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, 2002
--------------
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
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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 -
6,808,760 shares outstanding at May 12, 2002.
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, 2002 and December 31, 2001 2
Consolidated Condensed Statements of Income -
Three months ended March 31, 2002 and 2001 4
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Three months ended
March 31, 2002 5
Consolidated Condensed Statements of Cash Flows
- Three months ended March 31, 2002 and 2001 7
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 27
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
1
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands)
- ----------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 9,982 $ 14,189
Interest-bearing deposits 24,398 24,332
---------- ----------
34,380 38,521
Securities:
Available-for-sale, carried at fair value 46,419 48,453
Held-to-maturity, carried at amortized cost
(approximate fair value $5,184 and $5,678
at March 31, 2002 and December 31,
2001 respectively) 5,067 5,818
---------- ----------
51,486 54,271
Loans held for sale 1,148 672
Loans receivable, net 498,392 499,141
Accrued interest receivable 3,255 2,940
Federal Home Loan Bank stock 16,487 16,306
Office properties and equipment 19,882 20,067
Real estate and other assets held for sale 194 136
Goodwill, net 3,529 3,749
Deferred Taxes 342 35
Mortgage servicing rights 2,319 1,821
Other assets 7,224 6,535
Assets of discontinued operations 493,872 488,454
---------- ----------
Total assets $1,132,510 $1,132,648
========== ==========
See accompanying notes.
2
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands)
- ------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
-------------- -----------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Non-interest-bearing deposits $ 28,349 $ 25,428
Interest-bearing deposits 578,425 589,420
Total deposits 606,774 614,848
Advances from Federal Home Loan Bank 237,699 196,302
Warehouse and term notes payable 25,360 24,220
Advance payments by borrowers for taxes and insurance 220 390
Other liabilities 8,156 9,263
Liabilities of discontinued operations 141,438 176,604
----------- -----------
Total liabilities 1,019,647 1,021,627
STOCKHOLDERS' EQUITY
Preferred stock, no par value per share:
5,000 shares authorized; no shares
issued -- --
Common stock, $.01 par value per share:
20,000 shares authorized; 6,869
and 6,854 shares outstanding, respectively 69 69
Additional paid-in capital 53,999 53,725
Stock acquired by ESOP (2,600) (2,813)
Deferred compensation (69) (82)
Accumulated other comprehensive income,
net of income taxes of $263
and $410, respectively 508 763
Retained earnings 60,956 59,359
----------- -----------
Total stockholders' equity 112,863 111,021
----------- -----------
Total liabilities and stockholders' equity $ 1,132,510 $ 1,132,648
=========== ===========
See accompanying notes
3
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
- ----------------------------------------------------------------------------------------------------
For the Three Months Ended
March 31,
2002 2001
---- ----
Interest Income
Interest on Loans $ 8,961 $ 11,294
Investment securities 751 942
Interest-bearing deposits 17 61
-------- --------
Total interest income 9,729 12,297
Interest Expense
Deposits 3,928 5,768
FHLB advances and other 81 1,377
Notes payable and warehouse loans 192 308
-------- --------
Total interest expense 4,201 7,453
-------- --------
Net interest income 5,528 4,844
Provision for loan losses 582 135
-------- --------
Net interest income after provision for loan losses 4,946 4,709
Non-interest Income
Loan service fees and other charges 798 638
Insurance commission income 883 733
Dividends on stock 181 273
Gain on sale of loans 526 500
Loss on sale of securities (15) (45)
Trust income 31 29
Other non-interest income 21 26
-------- --------
Total non-interest income 2,425 2,154
Non-interest Expense
Compensation and benefits 3,304 2,952
Occupancy 692 687
SAIF deposit insurance premiums 32 30
State franchise tax 294 364
Data processing 226 320
Amortization and impairment of goodwill and other intangibles 200 77
Other non-interest expense 1,245 1,031
-------- --------
Total non-interest expense 5,993 5,461
-------- --------
Income before income taxes 1,378 1,402
Federal income taxes 491 458
-------- --------
Income from continuing operations 887 945
Discontinued operations, net of tax 2,015 2,110
-------- --------
Income before cumulative effect of a change in accounting principle 2,902 3,055
Cumulative effect of change in method of accounting for goodwill,
net of tax (194) --
-------- --------
Net income $ 2,708 $ 3,055
======== ========
Earnings per share (Note 5) Basic:
From continuing operations $ 0.14 $ 0.15
Discontinued operations, net of tax $ 0.31 $ 0.33
Cumulative effect in method of accounting for goodwill $ (0.03) --
-------- --------
Net income $ 0.42 $ 0.48
======== ========
Diluted:
From continuing operations $ 0.14 $ 0.15
Discontinued operations, net of tax $ 0.30 $ 0.32
Cumulative effect in method of accounting for goodwill $ (0.03) --
-------- --------
Net income $ 0.41 $ 0.47
======== ========
Dividends declared per share (Note 4) $ 0.13 $ 0.12
Average shares outstanding (Note 5)
Basic 6,442 6,366
======== ========
Diluted 6,663 6,536
======== ========
See accompanying notes
4
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------
Stock Acquired By
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
Balance at December 31 $ 69 $53,725 $(2,813) $ (82)
Comprehensive income:
Net income
Change in unrealized gains (losses)
net of income taxes of $146
Total comprehensive income
ESOP shares released 147 213
Amortization of deferred compensation
of Management Recognition Plan 13
Shares issued under stock option plan 363
Purchase of common stock for
treasury (236)
Dividends declared (Note 4)
------- ------- ------- -------
Balance at March 31 $ 69 $53,999 $(2,600) $ (69)
======= ======= ======= =======
See accompanying notes
5
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
- ------------------------------------------------------------------------------------------------------------
2002 2001
---- ----
Net Unrealized
gains (losses) on Total Total
available-for- Retained Stockholders' Stockholder's
sale securities Earnings Equity Equity
--------------- -------- ------ ------
Balance at December 31 $ 763 $ 59,359 $ 111,021 $ 99,473
Comprehensive income:
Net income 2,708 2,708 3,055
Change in unrealized gains (losses)
net of income taxes of $146 (255) (255) 545
--------- ---------
Total comprehensive income 2,453 3,600
ESOP shares released 360 248
Amortization of deferred compensation
of Management Recognition Plan 13 28
Shares issued under stock option plan 363 71
Purchase of common stock for
treasury (261) (497) (207)
Dividends declared (Note 4) (850) (850) (780)
--------- --------- --------- ---------
Balance at March 31 $ 508 $ 60,956 $ 112,863 $ 102,433
========= ========= ========= =========
See accompanying notes
6
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
- -------------------------------------------------------------------------------------------------
Three Months
Ended March 31,
2002 2001
-------------------------
Operating Activities
Net income $ 2,708 $ 3,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 582 135
Provision for depreciation 414 393
Net securities amortization 12 4
Amortization of mortgage servicing rights 157 132
Net impairment of mortgage servicing rights 68 --
Amortization of goodwill -- 77
Net impairment of goodwill 438 --
Gain on sale of loans (526) (500)
Amortization of Management Recognition Plan
deferred compensation 13 28
Release of ESOP Shares 360 248
Net securities losses 15 45
Deferred federal income tax credit (158) 6
Proceeds from sale of loans 32,584 31,150
Origination of mortgage servicing rights, net (723) (316)
Origination of loans held for sale (32,534) (30,786)
(Increase) decrease in interest receivable and other assets (1,004) 764
Increase (decrease) in other liabilities (1,325) 638
(Increase) decrease in assets of discontinued operations (5,418) 46,325
Decrease in liabilities of discontinued operations (35,166) (74,066)
-------- --------
Net cash provided by operating activities (39,503) (22,668)
Investing Activities
Proceeds from maturities of held-to-maturity securities 503 340
Proceeds from maturities of available-for-sale securities 1,948 1,210
Proceeds from sale of available-for-sale securities 423 1,512
Proceeds from sales of real estate and
other assets held for sale 105 121
Proceeds from sales of office properties and equipment -- 27
Purchases of available-for-sale securities (520) (1,437)
Purchases of Federal Home Loan Bank stock (181) (273)
Purchases of office properties and equipment (229) (245)
Net increase in loans receivable 4 1,487
-------- --------
Net cash provided by investing activities 2,053 2,742
7
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
- -------------------------------------------------------------------------------------
Three Months Ended
March 31,
2002 2001
---- ----
Financing Activities
Net increase (decrease) in deposits (8,244) 45,965
Repayment of Federal Home Loan Bank long-term advances (103) (159)
Repayment of term notes payable (160) (150)
Net increase (decrease) in Federal Home Loan Bank
short-term advances 41,500 (76,500)
Proceeds from short-term line of credit 1,300 5,000
Proceeds from Federal Home Loan Bank long term notes -- 60,000
Purchase of common stock for treasury (497) (207)
Cash dividends paid (850) (780)
Proceeds from exercise of stock options 363 71
-------- --------
Net cash used in financing activities 33,309 33,240
-------- --------
Increase (decrease) in cash and cash equivalents (4,141) 13,314
Cash and cash equivalents at beginning of period 38,521 22,366
-------- --------
Cash and cash equivalents at end of period $ 34,380 $ 35,680
======== ========
Supplemental cash flow information:
Interest paid $ 4,305 $ 6,915
======== ========
Income taxes paid $ 400 $ --
======== ========
Transfers from loans to real estate
and other assets held for sale $ 163 $ 116
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ 149 $ (340)
======== ========
Noncash investing activities:
Increase (decrease) in net unrealized gain or loss on
available-for-sale securities $ (404) $ 885
======== ========
Noncash financing activities:
Cash dividends declared but not paid $ 850 $ 778
======== ========
See accompanying notes
8
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at March 31, 2002 and 2001)
- --------------------------------------------------------------------------------
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"). Operations of The Leader were sold to
US Bancorp in a transaction that was completed on April 1, 2002. 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,
2001 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, 2002 and for the three-month period ending March 31, 2002 and 2001 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 accounting principles generally accepted in the United States. For the
purposes of these statements, operations of The Leader are reported in
results of discontinued operations and all prior time periods presented
have been restated to reflect results of discontinued operations. 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 2001 annual report on Form 10K for the year ended December
31, 2001. 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, 2002 are not
necessarily indicative of the results that may be expected for the entire
year.
9
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2002 and 2001)
- --------------------------------------------------------------------------------
3. Change in Accounting Method
On January 1, 2002, First Defiance adopted Financial Accounting Standards
Board Statement No. 142, Goodwill and Other Intangible Assets. As required
by FAS No. 142, goodwill is no longer amortized into the income statement
over an estimated life but rather is tested at least annually for
impairment based on specific guidance included in the FAS No. 142. Based on
an impairment test performed as of January 1, 2002, the Company determined
that a portion of previously recorded goodwill related to its First
Insurance business unit was impaired. The amount of impairment as of
January 1, 2002, which was $238,000 or $194,000 after tax, is reflected in
the financial statements as an adjustment for the cumulative effect of an
accounting change.
During the quarter ended March 31, 2002, management reached a settlement
with the former shareholders of one of the agencies acquired to form First
Insurance related to an earn-out provision of the original purchase
agreement. The payment of $200,000 was recorded as additional goodwill for
First Insurance and was considered impaired. This $200,000 impairment
adjustment is reported as an operating cost by First Defiance in the 2002
first quarter. Remaining goodwill recorded at First Insurance totals
$3,529,000 at March 31, 2002.
Results from continuing operations for the three months ended March 31,
2001 include goodwill amortization expense of $77,000. Had FAS Statement
No. 142 been in effect for that period, the Company would have reported
income from continuing operations of $1,007,000. This amount was determined
as follows ($000s except for earnings-per-share amounts:
10
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2002 and 2001)
- --------------------------------------------------------------------------------
3. Change in Accounting Method (continued)
For the Quarter ended March 31,
2002 2001
---- ----
Reported income from continuing operations $ 887 $ 945
Add back: Goodwill amortization 77
Deduct: Tax benefit from deductible goodwill (15)
------- ---------
Adjusted income from continuing operations $ 887 $ 1,007
======= =========
Basic earnings per share:
Reported income from continuing operations $ .14 $ .15
Add back: Goodwill amortization .01
Deduct: Tax benefit from deductible goodwill -- --
------- ---------
Adjusted income from continuing operations $ .14 $ .16
======= =========
Diluted earnings per share:
Reported income from continuing operations $ .14 $ .15
Add back: Goodwill amortization .01
Deduct: Tax benefit from deductible goodwill --
------- ---------
Adjusted income from continuing operations $ .14 $ .16
======= =========
4. Dividends on Common Stock
As of March 31, 2002, First Defiance had declared a quarterly cash dividend
of $.13 per share for the first quarter of 2002, payable April 26, 2002.
5. Earnings Per Share
Basic earnings per share as disclosed under Statement of Financial
Accounting Standard ("FAS") No. 128 has been calculated by dividing net
income by the weighted average number of shares of common stock outstanding
for the three month-month periods ended March 31, 2002 and 2001. 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, 2002 and
2001, 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.
11
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2002 and 2001)
- --------------------------------------------------------------------------------
5. Earnings Per Share (continued)
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,
2002 2001
---- ----
Numerator for basic and diluted
earnings per share - income from
continuing operations $ 887 $ 945
====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,442 6,366
Effect of dilutive securities:
Employee stock options 199 111
Unvested Management Recognition
Plan stock 22 59
------ ------
Dilutive potential common shares 221 170
------ ------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,663 6,536
====== ======
Basic earnings per share $ .14 $ .15
====== ======
Diluted earnings per share $ .14 $ .15
====== ======
12
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2002 and 2001)
- -------------------------------------------------------------------------------------------
6. Loans
Loans receivable and held for sale consist of the following (in thousands):
March 31, December 31,
2002 2001
---- ----
Real Estate:
One-to-four family residential $166,112 $167,738
Construction 5,054 7,875
Non-residential and multi-family real estate 180,576 174,052
-------- --------
351,742 349,665
Other Loans:
Commercial 80,904 83,690
Consumer finance 38,127 40,739
Home equity and improvement 39,075 36,179
-------- --------
158,106 160,608
-------- --------
Total real estate and other loans 509,848 510,273
Deduct:
Loans in process 2,315 2,888
Net deferred loan origination fees and costs 1,060 1,024
Allowance for loan loss 6,933 6,548
-------- --------
Totals $499,540 $499,813
======== ========
Changes in the allowance for loan losses were as follows:
Three Months ended
March, 31
2002 2001
---- ----
Balance at beginning of period $6,548 $6,331
Provision for loan losses 582 135
Charge-offs:
One to four family residential real estate 49 --
Non-residential and multi-family real estate 54 --
Consumer finance 147 149
------ ------
Total Charge-offs 250 149
Recoveries 53 50
------ ------
Net Charge-offs 97 99
------ ------
Ending allowance $6,933 $6,367
====== ======
13
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 2002 and 2001)
- --------------------------------------------------------------------------------
7. Deposits
A summary of deposit balances is as follows (in thousands):
March 31, December 31,
2002 2001
---- ----
Non-interest-bearing checking accounts $ 28,349 $ 25,428
Interest-bearing checking accounts 36,567 35,304
Savings accounts 38,750 36,952
Money market demand accounts 124,128 114,253
Certificates of deposit 378,980 402,911
-------- --------
$606,774 $614,848
======== ========
14
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"). Effective April 1, 2001, The Leader, a mortgage banking company, has
been sold and its operating results are reported as discontinued operations.
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. First Insurance is an insurance agency that
does business in the Defiance, Ohio area. First Insurance offers property and
casualty, life insurance, group and individual health insurance, 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
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 $5.1 million
at March 31, 2002. Securities not classified as held-to-maturity or are
classified as available-for-sale, which are stated at fair value and had a
recorded value of $46.4 million at March 31, 2002. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($18.4 million), corporate bonds ($8.5
million), certain municipal obligations ($8.7 million), adjustable-rate mortgage
backed security mutual funds ($2.0 million), CMOs and REMICs ($3.0 million),
mortgage backed securities ($3.7 million), and preferred stock and other equity
investments ($2.1 million). In accordance with FASB Statement No. 115,
unrealized holding gains and losses deemed temporary 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 $768,000 at March 31, 2002, or $505,000 after
considering the related deferred tax liability.
First Defiance's investment portfolio will increase substantially as proceeds
from the sale of The Leader are reinvested
15
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
deposit and loan servicing fees, gains on sales of mortgage loans, and insurance
commissions. 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.
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.
Changes in Financial Condition
- ------------------------------
At March 31, 2002, First Defiance's total assets, deposits and stockholders'
equity amounted to $1.132 billion, $606.8 million and $112.9 million,
respectively, compared to $1.133 billion, $614.8 million and $111.0 million,
respectively, at December 31, 2001. Total assets of discontinued operations,
included in total assets, were $493.9 million at March 31, 2002 and $488.5
million at December 31, 2001. The discussion below focuses only on assets and
liabilities from continuing operations.
Net loans receivable decreased to $499.5 million at March 31, 2002 from $499.8
million at December 31, 2001. The reduction in loans receivable occurred
primarily in the construction and single-family residential category, which
declined $3.8 million to $168.9 million at March 31, 2002 from $172.7 million at
December 31, 2001. This reduction was due to the refinance activity that
continued in the first quarter of 2002. The majority of loans refinanced are now
sold into the secondary market to limit the Company's exposure to interest rate
risk on long-term fixed rate loans. The reduction in mortgage loans was
partially replaced by commercial loans and non-residential and multi-family
residential real estate loans, which increased $3.8 million to $261.5 million at
March 31, 2002 from $257.7 million at December 31, 2001.
The investment portfolio decreased to $51.5 million at March 31, 2002 from $54.3
million at December 31, 2001. Pay-downs and maturities of investment securities
were not reinvested as those funds were used to fund the operations of The
Leader during the 2002 first quarter.
16
Deposits decreased from $614.8 million at December 31, 2001 to $606.8 million as
of March 31, 2002. Certificates of deposit balances declined by $23.9 million to
$379.0 million at March 31, 2002, from $402.9 million at December 31, 2001. This
decrease was the result of a $16.2 million decrease in brokered certificates of
deposit and a $7.7 million decrease in certificates of deposit originated
through First Federal's branch network. The decline in certificate of deposit
balances was partially offset by a $9.9 million increase in money market demand
accounts, to $124.1 million at March 31, 2002 from $114.3 million at December
31, 2001, and a $4.2 million increase in interest and non-interest bearing
checking accounts, to $64.9 million at March 31, 2002 from $60.7 million at
December 31, 2001. The Company has focused on increasing its lower cost core
deposits, and at the same time was less aggressive in retaining higher cost CDs
during the 2002 first quarter in anticipation of receiving the proceeds from the
sale of The Leader early in April, 2002.
Additionally, FHLB advances and notes payable increased to $237.7 million and
$25.4 million, respectively, at March 31, 2002 from $196.3 million and $24.2
million, respectively, at December 31, 2001. This is due to fact that First
Federal Bank continued to fund the activities of The Leader during the first
quarter.
17
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. The average
balance sheets and income statements have been adjusted to allocate interest
expense associated with financing The Leader's operations to discontinued
operations. The average balance of FHLB advances for this yield analysis does
not include those advances which were used to finance The Leader's operations.
The interest-bearing liabilities reflect only those funds necessary for First
Defiance's continuing operations.
Three Months Ended March 31,
--------------------------------------------------------------------------------------
2002 2001
----------------------------------------- -----------------------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
Interest-earning assets:
Loans receivable $ 496,671 $ 8,961 7.32% $ 528,345 $ 11,294 8.67%
Securities 53,499 768 5.82 60,037 1,003 6.78
FHLB stock 16,308 181 4.50 15,254 273 7.26
---------- ---------- ---------- ----------
Total interest-earning assets 566,478 9,910 7.09 603,636 12,570 8.45
Non-interest-earning assets
(including assets of discontinued
operations) 583,625 445,169
---------- ----------
Total assets $1,150,103 $1,048,805
========== ==========
Interest-bearing liabilities (3):
Deposits $ 496,495 $ 3,928 3.21% $ 441,623 $ 5,768 5.30%
FHLB advances and other 7,698 81 4.27 99,711 1,377 5.60
Notes payable 18,994 192 4.10 14,574 308 8.57
---------- ---------- ---------- ----------
Total interest-bearing liabilities 523,187 4,201 3.26 555,908 7,453 5.44
Non-interest bearing deposits 28,138 -- -- 31,545 -- --
---------- ---------- ---- ---------- ---------- ----
Total including non-interest bearing
demand deposits 551,325 4,201 3.09 587,453 7,453 5.14
Non-interest-bearing liabilities
(including liabilities of
discontinued operations) 486,693 360,686
---------- ----------
Total liabilities 1,038,018 948,139
Stockholders' equity 112,085 100,666
---------- ----------
Total liabilities and stock-
holders' equity $1,150,103 $1,048,805
========== ==========
Net interest income; interest
rate spread $ 5,709 3.84% $ 5,117 3.01%
========== ==== ========== ====
Net interest margin (2) 4.09% 3.44%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 108% 109%
==== ===
- --------------------
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
(3) This analysis does not reflect borrowings to fund discontinued operations.
18
Results of Operations
- ---------------------
Three Months Ended March 31, 2002 compared to Three Months Ended March 31, 2001
- -------------------------------------------------------------------------------
On a consolidated basis, First Defiance had net income of $2.7 million or $.41
per share for the three months ended March 31, 2002 compared to $3.1 million or
$.47 per share in 2001. Net income before the cumulative effect of a change in
accounting for goodwill was $2.9 million or $.44 per share for the 2002 first
quarter and income from continuing operations totaled $887,000 or $.14 per share
for the 2002 first quarter compared to $945,000 or $.15 per share in the same
period in 2001.
Net Interest Income. Net interest income from continuing operations for the
quarter ended March 31, 2002 was $5.5 million compared to $4.8 million for the
same period in 2001. Net interest margin for the 2002 first quarter was 4.09%
compared to 3.44% for the same period in 2001.
Total interest income from continuing operations decreased by $2.6 million, or
20.9%, from $12.3 million for the three months ended March 31, 2001 to $9.7
million for the three months ended March 31, 2002. The decrease was due to a
reduction in the average balance of loans receivable between the two periods, to
$496.7 million for the quarter ended March 31, 2002 compared to $528.3 million
for the same period in 2001.This decrease is a result of the high level of
refinance activity that the Company experienced in its mortgage loan portfolio
during 2001 and the first quarter of 2002. The balance of the single-family
mortgage portfolio was $221.1 million at March 31, 2001 compared to $166.1
million at March 31, 2002 as most of the new loans originated to replace the
refinanced loans in the portfolio were sold into the secondary market. The
reduction in mortgage loans was partially replaced by an increase in the average
balance of commercial loans and non-residential and multi-family residential
real estate loans, which increased from $230.2 million at March 31, 2001 to
$261.5 million at the same point in 2002. The liquidity created by this net
reduction in loans receivable was used to fund operations at The Leader rather
than being invested in interest earning assets at First Federal Bank. The yield
on interest-earning assets also decreased to 7.09% for the three-month period
ended March 31, 2002 from 8.45% for the same period in 2001 due to declining
interest rates.
Interest earnings from the investment portfolio decreased to $768,000 for the
three months ended March 31, 2002 compared to $1.0 million for the same period
in 2001. The decrease in interest income was primarily the result of a $6.5
million decrease in the average balance of investment securities, from $60.0
million for the first quarter of 2001 to $53.5 million for the same period in
2002. Additionally, the yield on the average portfolio balance for the three
months ended March 31, 2002 was 5.82% compared to 6.78% for the same period in
2001.
19
Interest expense from continuing operations decreased by $3.3 million, or 43.6%,
to $4.2 million for the first quarter of 2002 compared to $7.5 million for the
same period in 2001. The decrease is due primarily to a 218 basis point decrease
in the average cost of interest-bearing liabilities, from 5.44% for the first
quarter of 2001 compared to 3.26% in the first quarter of 2002. In addition, the
average balances of interest-bearing liabilities decreased $36.1 million from
$555.9 million first quarter of 2001 compared to $523.2 million in the first
quarter of 2002. The average balance sheets and income statements have been
adjusted to allocate interest expense associated with financing The Leader's
operations to discontinued operations. Therefore, the average interest-bearing
liabilities reflect only those funds necessary for First Defiance's continuing
operations.
Provision for Loan Losses. The provision for loan losses increased $447,000, to
$582,000 for the three-months ended March 31, 2002 from $135,000 during the same
period in 2001. The increase in the provision was due both to an increase in the
balance of commercial and non-residential real estate loan balances, which
require a larger reserve, and an increase in classified assets, to $9.7 million
from $7.9 million. Most of the increase was in loans classified as "substandard"
by management, which increased by $1.7 million between December 31, 2001 and
March 31, 2002. Of this $1.7 million increase in classified loans, $1.5 million
was in residential mortgage loans. 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 and asset quality ratios for First Defiance were as
follows (in $000's):
March 31, December 31,
2002 2001
---- ----
Non-accrual loans $ 3,311 $ 2,255
Loans over 90 days past due and still accruing -- --
--------- ---------
Total non-performing loans 3,311 2,255
Real estate owned (ORE) 194 136
--------- ---------
Total non-performing assets $ 3,505 $ 2,391
========= =========
Allowance for loan losses as a
percentage of total loans 1.36% 1.28%
Allowance for loan losses as a
percentage of non-performing assets 197.80% 273.86%
Allowance for loan losses as a
percentage of non-performing loans 209.39% 290.38%
Total non-performing assets as a percentage
of total assets from continuing operations 0.55% 0.37%
Total non-performing loans as a
percentage of total loans 0.65% 0.44%
20
Of the $3.3 million in non-accrual loans, $1.8 million were commercial loans or
non-residential real estate loans and $1.3 million were residential mortgage
loans. The allowance for loan losses at March 31, 2002 was $6.9 million compared
to $6.4 million at March 31, 2001 and $6.5 million at December 31, 2001. For the
quarter ended March 31, 2001, First Defiance charged off $250,000 of loans
against its allowance and realized recoveries of $53,000 from loans previously
charged off. During the same quarter in 2001, First Defiance charged off
$149,000 in loans and realized recoveries of $99,000.
Non-Interest Income. Non-interest income increased $270,000 in the first quarter
of 2002, to $2.42 million for the quarter ended March 31, 2002 from $2.15
million for the same period in 2001. Individual components of non-interest
income are as follows:
Deposit Fees. Deposit fees increased $100,000 to $552,000 for the quarter ended
March 31, 2002 from $452,000 for the quarter ended March 31, 2001. Increases
occurred primarily in debit card interchange fees which is a result of a
marketing program to promote the use of debit cards and an increase in NSF fees.
Insurance Commission. Insurance commission income increased $150,000 to $883,000
in the first quarter of 2002 from $733,000 in the same period of 2001. Increases
occurred in the property and casualty lines as well as income from the sale of
securities and annuities. Insurance commission income also includes $84,000
related to the placement of force-placed insurance for The Leader. This portion
of First Insurance's income is not recurring with the sale of The Leader. First
Insurance also incurred $67,000 of related expense associated with the
force-placed insurance which also won't be recurring.
Other Non-Interest Income. Other non-interest income, including loan servicing
fees, dividends on Federal Home Loan Bank stock, gain on sale of loans, and
other miscellaneous charges, increased to $$990,000 for the quarter ended March
31, 2002 from $968,000 for the same period in 2001.
Non-Interest Expense. Total non-interest expense increased $500,000 to $6.0
million for the quarter ended March 31, 2002 from $5.5 million for the same
period in 2001. Significant individual components of the increase are as
follows:
Compensation and Benefits. Compensation and benefits increased $350,000 from
$2.95 million for the quarter ended March 31, 2002 to $3.30 million for the same
period in 2001. This increase was the result of staffing increases as well as
merit and cost of living increases.
21
Amortization and Impairment of Goodwill. Effective January 1, 2002, First
Defiance adopted Financial Accounting Standards Board Statement No. 142,
Goodwill and Other Intangible Assets. As required under the standard, management
evaluated goodwill recorded at its First Insurance & Investments subsidiary for
the purpose of measuring impairment and determined that such goodwill was
impaired by $238,000 ($194,000 or $.03 per share after tax) as of January 1,
2002. As permitted, this amount is reflected in the income statement as the
cumulative effect of a change in accounting principle. In addition to the
$238,000 of impaired goodwill, during the first quarter, First Defiance paid
additional consideration of $200,000 to settle a contingent payout clause under
an agreement entered into in 1998 when First Insurance was acquired. Because
this settlement was not reached until after January 1, 2002, the impairment of
the related goodwill created by the settlement is recorded as an operating
expense rather than as part of the cumulative effect adjustment. The $200,000
payment is included in other non-interest expense during the 2002 first quarter.
Additionally, as a result of Statement No. 142, First Defiance was no longer
required to recognize goodwill amortization as an expense in the 2002 first
quarter. Such amortization totaled $77,000 in the first quarter of 2001. (See
Note 3 to the Consolidated Condensed Financial Statements)
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $2.5 million for the quarter ended March 31, 2002 from $2.4 million for the
same period in 2001.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 35.63% for the
quarter ended March 31, 2002 compared to 32.64% for the same period in 2001. The
higher tax rate was caused by the $200,000 goodwill write-off which was not tax
deductible.
As a result of the above factors, income from continuing operations for the
quarter ended March 31, 2001 was $887,000 compared to $945,000 for the
comparable period in 2001. On a per share basis, basic and diluted earnings per
share for the three months ended March 31, 2002 and 2001 from continuing
operations were each $.14 and $.15, respectively.
Earnings from discontinued operations, which is a summary of the operations of
The Leader netted with any gains or losses recognized on inter-company financing
activities, totaled $2.0 million after tax or $.31 per share for the 2002 first
quarter compared to $2.1 million or $.33 per share for the 2001 first quarter.
Also in the 2002 first quarter, First Defiance recorded a $194,000 after tax
charge representing the cumulative effect of changing the method of accounting
for goodwill. Taking discontinued operations and the cumulative effect
adjustment into account, First Defiance had net income of $2.7 million in the
2002 first quarter compared to $3.1 million in the same period in 2001.
First Defiance's board of directors declared a dividend of $.13 per common share
as of March 31, 2002. The dividend amounted to $892,971, including dividends on
unallocated ESOP shares. It was paid on April 26, 2002. 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.
22
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.
With the completion of the sale of The Leader early in the second quarter, First
Defiance has a significant amount of liquidity.
First Defiance used $39.5 million of cash from operating activities during the
first three months of 2002. However, excluding discontinued operations, First
Defiance generated $1.0 million of cash from operations during that same period.
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, goodwill write-offs, 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, 2002, First Defiance had $29.4 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $79.2 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 $1.1 million of loans held-for-sale. Also
as of March 31, 2002, the total amount of certificates of deposit that are
scheduled to mature by March 31, 2003 is $230.0 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.
Upon the sale of The Leader, First Defiance had net investible funds of
approximately $365 million. Of this, $81.5 million was used to pay off FHLB
overnight advances and $19.6 million was used to pay off term debt. Management
also elected to prepay $25 million of fixed rate FHLB advances, incurring a
prepayment penalty of $539,000 in the 2002 second quarter. The balance of the
funds from the sale of The Leader has been added to the investment portfolio.
Approximately $130 million of those funds have been invested long-term to earn a
yield of 5.65% and the balance is invested in short-term securities or overnight
in anticipation of rising rates.
First Defiance 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.
23
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 March 31, 2002 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, 2002. This table includes the operations of
The Leader and is consistent with amounts reported on First Federal's quarterly
Thrift Financial Report for the quarter ended March 31, 2002.
Core Capital Risk-Based Capital
Adequately Well Adequately Well
Capitalized Capitalized Capitalized Capitalized
----------- ----------- ----------- -----------
Regulatory Capital $71,177 $71,177 $80,141 $80,141
Minimum required regulatory capital 42,720 53,400 57,193 71,491
-------- ------- -------- ------
Excess regulatory capital $28,457 $17,777 $22,948 $8,650
======== ======= ======== ======
Regulatory capital as a percentage of assets (1) 6.7% 6.7% 11.2% 11.2%
Minimum capital required as a percentage of 4.0% 5.0% 8.0% 10.0%
-------- ------- -------- ------
assets
Excess regulatory capital as a percentage in
excess of requirement 2.7% 1.7% 3.2% 1.2%
======== ======= ======== ======
(1) Core capital is computed as a percentage of adjusted total assets of $1.068
billion. Risk-based capital is computed as a percentage of total
risk-weighted assets of $714.9 million.
Had First Federal calculated its capital requirements for continuing operations
only, the required amounts and the related excess capital would have been as
follows:
Core Capital Risk-Based Capital
Adequately Well Adequately Well
Capitalized Capitalized Capitalized Capitalized
----------- ----------- ----------- -----------
Regulatory Capital $124,985 $124,985 $131,146 $131,146
Minimum required regulatory capital 39,227 49,034 52,907 66,134
-------- ------- -------- --------
Excess regulatory capital $85,758 $75,951 $78,239 $65,012
======== ======= ======== ========
Regulatory capital as a percentage of assets (1) 19.6% 19.6% 26.7% 26.7%
Minimum capital required as a percentage of 4.0% 5.0% 8.0% 10.0%
-------- ------- -------- --------
assets
Excess regulatory capital as a percentage in
excess of requirement 15.6% 14.6% 18.7% 16.7%
======== ======= ======== ========
(1) Core capital is computed as a percentage of adjusted total assets of $637.4
million. Risk-based capital is computed as a percentage of total
risk-weighted assets of $492.2 million.
24
The difference between these two calculations relates to the elimination of
$44.2 million of dis-allowed mortgage servicing rights as of March 31, 2002 and
the elimination of $9.6 million of goodwill which had been recorded on the books
of The Leader. Also note that assets for continuing operations do not consider
the reinvestment of any of the proceeds from the sale of The Leader, which will
reduce the estimated excess capital amounts and the capital amounts do not
include the estimated $10 million after-tax gain that First Federal realized on
the sale of The Leader.
Pro Forma Income Statement
Management does not believe that income from continuing operations as presented
in the consolidated condensed financial statements accurately represents what
the results of operations for First Defiance will be on a going-forward basis
because the continuing operations results do not reflect the reinvestment of any
of the proceeds from the sale of The Leader. Such proceeds, which includes the
repayment of inter-company debt as well as the payment of the purchase price by
US Bank, will increase First Defiance's total assets by approximately $275
million over the reported assets of continuing operations, after the repayment
of FHLB advances to the extent that such advances could be prepaid.
The following pro-forma income statement attempts to present what First
Defiance's results from continuing operations would have been had the sale of
The Leader occurred as of January 1, 2002 and the proceeds from the sale fully
invested for the entire quarter. Management has estimated that the additional
assets added to the balance sheet as a result of the sale of The Leader would
have been reinvested to yield a weighted average rate of 4.44%. Also, to the
extent possible, management has assumed that proceeds of the sale have been used
to prepay advances. It should also be noted that management will take several
months to get the proceeds from the sale of The Leader reinvested and that the
pro-forma results reported below might not be indicative of the actual results
First Defiance will achieve. Dollars are in thousands (except per share
amounts).
Continuing Operations
Pro Forma As Reported
Interest income $12,772 $ 9,729
Interest expense 6,717 4,201
------- -------
Net interest income 6,055 5,528
Provision for loan losses 582 582
------- -------
Net interest after provision 5,473 4,946
Non-interest income 2,425 2,425
Non-interest expense 5,993 5,993
------- -------
Income before income taxes 1,905 1,378
Income taxes 676 491
------- -------
Income from continuing operations $ 1,229 $ 887
======= =======
Income per share from
continuing operations $.18 $.14
====== =======
25
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 2002 are approximately $0.018
per $100 of deposits.
26
Item 3. Qualitative and Quantitative Disclosure About Market Risk
- -----------------------------------------------------------------
As discussed in detail in the 2001 Annual Report on Form 10-K, First Defiance's
ability to maximize net income is dependent on management's ability to plan and
control net interest income through management of the pricing and mix of assets
and liabilities. Because a large portion of assets and liabilities of First
Defiance are monitory in nature, changes in interest rates and monetary or
fiscal policy affect its financial condition and can have significant impact on
the net income of the Company. First Defiance does not use off balance sheet
derivatives to enhance its risk management, nor does it engage in trading
activities beyond the sale of mortgage loans.
First Defiance monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyses the effect of a
presumed 100 basis point shift in interest rates (which is consistent with
management's estimate of the range of potential interest rate fluctuations) and
takes into account prepayment speeds on amortizing financial instruments, loan
and deposit volumes and rates, nonmaturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise or fall 100 basis points over a 12 month period, using
March 2002 amounts as a base case, First Defiance's net interest income would be
impacted by less than the board mandated guidelines of 10%.
Management will reassess its exposure to interest rate risk as it reinvests the
proceeds from the sale of The Leader.
27
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 23, 2002, 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 2005:
NOMINEE FOR WITHHELD
John U. Fauster III 5,657,661 36,875
Thomas A. Voigt 5,651,380 43,156
James L. Rohrs 5,319,017 375,519
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable
28
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 14, 2002 By: /s/ William J. Small
------------ ------------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: May 14, 2002 By: /s/ John C. Wahl
------------ ---------------------------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer
29