interest earnings from the loan portfolio increased
$1.0 million from $14.2 million for the three months ended June 30, 2000 to
$15.2 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 $745.2
million and 8.17% for the three-month period ended June 30, 2001, respectively,
from $727.2 million and 7.81%, respectively, for the same period in 2000. The
improvement in the average yield on the loan portfolio was primarily the result
of the continued growth in higher yielding commercial and commercial real estate
loans, which comprised 44.1% of the loan portfolio as of June 30, 2001 compared
to 36.2% at June 30, 2000.
Interest earnings from the investment portfolio decreased to $1.1 million for
the three months ended June 30, 2001 compared to $1.2 million for the same
period in 2000. The decrease in interest on investments was primarily the result
of a $4.6 million decrease in the average balance of investment securities, from
$64.6 million for the second quarter of 2000 to $60.0 million for the same
period in 2001. Additionally, the yield on the average portfolio balance for the
three months ended June 30, 2001 was 7.11% compared to 7.14% for the same period
in 2000.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
Interest expense decreased by $476,000, or 4.7%, to $9.7 million for the second
quarter of 2001 compared to $10.2 million for the same period in 2000. The
decrease is primarily due to the 32 basis point decrease in the average cost of
interest-bearing liabilities, to 4.69% for the second quarter of 2001 from 5.01%
for the same period of 2000. The decrease in funding cost was partially offset
by the $14.1 million increase in average interest-bearing liabilities during the
same period, from $816.7 million for the three-months ended June 30, 2000 to
$830.8 million for the same period in 2001. The increase in average
interest-bearing liabilities is primarily due to the funding of a $14.5 million
increase in average interest-earning assets noted above combined with a $55.2
million increase in average non-interest-earning assets, from $189.9 million for
the second quarter of 2000 to $245.1 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 $109.1
million for the three-months ended June 30, 2000 to $144.4 million for the same
period in 2001. The growth in the average balance of assets was partially funded
by a $44.4 million increase in the average balance of non-interest-bearing
liabilities, from $87.6 million for the three-months ended June 30, 2000 to
$132.0 million for the same period in 2001. The growth in the average balance of
non-interest-bearing liabilities was primarily the result of a $42.8 million
increase in the average balance of customer escrow balances from $73.3 million
for the second quarter of 2000 to $116.1 million for the same period in 2001.
The decrease in the Company's average cost of interest-bearing liabilities was
the result of the Company's strategy in 2000 to position the balance sheet for
lower interest rates. The average costs of deposits and FHLB advances declined
13 basis points and 60 basis points, respectively, to 4.51% and 4.99%,
respectively for the three-months ended June 30, 2001 from 4.64% and 5.59%,
respectively for the same period in 2000. Additionally, the average balance of
interest-bearing deposits, the Company's lowest cost source of interest-bearing
liabilities, increased from $530.2 million for the three-months ended June 30,
2000 to $572.7 million for the same period in 2001. This growth, a factor of
favorable rates on the money market deposit account, effective marketing,
increased penetration with commercial accounts and increased volumes at recently
opened branches, allowed the Company to reduce the average balance in warehouse
and term notes payable, the Company's highest cost source of funding, from $83.0
million for the second quarter of 2000 to $27.7 million for the same period in
2001.
Provision for Loan Losses. The provision for loan losses increased slightly to
$631,000 for the three-month period ended June 30, 2001 from $581,000 for the
same period in 2000. 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.
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets, totaled $1.9 million at June 30, 2001,
which is .18% of total assets. Non-performing loans and repossessed assets
reported do not include $19.0 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
June 30, 2001 was $9.4 million
22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
compared to $8.4 million at June 30, 2000 and $8.9 million at December 31, 2000.
For the quarter ended June 30, 2001, First Defiance charged off $685,000 of
loans against its allowance and realized recoveries of $149,000 from loans
previously charged off. During the same quarter in 2000, First Defiance charged
off $584,000 in loans and realized recoveries of $192,000.
Non-Interest Income. Non-interest income increased substantially in the second
quarter of 2001, from $13.1 million for the quarter ended June 30, 2000 to $14.8
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 $11.0 million for the three-month period
ended June 30, 2001 compared to $8.6 million for the same period in 2000, an
increase of $2.4 million or 28.3%. This increase in mortgage banking income was
primarily the result of the growth in the mortgage servicing portfolio from $6.9
billion as of June 30, 2000 to $8.6 billion at June 30, 2001.
Gain on Sale of Loans. Gain on sale of loans decreased to $1.7 million for the
quarter ended June 30, 2001 from $2.6 million for the same period of 2000. The
decrease in gains on sale of loans is a result of a reduction in production of
the Company's niche first-time home buyer programs, which have slowed
significantly as the borrowers that these programs typically attract have been
able to obtain attractive conventional loans in the lower rate environment
experienced during the first half of 2001. In a falling interest rate
environment, like the industry experienced during the 2001 first half, 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. Gains from the first-time homebuyer
programs were $576,000 for the 2001 second quarter, a decline from $2.5 million
in the same period in 2000. During that same period, loan settlements in these
programs decreased to $336.5 million for the 2001 second quarter from $594.8 in
the same period in 2000. Gains from conventional mortgage lending, both at First
Federal and through The Leader's retail origination division, have offset some
of the declines in the first-time homebuyer programs. Total gain on sale from
conventional mortgage originations was $1.1 million for the 2001 second quarter,
a 1,023% increase from the 2000 second quarter, which totaled only $109,000.
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 $2.1
million for the quarter ended June 30, 2001 from $1.9 for the same period in
2000. Deposit fees and other related charges at First Federal increased
$197,000, to $530,000 for the three-months ended June 30, 2001 from $333,000 for
the same period in 2000.
Non-Interest Expense. Total non-interest expense increased from $13.8 million
for the quarter ended June 30, 2000 to $16.7 million for the same period in
2001. Excluding amortization and impairment of mortgage servicing rights
non-interest expense increased by only 1.0%, from $10.1 million for the second
quarter of 2000 to $10.2 million for the same period in 2001. Significant
individual components of the increase are as follows:
Amortization and Impairment of Mortgage Servicing Rights. Amortization and
impairment of mortgage servicing rights (MSRs) increased to $5.1 million and
$1.4 million, respectively, for the
23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
quarter ended June 30, 2001 from $3.6 million and $5,000, respectively, for the
same period in 2000. These increases were due to the growth in the mortgage
servicing portfolio from $6.9 billion as of June 30, 2000 to $8.6 billion at
June 30, 2001 and increases in prepayments on this portfolio during the second
quarter of 2001 compared to the same period in 2000. The lower interest rate
environment of the second quarter of 2001 has increased prepayments on the
Company's servicing portfolio to 9.79%, annualized, compared to 4.54% for the
second quarter of 2000, annualized. The impairment charge was isolated to a
specific segment of the Company's servicing portfolio, which is servicing
mortgages issued under taxable bond programs with coupon rates exceeding 8%. The
total estimated fair value of the Company's servicing portfolio as of June 30,
2001 was $167.8 million, which exceeds book value (excluding the impairment
charges recorded) by $20.9 million. While management believes it has accounted
for impairment in a conservative manner, further drops in mortgage interest
rates or other factors causing prepayments to remain high could result in
additional impairment charges.
Compensation and Benefits. Compensation and benefits decreased $17,000 from
$5.921 million for the quarter ended June 30, 2000 to $5.904 million for the
same period in 2001. This decrease was the result of lower compensation due to a
reduction in the production levels at The Leader. This decrease is partially
offset by staffing increases to handle greater volumes of loans serviced in The
Leader's servicing portfolio and the addition of a full service branch in
Bowling Green, Ohio in the fourth quarter of 2000.
Occupancy. Occupancy expense increased from $1.2 million for the three-month
period ended June 30, 2000 to $1.3 for the three months ended June 30, 2001.
This increase was a result of expansions throughout the Company.
Amortization of Goodwill. Amortization of goodwill amounted to $222,000 in the
second quarter of 2001 compared to $219,000 during the same period in 2000.
Under the recently issued Financial Accounting Standards Board Statement No.
142, Accounting for Goodwill and Other Intangibles, First Defiance will not
amortize goodwill beginning in January 2002. However goodwill will be subject to
periodic tests for impairment. Management has not completed the review necessary
to determine if any of its goodwill is impaired.
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, loan servicing, and
amortization of other acquisition costs) increased from $2.77 million for the
quarter ended June 30, 2000 to $2.83 million for the same period in 2001. 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. These increases in other non-interest expenses were
partially offset by decreases in amortization of other acquisition costs due to
the expiration of certain contractual payments that ended June 30, 2000.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 36.4% for the
quarter ended June 30, 2001 compared to 36.3% for the same period in 2000.
24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
As a result of the above factors, net income for the quarter ended June 30, 2001
was $2.6 million compared to $2.5 million for the comparable period in 2000. On
a per share basis, basic and diluted earnings per share for the three months
ended June 30, 2001 were $.40 and $.39, respectively, compared to $.39 and $.38,
respectively, for the same period in 2000. Average shares outstanding for the
basic and diluted calculations were 6,394,000 and 6,603,000, respectively, for
the quarter ended June 30, 2001 compared to 6,305,000 and 6,407,000,
respectively, for the quarter ended June 30, 2000.
First Defiance's board of directors declared a dividend of $.12 per common share
as of June 30, 2001. The dividend amounted to $825,321, including dividends on
unallocated ESOP shares. It was paid on July 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.
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
- -------------------------------------------------------------------------
On a consolidated basis, First Defiance had net income of $5.6 million for the
six months ended June 30, 2001 compared to $4.7 million for the same period in
2000. On a per share basis, basic and diluted earnings per share were $.88 and
$.86, respectively, compared to $.74 and $.73 basic and diluted per share
earnings for the same period in 2000. The results for the six-month period ended
June 30, 2001 included a $1.4 million pre-tax charge ($.14 per share after-tax)
to write down the value of certain segments of the Company's mortgage servicing
rights portfolio.
Cash earnings for the six-months ended June 30, 2001 were $6.1 million or $.92
per diluted share compared to $5.1 million or $.79 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 before provision for loan losses
increased to $11.8 million for the six-month period ending June 30, 2001
compared to $11.3 million for the same period in 2000. The 2000 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. In addition,
management enhanced its method of estimating the required reserve for potential
losses on foreclosure loans to more accurately reflect the total risk inherent
in the servicing and loan portfolios at The Leader. This resulted in a one-time
adjustment to provision for loan losses of $693,000. The net impact of these two
items essentially offset each other and without these adjustments earnings for
the six months ended June 30, 2000 would still have been $.73 per diluted share.
The net interest margin for the first half of 2001 was 3.02% compared to 2.99%
for the same period in 2000 (2.82% excluding the one-time adjustment noted
above). The interest rate spread also increased to 3.13% for the six-month
period ended June 30, 2001 from 3.07% for the same period in 2000 (2.89%
excluding the one-time adjustment)..
Excluding the estimate change, total interest income increased by $2.2 million,
or 7.3%, from $30.5 million for the six months ended June 30, 2000 to $32.7
million for the same period in 2001. The increase was due to a $30.4 million
increase in the average balance of interest-earning assets for the
25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
six months ended June 30, 2001 when compared to the same period in 2000. The
yield on interest earning assets increased from 7.84% (8.01% including the
change in estimate) for the year-to-date period ended June 30, 2000 to 8.10% for
the same period in 2000. Excluding the impact of the change in estimate noted
above, interest earnings on the loan portfolio increased $2.9 million to $30.7
million for the six months ended June 30, 2001 from $27.8 million for the same
period in 2000. This increase was due to increases in the average balance of
loans receivable and the yield on these loans from $702.6 million and 7.92% for
the six-month period ended June 30, 2000, respectively, to $746.2 million and
8.22%, respectively, for the same period in 2001. As previously noted, although
interest rates have been generally decreasing throughout the first half of 2001,
the Company has increased the yield on the loan portfolio as a result of
continued growth in higher yielding commercial and commercial real estate loans.
Interest earnings from the investment portfolio decreased to $2.1 million for
the six months ended June 30, 2001 compared to $2.7 million for the same period
in 2000. The decrease in interest income was primarily the result of a $14.3
million decrease in the average balance of investment securities, to $60.3
million for the first six months of 2001 from $74.6 million for the same period
in 2000. This decrease resulted from including loans that were securitized
pending delivery to the bond trustees in trading securities beginning in late
December of 1999. These trading securities were delivered to the trustee during
the first quarter of 2000. Additionally, the yield on the average portfolio
balance for the six months ended June 30, 2001 was 6.68% compared to 7.17% for
the same period in 2000.
Interest expense increased by $1.0 million, or 5.1%, to $20.9 million for the
six months ended June 30, 2001 compared to $19.9 million for the same period in
2000. The increase is primarily due to the $36.6 million increase in average
interest-bearing liabilities, to $840.2 million for the first half of 2001 from
$803.6 million for the same period in 2000. The increase in average
interest-bearing liabilities is due to the funding of the $30.4 million increase
in average interest earning assets noted above combined with the funding of the
$52.5 million increase in average non-interest earning assets, from $182.9
million for the first six months of 2000 to $235.4 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 $105.3 million for the year-to-date period ended June 30, 2000 to $142.2
million for the same period in 2001. The growth in the average balance of assets
was partially funded by a $35.5 million increase in the average balance of
non-interest-bearing liabilities, to $115.3 million for the six-months ended
June 30, 2001 from $79.8 million for the same period in 2000. The growth in the
average balance of non-interest-bearing liabilities was primarily the result of
a $33.4 million increase in the average balance of customer escrow balances to
$115.3 million for the first half of 2001 from $66.6 million for the same period
in 2000.
Interest expense also increased due to an increase in the average cost of funds
during the first six months of 2001 to 4.97% from 4.94% for the comparable
period in 2000. This increase resulted from increases in the average costs of
deposits and notes payable of 19 basis points and 20 basis points, respectively,
from 4.55% and 6.29%, respectively for the six-months ended June 30, 2000, to
4.74% and 6.49%, respectively, for the same period in 2001. These increases were
partially offset by a 14 basis point decrease in the average cost of Federal
Home Loan Bank advances, from 5.44% for the first half of 2000 to 5.30% for the
same period in 2001.
26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
Provision for Loan Losses. The provision for loan losses decreased to $1.4
million for the six-months ended June 30, 2001 compared to $2.0 million for the
same period in 2000. As noted above, the 2000 amount included the $693,000
adjustment to reflect the change in accounting estimate on foreclosure loans at
The Leader. First Defiance charged off $1.2 million of loans against its
allowance for loan losses for the six-month period ended June 30, 2001 and
realized recoveries of $315,000 from loans previously charged off. During the
same period in 2000, First Defiance charged off $1.6 million in loans and
realized recoveries of $245,000.
Non-Interest Income. Non-interest income increased $5.1 million for the
six-month period ended June 30, 2001 to $30.1 million from $25.0 million for the
2001 and 2000 periods, respectively. Individual components of non-interest
income are as follows:
Mortgage Banking Income. Mortgage banking income, which includes servicing fees
and late charge income, increased to $22.1 million for the six-month period
ended June 30, 2001 from $16.7 million for the same period in 2000. This
increase in mortgage banking income was primarily the result of the growth in
the mortgage-servicing portfolio noted in the Results of Operations section for
the second quarter of 2001. The Company now services a total of 131,801 loans
with a balance of $8.6 billion.
Gain on Sale of Loans. Gain on sale of loans decreased to $3.9 million for the
six months ended June 30, 2001 from $4.5 million for the same period in 2000.
The decrease in gains on sale of loans is a result of the decreased production
in The Leader's niche first-time homebuyer programs noted in the Results of
Operations section for the second quarter of 2001. Through the first half of
2001, loan settlements under these programs decreased to $851.0 million from
$1,063.5 million for the same period in 2000.
Other Non-Interest Income. Other non-interest income, including insurance
commission income, dividends on Federal Home Loan Bank stock, gains on sale of
securities, trust revenues, and other miscellaneous charges, increased to $4.1
million for the six-month period ended June 30, 2001 from $3.7 million for the
same period in 2000. The primary reason for the growth in other non-interest
income was due to increasing deposit fees at the Company's First Federal Bank
subsidiary from $597,000 for the six-month period ended June 30, 2000 to
$980,000 for the same period in 2001.
Non-Interest Expense. Total non-interest expense increased to $31.8 million for
the six-month period ended June 30, 2001 from $27.1 million for the same period
in 2000. Excluding amortization and impairment of mortgage servicing rights,
non-interest expenses increased by $1.1 million, or 5.3%, from $19.8 million for
the first half of 2000 to $20.9 million for the same period of 2001. Significant
individual components of the increase are as follows:
Amortization and Impairment of Mortgage Servicing Rights. Amortization and
impairment of mortgage servicing rights increased from $7.2 million and $3,000,
respectively, for the six-month period ended June 30, 2000 to $9.5 million and
$1.4 million, respectively, for the same period in 2001 due to the growth in the
mortgage servicing portfolio and greater than expected prepayments. See the
discussion in the Results of Operations section for the second quarter of 2001.
For the first
27
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
half of 2001, the Company has experienced prepayments in the servicing portfolio
of 7.68%, annualized, compared to 4.01%, annualized, for the same period in
2000.
Compensation and Benefits. Compensation and benefits increased $358,000, or
3.1%, from $11.4 million for the year-to-date period ended June 30, 2000 to
$11.8 million for the same period in 2001. This increase was the result of
planned expansions of The Leader's operations, increases at First Federal to
support the growth in commercial lending and expansion of the branch network,
and general cost of living increases throughout the Company.
Occupancy. Occupancy expense increased to $2.6 million for the six-month period
ended June 30, 2001 from $2.4 million for the same period in 2000. This increase
was a result of expansions throughout the Company.
Amortization of Goodwill. Amortization of goodwill amounted to $442,000 for the
six months ended June 30, 2001 compared to $435,000 during the same period in
2000.
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $6.0 million for the six-month period ended June 30, 2001 compared to $5.5
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 include postage, examination
fees, real estate inspection fees, and collateral handling fees. The increase in
other non-interest expenses was partially offset by the decrease in amortization
of other acquisition costs due to the expiration of certain contractual payments
that ended June 30, 2000.
The effective tax rate utilized for the six months ended June 30, 2001 was 35.5%
compared to 35.6% for the six months ended June 30, 2000.
As a result of the above factors, net income for the six-month period ended June
30, 2001 increased to $5.6 million from $4.7 million for the six-months ended
June 30, 2000. On a per share basis, basic and diluted earnings per share for
the six months ended June 30, 2001 were $.88 and $.86, respectively, compared to
$.74 and $.73, respectively, for the same period in 2000. As stated above the
results for the six months ended June 30, 2001 were negatively impacted by a
pre-tax charge of nearly $1.4 million ($.14 per diluted share after tax) to
write down the value of certain segments of the Company's mortgage servicing
rights portfolio. Average shares outstanding for the basic and diluted
calculations were 6,381,000 and 6,571,000, respectively, for the six-months
ended June 30, 2001 compared to 6,272,000 and 6,394,000, respectively, for the
same period in 2000.
Through June 30, 2001, First Defiance has declared dividends totaling $.24 per
share.
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
28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
savings institutions to maintain a specific level of liquid assets were repealed
during the 2001 first quarter.
First Defiance used $6.6 million of cash in operating activities during the
first six 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 June 30, 2001, First Defiance had $52.8 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $50.7 million committed under existing consumer and
commercial lines of credit and standby letters of credit. Also at that date,
First Defiance had commitments to sell $221.3 million of loans held-for-sale and
it also had commitments to acquire $2.3 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 June 30, 2001, the total amount of certificates of
deposit that are scheduled to mature by June 30, 2002 is $304.0 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.
First Defiance also invests in on-balance sheet derivative securities as part of
the overall asset and liability management process. Such derivative securities
include REMIC and CMO investments. Such investments are not classified as high
risk at June 30, 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 June 30, 2001.
29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
- --------------------------------------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
--------- --------- ---------
(Dollars in Thousands)
Regulatory capital $ 65,569 $ 65,569 $ 74,097
Minimum required regulatory
capital 15,360 40,961 54,534
--------- --------- ---------
Excess regulatory capital $ 50,209 $ 22,599 $ 19,563
========= ========= =========
Regulatory capital as a
percentage of assets (1) 6.4% 6.4% 10.9%
Minimum capital required as
a percentage of assets 1.5% 4.0% 8.0%
--------- --------- ---------
Excess regulatory capital as a
percentage in excess of
requirement 4.9% 2.4% 2.9%
========= ========= =========
- ------------------------
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $1.024 billion. Risk-based capital is computed as a percentage
of total risk-weighted assets of $681.7 million.
FDIC Insurance
The Deposits of First Federal are currently insured by the Savings Association
Insurance Fund("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
to commercial bank depositors. Both the SAIF and BIF are required by law to
maintain a reserve ratio of 1.25% of insured deposits. First Federal's annual
deposit insurance premiums for 2001 are approximately $0.019 per $100 of
deposits.
30
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. First Defiance does not use off balance sheet
derivatives to enhance its risk management, nor does it engage in trading
activities beyond the sale of mortgage loans.
First Defiance monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyses the effect of a
presumed 100 basis point shift in interest rates (which is consistent with
management's estimate of the range of potential interest rate fluctuations) and
takes into account prepayment speeds on amortizing financial instruments, loan
and deposit volumes and rates, nonmaturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise or fall 100 basis points over a 12 month period, using
June 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 June 30, 2001, a 100 basis
point decrease in interest rates would require a $6.2 million adjustment to
First Defiance's reserve for impairment of MSRs.
31
FIRST DEFIANCE FINANCIAL CORP.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a material
nature.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable
32
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: August 13, 2001 By: /s/ William J. Small
--------------- ------------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: August 13, 2001 By: /s/ John C. Wahl
--------------- -------------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer
33