UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Period Ended September 30, 1996
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
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(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)
(419) 782-5015
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Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to 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 issuers classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 9,911,935 shares outstanding at November 6,
1996.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - September 30, 1996
and December 31, 1995
Consolidated Condensed Statements of Income Three
months ended September 30, 1996 and 1995;
Nine months ended September 30, 1996 and 1995
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Nine months ended
September 30, 1996
Consolidated Condensed Statements of Cash Flows
- Nine months ended September 30, 1996 and 1995
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
September 30, December 31,
1996 1995
-------- --------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ............................................... $ 2,702 $ 4,394
Interest-bearing deposits ................................................. 2,299 4,291
-------- --------
5,001 8,685
Securities:
Available-for-sale, carried at fair value ................................. 70,885 93,041
Held-to-maturity, carried at amortized cost
(approximate fair value $22,505 and $26,692
at September 30, 1996 and December 31,
1995, respectively) ................................................... 22,235 26,072
-------- --------
93,120 119,113
Loans:
Loans held for sale (at lower of cost or fair value,
approximate fair value $115 and $3,806 at
September 30, 1996 and December 31, 1995, respectively) ............... 114 3,759
Loans receivable, net ..................................................... 407,919 381,444
-------- --------
408,033 385,203
Accrued interest receivable .................................................... 2,705 2,827
Federal Home Loan Bank stock ................................................... 2,981 2,830
Real estate, mobile homes and other
assets held for sale ...................................................... 217 173
Office properties and equipment ................................................ 10,326 6,285
Deferred federal income taxes .................................................. 628 222
Other assets ................................................................... 1,236 212
-------- --------
$524,247 $525,550
======== ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
September 30, December 31,
1996 1995
--------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ............................................. $ 380,760 $ 381,779
Advances from Federal Home Loan Bank ................. 17,777 6,842
Other liabilities .................................... 5,102 3,423
--------- ---------
Total liabilities .................................... 403,639 392,044
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; 9,911,935 and
10,976,615 shares outstanding at September 30,
1996 and December 31, 1995, respectively ........ 99 110
Additional paid-in capital ........................... 76,696 83,458
Stock acquired by ESOP ............................... (5,255) (5,703)
Stock acquired by Management
Recognition Plan ................................ (2,449) (97)
Net unrealized losses on available-for-sale
securities, net of income taxes
of $301 and $78 at September 30,
1996 and December 31, 1995, respectively ........ (585) (152)
Retained earnings - substantially restricted ......... 52,102 55,890
--------- ---------
Total stockholders' equity ........................... 120,608 133,506
--------- ---------
Total liabilities and stockholders' equity ........... $ 524,247 $ 525,550
========= =========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
--------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
Interest income:
Loans $ 8,745 $ 8,144 $ 25,743 $ 23,636
Securities 1,482 1,464 4,849 4,395
Interest-bearing deposits 36 132 161 227
-------- ------- ------ ------
Total interest income 10,263 9,740 30,753 28,258
Interest expense:
Deposits 4,605 4,998 14,043 14,016
Federal Home Loan Bank
advances and other borrowings 177 408 412 1,145
------ ------- ------- ----------
Total interest expense 4,782 5,406 14,455 15,161
------ ------- -------- ---------
Net interest income 5,481 4,334 16,298 13,097
Provision for loan losses 264 246 608 432
------ ------- ------- --------
Net interest income after provision
for loan losses 5,217 4,088 15,690 12,665
SAIF special assessment (Note 7) 2,416 - 2,416 -
Other non-interest expense 3,502 2,618 9,815 7,788
Non-interest income 366 263 959 652
-------- ------- ------- --------
Income (loss) before income federal taxes (380) 1,733 4,373 5,529
Federal income taxes (credit) (145) 585 1,397 1,875
---------- ------- ------- --------
Net income (loss) $ (235) $ 1,148 $ 2,976 $ 3,654
======== ======= ======= ========
Earnings (loss) per share (Note 4) $ (.02) $ .11 $ .29 $ .35
========= ======= ======= ========
Dividends declared per share (Note 5) $ .07 $ .07 $ .21 $ .21
======== ======= ======= ========
Average number of shares
outstanding (Notes 4 and 5) 9,830 10,446 10,198 10,392
======== ======== ======== =========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
Stock Acquired By
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
Balance at December 31, 1995 ........................... $ 110 $ 83,458 $ (5,703) $ (97)
Net Income
ESOP shares released ................................... 92 448
Change in unrealized gains (losses)
net of income taxes of $223
Contribution to Management Recognition
Plan for purchase of common stock .................. (2,817)
Amortization of deferred compensation
of Management Recognition Plan ..................... 465
Stock issued under Option Plan ......................... 27
Purchase of common stock for
treasury ........................................... (11) (6,881)
Dividends declared (Note 5)
-------- -------- -------- --------
Balance at September 30, 1996 .......................... $ 99 $ 76,696 $ (5,255) $ (2,449)
======== ======== ======== ========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
Net Unrealized
losses on Total
available-for- Retained Stockholders'
sale securities Earnings Equity
--------------- -------- ------
Balance at December 31, 1995 $(152) $55,890 $133,506
Net Income 2,976 2,976
ESOP shares released 540
Change in unrealized gains (losses)
net of income taxes of $223 (433) (433)
Contribution to Management Recognition
Plan for purchase of common stock (2,817)
Amortization of deferred compensation
of Management Recognition Plan 465
Stock issued under Option Plan 27
Purchase of common stock for
treasury (4,714) (11,606)
Dividends declared (Note 5) (2050) (2,050)
----- ------- --------
Balance at September 30, 1996 $(585) $52,102 $120,608
===== ======= ========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Nine Months
Ended September 30,
----------------------
1996 1995
-------- --------
Operating Activities
Net income ............................................... $ 2,976 $ 3,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................... 608 432
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ... 192 198
Loss on sale or call of available-for-sale securities -- 75
Amortization of Management Recognition Plan
deferred compensation ...................... 465 135
Release of ESOP Shares .............................. 540 154
Loss on disposal of office properties and equipment . 46 8
Deferred federal income tax credit .................. (183) (58)
Decrease in loans available for sale ................ 3,644 --
Increase in interest receivable and other assets .... (902) (781)
Increase in other liabilities ....................... 1,754 1,327
-------- --------
Net cash provided by operating activities ................ 9,140 5,144
Investing activities
Proceeds from maturities of held-to-maturity securities .. 3,814 2,925
Proceeds from maturities of available-for-sale securities 16,466 2,195
Proceeds from sales of available-for-sale securities ..... 21,550 2,922
Proceeds from sales of real estate, mobile homes, and
other assets held for sale .......................... 881 805
Purchases of available-for-sale securities ............... (16,500) (3,000)
Proceeds from sales of Federal Home Loan Bank stock ...... -- 210
Purchases of Federal Home Loan Bank stock ................ (151) (138)
Purchases of office properties and equipment ............. (4,272) (2,096)
Net increase in loans receivable ......................... (28,007) (22,381)
-------- --------
Net cash used in investing activities .................... (6,219) (18,558)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Nine Months Ended
September 30,
1996 1995
---- ----
Financing Activities
Net proceeds from issuance of common stock ............. -- 63,085
Loan to Employee Stock Option Plan ..................... -- (5,982)
Net increase (decrease) in deposits .................... (1,019) 2,609
Repayment of Federal Home Loan Bank long-term advances . (1,065) (4,301)
Net increase (decrease) in Federal Home Loan Bank
short-term advances ............................... 12,000 (11,000)
Purchase of common stock for treasury .................. (11,606) --
Cash dividends paid .................................... (2,125) (1,178)
Contribution to management recognition plan for purchase
of common stock .................................. (2,817) --
Proceeds from exercise of stock options ................ 27 3
-------- --------
Net cash provided by (used in) financing activities .... (6,605) 43,236
-------- --------
Increase (Decrease) in cash and cash equivalents ....... (3,684) 29,822
Cash and cash equivalents at beginning of period ....... 8,685 10,111
-------- --------
Cash and cash equivalents at end of period ............. $ 5,001 $ 39,933
======== ========
Supplemental cash flow information:
Interest paid .......................................... $ 14,608 $ 15,078
======== ========
Income taxes paid ...................................... $ 2,181 $ 1,912
======== ========
Transfers from loans to real estate, mobile homes
and other assets held for sale .................... $ 924 $ 758
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities ..... $ 223 $ 999
======== ========
Noncash investing activities:
Increase in net unrealized loss on available-for-sale
securities ........................................ $ (433) $ (2,938)
======== ========
Notes issued in acquisition of office properties ....... $ -- $ 166
======== ========
Noncash financing activities:
Cash dividends declared but not paid ................... $ 646 $ --
======== ========
Repayment of ESOP obligation recorded as reduction
of deferred compensation .......................... $ -- $ 200
======== ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance") and its wholly-owned
savings and loan, First Federal Savings and Loan ("First Federal"). 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,
1995 has been derived from the audited financial statements at that date.
The accompanying consolidated condensed financial statements as of
September 30, 1996 and for the three and nine month periods ending
September 30, 1996 and 1995 have been prepared by First Defiance without
audit and do not include information or footnotes necessary for the
complete presentation of financial condition, results of operations, and
cash flows in conformity with generally accepted accounting principles. It
is suggested that these consolidated condensed financial statements be read
in conjunction with the financial statements and notes thereto included in
First Defiance's annual report for the year ended December 31, 1995.
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 nine
months ended September 30, 1996 are not necessarily indicative of the
results which may be expected for the entire year.
3. Reorganization and Change of Corporate Form
On September 29, 1995, First Federal and First Federal Mutual Holding
Company ("the Mutual Holding Company") completed a second step conversion
(the "Reorganization"). As part of the Reorganization, First Defiance was
formed as a first-tier wholly owned subsidiary of First Federal. The Mutual
Holding Company was converted to an interim Federal stock savings
association and simultaneously merged with and into First Federal, at which
point the Mutual Holding Company ceased to exist and three million shares
or 59% of the outstanding First Federal common stock held by the Mutual
Holding Company was canceled. A second interim savings and loan association
("Interim") formed by First Defiance solely for the reorganization was them
merged with and into First Federal. As a result of the merger of Interim
into First Federal, First Federal became a wholly owned subsidiary of First
Defiance. Pursuant to an exchange ratio of 2.1590231 shares for each share
of First Federal stock, which assured that the public shareholders of First
Federal maintained their 41% ownership of First Defiance, the 2,184,500
outstanding shares of First Federal were exchanged for approximately
4,716,000 shares of First Defiance. Concurrent with the Reorganization,
First Defiance sold 6,476,914 additional shares to Mutual Holding Company
members, First Federal employees and the public at a price of $10 per
share. Reorganization and stock offering costs of approximately $1,685,000
resulted in net proceeds of $63,085,000.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
4. Earnings Per Share
Earnings per share has been calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the
quarter and nine month period ended September 30, 1996. The effect of
shares issuable under stock options has been accounted for using the
Treasury Stock method. 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.
All per share amounts and outstanding shares previously reported for First
Federal have been adjusted to reflect the Reorganization using the exchange
ratio of 2.1590231 and adjusted for additional shares acquired by the ESOP.
5. Dividends on Common Stock
As of September 30, 1996, First Defiance had declared a quarterly cash
dividend of $.07 per share for the third quarter of 1996, payable October
25, 1996.
6. Adoption of New Accounting Pronouncements
Effective January 1, 1996, First Defiance adopted the provisions of
Financial Accounting Standards Board ("FASB") Statement No. 122,
"Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement
No. 65." The statement requires that companies engaged in mortgage banking
activities recognize mortgage servicing rights as an asset, which is
amortized over the period of estimated net servicing income. As a result of
the adoption of Statement No. 122, First Defiance has recorded mortgage
servicing rights totaling $108,000. First Defiance does not recognize
mortgage servicing rights as a separate asset until the related loans are
sold. FASB Statement No. 122 has been superceded by FASB Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." However the provisions of Statement No. 125
will not materially impact the present accounting for mortgage servicing
rights. FASB Statement No. 125 will be adopted in full on January 1, 1997.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." This statement requires either: (a) recognition
of compensation cost in earnings for stock-based compensation plans based
upon their fair value; or (b) pro forma disclosures of what earnings and
per share amounts would have been had the fair value method been used for
expense recognition. First Defiance has elected to use the pro forma
disclosure option. As provided in Statement No. 123, the disclosure
provisions for companies electing pro forma disclosures are not required to
be applied in interim reports which do not include a complete set of
financial statements.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
7. SAIF Assessment
The deposits of First Federal are currently insured by the Savings
Association Insurance Fund ("SAIF") which is administered by the FDIC. On
September 30, 1996, legislation was enacted to recapitalize the SAIF to the
mandated reserve ratio of 1.25% of insured deposits through a one-time
special assessment on SAIF-insured deposits as of March 31, 1995. The
special assessment amounted to approximately $4.5 billion in total for all
SAIF insured institutions, or approximately $.65 for every $100 of
assessable deposits. First Federal's assessment amounted to $2.5 million
($1.6 million, net of income tax benefit). As a result of the special
assessment, it is anticipated that First Federal's deposit insurance
premiums will decrease from the current rate of $0.23 per $100 of deposits
to approximately $0.06 per $100 of deposits. Total annual premiums under
the previous rates were approximately $860,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First Defiance Financial Corp. ("First Defiance") is a holding company which
conducts business through its wholly owned subsidiary, First Federal Savings and
Loan, Defiance, Ohio ("First Federal") which is primarily engaged in attracting
deposits from the general public through its offices and using those and other
available sources of funds to originate loans secured by single-family
residences primarily located in the five counties in which its offices are
located and in contiguous Putnam County. Single family residential mortgage
loans amounted to $237.6 million or 58.2% of First Defiance's total loan
portfolio at September 30, 1996. To a lesser extent, First Defiance originates
other real estate loans secured by non-residential real estate and construction
loans, which amounted to $43.0 million or 10.5% of total loans at September 30,
1996. Approximately 33.2% or $135.3 million of First Federal's loan portfolio as
of September 30, 1996 consisted of non-real estate loans including consumer
finance loans, primarily automobile loans, which amounted to $60.1 million or
14.7% of the total loan portfolio, commercial loans, which amounted to $25.9
million or 6.3% of the total loan portfolio and mobile home loans which amounted
to $25.0 million or 6.1% of the total loan portfolio.
In order to more effectively manage interest rate risk, First Defiance is an
authorized seller/servicer for the Federal Home Loan Mortgage Corporation
("Freddie Mac"). First Defiance sold 160 loans during the nine months ended
September 30, 1996 and realized a gain on sale of those loans of approximately
$172,000. Loans with a 30-year maturity which meet the Freddie Mac underwriting
guidelines are classified by management as available-for-sale. At September 30,
1996, First Defiance held $114,000 of available-for-sale loans.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Securities are classified as held-to-maturity when First Federal
has the positive intent and ability to hold the security to maturity.
Held-to-maturity securities are stated at amortized cost and had a recorded
value of $22.2 million at September 30, 1996. Securities not classified as
held-to-maturity are classified as available-for-sale, which are stated at fair
value and had a recorded value of $70.9 million at September 30, 1996. The
available-for-sale portfolio consists of U.S. Treasury securities and
obligations of U.S. Government corporations and agencies ($47.0 million), money
market mutual funds ($4.0 million) adjustable rate mortgage backed security
mutual funds ($11.7 million), mutual funds holding U.S. Government Securities
($5.7 million) and CMOs and REMICs ($2.4 million). In accordance with FASB
Statement No. 115, unrealized holding gains and losses on available-for-sale
securities are reported in a separate component of stockholders' equity and are
not reported in earnings until realized. Net unrealized holding losses on
available-for-sale securities were $886,000 at September 30, 1996, $585,000
after considering the related deferred tax benefit. For the nine months ended
September 30, 1996, unrealized losses increased by $656,000 ($433,000 after
tax).
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, which is the difference between interest and dividend income on
interest-earning assets, principally loans and securities, and interest expense
on interest-bearing deposits and Federal Home Loan Bank advances. First
Defiance's earnings also depend, to a lesser extent, on the provision for loan
losses, the level of its other income (including servicing fees and other fees)
and its non-interest, expenses, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums, and miscellaneous
other expense, as well as federal income tax expense.
Changes in Financial Condition
At September 30, 1996, First Federal's total assets, deposits and stockholders'
equity amounted to $524.2 million, $380.8 million and $120.6 million,
respectively, compared to $525.6 million, $381.8 million and $133.5 million,
respectively, at December 31, 1995. Net loans receivable have increased from
$385.2 million at December 31, 1995 to $408.0 million at September 30, 1996.
This increase was funded primarily with maturing or redeemed securities.
Securities decreased from $119.1 million at December 31, 1995 to $93.1 million
at September 30, 1996. Total stockholders' equity decreased because of the
purchase of 521,623 and 548,992 shares of treasury stock for $5.6 and $6.0
million during September and May, 1996, respectively.
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 on month-end balances.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Three Months Ended September 30,
1996 1995
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $403,352 $8,745 8.67% $371,331 $8,144 8.77%
Securities 98,618 1,518 6.16 101,402 1,596 6.30
Dividends on FHLB stock 2,968 53 7.14 2,770 49 7.08
-------- ------ -------- ------
Total interest-earning assets 504,938 10,316 8.17 475,503 9,789 8.23
Non-interest-earning assets 19,047 12,903
-------- --------
Total assets $523,985 $488,406
======== ========
Interest-bearing liabilities:
Deposits $381,312 $4,605 4.83% $385,773 $4,998 5.18%
FHLB advances and other 12,237 177 5.79 24,864 408 6.56
--------- ------ -------- ------
Total interest-bearing liabilities 393,549 4,782 4.86 410,637 5,406 5.26
------ ---- ------ ----
Non-interest-bearing liabilities 4,537 3,899
-------- --------
Total liabilities 398,086 414,536
Stockholders' equity 125,900 73,870
-------- --------
Total liabilities and stock-
holders' equity $523,985 $488,406
======== ========
Net interest income; interest
rate spread $5,534 3.31% $4,383 2.97%
====== ===== ====== =====
Net interest margin (2) 4.38% 3.69%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 128% 116%
==== ====
(1) Annualized
(2) Net interest margin is net interest divided by average interest-earning
assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Nine Months Ended September 30,
1996 1995
------------------------------ ----------------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
Interest-earning assets:
Loans receivable $395,489 $25,743 8.68% $363,307 $23,636 8.67%
Securities 109,003 5,010 6.13 99,316 4,622 6.21
Dividends on FHLB stock 2,920 154 7.03 2,789 141 6.74
-------- ------ -------- -------
Total interest-earning assets 507,412 30,907 8.12 465,412 28,399 8.14
Non-interest-earning assets 17,193 12,254
-------- --------
Total assets $524,605 $477,666
======== ========
Interest-bearing liabilities:
Deposits $381,384 $14,043 4.91% $379,398 $14,016 4.93%
FHLB advances and other 9,102 412 6.04 23,145 1,145 6.60
-------- -------- ------- -------
Total interest-bearing liabilities 390,486 14,455 4.94 402,543 15,161 5.02
------- ----- ------- -----
Non-interest-bearing liabilities 4,269 3,682
-------- --------
Total liabilities 394,755 406,225
Stockholders' equity 129,850 71,441
-------- --------
Total liabilities and stock-
holders' equity $524,605 $477,666
======== ========
Net interest income; interest
rate spread $16,452 3.18% $13,238 3.12%
======= ===== ======= =====
Net interest margin (2) 4.32% 3.79%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 130% 116%
==== ====
(1) Annualized
(2) Net interest margin is net interest divided by average interest-earning
assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Results of Operations
Three Months Ended September 30, 1996 compared to Three Months Ended September
30, 1995
The Company incurred a special one-time assessment of $2.5 million to
recapitalize the Savings Association Insurance Fund ("SAIF", see Note 7 to
Financial Statements) during the three months ended September 30, 1996.
Primarily as a result of the assessment, the Company had a loss for the quarter
of $235,000 or $.02 per share compared to income of $1.1 million or $.11 per
share during the same period of 1995. Without the special assessment, which
amounted to $1.6 million or $.17 after tax, the Company would have had net
income of $1.4 million or $.15 per share.
Net interest income, the difference between revenue generated from interest
earning assets and the interest cost of funding those assets, is First
Defiance's primary source of earnings. For the three month period ending
September 30, 1996, net interest income increased to $5,481,000 from $4,334,000
for the same period in 1995. First Defiance's interest rate spread (the
difference between yield on average interest earning assets and the interest
rate on average interest-bearing liabilities) for the quarter was 3.31%, which
was 34 basis points higher than the 1995 level of 2.97% for the same quarter.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $504.9 million for the quarter ended
September 30, 1996 compared to $475.5 million for the same period in 1995. That
growth was due to the receipt of $63 million in proceeds from the stock offering
completed on September 29, 1995. Average loans receivable increased to $403.4
million for the quarter ended September 30, 1996 from $371.3 million for the
same period in 1995. The average yield on loans was 8.67% for the quarter ended
September 30, 1996 compared to 8.77% for the three months ended September 30,
1995. Average securities outstanding for the quarter ended September 30, 1996
were $98.6 million compared to $101.4 million for the same period in 1995 and
the yield on those securities decreased slightly, to 6.1% for the three months
ended September 30, 1996 compared to 6.30% for the three months ended September
30, 1995. Total interest income plus dividends on Federal Home Loan Bank stock
was $10,316,000 for the three months ended September 30, 1996, a 5.4% increase
from the same period in 1995 when the total was $9,789,000.
Net interest income for the quarter ended September 30, 1996 was also improved
by a $624,000 decrease in total interest expense, which was $4,782,000 for the
three months ended September 30, 1996 compared to $5,406,000 for the three
months ended September 30, 1995. A portion of the proceeds from the September
1995 stock offering were used to repay approximately $18 million of advances
from the Federal Home Loan Bank. Average advances outstanding therefore declined
from $24.9 million for the three months ended September 30, 1995 to $12.2
million for the three months ended September 30, 1996. Interest expense on those
advances declined to $177,000 for the three months ended September 30, 1996
compared to $408,000 for the quarter ended September 30, 1995. Interest paid on
deposits decreased for the period, to $4,605,000 for the quarter ended September
30, 1996 from $4,998,000 for the quarter ended September 30, 1995. The decrease
was due to a 35 basis point decrease in interest rates, to 4.83% for the quarter
ended September 30, 1996 compared to 5.18% for the same period in 1995. Also
contributing to the decrease in interest paid on deposits was the $4.5 decrease
in the average balance of deposits outstanding for the quarter, $385.8 at
September 30, 1995 to $381.3 at September 30, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
First Defiance's provision for loan losses was $264,000 for the quarter ended
September 30, 1996 compared to $246,000 for the same period in 1995. Provisions
for loan losses are charged to earnings to bring the total allowance 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 collectability of First Defiance's loan portfolio.
Due to the continued low level of non-performing assets, which were $1.2 million
at September 30, 1996 compared to $945,000 at December 31, 1995, management
deemed its September 30, 1996 allowance of $2.0 million to be appropriate. At
September 30, 1996 First Defiance's allowance for loan losses amounted to 168.5%
of non-performing assets and .49% of total loans compared to 223.2% and .47% at
December 31, 1995. For the quarter ended September 30, 1996, First Defiance
charged off $220,000 of loans against its allowance and realized recoveries of
$33,000 from loans previously charged off. During the same quarter in 1995,
First Defiance charged off $135,000 in loans and realized recoveries of $8,000.
Total non-interest expense for the quarter ended September 30, 1996, excluding
the $2.5 million special assessment, was $3.5 million, compared to $2.6 million
for the quarter ended September 30, 1995, an increase of approximately $885,000.
This increase was mainly the result of increases in compensation and benefits,
which increased by $442,000 or 32.5% from the quarter ended September 30, 1995
to the comparable period in 1996. That increase was due to increases in ESOP and
management recognition plan expense due to the September, 1995 stock offering,
additional personnel in the compliance and human resource areas, and increases
in health insurance costs and in pension expense. Ohio franchise tax expense,
which is based on beginning of year equity, increased $124,000 from the quarter
ended September 30, 1995 to the quarter ended September 30, 1996. Also, loan
fees and expenses increased by $49,000, from $102,000 at September 30, 1995 to
$150,000 at September 30, 1996, due to the increased loan production volume.
Non-interest income increased to $366,000 for the quarter ended September 30,
1996 from $263,000 for the same period in 1995. Most of the increase is due to
gains on mortgage loans sold of $86,000 for the three months ended September 30,
1996. There were no loans sold during the comparable period in 1995.
First Defiance's board of directors declared a dividend of $.07 per common share
as of September 30, 1996. The dividend amounted to $646,403 and was paid on
October 11, 1996. 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.
Nine Months Ended September 30, 1996 compared to Nine Months Ended September 30,
1995
Net income for the nine month period ended September 30, 1996 was $3.0 million
or $.29 per share compared to $3.7 million or $.35 per share during the same
period in 1995. Without the $2.5 million SAIF assessment ($1.6 million or $.16
per share after tax), net income would have been $4.6 million or $.45 per share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
For the nine month period ended September 30, 1996, net interest income
increased to $16,298,000 from $13,097,000 for the same period in 1995. First
Defiance's interest rate spread for the nine month period was 3.18%, which
exceeded the September 30, 1995 level of 3.12% by 6 basis points.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $507.4 million for the nine months ended
September 30, 1996 compared to $465.4 million for the same period in 1995. That
growth was due to the receipt of $63 million in proceeds from the stock offering
completed on September 29, 1995. Average loans receivable increased to $395.5
million for the nine months ended September 30, 1996 from $363.3 million for the
same period in 1995. The average yield on loans was 8.68% for the nine months
ended September 30, 1996 and 8.67% for the comparable period in 1995. Average
securities outstanding for the nine months ended September 30, 1996 were $109.0
million compared to $99.3 million for the same period in 1995 and the yield on
those securities decreased slightly, to 6.13% for the nine months ended
September 30, 1996 compared to 6.21% for the comparable period in 1995. Total
interest income and dividends on Federal Home Loan Bank stock was $30,907,000
for the nine months ended September 30, 1996, a 8.8% increase from the same
period in 1995 when total earnings were $28,399,000.
Interest expense for the nine month period decreased slightly, from $15.2
million for the nine month period ended September 30, 1995 to $14.4 million for
the comparable period in 1996. Most of the decrease resulted from a $733,000
decrease in interest expense on Federal Home Loan Bank advances, from $1,145,000
for the nine months ended September 30, 1995 to $412,000 for the comparable
period in 1996. The decrease in interest expense on FHLB advances resulted from
the use of a portion of the funds from the September stock offering to repay
approximately $18 million of advances from the Federal Home Loan Bank. Interest
paid on deposits was $14.0 million for both the nine months ended September 30,
1996 and for the nine months ended September 30, 1995. An increase in average
balance outstanding was partially offset by a decrease in the cost of funds for
deposits outstanding from $379.4 million and 4.93%, respectively, for the nine
month period ended September 30, 1995 to $381.4 million and 4.91% for the nine
months ended September 30, 1996.
First Defiance's provision for loan losses was $608,000 for the nine months
ended September 30, 1996 compared to $432,000 for the same period in 1995. The
increase was due to the growth in the loan portfolio and the continued change in
loan mix between mortgage and consumer and commercial lending. First Defiance
charged off $502,000 of loans against its reserve and realized recoveries of
$97,000 from loans previously charged off. During the same period in 1995, First
Defiance charged off $249,000 in loans and realized recoveries of $29,000.
Total non-interest expense for the nine month period ended September 30, 1996,
excluding the special one time SAIF assessment charge, increased by
approximately $2 million. The most significant increases were in compensation
and benefits, which increased by $955,000 or 24.1% from 1995 to 1996. That
increase was due to enhancements in the Company's Employee Stock Ownership Plan
and Management Recognition Plan as a result of the 1995 stock offering and
staffing increases. Also, because of the additional equity generated by the
stock offering, the Company's Ohio Franchise Tax increased by $359,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Non-interest income increased to $959,000 for the nine months ended September
30, 1996 from $652,000 for the same period in 1995. The increase was due to the
recognition of $172,000 in gains on the sale of loans to the secondary market
and the recognition during 1995 of a $75,000 loss on the sale of marketable
securities.
The Company has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 31.9% for the nine
months ended September 30, 1996 compared to 33.9% for the same period in 1995.
Through September 30, 1996, First Defiance has declared dividends totaling $.21
per share.
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three month period ended September 30, 1996.
First Defiance generated $9,140,000 of cash from operating activities during the
first nine months of 1996. 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, 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 lending, which is funded with cash provided by
operations, proceeds from the amortization and prepayments of existing loans,
proceeds from the sale or maturity of securities, and borrowings from the
Federal Home Loan Bank.
At September 30, 1996, First Defiance had $12.9 million in outstanding mortgage
loan commitments and loans in process to be funded generally within the next six
months and an additional $20.6 million committed under existing consumer and
commercial lines of credit and standby letters of credit. At that date, the
total amount of certificates of deposit which are scheduled to mature by
September 30, 1997 is $194.8 million. First Defiance believes that it has
adequate resources to fund commitments as they arise and that it can adjust the
rate on savings certificates to retain deposits in changing interest rate
environments. If First Defiance requires funds beyond its internal funding
capabilities, advances from the FHLB of Cincinnati are available as an
additional source of borrowings. At September 30, 1996 First Federal had $12
million in outstanding short-term advances from the FHLB.
Currently First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities include agency step-up, REMIC and CMO investments. Such investments
are not classified as high risk at September 30, 1996 and do not present risk
significantly different than other mortgage-backed or agency securities. First
Defiance does not invest in off-balance sheet derivative securities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
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.
In August 1993 the OTS adopted final regulations which incorporate an interest
rate risk ("IRR") component into the current risk-based capital requirement. The
IRR component is a dollar amount to be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement. The IRR
component will be equal to one-half of the difference between an institution's
"measured exposure" and a "normal" level of exposure, in each case as measured
in terms of the sensitivity of an institution's net portfolio value ("NPV") to
changes in interest rates. The OTS will calculate changes in an institution's
NPV based on financial data submitted by the institution on a quarterly basis
and guidance provided by the OTS. An institution's measured IRR is expressed as
the change that occurs in its NPV as a result of a hypothetical 200 basis point
increase or decrease in interest rates (whichever leads to a lower NPV) divided
by the estimated economic value (present value) of its assets. An institution
with a "normal" level of interest rate risk is defined as one whose measured IRR
is less than 2%, as estimated by the OTS model, and only institutions whose
measured IRR exceeds 2% will be required to maintain an IRR component.
The Director of the OTS has delayed the implementation of the capital deduction
for interest rate risk pending the testing of the appeals process set forth in
OTS Thrift Bulletin 67. Had the IRR component been required as of September 30,
1996, risk based capital would have been reduced by $975,000 (the lowest of the
three prior quarters' component). First Federal would still have exceeded the
regulatory capital requirement by $77.9 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
The following table sets forth First Federal's compliance with each of the
capital requirements at September 30, 1996.
Tangible Core Risk-Based
Capital Capital Capital (1)(2)
---------- ---------- ----------
(Dollars in Thousands)
Regulatory capital ............. $ 103,442 $ 103,442 $ 105,382
Minimum required regulatory
capital ..................... 7,692 15,383 26,516
---------- ---------- ----------
Excess regulatory capital ...... $ 95,750 $ 88,059 $ 78,866
========== ========== ==========
Regulatory capital as a
percentage of assets (3) .... 18.7% 18.7% 31.8%
Minimum capital required as
a percentage ................ 1.5 3.0 8.0
---------- ---------- ----------
Excess regulatory capital as a
percentage in excess of
requirement ................. 17.2% 15.7% 23.8%
========== ========== ==========
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, discussed above.
(2) Reflects fully phased-in deductions from total capital.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $502.2 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $319.8 million.
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
for commercial bank deposits. Both the SAIF and the BIF are required by law to
attain and maintain a reserve ratio of 1.25% of insured deposits. As a result of
the BIF achieving fully funded status, the FDIC promulgated a regulation in
November 1995, which reduced deposit premiums paid by BIF-insured banks in the
lowest risk category from 27 basis points to zero (subject to an annual minimum
of $2,000).
On September 30, 1996, legislation was enacted to recapitalize the SAIF through
a one-time special assessment on SAIF-insured deposits as of March 31, 1995. The
special assessment amounted to approximately $4.5 billion or approximately $.65
for every $100 of assessable deposits. First Federal's assessment amounted to
$2.5 million ($1.6 million, net of income tax benefit). As a result of the
special assessment, it is anticipated that First Federal's deposit insurance
premiums will decrease from the current rate of $0.23 per $100 of deposits to
approximately $0.06 per $100 of deposits. First Federal's annual premiums under
the previous assessment schedule were approximately $860,000.
FIRST FEDERAL SAVINGS AND LOAN
DEFIANCE, OHIO
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a material
nature at the present time.
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.
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: November 12, 1996 By: /s/ Don C. Van Brackel
-------------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: November 12, 1996 By: /s/ Marvin K. Rabe
---------------------
Marvin K. Rabe
Senior Vice President, Chief
Financial Officer and
Treasurer