Exhibit 13
Annual Report to Shareholders
BUSINESS
General
First Defiance Financial Corp. ("First Defiance" or the "Company") conducts
business primarily through its wholly subsidiary, First Federal Savings and Loan
(First Federal), which is a federally chartered savings and loan association
which conducts business in Defiance, Ohio, and neighboring communities in
northwestern Ohio. It currently has nine full service offices and a loan
origination office located in Defiance, Fulton, Henry, Williams and Paulding
counties. At December 31, 1996, First Defiance had $543.4 million of total
assets, $426.8 million of total liabilities, including $382.5 million of
deposits and $116.6 million of stockholders' equity.
As a savings and loan, First Federal is primarily engaged in attracting deposits
from the general public through its nine branch offices and using those and
other available sources of funds to originate loans. As a member of the thrift
industry, First Defiance has traditionally emphasized mortgage lending. However,
the Company also has a large non-mortgage loan portfolio. First Defiance
anticipates that its operations in the future will be conducted in a manner and
scope which is consistent with its past practices.
First Defiance was organized in June, 1995 and on September 29, 1995 became the
parent company of 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 for $ 10 per share.
First Federal had reorganized, on July 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 held by the mutual holding company were canceled and the
shares held by the public were converted into common shares of First Defiance in
a ratio of 2.1590231 shares for every one share of First Federal.
Due to the Company's capital position, and because First Defiance stock was
trading at less than book value, in May, 1996, First Defiance initiated the
first of three five percent stock repurchases. As of December 31, 1996,
1,518,688 shares of First Defiance stock had been purchased from the public at
an average price of $11.07 per share and placed in treasury. As a result of the
stock repurchases, First Defiance had 9,470,877 shares of common stock
outstanding at December 31, 1996.
First Federal is subject to regulation by the Office of Thrift Supervision
("OTS"), as its primary federal regulator and by the Federal Deposit Insurance
Corporation ("FDIC"), which, through the Savings Association Insurance Fund
("SAIF") administered by it, insures First Federal's depositors up to applicable
limits. First Federal is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati, which is one of the 12 banks which comprise the FHLB System.
As a member of the SAIF, First Federal was required to pay a one- time
assessment of $2,460,977 to fully capitalize the SAIF during 1996. As a result
of the assessment, First Federal's annual insurance fees have fallen from $.23
annually on each $100 of deposits to $.064 per $100 of deposits. After
considering the tax benefit of the SAIF assessment, First Defiance's net income
was reduced by $1.6 million or $.16 per share in 1996.
SELECTED FINANCIAL DATA
Dollars in Thousands, Except per share data
The following tables set forth certain financial and other data of First
Defiance at the dates and for the periods indicated. For additional information
about First Defiance, reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of First Defiance and related notes included elsewhere herein.
As Of Or For The Year Ended December 31,
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1996 1995 1994 1993 1992
================================================================
SELECTED OPERATING DATA
Total Interest income ........................................ $ 41,257 $ 38,565 $ 35,260 $ 36,461 $ 38,884
Total interest expense ....................................... 19,459 20,269 16,926 16,413 21,849
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Net interest income ........................................ 21,798 18,276 18,332 16,046 17,035
Provision for loan losses .................................... 1,020 374 465 975 1,619
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Net interest income after provision for loan losses .......... 20,776 17,902 17,667 17,073 15,416
Non-interest income .......................................... 1,327 1,035 1,001 1,043 666
Non-interest expenses(1) ..................................... 15,957 10,560 9,930 8,631 7,224
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Income before income taxes and cumulative effect
of change in accounting principle .......................... 6,148 8,377 8,938 9,485 9,058
Federal income taxes ......................................... 1,997 2,856 2,985 3,052 3,045
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Income before cumulative effect of change in
accounting principle ....................................... 4,151 5,521 5,953 6,433 6,013
Cumulative effect of the change in accounting for
postretirement benefit costs ............................... -- -- -- -- 309
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Net income(l) ................................................ $ 4,151 $ 5,521 $ 5,953 $ 8,433 $ 5,704
================================================================
Earnings per share(1,2) ...................................... $ .42 $ .53 $ .58 $ .29 N/A
================================================================
Cash dividends declared per share (3) ........................ $ .29 $ .28 $ .28 $ .13 N/A
================================================================
Dividend payout ratio ........................................ 69.05% 52.83% 46.26% 44.83% N/A
================================================================
SELECTED FINANCIAL CONDITION DATA
Total assets ................................................. $543,411 $525,550 $471,461 $467,400 $447,889
Securities available-for-sale ................................ 77,407 93,041 65,604 77,069 --
Securities held-to maturity .................................. 25,937 26,073 30,632 39,351 100,379
Loans receivable held-to-maturity ............................ 415,366 361,444 354,937 333,664 321,909
Loans receivable held-for-sale ............................... 559 3,759 -- -- --
Deposits ..................................................... 382,525 361,779 375,690 376,261 378,540
FHLB advances ................................................ 40,821 6,842 23,741 21,509 25,949
Stockholders' equity (substantially restricted) .............. 116,685 133,506 66,396 65,681 41,474
As Of Or For The Year Ended December 31,
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1996 1995 1994 1993 1992
================================================================
SELECTED OPERATING RATIOS (4)
Return on average assets(1) .................................. 0.78% 1.13% 1.26% 1.40% 1.31%
Return on average equity(1) .................................. 3.26 6.14 8.67 12.30 1473
Equity to assets(5) .......................................... 24.07 16.36 14.40 11.41 889
Interest rate spread (5) ..................................... 3.22 3.01 3.50 3.59 3.66
Net interest margin (5) ...................................... 4.31 3.67 4.06 4.06 4.05
Non-performing assets and troubled debt
restructuring to total assets at end of period (5) ......... 0.41 0.24 0 28 0.25 0 37
Non-performing loans and troubled debt
restructuring to total loans (6) ........................... 0.54 0.28 0.32 0.31 0.40
Average interest-earning assets to average
interest-bearing liabilities ............................... 129 120 114 111 107
Net interest income after provision for loan
losses and of her income to total other expenses ........... 139 179 190 210 225
Non-interest expenses to average total assets ................ 3.02 2.16 2.13 1.88 1.66
<FN>
- ------------------
(1) Non-interest expense for 1996 includes a one-time charge of $2.461 million
to recapitalize the Savings Association Insurance Fund (SAIF). Without the
SAIF change, net income would have been $5.995 million, or $.58 per share,
return on average assets would have been 1.09% and return on average equity
would have been 4.55%.
(2) Earnings per share for 1993-1994 have been restated to reflect the
Reorganization. Earnings per share for 1993 are based on the weighted
average number of shares outstanding (as adjusted) and net income since
July 19, 1993, the date of the Mutual Holding Company Reorganization. See
Notes 1 and 2 to the Consolidated Financial Statements.
(3) Cash dividends declared per share for 1993-1994 have been restated to
reflect shares in the Reorganization since July 19, 1993. See Note 1 to the
Consolidated Financial Statements.
(4) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods.
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets. The ratio of
equity to assets and the interest rate spread are calculated based on
average balances.
(6) Non-performing loans consist of non-accrual loans that are contractually
past due 90 days or more and loans that are deemed impaired under criteria
of FASB Statement No. 114. Non-performing assets consist of non-performing
loans and real estate, mobile homes and other assets acquired by
foreclosure or deed-in-lieu thereof.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Defiance, through First Federal, its wholly owned subsidiary, attracts
deposits from the general public and uses those and other available sources of
funds to originate loans. Loans secured by single-family residences located
primarily in the five counties in which its offices are located and in
contiguous Putnam County amounted to $241.2 million, or 57.6% of the total loan
portfolio at December 31, 1996. To a lesser extent, First Defiance originates
other real estate and construction loans, which, net of undisbursed loan funds
amounted to $37.5 million or 8.9% of the total loan portfolio at December 31,
1996. Approximately 33.3% or $139.5 million of First Defiance's loan portfolio
at December 31, 1996 consisted of non-real estate loans including automobile
loans which amounted to $62.1 million or 14.7% of the total loan portfolio;
commercial loans which amounted to $26.7 million or 6.4% of the total loan
portfolio; and mobile home loans which amounted to $25.2 million or 6.0% of the
total loan portfolio.
To more effectively manage interest rate risk, First Defiance became an
authorized seller/servicer for the Federal Home Loan Mortgage Corporation
("Freddie Mac"). Loans with total principal balances of approximately $13.5
million were sold during 1996 and a gain of $209,000 was recognized. First
Defiance retains the servicing rights for all loans sold on the secondary
market. At December 31, 1996, $11.3 million of loans were being serviced for
others and mortgage servicing rights of $123,000 were recorded. All loans with a
30-year maturity which meet the Freddie Mac underwriting guidelines are
classified as loans held-for-sale. At December 31, 1996, the balance of loans
held-for-sale was $559,000.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, fixed income mutual funds, adjustable rate mortgage mutual funds,
money market mutual funds, obligations of the State of Ohio and its political
subdivisions, mortgage-backed securities which are issued by federal agencies,
and to a lesser extent, collateralized mortgage obligations (CMOs) and real
estate mortgage investment conduits (REMICs). Management determines the
appropriate classification of all such securities at the time of purchase.
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, which are comprised of mortgage-backed securities and municipal
obligations, are stated at amortized cost and had a recorded value of $25.9
million at December 31, 1996. Securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are stated at
fair value and had a recorded value of $77.4 million at December 31, 1996. First
Defiance does not engage in securities trading.
As of December 31, 1996, First Defiance's investment in adjustable-rate
mortgage-backed mutual funds consisted of investments in two funds, one of which
invests solely in mortgage-backed securities issued by U.S. Government agencies
and which had a carrying value of $5.8 million at such date, and the other of
which had a carrying value of $5.3 million and which invests in privately issued
mortgage-backed securities and in securities issued by U.S. Government agencies.
The risk of loss with privately-issued mortgage-backed securities may be greater
than the risk associated with mortgage-backed securities insured or guaranteed
by U.S. Government agencies. The investment in fixed income mutual funds
consists of a $15.0 million investment in a fund which invests in asset-backed
securities and corporate bonds, and $3.9 million in mutual funds which invest
primarily in U.S. Treasury obligations.
The profitability of First Defiance depends primarily on its net interest
income, which is the difference between interest income on loans and securities
and interest expense on interest-bearing deposits and borrowings. First
Defiance's net interest income is significantly affected by general economic
conditions and policies of regulatory authorities. First Defiance's net income
also is dependent on the level of non-interest income (including servicing fees
and other fees) and its non-interest expenses, such as employee compensation and
benefits, occupancy and equipment expense, deposit insurance premiums, Ohio
franchise tax, and miscellaneous other expenses, as well as federal income tax
expense.
Historically, First Defiance has experienced relatively low levels of
non-performing assets. First Defiance's total non-performing assets and
troubled-debt restructurings as percentage of total assets amounted to .41%,
0.24% and 0.28% at December 31, 1996, 1995 and 1994 respectively. The Company's
ratio of net charge-offs to average loans outstanding amounted to 0.15%, 0.08%
and 0.12% for the years ended December 31, 1996, 1995 and 1994 respectively.
ASSET/LIABILITY MANAGEMENT
First Defiance's ability to maximize net interest income is largely dependent
upon management's ability to plan and control net interest income through
management of the pricing and mix of assets and liabilities. Due to the fact
that the assets and liabilities of a financial institution are monetary in
nature, changes in interest rates and monetary or fiscal policy affect its
financial condition and have potentially the greatest impact on the net income
of the Company.
The following table shows First Defiance's interest sensitivity analysis as of
December 31, 1996. This analysis shows the cumulative gap and interest
sensitivity over the next two years. The interest rate gaps reported in the
table result when assets are funded with liabilities having different repricing
intervals. The traditional gap approach shows the Company to be liability
sensitive to rate changes at December 31,1996. In 1996, the impact on interest
income due to changing interest rates was a net increase of $687,000.
These gaps are actively managed and change frequently as adjustments are made to
interest rate views, market outlooks and balance sheet cash flows. The Company's
gap position at the end of any period may not be reflective of interest rate
views in subsequent periods, and the Company's active management dictates that
longer-term economic views are balanced against short-term interest rate
changes.
At December 31, 1995, First Defiance had a one year cumulative gap of 4.13%. The
year-to-year fluctuation is due to the fact that proceeds from the September,
1995 stock offering were invested in short-term investments at December 31,
1995. Those proceeds are now invested in longer term assets or were used to
repurchase company stock. Also, management changed its approach to measuring its
gap during 1996. For interest rate sensitivity analysis, interest bearing
checking accounts and savings accounts are considered to be only 60% sensitive
to interest rate changes; therefore if short term interest rates were to change
by 100 basis points the interest rates on these products would change by 60
basis points. In prior years, these non-maturity deposits were considered to
have the market sensitivity approximately the same as 2.5 year or 3.5 year
treasury bonds.
Over Over Over
Less than 3 through 6 6 Months 1 through 2 Over
3 Months Months through 1 Year Years 2 Years Total
--------- --------- --------- --------- --------- ---------
ASSETS
Loans, gross ............................... $ 67,754 $ 31,464 $ 63,304 $ 29,078 $ 227,110 $ 418,710
Securities ................................. 3,534 2,784 14,557 30,678 54,824 106,377
Other assets ............................... 1,650 -- -- -- 16,674 18,324
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Total Assets ............................... $ 72,938 $ 34,248 $ 77,861 $ 59,756 $ 298,608 $ 543,411
=====================================================================================
LIABILITIES
Passbook savings, NOW accounts,
checking & money market
demand accounts (1)......................... $ 68,957 -- -- -- $ 45,871 $ 114,928
Certificates of deposit .................... 97,508 53,599 72,508 27,106 14,883 265,601
FHLB advances .............................. 36,988 157 321 979 3,478 40,621
Other liabilities .......................... -- 613 -- -- 4,883 5,496
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Total liabilities .......................... 202,353 54,368 72,827 28,085 69,213 426,846
Stockholders equity ........................ -- -- -- -- 116,565 116,565
=====================================================================================
Total sources of funds ..................... $ 202,353 $ 54,368 $ 72,827 $ 28,085 $ 185,778 $ 543,411
=====================================================================================
Interest rate sensitivity gap .............. $(129,415) $ (20,120) $ 5,034 $ 31,671 $ 112,830
=====================================================================================
Cumulative interest rate sensitivity gap ... $(129,416) $(149,535) $(144,501) $(112,630)
=====================================================================================
Percentage of cumulative gap to total assets (23.82%) (27.52%) (26.59%) (20.76%)
=====================================================================================
<FN>
(1) Non maturity deposits are assumed to be 60% rate sensitive.
</FN>
In addition to gap, First Defiance has recently begun to monitor interest rate
risk through simulation analysis which measures the impact changes in interest
rates can have on net income. The simulation technique analyzes the effect of a
presumed 100 basis point shift in interest rates. Management does not believe
such a shift will have a significant adverse effect on net interest income. The
Company continues to expand its interest rate risk measurement system to more
sophisticated simulation methods that will monitor the impact interest rate
changes have on net interest income. Such measurements will be made on a monthly
basis.
First Defiance also utilized the "market value of portfolio equity" ("NPV")
methodology which the OTS has adopted as part of its capital regulations. Under
the NPV methodology, interest rate risk exposure ("IRR") is assessed by
reviewing the estimated changes in First Federal's Net Interest Income ("NII")
and NPV which would hypothetically occur if interest rates rapidly rise or fall
along the yield curve. Projected values of NII and NPV at both higher and lower
regulatory defined rate scenarios are compared to base case values (no change in
rates) to determine the sensitivity to changing interest rates. For 1996 the
results of such projections were within the limits set by the Company's board of
directors.
Specific steps that First Defiance has taken to better manage its interest rate
exposure include establishing a policy of selling all newly originated 30-year
fixed rate mortgages. First Defiance is an approved seller/servicer for Freddie
Mac and in 1996 sold loans with balances of $13.5 million. First Defiance also
has continued to focus on growth in the consumer and commercial portfolios,
which by their nature have less exposure to interest rate fluctuations. The
balances of First Defiance automobile loans increased from $51.1 million as of
December 31, 1995 to $62.1 million at December 31, 1996. During that same period
the commercial portfolio increased from $23.6 million to $26.7 million.
Management of First Defiance also has tried to reduce the impact of interest
rate changes on its deposits by emphasizing low interest rate deposit products
and by maintaining competitive pricing on longer-term certificates of deposit.
CHANGES IN FINANCIAL CONDITION
At December 31, 1996, First Defiance's total assets, deposits and stockholders'
equity amounted to $543.4 million, $382.5 million and $116.6 million
respectively, compared to $525.6 million, $381.8 million and $133.5 million
respectively at December 31, 1995.
The increase in assets is due to growth in the loan portfolio and the
implementation during the fourth quarter of 1996 of $20 million of leveraging
strategies where the Company utilized overnight and adjustable rate advances
from the Federal Home Loan Bank ("FHLB") to purchase shares of a short-term
income mutual fund and adjustable rate mortgage-backed securities. The decline
in equity is due to the repurchase by the Company of 1,518,688 shares of its own
common stock. The shares were acquired in open market purchases totalling
$16,815,187, or $11.07 per share. At December 31, 1996 First Defiance's common
stock had a book value per share of $12.31. Equity also was reduced when the
Company funded its Management Recognition Plan through the acquisition of
259,076 shares of its stock for $2,817,452.
For the year, net loans receivable, including loans held for sale, have
increased $30.7 million. Net mortgage loans, including loans held for sale,
increased by $14.7 million to $278.6 million from $263.9 million, and
non-mortgage loans increased $16.0 million, to $137.3 million from $121.3
million. The most significant increases in non-mortgage loans were in automobile
loans, which increased from $51.1 million at December 31, 1995 to $62.1 million
at December 31, 1996, commercial loans, which increased from $23.6 million to
$26.7 million during that same period, and home equity and improvement loans,
which increased from $11.9 million to $13.6 million.
The growth in the loan portfolios was funded in part with proceeds from maturing
investment securities. Total investment securities declined from $119.1 million
at December 31, 1995 to $103.3 million at December 31, 1996. The overall decline
in investment securities of $15.8 million includes the acquisition of
approximately $20 million in investment securities as part of the previously
mentioned leveraging strategy. Without the purchase of securities associated
with that strategy, the investment portfolio actually declined by $35.8 million.
In addition to funding loan growth, certain available-for-sale securities were
liquidated to fund a portion of the stock repurchase programs. The overall
decline in the securities balance was primarily in the available-for-sale
portfolio, which declined from $93.0 million at December 31, 1995 to $77.4
million at December 31, 1996. The available-for-sale portfolio was also
negatively impacted by a $370,000 decrease in the market value of the securities
during 1996 which was recorded in accordance with FASB Statement No. 115. The
declining market values of these securities was the result of slightly rising
interest rates during the year. Held-to-maturity securities declined during
1996, from $26.1 million at December 31, 1995 to $25.9 million at December 31,
1996. The balance actually declined by $5.1 million without taking into account
the acquisition of $5 million in adjustable-rate mortgage-backed securities as
part of the Company's leveraging strategy. The decline in held-to-maturity
balances is due to maturities and prepayments of certain mortgage-backed
securities.
First Defiance also had an increase in office properties and equipment, which
increased from $6.3 million to $12.3 million. The increase in property and
equipment is due to substantial additions and renovations to the main offices in
Defiance, Bryan, Napoleon and Wauseon. The December 31, 1996 balance includes
construction in progress on the renovations of $7.6 million. Management
estimates the cost to complete the renovation projects to be approximately $2.9
million. It is anticipated that the projects will all be substantially completed
during the first quarter of 1997.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar amounts
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates, and the net interest margin. Dividends received on
Federal Home Loan Bank stock are included as interest income. The table does not
reflect the effect of income taxes.
Year Ended December 31,
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1996 1995 1994
---------------------------- ---------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate
==============================================================================================
INTEREST-EARNING ASSETS
Loans receivable $399,949 $34,635 8.66% $367,773 $32,003 8.70% $343,523 $29,180 8.49%
Securities 107,702 6,622 6.15 106,120 6,562 6.18 108,762 6,080 5.59
Dividends on FHLB stock 2,955 207 7.00 2,798 191 6.82 2,818 182 5.75
-----------------------------------------------------------------------------------------------
Total interest-earning assets 510,606 41,464 8.12 476,691 38,756 8.13 455,101 35,422 7.78
Non-interest earning assets 18,257 12,937 11,174
------ ------ ------
Total assets $528,863 $489,628 $466,275
======== ======== ========
INTEREST-BEARING LIABILITIES
Deposits $381,444 $16,579 4.87 $376,864 $18,857 5.00 $374,615 $15,480 4 13
FHLB advances 15,828 880 5.58 19,036 1,432 7.52 21,169 1,448 684
-----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 397,272 19,459 4.90 395,900 20,289 5.12 395,784 16,928 4.28
Non-interest-bearing liabilities 4,311 3,855 3,355
----- ----- -----
Total liabilities 401,583 399,755 399,139
Stockholders' equity 127,280 89,873 67,136
======= ====== ======
Total liabilities and
stockholders' equity $528,863 $489,626 $466,275
Net interest income; interest
rate spread $22,005 3.22% $16,467 3.01% $18,494 3.50%
======= ==== ======= ==== ======= ====
Net interest margin (2) 4.31% 3.87% 4.06%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 129% 120% 114%
=== === ===
<FN>
(1) At December 31, 1996, the yields earned and rates paid were as follows:
loans receivable, 8.62%; securities, 6.22%; other interest-earning assets,
7.03%; total interest-earning assets, 8.14%; deposits, 4.73%; FHLB
advances, 5.73%; total interest-bearing liabilities, 4.83%; and interest
rate spread, 3.31%.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
</FN>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected First
Defiance's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) change in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
Year Ended December 31,
----------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs.1994 1994 vs. 1993
----------------------------------------------------------------------------------------------
Increase Increase Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total (Decrease) (Decrease) Total
Due to Due to Increase Due to Due to Increase Due to Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
----------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans ............................ $ (146) $ 2,778 $ 2,632 $ 732 $ 2,091 $ 2,623 $(2,039) $ 1,603 $ (436)
Securities ....................... (29) 89 60 632 (150) 482 (152) (613) (765)
FHLB stock ....................... 5 11 16 30 (1) 29 35 3 36
----------------------------------------------------------------------------------------------
Total interest-earning assets .... $ (170) $ 2,878 $ 2,708 $ 1,394 $ 1,940 $ 3,334 $(2,156) $ 993 $(1,163)
==============================================================================================
INTEREST-BEARING LIABILITIES
Deposits ......................... $ (522) $ 244 $ (278) $ 3,283 $ 94 $ 3,377 $(1,033) $ (165) $(1,198)
FHLB advances .................... (335) (217) (552) 137 (153) (16) (113) (173) (286)
Total interest-bearing liabilities $ (857) $ 27 $ (830) $ 3,420 $ (59) $ 3,361 $(1,146) $ (338) $(1,484)
==============================================================================================
Increase (decrease) in net interest
income ........................... $ 3,538 $ (27) $ 321
======= ======= =======
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1996 and December 31, 1995
General -- First Defiance reported net income of $4.2 million for the year ended
December 31, 1996 compared to $5.5 million for the year ended December 31, 1995,
a decrease of $1.3 million or 24.8%. The 1996 results were impacted during the
third quarter by a one-time assessment of $2.5 million to recapitalize the SAIF.
The after-tax impact of the SAIF charge was a reduction in net income by $1.6
million. Without the SAIF charge, First Defiance would have had net income for
the year of $5.8 million, an increase of $254,000 or 4.6%. Net interest income
after the provision for loan losses was $20.8 million for the year ended
December 31, 1996 compared to $17.9 million for 1995, an increase of 16%.
However, non interest expense increased to $16.0 million for 1996 from $10.6
million in 1995, an increase of 51.1%. Excluding the effect of the $2.5 million
SAIF charge which is included in non-interest expense for 1996, non-interest
expense increased by $2.9 million, or 27.8% during 1996.
Net interest margin, or net yield on average interest-earning assets was 4.31%
in 1996 compared to 3.87% in 1995. The yield on interest earning assets declined
slightly to 8.12% for 1996 compared to 8.13% for 1995. The Company's cost of
funds declined to 4.90% for the year ended December 31, 1996 from 5.12% for the
same period in 1995 because of the use of proceeds from the September 1995 stock
offering for a full year in 1996 compared to only three months in 1995. As a
result, the interest rate spread increased to 3.22% for 1996 compared to 3.01%
for 1995.
Net Interest Income -- First Defiance's net interest income is determined by its
interest rate spread (i.e., the difference between the yields on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Total interest income increased by $2.7 million, or 7.0% from $38.6 million for
1995 to $41.3 million for 1996. The increase was due to a $32.2 million increase
in the average balance of loans outstanding. The yields on those loans fell
slightly, to 8.66% for 1996 compared to 8.70% for 1995. First Defiance
experienced strong growth in both mortgage and non-mortgage loans during 1996.
The average balance in other interest-earning assets, primarily
available-for-sale and held-to-maturity securities changed only slightly in 1996
compared to 1995.
Interest expense in 1996 decreased by $830,000 or 4.1% to $19.5 million compared
to $20.3 million in 1995. The decline was due primarily to a decrease in the
average outstanding balance of advances from the FHLB, which averaged $15.8
million for the year ended December 31, 1996 compared to $19.0 million for 1995.
The cost of deposits was slightly less in 1996 ($18.6 million) than it was in
1995 ($18.9 million) because of a 13 basis point decline in the average rate
paid on deposits. The average balance of deposits outstanding actually increased
slightly in 1996 compared to 1995. Interest expense was also favorably impacted
by a lower average rate paid on FHLB advances in 1996 compared to 1995. Interest
expense in 1995 also included an interest penalty of approximately $123,000 to
pay off a high rate fixed-rate advance in December, 1995.
As a result of the foregoing, First Defiance net interest income was $21.8
million for 1996 compared to $18.3 million for 1995.
Provision for Loan Losses -- First Defiance's provision for loan losses was $1.0
million for the year ended December 31, 1996 compared to $374,000 for 1995.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level deemed appropriate by management. Factors considered
by management include historical experience, the volume and type of lending
conducted by First Defiance, industry standards, the amount of non-performing
assets, including loans which meet the Financial Accounting Standards Board
("FASB") Statement No. 114's definition of impaired, general economic
conditions, particularly as they relate to First Defiance's market area, and
other factors related to the collectability of First Defiance's loan portfolio.
The increase in the provision for loan losses can be attributable to the overall
growth in the loan portfolio and the continued emphasis on consumer and
commercial lending, which have inherently greater credit risk than mortgage
lending. At December 31, 1996, two borrowers with total loans outstanding of
$1.6 million met the FAS Statement No. 114 definition for impairment. The total
allowance for loan losses related to those specific loans was $804,000 at
December 31, 1996. Other non-performing assets, which consist of loans 90 days
past-due and repossessed assets totaled $678,000 at December 31, 1996. The total
allowance for loan losses at December 31, 1996 was $2.2 million.
Non-interest Income -- First Defiance's non-interest income amounted to $1.3
million for the year ended December 31, 1996 compared to $1.0 million for the
year ended December 31, 1995. Service fees and other charges increased by
$153,000, primarily due to increases in fees on NSF checks. Non-interest income
also includes gains on sales of mortgage loans and service fees related to the
servicing of those loans in 1996 of $221,000. First Defiance had less than
$2,000 of such gains in 1995 as they became a Freddie Mac seller/service in
December, 1995. Non-interest income in 1996 also included a gain on sale of
available-for-sale investments of $26,000 compared to a loss in 1995 of $75,000.
In addition, non-interest income for 1995 included the gain on the disposal of
investment properties of $110,000.
Non-Interest Expenses -- Total non-interest expense for the year ended December
31, 1996 was $16.0 million. Excluding the $2.5 million SAIF assessment,
non-interest expense for 1996 was $13.5 million compared to $10.6 million for
the year ended December 31, 1995, an increase of $2.9 million or 27.8%. The
increase is primarily due to a $1.6 million increase in compensation and
benefits costs, a $695,000 increase in Ohio franchise taxes, a $123,000 increase
in data processing costs, and a $462,000 increase in non-interest expense --
other.
The increase in compensation costs was due to an increase in salaries and wages
of $665,000, a 21% increase from 1995. This increase is due to the expansion of
staffing, both at headquarters and in the branches, to meet increased workloads
and to build the appropriate infrastructure, inflationary wage increases, and
merit increases. Compensation costs also increased by $577,000 due to the
amortization of the additional shares acquired by the Management Recognition
Plan in 1996, by $161,000 due to increases in ESOP expense because of increases
in the price of First Defiance's common stock, and an increase in pension plan
expense of $126,000.
Ohio franchise taxes are calculated based on beginning of year equity and
increased in 1996 because of the proceeds from the September 1995 stock
offering. Data processing costs increased due to the upgrade of systems and the
addition of several new applications. Non-interest expense -- other increased in
part because of increases in charitable contributions by $163,000 and in
appraisal fees by $93,000. Appraisal fees increased because First Defiance began
outsourcing a majority of their real estate appraisals in mid-1996. That
increase is offset by an increase in fees charged to loan customers.
Federal Income Taxes -- Income tax expense amounted to $2.0 million in 1996
compared to $2.9 million in 1995. The effective tax rates for 1996 and 1995 were
32.5% and 34.1% respectively.
Comparison of the Years Ended December 31, 1995 and December 31, 1994.
General -- First Defiance reported net income of $5.5 million for the year ended
December 31, 1995 compared to $6.0 million for the year ended December 31, 1994,
a decrease of $500,000 or 7.3%. Net interest income after the provision for loan
losses was $17.9 million for both 1995 and 1994. However, non-interest expense
increased to $10.6 million in 1995 from $9.9 million in 1994, an increase of
6.3%.
Net interest margin, or net yield on average interest-earning assets was 3.87%
in 1995 compared to 4.06% in 1994. The yield on interest earning assets
increased 35 basis points from 1994 to 1995 while the Company's cost of funds
increased by 84 basis points during the same period. As a result, the interest
rate spread decreased to 3.01% in 1995 from 3.50% in 1994.
Net Interest Income -- Total interest income increased by $3.3 million, or 9.4%
from $35.3 million for 1994 to $38.6 million for 1995. The increase was due both
to a 21 basis point increase on the average yield on loans receivable and a
$24.2 million increase in the average outstanding balance of loans receivable.
The increase in the yields on loans is primarily reflective of the continued
growth in the higher rate non-mortgage loan portfolio at a faster pace than the
growth of the mortgage loan portfolio.
The increase in interest income was offset by a similar increase in interest
expense, which rose from $16.9 million for the year ended December 31, 1994 to
$20.3 million for the year ended December 31, 1995, a $3.4 million or 20.1%
increase. The increase is due primarily to an 87 basis point increase in the
average rate paid on deposits. The rates were increased for certain certificates
of deposit early in 1995 in order to remain competitive with other local banks.
The cost of FHLB advances was $1.4 million for both 1995 and 1994, despite the
fact that short-term advances were paid off with the proceeds of the stock
offering.
The Company utilized a higher balance of FHLB advances during 1995 prior to the
stock offering however, and the average balance of FHLB advances outstanding for
the year was $21.2 million for 1994 compared to $19.0 million for 1995. The 1995
expense also includes an interest penalty of approximately $123,000 to pay off a
high rate fixed-rate advance in December, 1995.
As a result of the foregoing, First Defiance's net interest income was $18.3
million for both 1995 and 1994, despite the decrease in the interest rate spread
to 3.01% in 1995 from 3.5% in 1994.
Provision for Loan Losses -- First Defiance's provision for loan losses was
$374,000 for the year ended December 31, 1995 compared to $465,000 for 1994.
First Defiance's allowance for loan losses was $1.8 million at December 31, 1995
compared to $1.7 million at December 31, 1994.
Non-interest Income -- First Defiance's non-interest income amounted to $1.0
million for both the year ended December 31, 1995 and 1994. Loan service fees
and dividends from the FHLB both increased during 1995 and First Defiance
realized a one-time gain of $110,000 from the disposal of certain investment
properties during the fourth quarter of 1995. These increases were offset by
gains and losses on the disposal of available-for-sale securities as First
Defiance realized a $75,000 loss on such securities during 1995 compared to a
gain of $63,000 on similar securities during 1994.
Non-interest Expenses -- Total non-interest expense was $10.6 million for the
year ended December 31, 1995 compared to $9.9 million for the year ended
December 31, 1994, an increase of $630,000 or 6.3%. The increase is primarily
due to a $321,000 increase in compensation and benefits costs, an $80,000
increase in occupancy costs and an increase in non-interest expense -- other of
$125,000.
The increase in compensation costs was due to staffing increases related to the
start-up of the Defiance Super K-Mart branch and the two loan origination
offices; a full years' salary for two executive level positions filled in
mid-1994; and an $80,000 increase in the Company's group life and health
insurance cost.
Occupancy costs increased primarily because of the new Super K-Mart branch as
well as the two new loan origination offices. The major components in the
non-interest other increases were advertising costs, which increased by $55,000,
and printing and office supplies and telephone costs which each increased by
$24,000 in 1995 compared to 1994. Those increases were primarily attributable to
the start-up of the Super K-Mart branch and a change in focus in the Company's
overall advertising programs.
Federal Income Taxes -- Income tax expense amounted to $2.9 million compared to
$3.0 million in 1994. The effective tax rate for 1995 and 1994 was 34.1% and
33.4% respectively.
NEW ACCOUNTING PRONOUNCEMENT
In June 1996, FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Statement No.
125 provides new accounting and reporting standards for sales, securitizations,
and servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities.
The statement is generally effective for transactions occurring after December
31, 1996, although certain provisions that deal with securities lending,
repurchase and dollar repurchase agreements, and the recognition of collateral
have been postponed until 1998. Management does not believe the provisions of
Statement No. 125 will have a material effect of the financial statements of
First Defiance.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity -- First Defiance's principle sources of funds are deposits, advances
from the FHLB of Cincinnati, repayments on loans and mortgage-backed securities,
maturities of investment securities, proceeds from the sale of
available-for-sale securities and funds provided by operations. While scheduled
loan and mortgage-backed security amortization, maturing interest-bearing
deposits and investment securities are relatively predictable sources of funds,
deposit flows and loan and mortgage-backed security prepayments are greatly
influenced by economic conditions, the general level of interest rates and
competition. First Defiance generally manages the pricing of its deposits to
maintain a steady deposit balance. When necessary First Defiance will supplement
deposits with longer term and/or less expensive alternative sources of funds
such as advances from the FHLB.
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Treasury, federal agency and other investments having maturities of five years
or less. Current OTS regulations require than a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout 1996 and at December 31, 1996.
Cash was generated by First Defiance's operating activities during the years
ended December 31, 1996, 1995 and 1994, primarily as a result of net income. The
adjustments to reconcile net income to net cash provided by operations during
the periods presented consisted primarily of proceeds from the sale of loans
(less the originations of loans held for sale), the provision for loan losses,
depreciation and amortization expense, ESOP expense related to the release of
ESOP shares in accordance with AICPA SOP 93-6 and increases and decreases in
other assets and other liabilities. The primary investing activity of First
Defiance is lending, which is funded with cash provided from operations and
financing activities, as well as proceeds from amortization and prepayments on
existing loans and proceeds from maturities of securities and, in 1995 from
proceeds from a public stock offering. For additional information about cash
flows from First Defiance's operating, investing and financing activities, see
the Statements of Cash Flows included in the Financial Statements.
At December 31, 1996, First Defiance had an aggregate of $31.5 million in
unfunded commitments to originate loans (including unused portions of lines of
credit and letters of credit) and no commitments to purchase securities. At the
same date, the total amount of certificates of deposit which are scheduled to
mature by December 31, 1997 was $210.1 million. First Defiance believes that it
has adequate resources to fund commitments as they arise and that it can adjust
the rate on savings certificates to retain deposits in changing interest rate
environments. If First Defiance requires funds beyond its internal funding
capabilities, advances from FHLB are available.
Capital -- First Federal is required to maintain specified amounts of capital
pursuant to regulations promulgated by the OTS. The capital standards generally
require the maintenance of regular capital sufficient to meet a tangible capital
requirement, a core capital requirement and a risk-based capital requirement. At
December 31, 1996, First Federal's tangible and core capital totaled $74.9
million or 13.97% of adjusted total assets, which exceeded the respective
minimum requirements at that date by approximately $58.8 million and $66.9
million, respectively, or 12.47% and 10.97% of adjusted total assets
respectively. First Federal's risk-based capital totaled $76.6 million at
December 31, 1996, or 22.43% of risk-weighted assets, which exceeded the current
requirement of 8.0% by approximately $49.3 million, or 14.43% of risk-weighted
assets. First Federal's capital was reduced in December, 1996 with the
declaration of a $30 million dividend to its parent, First Defiance Financial
Corp. For additional information about First Federal's capital requirements, see
Note 12 to the Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with Generally Accepted Accounting
Principles, which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of First Defiance's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
Report of Independent Auditors
To the Stockholders and the Board of Directors
First Defiance Financial Corp.
We have audited the consolidated statements of financial condition of First
Defiance Financial Corp. as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Defiance
Financial Corp. at December 31, 1996 and 1995, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Toledo, Ohio
January 17, 1997
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
December 31
1996 1995
-----------------------------------------
Assets Cash and cash equivalents:
Cash and amounts due from depository institutions $ 3,102,385 $ 4,393,833
Interest-bearing deposits 1,649,801 4,291,348
-----------------------------------------
4,752,186 8,685,181
Investment securities:
Available-for-sale, carried at fair value 77,407,019 93,040,937
Held-to-maturity, carried at amortized cost (approximate
fair value $26,324,936 and $26,691,928 at December 31,
1996 and 1995, respectively)
25,936,547 26,072,523
-----------------------------------------
103,343,566 119,113,460
Loans for sale (approximate fair value -
$563,642 and $3,823,000 at December 31,
1996 and 1995, respectively)
558,550 3,758,572
Loans receivable, net of allowance of $2,217,022
and $1,816,944 at December 31, 1996 and 1995,
respectively 415,366,199 381,444,265
Accrued interest receivable 3,061,133 2,827,176
Federal Home Loan Bank stock 3,033,300 2,830,000
Premises and equipment 12,254,660 6,284,524
Deferred federal income taxes 550,000 222,000
Real estate, mobile homes and other assets held
for sale 266,521 172,904
Other assets 224,606 211,970
-----------------------------------------
Total assets $543,410,721 $525,550,052
=========================================
December 31
1996 1995
-----------------------------------------
Liabilities and stockholders' equity
Liabilities:
Deposits $382,525,366 $381,779,140
Advances from the Federal Home Loan Bank 40,820,664 6,842,438
Accrued expenses and other liabilities 2,886,535 2,787,460
Advance payments by borrowers for taxes and insurance
613,494 634,525
-----------------------------------------
Total liabilities 426,846,059 392,043,563
Stockholders' equity:
Preferred stock, no par value per share:
5,000,000 shares authorized; no shares issued
Common stock, $.01 par value per share:
20,000,000 shares authorized; 9,470,877 and 10,976,612
shares outstanding, respectively 94,709 109,766
Additional paid-in capital 73,670,607 83,458,280
Stock acquired by ESOP (5,092,569) (5,702,364)
Stock acquired by Management Recognition Plan (2,172,987) (97,257)
Net unrealized losses on available-for-sale securities, net
of tax of $203,000 and $78,000, respectively
(397,056) (151,637)
Retained earnings--substantially restricted 50,461,958 55,889,701
-----------------------------------------
Total stockholders' equity 116,564,662 133,506,489
=========================================
Total liabilities and stockholders' equity $543,410,721 $525,550,052
=========================================
See accompanying notes.
First Defiance Financial Corp.
Consolidated Statements of Income
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Interest income:
Mortgage and other loans $34,635,111 $32,002,983 $29,179,761
Investment securities 6,429,590 5,915,313 5,960,203
Deposits with banks 192,200 646,405 120,168
-----------------------------------------------------
Total interest income 41,256,901 38,564,701 35,260,132
Interest expense:
Deposits 18,579,237 18,857,219 15,480,148
Federal Home Loan Bank advances
and other 879,565 1,431,751 1,448,075
-----------------------------------------------------
Total interest expense 19,458,802 20,288,970 16,928,223
-----------------------------------------------------
Net interest income 21,798,099 18,275,731 18,331,909
Provision for loan losses 1,019,813 373,741 465,064
-----------------------------------------------------
Net interest income after provision for
loan losses 20,778,286 17,901,990 17,866,845
Non-interest income:
Service fees and other charges 824,239 671,602 609,006
Dividends on Federal Home Loan
Bank stock 206,941 190,861 161,650
Net gain (loss) on sale of available-for-sale
securities 25,527 (75,158) 62,864
Other 270,684 248,018 166,986
-----------------------------------------------------
1,327,391 1,035,323 1,000,506
Non-interest expenses:
Compensation and benefits 6,899,701 5,329,669 5,008,681
Occupancy 645,166 600,413 519,158
SAIF deposit insurance premiums 871,611 858,765 855,272
SAIF special assessment 2,460,977 - -
State franchise tax 1,721,329 1,025,947 985,214
Data processing 721,132 598,556 562,831
Mobile home loan servicing 433,331 404,313 382,696
Other 2,204,388 1,742,315 1,615,632
-----------------------------------------------------
15,957,635 10,559,978 9,929,484
-----------------------------------------------------
First Defiance Financial Corp.
Consolidated Statements of Income
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Income before income taxes 6,148,042 8,377,335 8,937,867
Income taxes 1,997,000 2,856,000 2,985,000
-----------------------------------------------------
Net income $ 4,151,042 $ 5,521,335 $ 5,952,867
=====================================================
Earnings per share $ .42 $ .53 $ .58
=====================================================
Dividends declared per share $ .29 $ .28 $ .28
=====================================================
Average number of shares outstanding 9,993,818 10,413,589 10,284,811
=====================================================
See accompanying notes.
First Defiance Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Common Stock Additional
------------------------------ Paid-In
Shares Amount Capital
---------- ------------- -------------
Balance at January 1, 1994 10,967,036 $ 109,670 $ 19,855,003
Amortization of deferred compensation of
Management Recognition Plan -- -- --
ESOP shares released -- -- 171,100
Change in net unrealized gains (losses),
net of income taxes of $1,517,000 -- -- --
Shares issued under stock option plan 9,175 92 42,408
Dividends declared -- -- --
Net income -- -- --
---------- ------------- -------------
Balance at December 31, 1994 10,976,211 109,762 20,068,511
Amortization of deferred compensation of
Management Recognition Plan -- -- --
ESOP shares released -- -- 102,601
Shares issued under stock option plan 539 5 2,495
Organization of First Defiance Financial Corp.:
Cancellation of shares held by First Federal
Mutual Holding Company (6,476,914) (64,769) 64,769
Proceeds from issuance of 6,476,914 shares of
First Defiance Financial Corp. common stock on
September 29, 1995, net of 138 fractional
shares acquired, and net of stock offering
costs of $1,684,468 6,476,776 64,768 63,019,904
First Federal Mutual Holding Company Equity -- -- 200,000
Change in net unrealized gains (losses), net of
income taxes of $1,206,000 -- -- --
Dividends declared -- -- --
Net income -- -- --
---------- ------------- -------------
Balance at December 31, 1995 10,976,612 109,766 83,458,280
Amortization of deferred compensation of
Management Recognition Plan -- -- --
ESOP shares released -- -- 133,381
Shares issued under stock option plan 12,953 130 59,843
Acquisition of common stock for Management
Recognition Plan -- -- --
Acquisition of common stock for treasury (1,518,688) (15,187) (9,980,897)
Change in net unrealized gains (losses),
net of income taxes of $125,000 -- -- --
Dividends declared -- -- --
Net income -- -- --
---------- ------------- -------------
Balance at December 31, 1996 9,470,877 $ 94,709 $ 73,670,607
========== ============= =============
First Defiance Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Stock Acquired By Net Unrealized
------------------------------- Gains
Management (Losses) on
Recognition Available-For-
ESOP Plan Sale Securities
------------- ------------- -------------
Balance at January 1, 1994 $ (1,400,000) $ (514,031) $ 451,189
Amortization of deferred compensation of
Management Recognition Plan -- 251,936 --
ESOP shares released 400,000 -- --
Change in net unrealized gains (losses),
net of income taxes of $1,517,000 -- -- (2,944,199)
Shares issued under stock option plan -- -- --
Dividends declared -- -- --
Net income -- -- --
------------- ------------- -------------
Balance at December 31, 1994 (1,000,000) (262,095) (2,493,010)
Amortization of deferred compensation of
Management Recognition Plan -- 164,838 --
ESOP shares released 479,166 -- --
Shares issued under stock option plan -- -- --
Organization of First Defiance Financial Corp.:
Cancellation of shares held by First Federal
Mutual Holding Company -- -- --
Proceeds from issuance of 6,476,914 shares of
First Defiance Financial Corp. common stock on
September 29, 1995, net of 138 fractional
shares acquired, and net of stock offering
costs of $1,684,468 (5,181,530) -- --
First Federal Mutual Holding Company Equity -- -- --
Change in net unrealized gains (losses), net of
income taxes of $1,206,000 -- -- 2,341,373
Dividends declared -- -- --
Net income -- -- --
------------- ------------- -------------
Balance at December 31, 1995 (5,702,364) (97,257) (151,637)
Amortization of deferred compensation of
Management Recognition Plan -- 741,722 --
ESOP shares released 609,795 -- --
Shares issued under stock option plan -- -- --
Acquisition of common stock for Management
Recognition Plan -- (2,817,452) --
Acquisition of common stock for treasury -- -- --
Change in net unrealized gains (losses),
net of income taxes of $125,000 -- -- (245,419)
Dividends declared -- -- --
Net income -- -- --
------------- ------------- -------------
Balance at December 31, 1996 $ (5,092,569) $ (2,172,987) $ (397,056)
============= ============= =============
First Defiance Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Total
Retained Stockholders'
Earnings Equity
------------- -------------
Balance at January 1, 1994 $ 47,179,093 $ 65,680,924
Amortization of deferred compensation of
Management Recognition Plan -- 251,936
ESOP shares released -- 571,100
Change in net unrealized gains (losses),
net of income taxes of $1,517,000 -- (2,944,199)
Shares issued under stock option plan -- 42,500
Dividends declared (1,158,675) (1,158,675)
Net income 5,952,867 5,952,867
------------- -------------
Balance at December 31, 1994 51,973,285 68,396,453
Amortization of deferred compensation of
Management Recognition Plan -- 164,838
ESOP shares released -- 581,767
Shares issued under stock option plan -- 2,500
Organization of First Defiance Financial Corp.:
Cancellation of shares held by First Federal
Mutual Holding Company -- --
Proceeds from issuance of 6,476,914 shares of
First Defiance Financial Corp. common stock on
September 29, 1995, net of 138 fractional
shares acquired, and net of stock offering
costs of $1,684,468 -- 57,903,142
First Federal Mutual Holding Company Equity -- 200,000
Change in net unrealized gains (losses), net of
income taxes of $1,206,000 -- 2,341,373
Dividends declared (1,604,919) (1,604,919)
Net income 5,521,335 5,521,335
------------- -------------
Balance at December 31, 1995 55,889,701 133,506,489
Amortization of deferred compensation of
Management Recognition Plan -- 741,722
ESOP shares released -- 743,176
Shares issued under stock option plan -- 59,973
Acquisition of common stock for Management
Recognition Plan -- (2,817,452)
Acquisition of common stock for treasury (6,819,103) (16,815,187)
Change in net unrealized gains (losses),
net of income taxes of $125,000 -- (245,419)
Dividends declared (2,759,682) (2,759,682)
Net income 4,151,042 4,151,042
------------- -------------
Balance at December 31, 1996 $ 50,461,958 $ 116,564,662
============= =============
See accompanying notes.
First Defiance Financial Corp.
Consolidated Statements of Cash Flows
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Operating activities
Net income $ 4,151,042 $ 5,521,335 $ 5,952,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,019,813 373,741 465,064
Provision for depreciation 256,713 239,164 207,823
Amortization of deferred compensation of
Management Recognition Plan 741,722 164,838 251,936
Release of ESOP shares 743,176 381,767 171,100
Loss on sale of office properties and equipment 44,575 7,275 -
Gain on sale of investment properties - (110,881) -
(Gain) loss on sale of securities (25,527) 75,158 (62,864)
Gain on sale of loans (209,458) (1,658) -
Amortization of premiums and accretion of
discounts on available-for-sale and
held-to-maturity securities 9,704 33,309 97,639
Deferred federal income taxes (credit) (203,000) 176,000 200,000
(Increase) decrease in interest receivable and
other assets (246,593) (369,012) 96,305
Proceeds from sale of loans 13,541,259 87,599 -
Originations of loans held for sale (10,131,779) (3,847,829)
Increase in accrued interest and other expenses 89,540 126,261 39,570
-----------------------------------------------------
Net cash provided by operating activities 9,781,187 2,857,067 7,419,440
Investing activities
Proceeds from maturities of available-for-sale
securities 19,613,796 5,604,170 13,956,685
Proceeds from sale of available-for-sale securities 27,247,132 2,921,719 4,003,437
Purchases of available-for-sale securities (36,747,804) (32,500,000) (10,891,250)
Proceeds from maturities of held-to-maturity
securities 5,302,174 4,535,734 8,619,381
Proceeds from sale of real estate, mobile homes and
other assets held for sale 1,336,585 1,043,797 237,196
Proceeds from sale of Federal Home Loan Bank stock - 209,700 128,900
Proceeds from sale of office properties and
equipment and investment properties 1,600 315,675 -
Purchases of Federal Home Loan Bank stock (203,300) (186,500) (147,800)
Purchases of office properties and equipment (6,273,024) (3,616,879) (249,120)
Net increase in mortgage and other loans (36,371,949) (27,928,124) (22,044,698)
-----------------------------------------------------
Net cash used in investing activities (26,094,790) (49,600,708) (6,387,269)
First Defiance Financial Corp.
Consolidated Statements of Cash Flows (continued)
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Financing activities
Net increase (decrease) in deposits and advance
payments by borrowers for taxes and insurance 746,227 6,288,692 (532,403)
Net increase (decrease) in Federal Home Loan Bank
short-term advances 35,220,000 (11,000,000) 11,000,000
Proceeds from Federal Home Loan Bank long-term
advances - 1,364,000 -
Repayment of Federal Home Loan Bank long-term
advances (1,241,774) (7,262,204) (8,768,378)
Loan to ESOP - (5,981,530) -
Purchase of common stock for treasury (16,815,187) - -
Contribution to Management Recognition Plan for
purchase of common stock (2,817,451) - -
Cash dividends paid (2,771,179) (1,178,625) (1,152,037)
Proceeds from exercise of stock options 59,972 2,500 42,500
Net proceeds from issuance of common stock - 63,084,672 -
-----------------------------------------------------
Net cash provided by financing activities 12,380,608 45,317,505 589,682
-----------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,932,995) (1,426,136) 1,621,853
Cash and cash equivalents at beginning of period 8,685,181 10,111,317 8,489,464
-----------------------------------------------------
Cash and cash equivalents at end of period $ 4,752,186 $ 8,685,181 $10,111,317
=====================================================
Supplemental cash flow information:
Interest paid $19,652,287 $20,473,789 $17,049,662
=====================================================
Income taxes paid $ 2,364,000 $ 2,612,434 $ 2,985,433
=====================================================
Transfers from loans to real estate, mobile
homes and other assets held for sale $ 1,430,202 $ 1,047,107 $ 345,509
=====================================================
Noncash operating activities:
Change in deferred taxes on net unrealized gains
or losses on available-for-sale securities $ (125,000) $ (1,206,000) $ 1,517,000
=====================================================
Noncash investing activities:
Change in net unrealized gain (loss) on
available-for-sale securities $ (370,419) $ 3,547,373 $ (4,461,199)
=====================================================
Land acquired with notes payable $ - $ 236,400 $ -
=====================================================
Land formerly included in investment properties $ - $ 186,842 $ -
=====================================================
Noncash financing activities:
Cash dividends declared but not paid $ 757,675 $ 720,928 $ 294,638
=====================================================
Repayment of ESOP obligation guaranteed by First
Federal $ - $ 1,000,000 $ 400,000
=====================================================
Transfer of equity of Mutual Holding Company $ - $ 200,000 $ -
=====================================================
See accompanying notes.
First Defiance Financial Corp.
Notes to Consolidated Financial Statements
December 31, 1996
1. Basis of Presentation and Reorganization
The consolidated financial statements include the accounts of First Defiance
Financial Corp. ("First Defiance" or "the Company") and First Federal Savings
and Loan ("First Federal"), its wholly-owned subsidiary. First Federal operates
nine branches and two loan origination offices in northwestern Ohio as a
federally chartered savings and loan. First Federal focuses primarily on single
family residential mortgage lending, consumer and business loans to customers.
First Federal is subject to the regulations of certain federal agencies and
undergoes periodic examinations by those regulatory authorities. All significant
intercompany transactions and balances are eliminated in consolidation.
On September 29, 1995, First Federal and First Federal Mutual Holding Company
("the Mutual Holding Company") completed a second step conversion ("the
Reorganization"). As part of the Reorganization, First Defiance was formed as a
first-tier wholly-owned subsidiary of First Federal. The Mutual Holding Company
was converted to an interim federal stock savings association and simultaneously
merged with and into First Federal, at which point the Mutual Holding Company
ceased to exist and 3,000,000 shares or 59% of the outstanding First Federal
common stock held by the Mutual Holding Company was cancelled. A second interim
savings and loan association ("Interim") formed by First Defiance solely for the
Reorganization was then merged with and into First Federal. As a result of the
merger of Interim with and into First Federal, First Federal became a
wholly-owned subsidiary of First Defiance. Pursuant to an exchange ratio of
2.1590231 shares for each share of First Federal stock, which assured that the
public shareholders of First Federal maintained their 41.0% ownership of First
Defiance, the 2,184,500 outstanding shares of First Federal were exchanged for
approximately 4,500,000 shares of First Defiance. Concurrent with the
Reorganization, First Defiance sold 6,476,914 additional shares to members of
the Mutual Holding Company, employees of First Federal and the public at a price
of $10.00 per share. Reorganization and stock offering costs of approximately
$1,685,000 resulted in net proceeds from the offering of approximately
$63,085,000.
Each depositor of First Federal as of the effective date of the Conversion will
have upon liquidation of First Federal a right to his pro rata interest in a
liquidation account established for the benefit of such depositors. Records are
maintained to ensure such rights receive statutory priority as required by OTS
regulations. The reorganization was accounted for as a change in corporate form
with the historic basis of accounting for First Federal unchanged.
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Most significantly, First Defiance uses estimates in determining the
value of the allowance for loan losses.
Earnings Per Share
Earnings per share are based on the weighted average number of shares of common
stock including shares subject to stock options, which are deemed common stock
equivalents. As discussed in Note 14, First Defiance accounts for the 850,332
shares held by its Employee Stock Ownership Plan ("ESOP") in accordance with
Statement of Position 93-6. As a result, shares controlled by the ESOP are not
considered in the weighted average number of shares of common stock outstanding
until the shares are committed for allocation to employees' accounts.
While the number of outstanding shares has been restated for all periods to
reflect the Reorganization, earnings on the proceeds from the Reorganization are
reflected only in the fourth quarter of 1995 and thereafter. Had the
Reorganization occurred at January 1, 1994 and assuming the net proceeds were
used to repay advances and invested in medium-term investment securities,
pro-forma net income (unaudited) would have been $6,327,000 and $6,927,000 for
the years ended December 31, 1995 and 1994, respectively. Pro-forma earnings per
share (unaudited) for those periods would have been $.61 and $.67, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from banks and overnight
investments with the Federal Home Loan Bank ("FHLB").
Investment Securities
Management determines the appropriate classification of debt securities at the
time of purchase and evaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to
2. Statement of Accounting Policies (continued)
hold the securities to maturity and are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest method
over the period to maturity.
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, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity until realized.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gains (losses) on sale of securities. The
cost of mutual funds sold is based on the average cost method. The cost of all
other securities sold is based on the specific identification method.
Currently, First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities are disclosed in Note 3 and include agency step-up, REMIC and CMO
investments. Such investments are not classified as high risk at December 31,
1996 and do not present risk significantly different than other mortgage-backed
or agency securities. First Defiance does not invest in off-balance sheet
derivative securities.
Investments Required by Regulations
As a member of the FHLB System, First Federal is required to own stock of the
FHLB of Cincinnati in an amount principally equal to at least 1% of its net home
mortgage loans, subject to periodic redemption at par if the stock owned is over
the minimum requirement. FHLB stock is a restricted equity security that does
not have a readily determinable fair value and is carried at cost.
Loans Receivable
Investment in real estate mortgage loans consists principally of long-term
conventional loans collateralized by first mortgages on single-family
residences, other residential property, and commercial and industrial property.
Such loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.
2. Statement of Accounting Policies (continued)
Mortgage loans originated and intended for the secondary market are carried at
the lower of cost or estimated market value in the aggregate.
Nonrefundable fees and related costs associated with originating or acquiring
real estate mortgage and other loans are capitalized and recognized as an
adjustment of the yield of the related loan.
Interest receivable is accrued on loans and credited to income as earned. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is fully reserved.
Interest income is subsequently recognized only to the extent cash payments are
received.
Management's determination of the adequacy of the allowance for loan losses is
based on an evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth and composition of the loan portfolio, and
other relevant factors. The allowance is increased by provisions for loan losses
charged against earnings and decreased by charge-offs (net of recoveries).
Loan Servicing Rights
In May 1995, the Financial Accounting Standards Board ("FASB") issued FAS 122,
"Accounting for Mortgage Servicing Rights." This Statement amends certain
provisions of Statement 65, "Accounting for Certain Mortgage Banking
Activities," and requires enterprises engaging in mortgage banking activities to
recognize as separate assets rights to service mortgage loans for loans
originated by the enterprise. The adoption of FAS 122 has had no significant
impact on the results of operations.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the risk characteristics of the underlying loans. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
2. Statement of Accounting Policies (continued)
Real Estate, Mobile Homes and Other Assets Held for Sale
Assets held for sale are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair value at time of foreclosure or insubstance
foreclosure. Loan losses arising from the acquisition of such property are
charged against the allowance for loan losses.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method over the following
estimated useful lives:
Buildings and improvements 20 to 50 years
Furniture, fixtures and equipment 5 to 15 years
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Effect of New Accounting Standards
In October 1995, the FASB issued FAS 123, "Accounting for Stock-Based
Compensation" which is effective for the year ending December 31, 1996. FAS 123
defines a fair value-based method of accounting for stock-based employee
compensation plans. Under the fair value-based method, compensation costs is
measured at the grant date based upon the value of the award and is recognized
over the service period. While the standard encourages entities to adopt this
method of accounting for employee stock compensation plans, it also allows an
entity to continue to measure compensation costs for its plans as prescribed in
APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." First
Defiance has elected to continue to apply APB 25 and has disclosed the pro forma
effect on earnings in Note 15.
2. Statement of Accounting Policies (continued)
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." Under FASB's "financial
components" approach, both the transferor and transferee would recognize the
asset and liabilities (or components thereof) that it controls in a physical
sense and "derecognize" the assets and liabilities that were surrendered or
extinguished in the transfer. Prior rules emphasize the economic risks or
rewards of ownership of the assets. This Statement is effective for transactions
occurring after December 31, 1996. First Defiance does not anticipate any impact
on results of operations and financial condition from the adoption of this
Statement.
3. Investment Securities
The following is a summary of available-for-sale and held-to-maturity
securities:
December 31, 1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------------------------------------
U. S. Treasury securities and obligations of
U. S. Government corporations and agencies $44,762,114 $ 13,681 $541,513 $44,234,282
Fixed income mutual funds 18,856,749 56,918 - 18,913,667
Adjustable rate mortgage-backed security
mutual funds 11,255,372 7,083 159,752 11,102,703
Money market mutual funds 750,000 - - 750,000
REMIC 1,160,983 - 19,812 1,141,171
Collateralized mortgage obligations 1,097,593 34,507 - 1,132,100
Other 124,264 8,832 - 133,096
==========================================================
Totals $78,007,075 $121,021 $721,077 $77,407,019
==========================================================
Held-to-Maturity Securities
FHLMC certificates $11,795,121 $261,891 $ 48,933 $12,008,079
FNMA certificates 9,628,002 104,518 177,919 9,554,601
GNMA certificates 3,089,882 90,538 2,922 3,177,498
Obligations of states and political
subdivisions 1,423,542 161,316 100 1,584,758
----------------------------------------------------------
Totals $25,936,547 $618,263 $229,874 $26,324,936
==========================================================
3. Investment Securities (continued)
December 31, 1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------------------------------------
U. S. Treasury securities and obligations of
U. S. Government corporations and agencies
$53,762,782 $119,028 $255,935 $53,625,875
Money market mutual funds 25,500,000 - - 25,500,000
Adjustable rate mortgage-backed security
mutual funds 8,981,304 - 177,776 8,803,528
REMIC 3,776,078 39,612 3,954 3,811,736
Collateralized mortgage obligations 1,126,146 38,019 - 1,164,165
Other 124,264 11,369 - 135,633
----------------------------------------------------------
Totals $93,270,574 $208,028 $437,665 $93,040,937
==========================================================
Held-to-Maturity Securities
FHLMC certificates $12,540,831 $315,713 $ 51,197 $12,805,347
FNMA certificates 8,274,592 170,662 121,555 8,323,699
GNMA certificates 3,648,488 110,058 3,526 3,755,020
Obligations of states and political
subdivisions 1,608,612 199,421 171 1,807,862
----------------------------------------------------------
Totals $26,072,523 $795,854 $176,449 $26,691,928
==========================================================
During the years ended December 31, 1996, 1995 and 1994, available-for-sale
securities with fair values of $27.2, $2.9 and $4 million, respectively, were
sold with realized gains (losses) of $25,500, ($75,000) and ($15,000),
respectively. In addition, available-for-sale securities which were called in
1994 resulted in gross realized gains totaling $78,000.
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; periodic payments are received on the securities based on the
payment patterns of the underlying collateral or have no stated maturity date.
3. Investment Securities (continued)
Available-for-Sale Held-to-Maturity
Amortized Amortized
Cost Fair Value Cost Fair Value
----------------------------------------------------------------------
Due in one year or less $12,999,860 $12,902,180 $ 187,689 $ 193,430
Due after one year through five
years 31,762,254 31,332,102 607,176 649,766
Due after five years through ten
years - - 268,677 313,414
Due after ten years - - 360,000 428,148
----------------------------------------------------------------------
44,762,114 44,234,282 1,423,542 1,584,758
Fixed income mutual funds 18,856,749 18,913,667 - -
Adjustable rate mortgage-backed
security mutual funds 11,255,372 11,102,703 - -
Money market mutual funds and other
874,264 883,096 - -
REMIC and collateralized mortgage
obligations 2,258,576 2,273,271 - -
FHLMC, FNMA, GNMA certificates and
other - - 24,513,005 24,740,178
----------------------------------------------------------------------
Totals $78,007,075 $77,407,019 $25,936,547 $26,324,936
======================================================================
4. Loan Commitments and Delinquencies
Loan commitments are made to accommodate the financial needs of First Defiance's
customers. The associated credit risk is essentially the same as that involved
in extending loans to customers and are subject to First Defiance's normal
credit policies. Collateral such as mortgages on property and equipment,
receivables and inventory is obtained based on management's credit assessment of
the customer. At December 31, 1996, First Defiance's outstanding commitments to
fund long-term mortgage loans amounted to approximately $5,961,000 which were
comprised of approximately 65% fixed rate and 35% adjustable rate loans with
rates ranging from 6.75% to 10.25%. First Defiance's maximum exposure to credit
loss for loan commitments (unfunded loans, unused lines of credit and letters of
credit) was $31,454,000 and $28,027,000 at December 31, 1996 and 1995,
respectively.
Unpaid balances of mortgage and installment loans with contractual payments
delinquent 90 days or more totaled $411,000 at December 31, 1996 and $663,000 at
December 31, 1995. First Federal does not anticipate any significant losses in
the collection of these delinquent loans in excess of the allowance for loan
losses.
4. Loan Commitments and Delinquencies (continued)
Impairment of loans having recorded investments of $1.6 million at December 31,
1996 and $-0- at December 31, 1995 has been recognized in conformity with FAS
Statement No. 114, as amended by FAS Statement No. 118. 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 at December 31, 1996.
Loans having carrying values of $1.4 million and $1.0 million were transferred
to real estate, mobile homes and other assets held for sale in 1996 and 1995,
respectively.
First Defiance is not committed to lend additional funds to debtors whose loans
have been modified.
5. Loans Receivable
December 31
1996 1995
----------------------------------------
Loans receivable consist of the following at December 31:
Mortgage loans:
Secured by one-to-four-family residences $241,227,635 $220,879,740
Secured by other properties 28,438,585 35,071,107
Construction loans 11,412,465 8,200,507
Other mortgage loans 2,084,060 1,637,720
----------------------------------------
283,162,745 265,789,074
Other loans:
Automobile 62,089,625 51,147,640
Mobile home 25,198,701 24,671,093
Commercial 26,674,342 23,647,432
Home equity and improvement 13,570,255 11,875,308
Other 11,929,499 10,661,500
----------------------------------------
139,462,422 122,002,973
----------------------------------------
Total mortgage and other loans 422,625,167 387,792,047
Deduct:
Undisbursed loan funds 4,473,780 3,971,252
Net deferred loan origination fees and costs 568,166 559,586
Allowance for loan losses 2,217,022 1,816,944
----------------------------------------
Totals $415,366,199 $381,444,265
========================================
Changes in the allowance for mortgage and other loan losses were as follows:
Year ended December 31
1996 1995 1994
-----------------------------------------------------
Balance at beginning of period $1,816,944 $1,733,411 $1,661,941
Charge-offs (775,399) (344,563) (401,091)
Recoveries 155,664 51,355 46,208
-----------------------------------------------------
Net charge-offs (619,735) (293,208) (354,883)
Provision charged to income 1,019,813 376,741 426,353
-----------------------------------------------------
Balance at end of period $2,217,022 $1,816,944 $1,733,411
=====================================================
5. Loans Receivable (continued)
Interest income on mortgage and other loans for the years ended December 31, is
as follows:
1996 1995 1994
-----------------------------------------------------
Mortgage loans $22,272,502 $21,039,898 $20,345,137
Other loans 12,362,609 10,963,085 8,834,624
=====================================================
Totals $34,635,111 $32,002,983 $29,179,761
=====================================================
6. Mortgage Banking
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was approximately $11.3 million and $86,000
at December 31, 1996 and 1995, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing, and included in
demand deposits, were approximately $46,000 at December 31, 1996.
In accordance with FAS Statement No. 122, mortgage servicing rights of $122,925
were capitalized during the year ended December 31, 1996. The book value of
mortgage servicing rights was approximately $122,000 at December 31, 1996.
Amortization of mortgage servicing rights was $1,456 in the year ended December
31, 1996.
The components of mortgage banking income (included in other non-interest
income) are as follows:
Year ended December 31
1996 1995 1994
-----------------------------------------------------
(In thousands)
Gain on sale of loans $209,458 $1,658 $ -
Loan servicing fee income, net of
amortization 11,406 - -
-----------------------------------------------------
$220,864 $1,658 $ -
=====================================================
7. Premises and Equipment
Premises and equipment are summarized as follows:
December 31
1996 1995
-----------------------------------
Cost:
Land $ 1,850,427 $1,603,994
Buildings 3,604,775 3,489,538
Leasehold improvements 235,714 235,714
Furniture, fixtures and equipment 1,833,311 1,476,645
Construction in process (estimate to complete at
December 31, 1996 - $2.9 million) 7,616,060 2,172,241
-----------------------------------
15,140,287 8,978,132
Less allowances for depreciation and amortization
2,885,627 2,693,608
-----------------------------------
$12,254,660 $6,284,524
===================================
Interest capitalized on construction projects amounted to approximately $213,000
in 1996.
8. Deposits
The following schedule sets forth interest expense for the years ended December
31 by type of savings deposit (in thousands):
1996 1995 1994
----------------- ----------------- ----------------
Checking and money market accounts $ 1,119 $ 1,126 $ 1,292
Passbook accounts 2,036 2,139 2,220
Certificates 15,638 15,613 11,968
----------------- ----------------- ----------------
18,793 18,878 15,480
Less interest capitalized (214) (21) -
----------------- ----------------- ----------------
Totals $18,579 $18,857 $15,480
================= ================= ================
8. Deposits (continued)
A summary of deposit balances is as follows (in thousands):
December 31
1996 1995
-----------------------------------
Passbooks $ 68,865 $ 67,069
N.O.W. accounts 32,184 30,847
Money Market demand accounts 15,875 16,726
Certificates of deposit 265,601 267,137
-----------------------------------
$382,525 $381,779
===================================
The amount of deposits included
above of $100,000 or more $ 24,631 $ 23,670
===================================
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows (in thousands):
1997 $210,075
1998 40,158
1999 8,958
2000 3,835
2001 and thereafter 2,575
==============
Total $265,601
==============
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Act) was
enacted. The Act provided for a special assessment to be calculated for
depository institutions on deposit, accrued interest and escrow data from the
base date of March 31, 1995. The assessment of $2,460,977 was assessed at
September 30, 1996 and was subsequently paid when due to the Federal Deposit
Insurance Corporation in November 1996.
9. Advances from Federal Home Loan Bank
First Federal has the ability to borrow funds from the FHLB. First Federal
pledges its single-family residential mortgage loan portfolio as security for
these advances. At December 31, 1996, the total available for collateral
amounted to approximately $241.2 million. Collateral must exceed borrowings by
150%. The total level of borrowing is also limited to 25% of total assets. This
would give First Federal a maximum potential to acquire advances of
approximately $134.1 million from the FHLB.
The FHLB made a series of fixed rate long-term advances to First Defiance during
1992 and a long-term fixed rate advance under the FHLB Affordable Housing
Program in 1995. The total FHLB long-term advances bear a weighted average
interest rate of 6.58% at December 31, 1996. Future minimum payments by fiscal
year are as follows:
1997 $ 971,884
1998 863,945
1999 769,056
2000 685,639
2001 612,308
Thereafter 3,194,054
--------------------
Total minimum payments 7,096,886
Less amounts representing interest 1,496,223
--------------------
Totals $5,600,663
====================
First Defiance also 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. Information concerning
short-term advances is summarized as follows:
1996 1995
----------------------------------------
Average balance during the year $ 8,309,801 $ 8,286,290
Maximum month-end balance during the year 35,220,000 17,000,000
Average interest rate during the year 5.59% 6.15%
10. Postretirement Benefits
The Company sponsors a defined benefit postretirement plan that is intended to
supplement Medicare coverage and provide full medical benefits to all retirees
who have completed 20 years of service after age 40. Coverage for retirees and
their spouse is fully paid for by First Defiance. Upon the retiree's death, his
or her spouse may continue their coverage for one year, after which coverage may
be continued provided the spouse pays 50% of the average cost. For employees who
complete 15 years of service after age 40 and retire after age 55, coverage is
provided for the retiree and their spouse for one year after which coverage may
be continued provided the retiree pays 50% of the average cost. Deductibles paid
by retirees are $100 per person and $200 per family. The plan also contains a
coinsurance provision of 20% for the first $2,000 of medical expenditures.
The plan is not currently funded. The following table sets forth the amount
recorded in the Company's consolidated statement of financial condition at
December 31:
1996 1995
---------------------------------------
Accumulated postretirement benefit obligation:
Retirees $270,191 $242,098
Active employees fully eligible for benefits 274,329 245,806
Other active plan participants 190,264 170,481
---------------------------------------
734,784 658,385
Unrecognized net gain (loss) (44,155) (41,750)
---------------------------------------
Accrued postretirement benefit obligation included in
accrued interest and other expenses in consolidated
statement of financial condition $690,629 $616,635
=======================================
10. Postretirement Benefits (continued)
Net periodic postretirement benefit cost includes the following components:
Year ended December 31
1996 1995 1994
-----------------------------------------------------
Service cost-benefits attributable to service
during the period $43,902 $21,980 $33,536
Interest cost on accumulated postretirement benefit
obligation 47,200 35,283 40,033
Net amortization and deferral - (8,807) -
-----------------------------------------------------
Net periodic postretirement benefit cost $91,102 $48,456 $73,569
=====================================================
For measurement purposes, an 8.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1996 and 1995; the rate was
assumed to decrease gradually to 5.5% for the year 2001 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rate by 1 percentage point for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $110,000 and the
aggregate of the service and interest cost for the year then ended by $19,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1996 and 1995 and 8.5% for 1994.
11. Pension Plan
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during the last five years of employment. The Company's policy is
to fund pension costs as accrued and to amortize past service costs over
approximately twenty years.
11. Pension Plan (continued)
Net periodic pension cost includes the following components:
Year ended December 31
1996 1995 1994
-----------------------------------------------------
Service cost--benefits earned during the
period $311,459 $225,175 $187,417
Interest cost on projected benefit
obligation 244,186 234,485 181,135
Actual return on plan assets 66,041 (142,619) (22,633)
Net amortization and deferral (53,727) 124,958 (1,638)
-----------------------------------------------------
Net periodic pension cost $567,959 $441,999 $344,281
=====================================================
Weighted average discount rate 5.75% 7% 7%
Rate of increase in future compensation
levels 4% 4% 4%
Expected long-term rate of return on plan
assets 5.5% 5.5% 5.5%
11. Pension Plan (continued)
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated statement of financial condition.
December 31
1996 1995
----------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,733,744 and $2,341,128 $3,026,043 $2,565,599
========================================
Projected benefit obligation for service rendered to date
$4,849,273 $4,246,719
Plan assets (guaranteed insurance contracts and money market
certificates) at fair value (2,284,964) (1,973,769)
----------------------------------------
Projected benefit obligation in excess of plan
assets 2,564,309 2,272,950
Unrecognized net loss from experience different than that
assumed and effects of changes in assumptions
(2,350,987) (2,159,945)
Unrecognized net obligation at transition (125,662) (143,304)
Adjustment required to recognize minimum liability
653,419 256,099
----------------------------------------
Accrued pension liability recorded in accrued interest and
other expenses in statement of financial condition
$ 741,079 $ 225,800
========================================
12. Regulatory Matters
First Defiance is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on First Defiance's financial statements. Under capital
guidelines and the regulatory framework for prompt corrective action, First
Federal must meet specific capital guidelines that involve quantitative measures
of First Federal's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. First Federal's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
12. Regulatory Matters (continued)
Quantitative measures established by regulation to ensure capital adequacy
require First Federal to maintain minimum amounts and ratios of Tier I and total
capital to risk-weighted assets and of Tier I capital to average assets. As of
December 31, 1996 and 1995, First Federal meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Federal Savings and Loan Insurance
Corporation categorized First Federal as well capitalized under the regulatory
framework. To be categorized as well capitalized First Federal must maintain
minimum Tangible, Core and Risk-Based Capital ratios as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed First Federal's ranking.
The following schedule presents First Federal's regulatory capital ratios as of
December 31, 1996 and 1995 (dollars in thousands):
Regulatory Capital Standards
Actual Required
Amount Ratio Amount Ratio
----------------------------------------------------------------------
As of December 31, 1996:
Tangible Capital $ 74,942 13.97% $16,098 1.5%
Core Capital 74,942 13.97 8,049 3.0
Risk-Based Capital 76,617 22.43 27,332 8.0
As of December 31, 1995:
Tangible Capital $102,701 20.54% $15,002 1.5%
Core Capital 102,701 20.54 7,501 3.0
Risk-Based Capital 104,482 33.94 24,627 8.0
13. Federal Income Taxes
The components of federal income tax expense are as follows:
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Current $2,200,000 $2,680,000 $2,785,000
Deferred (credit) (203,000) 176,000 200,000
-----------------------------------------------------
$1,997,000 $2,856,000 $2,985,000
=====================================================
13. Federal Income Taxes (continued)
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Tax expense at statutory rate $2,090,000 $2,848,000 $3,039,000
Increases (decreases) in taxes from:
ESOP accounting (76,000) 63,000 89,000
Tax exempt interest income (39,000) (41,000) (48,000)
Other 22,000 (14,000) (95,000)
-----------------------------------------------------
Totals $1,997,000 $2,856,000 $2,985,000
=====================================================
13. Federal Income Taxes (continued)
Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of First Defiance's deferred federal income tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
December 31
1996 1995
-----------------------------------
Deferred federal income tax assets:
Net unrealized losses on
available-for-sale securities $ 203,000 $ 78,000
Allowance for loan losses 218,000 184,000
Postretirement benefit costs 233,000 208,000
Deferred compensation and
management recognition plans 403,000 163,000
Deferred loan origination fees and
costs (net) - 6,000
Other 105,000 54,000
-----------------------------------
Total deferred federal income tax assets 1,162,000 693,000
Deferred federal income tax liabilities:
FHLB stock dividends 532,000 461,000
Deferred loan origination fees and costs (net) 80,000 -
Other - 10,000
-----------------------------------
Total deferred federal income tax liabilities 612,000 471,000
===================================
Net deferred federal income tax assets $ 550,000 $222,000
===================================
No valuation allowance was required at December 31, 1996 or 1995.
Retained earnings at December 31, 1996 include financial statement tax bad debt
reserves of $10.6 million. The Small Business Job Protection Act of 1996 passed
on August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of First Federal's reserve over its base year reserve as of December 31,
1987. The recapture tax is to be paid in six equal annual installments beginning
after December 31, 1996. However, deferral of these
13. Federal Income Taxes (continued)
payments will be permitted for up to two years, contingent upon satisfying a
specified mortgage origination test for 1996 and/or 1997. At December 31, 1996,
First Federal had $1.037 million in excess of the base year reserves. Deferred
taxes have been provided related to this item. No provision is required to be
made for the $9.52 million of base year reserves.
14. Employee Stock Ownership and Management Recognition Plans
The Company has established an Employee Stock Ownership Plan ("ESOP") covering
all employees age 21 or older who have at least one year of credited service.
The ESOP will be funded by First Defiance's contributions made in cash or common
stock. Benefits may be paid either in shares of common stock or in cash. The
Company accounts for its ESOP in accordance with Statement of Position 93-6.
In conjunction with First Federal's initial offering of common stock in 1993,
the ESOP borrowed $1,600,000 from an unaffiliated lender to purchase 160,000
shares of First Federal common stock (exchanged for 345,443 shares of First
Defiance stock in 1995). The remaining loan was paid in connection with the
Reorganization. Also in conjunction with the Reorganization, the ESOP acquired
an additional 518,153 shares of common stock of the Company.
First Defiance makes contributions to the ESOP in amounts sufficient to pay
obligations maturing under the loan made to the ESOP. As principal and interest
on the loan is paid, shares are released from collateral and committed for
allocation to active employees, based on the proportion of debt service paid in
the year. Shares held by the ESOP which have not been released for allocation
are reported as stock acquired by the ESOP plan in the statement of financial
condition. As shares are released, First Defiance reports compensation expense
equal to the average fair value of the shares over the period in which the
shares were earned. Also, the shares are included in average shares outstanding
for earnings per share computations. Dividends on allocated shares are recorded
as a reduction of retained earnings and dividends on unallocated shares are
recorded as a reduction of the loan and accrued interest. ESOP compensation
expense was $735,000, $582,000 and $571,100 for 1996, 1995 and 1994,
respectively. As of December 31, 1996, 274,584 ESOP shares have been released
for allocation of which 260,576 were allocated to participants. The 589,012
unreleased shares have a fair value of $7.3 million at December 31, 1996.
14. Employee Stock Ownership and Management Recognition Plans (continued)
The Shareholders of First Defiance approved and established Management
Recognition Plans ("MRP") in 1993 and 1996 to provide directors, officers and
employees with a proprietary interest in First Defiance as incentive to
contribute to its success. Cash was contributed to the MRP in the form of
prepaid compensation amounting to $800,000 in 1993 and $2,817,452 in 1996. The
$800,000 contributed in 1993 was used to purchase 80,000 shares of First Federal
common stock (exchanged for 172,722 shares of First Defiance common stock in
1995). The $2,817,452 contributed in 1996 was used to purchase 259,076 shares of
First Defiance common stock. At the discretion of a committee appointed by the
Board of Directors, all 172,722 shares acquired in 1993 were granted on July 19,
1993. Also at the committee's discretion, 204,462 shares acquired in 1996 were
granted on April 19, 1996 and 20,200 shares were granted on July 15, 1996. The
shares vest at a rate of 20% per year over 5 years. First Defiance is amortizing
the prepaid compensation and recording additions to stockholder's equity as the
shares vest. Compensation expense attributable to the MRP amounted to $741,722,
$164,838 and $251,936 in 1996, 1995 and 1994, respectively.
15. Incentive Stock Option Plans
First Defiance has established incentive stock option plans for its directors
and its employees and has reserved 1,056,810 shares of common stock for issuance
under the plans. A total of 754,560 shares are reserved for employees and
302,250 shares are reserved for directors. As of December 31, 1996, 894,339
options (662,037 for employees and 232,302 for directors) have been granted at
option prices based on the market value of the underlying shares on the date the
options were granted. The 362,303 options granted under the 1993 plan are
currently excercisable while the 532,036 options granted under the 1996 plan
vest at 20% per year beginning in 1997. All options expire ten years from date
of grant. All options granted to date are considered compensatory stock options.
As previously discussed, First Defiance accounts for stock options in accordance
with APB 25. The following proforma information regarding net income and
earnings per share assumes the adoption of Statement No. 123 for stock options
granted subsequent to December 31, 1994. The estimated fair value of the option
is amortized to expense over the option and vesting period. The fair value was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1996: risk-free interest rate of
6.62%; a dividend yield of 2.66%; volatility factors of the expected market
price of First Defiance's common stock of .341% and a weighted-average expected
life of 7.35 years.
15. Incentive Stock Option Plans (continued)
Based upon the above assumptions, pro forma net income and earnings per share
for the year ended December 31, 1996 are $3,783,000 and $.38, respectively if
the fair value provision of Statement No. 123 had been used. No options were
granted in 1995, thus pro forma disclosures are not required. The pro forma
effects for 1996 are not likely to be representative of the pro forma effects
for future years.
Because Statement No. 123 is applicable only to options granted subsequent to
Decem-ber 31, 1994, options granted prior to December 31, 1994 do not have fair
value pro forma information provided.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
First Defiance's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
15. Incentive Stock Option Plans (continued)
The following table summarizes stock option activity for 1996 and 1995:
1996 1995
----------------------------------- -----------------------------------
Range of Range of
Option Option Option Option
Shares Prices Shares Prices
------------------------------------------------------------------------
Outstanding at January 1, 1996 325,456 $4.63 to $6.95 326,534 $4.63 to $6.95
Granted 582,836 $10.375 to $10.6875 - -
Exercised (12,953) 4.63 (539) 4.63
Expired or cancelled (1,000) 10.50 (539) 4.63
------------------------------------------------------------------------
Outstanding at December 31, 1996
(all exercisable) 894,339 $4.63 to $10.6875 325,456 $4.63 to $6.95
========================================================================
Exercisable to:
2004 312,503 $4.63 to $6.95 325,456 $4.63 to $6.95
2006 581,836 $10.375 to $10.6875
------------------------------------------------------------------------
894,339 $4.63 to $10.6875 325,456 $4.63 to $6.95
========================================================================
Available for future grant at
December 3l 162,471 96,633
========================================================================
16. Condensed Financial Statements of First Defiance Financial Corp.
(Parent Only)
First Defiance Financial Corp. was organized in June 1995 and began operations
on September 29, 1995. The Company's balance sheet as of December 31, 1996 and
1995 and related statements of income and cash flows for the year ended December
31, 1996 and from inception to December 31, 1995 are as follows:
December 31,
Balance Sheet 1996 1995
--------------------------------------------
Assets
Cash and cash equivalents $ 344,476 $ 221,328
Investment securities available-for-sale 6,927,616 25,500,000
Investment in First Federal Savings and Loan 74,558,462 102,549,568
Subordinated debt receivable from First Federal Savings and
Loan 30,000,000 -
Loan receivable from First Federal Employee Stock Ownership
Plan 5,438,254 5,897,208
Other assets 36,442 141,054
--------------------------------------------
Total assets $117,305,250 $134,309,158
============================================
Liabilities and Stockholders' Equity
Accrued liabilities $ 740,588 $ 802,669
Stockholders' equity 116,564,662 133,506,489
--------------------------------------------
Total liabilities and stockholders' equity $117,305,250 $134,309,158
============================================
Year ended
December 31, September 29, 1995
1996 to December 31, 1995
--------------------------------------------
Statement of Income
Interest income $ 955,190 $ 96,675
Interest on loan to ESOP 499,044 131,654
Gain on sale of investments 25,527 -
Noninterest expense (582,384) (72,814)
--------------------------------------------
Income before income taxes and equity in
earnings of subsidiary 897,377 155,515
Income tax expense 363,000 20,000
--------------------------------------------
Income before equity in earnings of subsidiary 534,377 135,515
Equity in earnings of First Federal Savings and
Loan 3,616,665 1,732,273
============================================
Net income $ 4,151,042 $ 1,867,788
============================================
16. Condensed Financial Statements of First Defiance Financial Corp. (Parent Only) (continued)
Year ended
December 31, September 29, 1995
1996 to December 31, 1995
--------------------------------------------
Statement of Cash Flows
Operating activities
Net income $ 4,151,042 $ 1,867,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of securities (25,527) -
Deferred federal income taxes (credit) (37,000) -
Equity in earnings of First Federal Savings and Loan
(3,616,665) (1,732,273)
Dividends received from subsidiary 30,000,000 25,560,806
Change in other assets and liabilities 74,028 (59,315)
--------------------------------------------
Net cash provided by operating activities 30,545,878 25,637,006
Investing activities
Loan to subsidiary (30,000,000) -
Proceeds from sale of available-for-sale securities 27,247,132 -
Investment in subsidiary - (57,103,142)
Loan to ESOP - (5,981,530)
Principal payments received on ESOP loan 458,954 84,322
Purchase of available-for-sale securities (8,602,422) (25,500,000)
--------------------------------------------
Net cash used in investing activities (10,896,336) (88,500,350)
Financing activities
Proceeds from sale of common stock - 63,084,672
Stock options exercised 59,972 -
Purchase of common stock for treasury (16,815,187) -
Cash dividends paid (2,771,179) -
--------------------------------------------
Net cash (used in) provided by financing activities (19,526,394) 63,084,672
--------------------------------------------
Net increase in cash and cash equivalents 123,148 221,328
Cash equivalents at beginning of year 221,328 -
--------------------------------------------
Cash equivalents at end of year $ 344,476 $ 221,328
============================================
Noncash financing activities--cash dividends
declared but not paid $ 757,675 $ 720,928
============================================
17. Fair Value Statement of Consolidated Financial Condition
The following is a comparative condensed consolidated statement of financial
condition based on carrying and estimated fair values of financial instruments
as of December 31, 1996 and 1995 (dollars in thousands). In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of First Defiance
Financial Corp.
December 31, 1996 December 31, 1995
----------------------------------- ------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Values Value Fair Values
-------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 4,752 $ 4,752 $ 8,685 $ 8,685
Investment securities 103,344 103,732 119,113 119,733
Loans, net 415,925 417,977 385,203 380,760
-------------------------------------------------------------------------
524,021 $526,461 513,001 $509,178
================== ==================
Other assets 19,390 12,549
================= ==================
Total assets $543,411 $525,550
================= ==================
Liabilities and stockholders'
equity
Deposits $382,525 $383,273 $381,779 $382,808
Advances from Federal Home Loan
Bank 40,821 41,000 6,842 6,661
-------------------------------------------------------------------------
423,346 $424,273 388,621 $389,469
================== ==================
Other liabilities 3,500 3,423
----------------- ------------------
426,846 392,044
Stockholders' equity 116,565 133,506
----------------- ------------------
Total liabilities and
stockholders' equity $543,411 $525,550
================= ==================
18. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations
for 1996 and 1995 (amounts in thousands, except per share data):
1996 Three months ended
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
Interest income $10,237 $10,254 $10,263 $10,503
Interest expense 4,895 4,778 4,782 5,004
----------------------------------------------------------------------
Net interest income 5,342 5,476 5,481 5,499
Provision for loan losses 163 181 264 412
----------------------------------------------------------------------
Net interest income after
provision for loan losses 5,179 5,295 5,217 5,087
Gain on sale of securities - - - 26
Non-interest income 308 284 366 343
Non-interest expenses 3,201 3,113 5,963 3,680
----------------------------------------------------------------------
Income (loss) before income taxes
2,286 2,466 (380) 1,776
Income taxes (credit) 751 791 (145) 600
----------------------------------------------------------------------
Net income (loss) $ 1,535 $ 1,675 $ (235) $ 1,176
======================================================================
Earnings (loss) per share $ 0.15 $ 0.16 $ (0.02) $ 0.12
======================================================================
Average shares outstanding 10,506 10,257 9,830 9,382
======================================================================
18. Quarterly Consolidated Results of Operations (Unaudited) (continued)
1995 Three months ended
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
Interest income $ 9,143 $ 9,376 $ 9,740 $10,306
Interest expense 4,701 5,054 5,406 5,128
----------------------------------------------------------------------
Net interest income 4,442 4,322 4,334 5,178
Provision for loan losses (credit)
80 107 246 (59)
----------------------------------------------------------------------
Net interest income after
provision for loan losses 4,362 4,215 4,088 5,237
Loss on sale of securities 75 - - -
Non-interest income 229 234 263 384
Non-interest expenses 2,580 2,590 2,618 2,772
----------------------------------------------------------------------
Income before income taxes 1,936 1,859 1,733 2,849
Income taxes 660 630 585 981
----------------------------------------------------------------------
Net income $ 1,276 $ 1,229 $ 1,148 $ 1,868
======================================================================
Earnings per share $ .12 $ .12 $ .11 $ .18
======================================================================
Average shares outstanding 10,324 10,385 10,447 10,480
======================================================================