================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number ________________
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 Identification Number)
incorporation or organization)
601 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (419) 782-5015
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 27, 1997, there were issued and outstanding 9,423,896
shares of the Registrants common stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and ask price of such
stock as of March 27, 1997 was approximately $130.8 million.
Documents Incorporated by References
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Registrants Annual Report to Stockholders for the fiscal
year ended December31, 1996 are incorporated into Part II, Items 5-8 of this
Form 10-K.
(2) Portions of the Registrants definitive proxy statement for its 1997 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
================================================================================
PART I
Item 1. Business
First Defiance Financial Corp. (First Defiance or the Company) was
organized in June, 1995 and on September 29, 1995 became the parent company of
First Federal Savings and Loan, Defiance, Ohio (First Federal) when First
Federal and First Federal Mutual Holding Company, which at the time owned 59% of
the outstanding common stock of First Federal, completed a Conversion and
Reorganization from the mutual holding company form of ownership to full stock
ownership. In connection with the Conversion and Reorganization (the
Reorganization) First Defiance completed a Subscription and Community Stock
Offering (the Offering) in which it sold 6,476,914 shares of common stock
(equivalent to the 59% ownership of First Federal Mutual Holding Company) for
$10 per share. The outstanding public shares of common stock of First Federal
were converted into common shares of First Defiance in a ratio of 2.1590231
shares for every one share of First Federal.
First Federal had reorganized on June 19, 1993 from a mutual savings
and loan association to a mutual holding company known as First Federal Mutual
Holding Company (the Mutual Holding Company Reorganization). As part of the
Mutual Holding Company Reorganization First Federal Mutual Holding Company
organized a federally chartered stock savings and loan association (now First
Federal) and transferred all of its assets and liabilities to First Federal in
exchange for 3,000,000 shares of common stock which represented all of the
outstanding shares of First Federal upon completion of the Mutual Holding
Company Reorganization. Concurrent with the Mutual Holding Company
Reorganization, First Federal sold 2,080,000 additional shares of common stock
to members and employees of First Federal and to the public. On September 29,
1995, as part of the Reorganization, the 3,000,000 shares of First Federal held
by the Mutual Holding Company were canceled and the shares held by the public
were exchanged for shares of First Defiance in accordance with an exchange ratio
which assured they would maintain their existing 41.0% ownership.
The business of the Company and its subsidiaries will be discussed
herein as activities of the Company (on a consolidated basis), and references to
the Companys historical investment activities include the activities of First
Federal prior to September29, 1995 unless otherwise noted.
The Company employs executive officers and a support staff if and as
the need arises. Such personnel are provided by First Federal and are not paid
separate remuneration for such services. The Company reimburses First Federal
for the use of First Federal personnel, pursuant to an expense sharing agreement
between the Company and First Federal. First Federal provides the Company with
office space and is reimbursed for the use of the space through the expense
sharing agreement. At December 31, 1996, the Company had consolidated assets of
$543.4 million, consolidated deposits of $382.5 million, and consolidated
stockholders equity of $116.6 million. The Companys executive office is located
at 601 Clinton St., Defiance, Ohio 43512 and its telephone number is (419)
782-5015.
First Federal Savings and Loan
First Federal is a federally chartered stock savings and loan
headquartered in Defiance, Ohio. It conducts operations through its main office,
eight full service branch offices and two loan origination offices in Defiance,
Fulton, Henry, Putnam and Williams Counties in northwest Ohio. First Federals
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) under
the Savings Association Insurance Fund (SAIF). First Federal is a member of the
Federal Home Loan Bank System.
First Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences
(one-to-four-family units) primarily located in the five counties in which its
offices are located and in contiguous Paulding County. First Federal also
originates other real estate loans secured by nonresidential and multi-family
residential real estate and construction loans. First Federal also holds a
significant number of non real estate loans including commercial, home
improvement and equity, consumer finance loans, primarily automobile loans, and
mobile home loans. First Federal also invests in U.S. Treasury and federal
government agency obligations, obligations of the State of Ohio and its
political subdivisions and mortgage-backed securities which are issued by
federal agencies.
Lending Activities
General. A savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. See Regulation - Federal Regulation of
Savings Associations. At December31, 1996, First Federals limit on loans-to-one
borrower was $11.2 million and its five largest loans or groups of loans to one
borrower, including related entities, aggregated $3.9 million, $3.4 million,
$3.1 million, $2.6 million and $2.5 million. All of these loans or groups of
loans were performing in accordance with their terms at December31, 1996.
Loan Portfolio Composition. Loan volume continues to be strong. The net
increase in net loans outstanding over the prior year was $33.9 million, $26.5
million, and $21.3 million in 1996, 1995 and 1994, respectively. The loan
portfolio contains no foreign loans nor any concentrations to identified
borrowers engaged in the same or similar industries exceeding 10% of total
loans.
The following table sets forth the composition of the Companys loan
portfolio by type of loan at the dates indicated.
December 31
-------------------------------------------------------------------------------------------
1996 1995 1994 1993
-------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate:
Single-family residential $241,228 57.1% $220,880 56.9% $222,035 61.6% $219,435 64.7%
Multi-family residential 9,175 2.2 16,929 4.4 7,577 2.1 5,745 1.7
Non-residential real estate 21,348 5.0 19,780 5.1 19,888 5.5 18,596 5.5
Construction 11,412 2.7 8,200 2.1 6,858 1.9 6,954 2.1
-------------------------------------------------------------------------------------------
Total real estate loans 283,163 67.0 265,789 68.5 256,358 71.1 250,730 74.0
Non-real estate:
Consumer finance 74,019 17.5 61,810 15.9 52,491 14.6 41,041 12.1
Commercial 26,674 6.3 23,647 6.1 17,436 4.8 15,560 4.6
Mobile home 25,199 6.0 24,671 6.4 24,191 6.7 22,274 6.5
Home equity and improvement 13,570 3.2 11,875 3.1 10,265 2.8 9,464 2.8
-------------------------------------------------------------------------------------------
Total non-real estate loans 139,462 33.0 122,003 31.5 104,383 28.9 88,339 26.0
-------------------------------------------------------------------------------------------
Total loans 422,625 100.0% 387,792 100.0% 360,741 100.0% 339,069 100.0%
===== ===== ===== =====
Less:
Loans in process 4,474 3,971 3,440 2,860
Deferred loan origination fees 568 559 631 883
Allowance for loan losses 2,217 1,817 1,733 1,662
-------- -------- -------- --------
Net loans $415,366 $381,445 $354,937 $333,664
======== ======== ======== ========
----------------------
1992
----------------------
Amount %
----------------------
(Dollars in thousands)
Real estate:
Single-family residential $215,666 65.9%
Multi-family residential 6,102 1.9
Non-residential real estate 20,935 6.4
Construction 5,591 1.7
----------------------
Total real estate loans 248,294 75.9
Non-real estate:
Consumer finance 33,473 10.2
Commercial 14,462 4.4
Mobile home 20,841 6.4
Home equity and improvement 10,025 3.1
----------------------
Total non-real estate loans 78,801 24.1
----------------------
Total loans 327,095 100.0%
=====
Less:
Loans in process 2,919
Deferred loan origination fees 1,082
Allowance for loan losses 1,185
--------
Net loans $321,909
========
First Defiance also had $.6 million and $3.8 million in loans
classified as available-for-sale at December31, 1996 and 1995, respectively. The
fair value of such loans, which are all single-family residential mortgage
loans, exceeded their carrying value by $5,000 and $64,000 as of December 31,
1996 and 1995, respectively.
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1996 regarding the dollar
amount of loans maturing in First Defiance's portfolio, based on the contractual
terms to maturity, before giving effect to net items. Demand loans, loans having
no stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.
Due 3-5 Due 5-10 Due 10-15 Due 15+
Due Due Years Years Years Years
Before Before After After After After
12/31/97 12/31/98 12/31/96 12/31/96 12/31/96 12/31/96 Total
---------------------------------------------------------------------------------
(In Thousands)
Real estate $21,206 $16,207 $47,612 $78,089 $53,298 $66,750 $283,162
Non-real estate:
Commercial 14,174 5,045 6,429 785 241 -- 26,674
Home equity and
improvement 6,627 686 1,405 741 81 4,030 13,570
Mobile home 1,856 2,026 6,501 9,594 3,837 1,385 25,199
Consumer finance 25,401 18,901 29,067 602 32 17 74,020
---------------------------------------------------------------------------------
Total $69,264 $42,865 $91,014 $89,811 $57,489 $72,182 $422,625
===================================================================================
The schedule above does not reflect the actual life of the Company's
loan portfolio. The average life of loans is substantially less than their
contractual terms because of prepayments and due-on-sale clauses, which give
First Defiance the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid.
The following table sets forth the dollar amount of all loans, before
net items, due after one year from December 31, l996 which have fixed interest
rates or which have floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
------------------------------------------------------
(In Thousands)
Real estate $191,446 $70,510 $261,956
Non-real estate:
Commercial 3,753 8,747 12,500
Other 74,574 4,331 78,905
------------------------------------------------------
$269,773 $83,588 $353,361
=====================================================
Originations, Purchases and Sales of Loans. The lending activities of
First Defiance are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Board of Directors
and management. Loan originations are obtained by a variety of sources,
including referrals from real estate brokers, developers, builders, and existing
customers; newspapers and radio advertising; and walk-in customers.
First Defiance's loan approval process is intended to assess the
borrowers ability to repay the loan, the viability of the loan, and the adequacy
of the value of the property that will secure the loan. A loan application is
first reviewed by a loan officer of First Defiance and then, if the loan exceeds
the loan officer's lending authority, the loan is submitted for approval to the
appropriate Vice President of Lending. All loans greater than $200,000, all
commercial loans and all employee loans are subject to the approval of the
executive committee of the Board of Directors. Loans is excess of $500,000
require approval by the full Board of Directors.
First Defiance offers adjustable rate loans in order to decrease the
vulnerability of its operations to changes in interest rates. The demand for
adjustable-rate loans in First Defiance's primary market area has been a
function of several factors, including customer preference, the level of
interest rates, the expectations of changes in the level of interest rates and
the difference between the interest rates offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
The general lowering of interest rates in 1996 has decreased the demand
for adjustable rate loans. Adjustable rate loans represented 26.0% of First
Federal's total originations of mortgage loans compared to 33.4% and 35.8%
during the year ended December 31, 1995 and 1994, respectively. First Defiance
continues to hold adjustable-rate securities in order to further reduce its
interest-rate gap.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.
First Defiance originated substantially all of the loans in its
portfolio. To better manage interest rate risk, First Defiance is an approved
seller/servicer for the Federal Home Loan Mortgage Corporation (Freddie Mac).
The Company sold $13.3 million and $86,000 in loans during the years ended
December 31, 1996 and 1995, respectively. First Defiance had identified $559,000
and $3.8 million in additional loans which were classified as held for sale as
of December 31, 1996 and 1995, respectively. All loans with a 30-year maturity
which meet the Freddie Mac underwriting guidelines are deemed
available-for-sale. Management intends to retain servicing rights on any loans
sold.
The following table shows total loans originated, loan reductions, and
the net increase in First Defiance's total loans during the periods indicated:
Year ended December 31
1996 1995 1994
------------------------------------
(In thousands)
Loan originations:
One to four family residential $ 70,494 $ 49,430 $ 42,188
Five or more family residential 1,414 2,564 2,313
Non-residential real estate 5,006 4,065 7,964
Construction 15,936 13,133 11,457
Commercial 25,298 23,854 14,698
Mobile home 6,465 5,982 7,263
Home equity and improvement 6,448 5,323 4,049
Consumer 53,698 42,700 41,918
------------------------------------
Total loans originated 184,759 147,051 131,850
Loan reductions:
Loan pay-offs 87,879 73,869 70,984
Mortgage loans sold 13,332 86 --
Periodic principal repayments 48,715 46,045 39,194
------------------------------------
149,926 120,000 110,178
------------------------------------
Net increase in total loans $ 34,833 $ 27,051 $ 21,672
====================================
Asset Quality
First Defiances credit policy establishes guidelines to manage credit
risk and asset quality. These guidelines include loan review and early
identification of problem loans to ensure sound credit decisions. First
Defiances credit policies and review procedures are meant to minimize the risk
and uncertainties inherent in lending. In following the policies and procedures,
management must rely on estimates, appraisals and evaluations of loans and the
possibility that changes in these could occur because of changing economic
conditions.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1996, in dollar amount and as a percentage of
First Defiances total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
Non-residential and
Single-family multi-family Home equity
residential residential Mobile home and improvement
--------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans delinquent for:
30-59 days $2,183 .52% $725 .18% $1,461 .35% $58 .02%
60-89 days 524 .13 149 .03 408 .09 20 --
90 days and over 89 .02 18 -- 193 .05 -- --
--------------------------------------------------------------------------------------------------------
Total delinquent loans $2,796 .67% $892 .21% $2,062 .49% $78 .02%
========================================================================================================
Consumer
finance Commercial Total
-------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage
-------------------------------------------------------------------------
Loans delinquent for:
30-59 days $1,643 .39% $ 5 --% $6,075 1.46%
60-89 days 462 .11 63 .02 1,626 .38
90 days and over 111 .03 ( -- 411 .10
-------------------------------------------------------------------------
Total delinquent loans $2,216 .53% $68 .02% $8,112 1.94%
=========================================================================
Non-Performing Assets. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, First Defiance places all loans more than 90 days past due
on non-accrual status. When a loan is placed on non-accruing status, total
unpaid interest accrued to date is reserved. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan. First
Defiance considers that a loan is impaired when, based on current information
and events, it is probable that they will be unable to collect all amounts due
(both principal and interest) according to the contractual terms of the loan
agreement. When a loan is impaired, First Defiance measures impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral if collateral dependent. If the measure of the impaired loan
is less than the recorded investment, First Defiance will recognize an
impairment by creating a valuation allowance. This policy excludes large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment such as residential mortgage, consumer installment, and credit card
loans. During the fourth quarter of 1996 First Federal identified two commercial
loans which were impaired in the amount of $1.6 million. Interest received and
recorded in income during 1996 on impaired loans including interest received and
recorded in income prior to such impaired loan designation amounted to $156,198.
Unrecorded interest income on these and all non-performing loans in 1996 was
$34,000. The average recorded investment in impaired loans during 1996 and 1995
was $1.45 million and $-0-, respectively. The total allowance for loan losses
related to these loans was $804,000 on December 31, 1996.
Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. In addition, First Defiance also repossesses
other assets securing loans, consisting primarily of automobiles and mobile
homes. When such property is acquired it is recorded at the lower of the
restated loan balance, less any allowance for loss, or fair value. Costs
relating to development and improvement of property are capitalized, whereas
costs relating to holding the property are expensed. Valuations are periodically
performed by management and an allowance for losses is established by a charge
to operations if the carrying value of property exceeds its estimated net
realizable value.
As of December 31, 1996, First Defiance's total non-performing loans
amounted to $1,972,000, or .47% of total loans, compared to $772,000, or .20%
of total loans, at December 31, 1995.
The following table sets forth the amounts and categories of First
Defiance's nonperforming assets and troubled debt restructurings at the dates
indicated.
December 31
1996 1995 1994 1993 1992
--------------------------------------------------------------
(Dollars in thousands)
Non-performing loans:
Single-family residential $ 88 $263 $207 $ 150 $ 475
Non-residential and multi-family
residential real estate 19 - 18 209 131
Commercial 1,561 268 294 380 -
Mobile home 193 130 163 135 234
Home equity and improvement - - - - 49
Consumer finance 111 111 16 41 73
--------------------------------------------------------------
Total non-performing loans 1,972 772 698 915 962
Real estate owned - 1 3 29 218
Other repossessed assets 267 172 164 71 130
--------------------------------------------------------------
Total repossessed assets 267 173 167 100 348
--------------------------------------------------------------
Total non-performing assets $2,239 $945 $865 $1,015 $1,310
==============================================================
Troubled debt restructurings $ - $437 $443 $ 136 $ 348
==============================================================
Total non-performing assets as a percentage
of total assets .41% .18% .18% .22% .29%
==============================================================
Total non-performing loans and troubled
debt restructurings as a percentage of
total loans .47% .31% .32% .31% .40%
==============================================================
Total non-performing assets and troubled
debt restructurings as a percentage of
total assets .41% .26% .28% .25% .37%
==============================================================
Allowance for loan losses as a percent of
total non-performing assets
99.0% 192.3% 200.5% 164.0% 93.5%
==============================================================
Allowance for Loan Losses. It is management's policy to maintain an
allowance for loan losses based upon an assessment of prior loss experience, the
volume and type of lending conducted by First Defiance, industry standards, past
due loans, general economic conditions and other factors related to the
collectibility of the loan portfolio. Although management believes that it uses
the best information available to make such determinations, future adjustments
to allowances may be necessary, and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations.
At December 31, l996, First Defiance's allowance for loan losses
amounted to $2.2 million compared to $1.8 million at December 31, 1995. As of
December 31, l996, $837,000 constituted an allowance with respect to specific
loans or assets held for sale.
The following table sets forth the activity in First Defiance's
allowance for loan losses during the periods indicated.
Year Ended December 31
1996 1995 1994 1993 1992
--------------------------------------------------------------
(Dollars in thousands)
Allowance at beginning of period $1,817 $1,733 $1,662 $1,185 $1,988
Provisions 1,020 374 426 829 1,496
Charge-offs:
Real estate:
Single-family - - 19 63 316
Nonresidential - - - - 8
--------------------------------------------------------------
Total real estate - - 19 63 324
Non-real estate:
Consumer finance 430 230 222 132 198
Mobile home 334 91 159 121 128
Commercial 12 23 1 86 1,694
--------------------------------------------------------------
Total non-real estate 776 344 382 339 2,020
--------------------------------------------------------------
Total charge-offs 776 344 401 402 2,344
Recoveries:
Consumer finance 152 51 46 50 39
Commercial 4 - - - 6
Assets held for sale - 3 - - -
--------------------------------------------------------------
Total 156 54 46 50 45
--------------------------------------------------------------
Allowance at end of period $2,217 $1,817 $1,733 $1,662 $1,185
==============================================================
Allowance for loan losses to total
non-performing loans at end of period
112.4% 235.4% 248.3% 181.6% 123.2%
Allowance for loan losses to total loans at
end of period .53% .47% .48% .49% .36%
The following table sets forth information concerning the allocation of
First Defiance's allowance for loan losses by loan categories at the dates
indicated. For information about the percent of total loans in each category to
total loans, see "- Lending Activities - Loan Portfolio Composition."
December 31
1996 1995 1994
------------------------------------------------------------------------------
Percent of Percent of Percent of
total loans total loans total loans
Amount by category Amount by category Amount by category
------------------------------------------------------------------------------
Real estate mortgage loans $ 307,041 67.0% $ 431,133 68.5% $ 376,358 71.1%
Other:
Commercial business loans 866,185 6.3 687,122 6.1 775,085 4.8
Mobile home loans 208,095 6.0 191,646 6.4 240,521 6.7
Consumer and home equity
and improvement loans 835,701 20.7 507,043 19.0 341,447 17.4
------------------------------------------------------------------------------
$2,217,022 100.0% $1,816,944 100.0% $1,733,411 100.0%
==============================================================================
Securities
Management determines the appropriate classification of debt securities
at the time of purchase. Debt securities are classified as held-to-maturity when
First Defiance has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Debt
securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available for-sale securities are stated at
fair value.
First Defiance's securities portfolio is managed in accordance with a
written policy adopted by the Board of Directors and administered by the
Investment Committee. All securities transactions must be approved by the
Investment Committee and reported to the Board of Directors.
First Defiance's investment portfolio includes four CMO and REMIC
issues totalling $2.3 million, all of which are fully amortizing securities, and
four separate agencies securities totalling $8.6 million which have a step-up
feature. All such investments are considered derivative securities. None of
First Defiance's investments are considered to be high risk and management does
not believe the risks associated with these investments to be significantly
different from risks associated with other pass-through mortgage backed or
agency securities. First Defiance does not invest in off-balance sheet
derivative securities.
The amortized cost and fair value of securities at December 31, 1996 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. REMIC, collateralized
mortgage obligations, FHLMC certificates, FNMA certificates, GNMA certificates,
money market mutual funds and other mutual funds are not due at a single
maturity date. For purposes of the maturity table, mortgage-backed securities,
which are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of underlying
collateral. The mortgage-backed securities may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
Contractually Maturing Total
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average
Year Rate Years Rate Years Rate Years Rate Amount Yield
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Government and
federal agency
obligations $10,000 5.95% $34,762 5.82% $ - - % $ - - % $ 44,762 5.89%
Obligations of
states and
political 188 6.45 607 6.53 269 7.18 360 7.38 1,424 7.14
subdivisions
Mortgage-backed
securities 1,080 7.81 2,587 7.04 2,815 8.10 18,031 7.27 24,513 7.29
REMICs and CMOs - - - - - - 2,259 6.15 2,259 6.15
-------------------------------------------------------------------------------------------------
Total $11,268 $37,956 $3,084 $20,650 72,958
======= ======= ====== =======
Mutual funds and
other 30,986
Unrealized loss
on securities
available for
sale (600)
----------
Total $103,344
==========
For additional information regarding First Defiance's investment portfolio refer
to Note 3 to the financial statements.
Interest-Bearing Deposits
First Defiance has interest-bearing deposits in the FHLB of Cincinnati
amounting to $1.6 and $4.3 million at December 31, l996 and l995, respectively.
Sources of Funds
General. Deposits are the primary source of First Defiance's funds for
lending and other investment purposes. In addition to deposits, First Defiance
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
from the Federal Home Loan Bank may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. First Defiance's deposits are attracted principally from
within First Defiance's primary market area through the offering of a broad
selection of deposit instruments, including NOW accounts, money market accounts,
regular savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$55.6 million at December 31, l996. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
Historically, First Defiance has not advertised for deposits outside
its local market area or utilized the services of deposit brokers.
The following table sets forth the maturities of First Defiance's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1996.
Certificates of
deposit maturing in quarter ending:
- --------------------------------------------------------------------------------
(In thousands)
March 31, 1997 $ 4,248
June 30, 1997 5,249
September 30, 1997 2,650
December 31, 1997 2,702
After December 31, 1997 5,100
-------
Total certificates of deposit with balances of
$100,000 or more $19,949
=======
The following table details the deposit accrued interest payable as of December
31:
1996 1995
----------------- ----------------
Checking and Money Market Accounts $ 49,502 $ 21,639
Passbook Accounts - 5,327
Certificates 166,811 247,209
================= ================
$216,313 $274,175
================= ================
For additional information regarding First Defiance's deposits see Note 8 to the
financial statements.
Borrowings. First Defiance may obtain advances from the FHLB of
Cincinnati upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. See "Regulation
- - Federal Regulation of Savings Associations - Federal Home Loan Bank System."
The following table sets forth certain information as to First
Defiance's FHLB advances at the dates indicated.
December 31
1996 1995 1994
-----------------------------------------------------
(Dollars in thousands)
Long-term:
FHLB advances $ 5,601 $6,842 $12,741
Weighted average interest rate 6.58% 6.70% 7.38%
Short-term:
FHLB advances 35,220 - 11,000
Weighted average interest rate 6.28% - 7.00%
The following table sets forth the maximum month-end balance and
average balance of First Defiance's FHLB advances during the periods indicated.
Year ended December 31
1996 1995 1994
-----------------------------------------------------
(Dollars in thousands)
Long-term:
Maximum balance $ 6,842 $12,641 $21,509
Average balance 6,115 9,881 15,646
Weighted average interest rate of FHLB advances
6.59% 7.28% 7.39%
Short-term:
Maximum balance 35,220 18,000 11,000
Average balance 8,310 8,154 4,231
Weighted average interest rate of FHLB advances 5.59% 6.19% 5.09%
$4.3 million of First Defiance's outstanding long-term FHLB advances
were obtained in the first calendar quarter of 1992 as part of the Company's
asset and liability management strategy and $1.3 million were obtained in the
fourth quarter in 1995 as part of the FHLB's Affordable Housing Program. First
Defiance utilizes short-term advances from the FHLB to meet cash flow needs and
for short-term investment purposes. There were $35.2 million in short-term
advances outstanding at December 31, 1996 (none at December 31, 1995). First
Defiance borrows funds under a variety of programs at FHLB. At December 31,
1996, $15 million was outstanding under First Defiance's REPO Advance line of
credit. The total available under the REPO line is $30 million. Amounts
are generally borrowed under the REPO line on an overnight basis. An additional
$15 million was borrowed under the FHLB's Cash Management Advance (CMA) program
at a variable rate. Amounts borrowed under the CMA program mature within 90
days. The $5.2 million of other advances are borrowed under the FHLB's
short-term fixed or LIBOR based programs.
Subsidiaries. The Company has two wholly-owned subsidiaries, First
Federal and First Defiance Service Company ("First Defiance Service"). First
Defiance was established to provide customers with certain uninsured financial
service products through an affiliation with a third party vendor. Total fees
collected in 1996 by First Defiance Service were less than $6,000.
Employees. First Defiance had 124 full-time employees and 30 part-time
employees at December 31, 1996. None of these employees are represented by a
collective bargaining agent, and First Defiance believes that it enjoys good
relations with its personnel.
Competition
First Defiance faces strong competition both in attracting deposits and
making real estate loans. Its most direct competition for deposits has
historically come from commercial banks and credit unions located in
northwestern Ohio, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, First
Defiance has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The ability of First Defiance to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
First Defiance experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. First Defiance competes for loans principally through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
REGULATION
General
The Company, as the holding company of First Federal, is subject to
regulation, examination and oversight by the OTS and is required to submit
periodic reports to the OTS. As a savings association organized under the laws
of the United States, First Federal is also subject to regulatory oversight by
the OTS, and, because First Federal's deposits are insured by the FDIC, First
Federal is also subject to examination and regulation by the FDIC. First Federal
must file periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by the OTS and the FDIC to
determine whether First Federal is in compliance with various regulatory
requirements and is operating in a safe and sound manner. First Federal is a
member of the FHLB of Cincinnati.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations, and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and First Federal
may be regulated under federal law as a bank or be required to change its
charter. Such change in regulation or charter would likely change the range of
activities in which First Federal may engage. In addition, the Company might
become subject to a different set of holding company regulations which may limit
the activities in which the Company may engage and subject the Company to other
additional regulatory requirements, including separate capital requirements. At
this time, the Company cannot predict when or whether Congress may actually pass
legislation regarding the Company's and First Federal's regulatory requirements
or charter.
Holding Company Regulation. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act (the "HOLA"). As such,
the Company registered with the OTS and is subject to OTS regulations,
examination, supervision and reporting requirements, in addition to the
reporting requirements of the Securities and Exchange Commission (the "SEC").
Congress is considering legislation which may require that the Company become or
be treated as a bank holding company regulated by the FRB. Bank holding
companies with more than $150 million in assets are subject to capital
requirements similar to those imposed on First Federal and have more extensive
interstate acquisition authority than savings and loan holding companies. They
are also subject to more restrictive activity and investment limits than savings
and loan holding companies. No assurances can be given that such legislation
will be enacted, and the Company cannot be certain of the legislation's impact
on its future operations until it is enacted.
The Company is a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company, and such companies are the only financial institution holding
companies which may engage in commercial, securities and insurance activities
without limitation. Congress is considering, however, either limiting unitary
savings and loan holding companies to the same activities as other financial
institution holding companies or permitting certain bank holding companies to
engage in commercial activities and expanded securities and insurance
activities. The Company cannot predict if and in what form these proposals might
become law. The broad latitude to engage in activities under current law can be
restricted, however, if the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association. The OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At December 31, 1996, First Federal met the QTL
Test. See "Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution
other than through a merger or other business combination with First Federal,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than
First Federal or other subsidiary savings associations) would thereafter be
subject to further restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence, or shall continue after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a subsidiary
savings institution, (ii) conducting an insurance agency or escrow business,
(iii) holding, managing or liquidating assets owned by or acquired from a
subsidiary savings institution, (iv) holding or managing properties used or
occupied by a subsidiary savings institution, (v) acting as trustee under deeds
of trust, (vi) those activities previously directly authorized by federal
regulation as of March 5, 1987, to be engaged in by multiple holding companies,
or (vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the OTS prior to being engaged in by a multiple holding
company.
The OTS may also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, if the multiple savings and loan holding company involved
controls a savings association which operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).
As under prior law, the OTS may approve an acquisition resulting in a multiple
savings and loan holding company controlling savings associations in more than
one state in the case of certain emergency thrift acquisitions.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program, and loans to executive officers are subject
to additional limitations. First Federal was in compliance with such
restrictions at December 31, 1996.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. The
Company is an affiliate of First Federal. Generally, Sections 23A and 23B of the
FRA (i) limit the extent to which a savings association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, (ii) limit the aggregate of
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. First Federal was
in compliance with these requirements and restrictions at December 31, 1996.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted.
Neither the Company nor First Federal has opted out of the protection afforded
by Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3% or 50% of the outstanding voting securities of an Ohio corporation (a
"Control Share Acquisition") must be approved in advance by the holders of at
least a majority of the outstanding voting shares of such corporation
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting excluding
the voting shares owned by the acquiring shareholder. The Control Share
Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
Takeover Bid Statute. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offers of all information material to a decision to
accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
OTS Regulations
General. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally chartered
savings associations, including the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and securities they
may make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws or
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to abide
by federal laws and regulations governing community reinvestment could limit the
ability of an association to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income areas and borrowers.
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for First Federal is equal to tangible capital) of 3% of adjusted total assets,
and risk-based capital (which for First Federal consists of core capital and
general valuation allowances) equal to 8% of risk-weighted assets. Assets and
certain off balance sheet items are weighted at percentage levels ranging from
0% to 100% depending on their relative risk.
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. First
Federal does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed. First Federal exceeded
all of its regulatory capital requirements at December 31, 1996.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and First Federal currently qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be placed
in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. First Federal's
capital at December 31, 1996, meets the standards for a well-capitalized
association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four consecutive calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution at the time the
institution fails to comply with its capital restoration plan.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends, repurchases
and certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other association.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of its net
income, current year-to-date, plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the proposed
capital distribution, meet their current minimum, but not fully phased-in
capital requirement. Associations in this category may make capital
distributions up to 75% of their net income over the most recent four quarters.
Tier 3 associations do not meet their current minimum capital requirement and
must obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or a Tier 3 association.
First Federal meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision. As a subsidiary
of the Company, First Federal will also be required to give the OTS 30 days'
notice prior to declaring any dividend on its common shares. The OTS may object
to the dividend during that 30-day period based on safety and soundness
concerns. Moreover, the OTS may prohibit any capital distribution otherwise
permitted by regulation if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association not owned by a holding
company and having a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it remains adequately capitalized, as
described above, after the distribution is made. Any other association seeking
to make a capital distribution that would not cause the association to fall
below the capital levels to qualify as adequately capitalized or better would
have to provide notice to the OTS. Except under limited circumstances and with
OTS approval, no capital distribution would be permitted if it would cause the
association to become undercapitalized or worse.
Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet these
liquidity requirements. The eligible liquidity of First Federal, as computed
under current regulations, at December 31, 1996, was approximately $59.9
million, or 14.3%, and exceeded the then applicable 5% liquidity requirement by
approximately $38.9 million, or 9.3%.
Qualified Thrift Lender Test. Savings associations are required to
qualify as a qualified thrift lender ("QTL") in order to avoid certain
regulatory restrictions. If a savings association fails to meet the QTL test,
its holding company will be limited to the activities permitted for a multiple
savings and loan holding company and its savings association subsidiary that
fails to meet the QTL test will not be eligible for new FHLB advances. In order
to be a QTL prior to September 30, 1996, a savings association was required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTI"), which are generally related to domestic
residential real estate and manufactured housing and include credit card,
student and small business loans, stock issued by any FHLB, the FHLMC or the
FNMA. Under such test, 65% of an institution's "portfolio assets" (total assets
less goodwill and other intangibles, property used to conduct business and 20%
of liquid assets) must consist of QTI on a monthly average basis in 9 out of
every 12 months. Effective September 30, 1996, as an alternative to the
foregoing QTL test, a savings association may also qualify as a QTL if at least
60% of the institution's assets (on a tax basis) consist of specified assets
(generally loans secured by residential real estate or deposits, educational
loans, cash and certain governmental obligations). The OTS may grant exceptions
to the QTL test under certain circumstances. At December 31, 1996, First Federal
met the QTL test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's total capital under the regulatory capital requirements plus
any additional loan reserve not included in total capital. A savings association
may loan to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional loan amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Certain types of loans are not subject to these
limits. In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At December 31, 1996, First Federal was in
compliance with this lending limit.
FDIC Regulations
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met.
First Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including First Federal, and
has authority to initiate enforcement actions against federally insured savings
associations if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance each for members of the BIF and the SAIF.
The FDIC may increase assessment rates for either fund if necessary to restore
the fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such rates if such target level has been met.
The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
cost of prior thrift failures. The BIF has, however, met its required reserve
level.
The assessments paid by healthy savings associations exceeded those
paid by healthy BIF members by approximately $.19 per $100 in deposits for 1995,
and no BIF assessments were required of healthy commercial banks in 1996 except
a $2,000 minimum fee. Legislation to recapitalize the SAIF and eliminate the
significant premium disparity became effective September 30, 1996. The
recapitalization plan provides for a special assessment equal to $.657 per $100
of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. In addition, the cost of prior thrift failures will
be shared by both the SAIF and the BIF, which will increase BIF assessments in
1997. SAIF assessments for healthy savings associations will be approximately
$.064 per $100 in deposits in 1997 but can never be reduced below the level set
for healthy BIF institutions.
First Federal paid on November 27, 1996, an additional pre-tax
assessment of approximately $2.5 million. Such payment was recorded as an
expense and accounted for by First Federal as of September 30, 1996.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming there are no savings associations
under federal law. Under separate proposed legislation, Congress is considering
the elimination of the federal thrift charter and the separate federal
regulation of thrifts. As a result, First Federal would have to convert to a
different financial institution charter and would be regulated under federal law
as a bank, including being subject to the more restrictive authority limitations
imposed on national banks.
In addition, the Company may become subject to more restrictive holding
company requirements, including activity limits and capital requirements similar
to those imposed on First Federal. The Company cannot predict the impact of the
conversion of First Federal to, or the regulation of First Federal as, a bank
until the legislation requiring such change is enacted.
FRB Regulations
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts) of
3% of deposits in net transaction accounts for that portion of accounts in
excess of $4.3 million up to $52 million, and to maintain reserves of 10% of
deposits in net transaction accounts against that portion of total transaction
accounts in excess of $52 million. These percentages are subject to adjustment
by the FRB. At December 31, 1996, First Federal was in compliance with its
reserve requirements.
Federal Home Loan Banks
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances. First
Federal is a member of the FHLB of Cincinnati and must maintain an investment in
the capital stock of the FHLB of Cincinnati in an amount equal to the greater of
1.0% of the aggregate outstanding principal amount of First Federal's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. First Federal
is in compliance with this requirement with an investment in FHLB of Cincinnati
stock of $3.0 million at December 31, 1996.
FHLB advances to members such as First Federal who meet the QTL test
are generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. Upon the origination or renewal of
a loan or advance, the FHLB of Cincinnati is required by law to obtain and
maintain a security interest in collateral in one or more of the following
categories: fully disbursed, whole first mortgage loans on improved residential
property or securities representing a whole interest in such loans; securities
issued, insured or guaranteed by the United States government or an agency
thereof; deposits in any FHLB; or other real estate related collateral (up to
30% of the member association's capital) acceptable to the applicable FHLB, if
such collateral has a readily ascertainable value and the FHLB can perfect its
security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. First Federal has $1.3 million in advances outstanding at December 31,
1996 resulting form a 1995 participation in this program. These funds were used
in accordance with the stipulations of the program.
TAXATION
Federal Taxation
The Company and First Federal are each subject to the federal tax laws
and regulations which apply to corporations generally. Certain thrift
institutions, including First Federal, were, however, prior to the enactment of
the Small Business Jobs Protection Act, which was signed into law on August 21,
1996, allowed deductions for bad debts under methods more favorable than those
granted to other taxpayers. Qualified thrift institutions could compute
deductions for bad debts using either the specific charge off method of Section
166 of the Code, or the reserve method of Section 593 of the Code under which a
thrift institution annually could elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax years 1995 and 1994, First Federal
used the percentage of taxable income method.
Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that would
be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans and its reserve for losses on nonqualifying loans
as of the close of its last taxable year beginning before January 1, 1996, over
(ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the
thrift's reserves would have been at the close of its last year beginning before
January 1, 1996, had the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less then its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct, or improve the property.
In addition to the regular income tax, the Company and First Federal
are subject to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1996, the Company and First Federal are also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (excess to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by First Federal to the Company is deemed paid out of its pre-1988 reserves
under these rules, the pre-1988 reserves would be reduced and First Federal's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of December 31, 1996, First Federal's pre-1988 reserves for tax purposes
totaled approximately $9.5 million.
The tax returns of First Federal have been audited or closed without
audit through the tax year ended December 31, 1992. In the opinion of
management, any examination of open returns would not result in a deficiency
which could have a material adverse effect on the financial condition of First
Federal.
Ohio Taxation
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth.
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock of First Federal after the
Conversion, as reflected on the balance sheet of the Company, in computing its
taxable net worth as long as it owns at least 25% of the issued and outstanding
capital stock of First Federal. The calculation of the exclusion from net worth
is based on the ratio of the excludable investment (net of any appreciation or
goodwill included in such investment) to total assets multiplied by the net
value of the stock. As a holding company, the Company may be entitled to various
other deductions in computing taxable net worth that are not generally available
to operating companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of First
Federal's book net worth determined in accordance with GAAP. As a "financial
institution," First Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
Item 2. Properties
At December 31, 1996, First Federal conducted its business from its
main office at 601 Clinton Street, Defiance, Ohio, and eight other full service
branches in northwestern Ohio. It also operates two loan origination offices
which were opened in 1995.
First Defiance maintains its headquarters in the main office of First
Federal at 601 Clinton Street, Defiance, Ohio.
The following table sets forth certain information with respect to the
office and other properties of the Company at December 31, l996. See Note 7 to
the Consolidated Financial Statements.
Net book value
Description/address Leased/owned of property Deposits
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office Owned $1,476 $155,037
601 Clinton Street
Defiance, OH
Branch Offices
204 E. High Street Owned 359 77,645
Bryan, OH
211 S. Fulton Street Owned 132 37,856
Wauseon, OH
625 Scott Street Owned 579 65,443
Napoleon, OH
1050 East Main Street Owned 672 16,384
Montpelier, OH
926 East High Street Owned 131 7,348
Bryan, OH
1333 Woodlawn Owned 85 12,839
Napoleon, OH
825 N. Clinton Street Owned 372 8,231
Defiance, OH
Inside Super K-Mart Leased 200 1,742
190 Stadium Dr.
Defiance, OH
14241 Airport Highway Leased - *
Swanton, OH
1017 N. Williams St. Leased - *
Paulding, OH
----------------------------------------
$4,006 $382,525
========================================
* -- Loan origination office only
Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of First Defiance.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of securities holders during the
fourth quarter of l996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference from page
36 of First Defiance's Annual Report to Stockholders for fiscal 1996 ("Annual
Report"), which is included herein as Exhibit 13.
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page
3 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages
4 through 14 of the Annual Report.
Item 8. Financial Statements and Supplementary Data
The financial statements required herein are incorporated by reference
from pages 15 through 35 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from page
7 through 11 of the definitive proxy statement dated March 24, 1997. Otherwise,
the requirements of this Item 10 are not applicable.
Item 11. Executive Compensation
The information required herein is incorporated by reference from page
14 of the definitive proxy statement dated March 24, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference from page
3 of the definitive proxy statement dated March 24, 1997.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page
23 of the definitive proxy statement dated March 24, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following financial statements are incorporated herein by reference
from pages 15 through 35 of the Annual Report:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are included in the Notes to Financial Statements
incorporated herein by reference and therefore have been omitted.
(3) Exhibits
The following exhibits are either filed as a part of this report or are
incorporated herein by reference to documents previously filed as indicated
below:
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation *
3.2 Form of Code of Regulations *
3.2 Bylaws *
4.1 Specimen Stock Certificate *
10.1 1996 Stock Option Plan **
10.2 1996 Management Recognition Plan and Trust ***
10.3 1993 Management Recognition Plan and Trust *
10.4 1993 Stock Incentive Plan *
10.5 1993 Directors' Stock Option Plan *
10.6 Employment Agreement with Don C. Van Brackel *
10.7 Employment Agreement with Marvin K. Rabe (also the form of the *
Employment Agreement with John W. Boesling)
13 Annual Report to Shareholders and Notice of Annual Meeting of
Shareholders and Proxy Statement
21.1 List of Subsidiaries of the Company
23.1 Consent of Independent Auditors
* Incorporated herein by reference to the like numbered exhibit in the Registrant's Form S-1 (File No. 33-93354).
** Incorporated herein by reference to Appendix A to the Proxy Statement.
*** Incorporated herein by reference to Appendix B to the Proxy Statement.
(b) Reports on Form 8-K
None
(c) See (a)(3) above for all exhibits filed herewith or incorporated herein by
reference to documents previously filed and the Exhibit Index.
(d) There are no other financial statements and financial statement schedules
which were excluded from the Annual Report to Stockholders which are
required to be included herein.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST DEFIANCE FINANCIAL CORP.
March 28, 1997 By: /s/ Don C. Van Brackel
-------------------------
Don C. Van Brackel
Chairman, President, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 1997.
Signature Title
--------- -----
/s/ Don C. Van Brackel Chairman of the Board, President and
- ----------------------------- CEO
Don C. Van Brackel
/s/ John C. Wahl Senior Vice President and CFO
- -----------------------------
John C. Wahl
/s/ Edwin S. Charles Director, Vice Chairman
- -----------------------------
Edwin S. Charles
/s/ Stephen L. Boomer Director
- -----------------------------
Stephen L. Boomer
/s/ Dr. Douglas A. Burgei Director
- -----------------------------
Dr. Douglas A. Burgei
/s/ Erwin L. Clemens, Esq. Director, Secretary
- -----------------------------
Erwin L. Clemens, Esq.
Signature Title
--------- -----
/s/ Dr. John U. Fauster, III Director
- -----------------------------
Dr. John U. Fauster, III
/s/ Dr. Marvin J. Ludwig Director
- -----------------------------
Dr. Marvin J. Ludwig
/s/ Thomas A. Voigt Director
- -----------------------------
Thomas A. Voigt
/s/ James M. Zachrich Director
- -----------------------------
James M. Zachrich