UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Period Ended March 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ___________to__________
Commission file number 0-26850
First Defiance Financial Corp.
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(Exact name of registrant as specified in its charter)
Ohio 34-1803915
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Clinton Street, Defiance, Ohio 43512
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(Address or principal executive office) (Zip Code)
(419) 782-5015
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Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ X ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value --
9,424,432 shares outstanding at May 12, 1997.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial Condition n
March 31, 1997 and December 31, 1996
Consolidated Condensed Statements of Income - Three months
ended March 31, 1997 and 1996
Consolidated Condensed Statement of Changes in Stockholders'
Equity - Three months ended March 31, 1997
Consolidated Condensed Statements of Cash Flows - Nine months
ended Mach 31, 1997 and 1996
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
March 31, December 31,
1997 1996
-------- --------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ................... $ 2,473 $ 3,102
Interest-bearing deposits .......................... 2,736 1,650
-------- --------
5,209 4,752
Investment securities:
Available-for-sale, carried at fair value .......... 72,838 77,407
Held-to-maturity, carried at amortized cost
(approximate fair value $25,371 and $26,325
at March 31, 1997 and December 31,
1996, respectively) ....................... 24,712 25,937
-------- --------
97,550 103,344
Loans held for sale (at lower of cost or fair value,
approximate fair value $643 and $564 at
March 31, 1997 and December 31, 1996, respectively). 641 559
Loans receivable, net ....................................... 420,567 415,366
Accrued interest receivable ................................. 3,022 3,061
Federal Home Loan Bank stock ................................ 3,087 3,033
Real estate, mobile homes and other
assets held for sale ............................... 501 266
Office properties and equipment ............................. 14,145 12,255
Deferred federal income taxes ............................... 879 550
Other assets ................................................ 459 225
-------- --------
$546,060 $543,411
======== ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
March 31, December 31,
1997 1996
--------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits............................................ $ 378,261 $ 382,525
Advances from Federal Home Loan Bank ............... 46,652 40,821
Other liabilities .................................. 4,193 3,500
--------- ---------
Total liabilities .................................. 429,106 426,846
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; 9,424,432 and
9,470,877 shares outstanding at March 31,
1997 and December 31, 1996, respectively .. 94 95
Additional paid-in capital 73,398 .................. 73,671
Stock acquired by ESOP ............................. (4,922) (5,093)
Stock acquired by Management
Recognition Plan .......................... (1,993) (2,173)
Net unrealized losses on available-for-sale
securities, net of income taxes
of $362 and $203 at March 31,
1997 and December 31, 1996, respectively .. (703) (397)
Retained earnings - substantially restricted ....... 51,080 50,462
--------- ---------
Total stockholders' equity ......................... 116,954 116,565
--------- ---------
Total liabilities and stockholders' equity ......... $ 546,060 $ 543,411
========= =========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
Three Months Ended
March 31
1997 1996
-------- -------
Interest income:
Loans ................................ $ 9,031 $ 8,431
Securities ........................... 1,558 1,731
Interest-bearing deposits ............ 11 75
-------- -------
Total interest income ......................... 10,601 10,237
Interest expense:
Deposits.............................. 4,347 4,779
Federal Home Loan Bank
advances and other borrowings ...... 619 116
-------- -------
Total interest expense ........................ 4,966 4,895
-------- -------
Net interest income ........................... 5,635 5,342
Provision for loan losses ..................... 365 163
-------- -------
Net interest income after provision
for loan losses ...................... 5,270 5,179
Non-interest expense .......................... 3,254 3,201
Non-interest income ........................... 336 308
-------- -------
Income before income federal taxes ............ 2,352 2,286
Federal income taxes .......................... 795 751
-------- -------
Net income .................................... $ 1,557 $ 1,535
======== =======
Earnings per share (Note 4) ................... $ .17 $ .15
======== =======
Dividends declared per share (Note 3) ......... $ .08 $ .07
======== =======
Average number of shares
outstanding (Note 4) ................. 9,141 10,506
======== =======
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
Stock Acquired By
-----------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
Balance at December 31, 1996 .......... $ 95 $73,671 $(5,093) $ (2,173)
Net Income
ESOP shares released .................. 64 171
Change in unrealized losses
net of income taxes of $159
Amortization of deferred compensation
of Management Recognition Plan 180
Stock issued under Option Plan ........ 5
Purchase of common stock for treasury.. (1) (342)
Dividends declared (Note 3)
Balance at March 31, 1997 ............. $ 94 $73,398 $(4,922) $ (1,993)
======= ======= ======= =========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
Net Unrealized
losses on Total
available-for- Retained Stockholders'
sale securities Earnings Equity
--------------- -------- ------
Balance at December 31, 1996 .......... $ (397) $ 50,462 $ 116,565
Net Income ............................ 1,557 1,557
ESOP shares released .................. 235
Change in unrealized losses
net of income taxes of $159 .. (306) (306)
Amortization of deferred compensation
of Management Recognition Plan 180
Stock issued under Option Plan ........ 5
Purchase of common stock for
treasury ..................... (233) (576)
Dividends declared (Note 3) ........... (706) (706)
--------- --------- ---------
Balance at March 31, 1997 ............. $ (703) $ 51,080 $ 116,954
========= ========= =========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Three Months
Ended March 31,
1997 1996
------- -------
Operating Activities
Net income ................................................... $ 1,557 $ 1,535
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................... 365 163
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ... 109 76
Gain on sale or call of available-for-sale securities (7) --
Gain on sale of loans ............................... (31) (59)
Amortization of Management Recognition Plan
deferred compensation ...................... 180 17
Release of ESOP Shares .............................. 235 147
Loss on disposal of office properties and equipment . -- 46
Unrealized loss on loans held for sale .............. -- 29
Deferred federal income tax credit ................. (169) (20)
Proceeds from sale of loans ......................... 2,027
Originations of loans held for sale ................. (2,078) (684)
Increase in interest receivable and other assets .... (195) (1,000)
Increase in other liabilities ....................... 693 241
------- -------
Net cash provided by operating activities .................... 2,686 550
Investing activities
Proceeds from maturities of held-to-maturity securities ...... 1,216 1,485
Proceeds from maturities of available-for-sale securities .... 3,065 6,991
Proceeds from sales of available-for-sale securities ......... 1,100 750
Proceeds from sales of real estate, mobile homes, and
other assets held for sale ......................... 305 333
Purchases of available-for-sale securities ................... (50) (3,973)
Purchases of Federal Home Loan Bank stock .................... (54) (50)
Purchases of office properties and equipment ................. (1,992) (1,063)
Net increase in loans receivable ............................. (6,106) (6,471)
------- -------
Net cash used in investing activities ........................ (2,516) (1,998)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Nine Months Ended
March 31,
1997 1996
------- -------
Financing Activities
Net increase (decrease) in deposits .................. (4,264) 1,931
Repayment of Federal Home Loan Bank long-term advances (169) (180)
Net increase (decrease) in Federal Home Loan Bank
short-term advances ......................... 6,000 --
Purchase of common stock for treasury ................ (576) --
Cash dividends paid .................................. (709) (721)
Proceeds from exercise of stock options .............. 5 5
------- -------
Net cash provided by financing activities ............ 287 1,035
------- -------
Increase (Decrease) in cash and cash equivalents ..... 457 (413)
Cash and cash equivalents at beginning of period ..... 4,752 8,685
------- -------
Cash and cash equivalents at end of period ........... $ 5,209 $ 8,272
======= =======
Supplemental cash flow information:
Interest paid ........................................ $ 4,915 $ 4,946
======= ========
Income taxes paid .................................... $ -- $ 25
======= ========
Transfers from loans to real estate, mobile homes
and other assets held for sale .............. $ 540 $ 293
======= ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ 160 $ 156
======= ========
Noncash investing activities:
Increase in net unrealized loss on available-for-sale
securities .................................. $ (466) $ (458)
======= ========
Noncash financing activities:
Cash dividends declared but not paid ................. $ 705 $ 721
======= ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance") and its wholly owned savings
and loan, First Federal Savings and Loan ("First Federal"). In the opinion of
management, all significant intercompany accounts and transactions have been
eliminated in consolidation.
2. Basis of Presentation
The consolidated condensed statement of financial condition at December
31, 1996 has been derived from the audited financial statements at that date.
The accompanying consolidated condensed financial statements as of
March 31, 1997 and for the three month periods ending March 31, 1997 and 1996
have been prepared by First Defiance without audit and do not include
information or footnotes necessary for the complete presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. It is suggested that these consolidated
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in First Defiance's annual report for the
year ended December 31, 1996. However, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for the fair
presentation of the financial statements have been made. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the entire year.
3. Dividends on Common Stock
As of March 31, 1997, First Defiance had declared a quarterly cash
dividend of $.08 per share for the first quarter of 1997, payable April 25,
1997.
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the first quarter ended
March 31, 1997 of $.01 per share. It is not expected that there will be any
impact for the quarter ended March 31, 1996. The impact of Statement 128 on the
calculation of fully diluted earnings per share for these quarters is not
expected to be material.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
4. Earnings Per Share (continued)
Earnings per share as disclosed under Accounting Principles Board
Opinion No. 15 has been calculated by dividing net income by the weighted
average number of shares of common stock outstanding for the quarter ended March
31, 1997. The effect of shares issuable under stock options has been accounted
for using the Treasury Stock method. First Defiance accounts for the shares
issued to its Employee Stock Ownership Plan ("ESOP") in accordance with
Statement of Position 93-6 of the American Institute of Certified Public
Accountants ("AICPA"). As a result, shares controlled by the ESOP are not
considered in the weighted average number of shares of common stock outstanding
until the shares are committed for allocation to an employee's individual
account.
5. Stock Option Disclosures
FASB Statement No. 123, "Accounting for Stock-Based Compensation."
requires either: (a) recognition of compensation cost in earnings for
stock-based compensation plans based upon their fair value; or (b) pro forma
disclosures of what earnings and per share amounts would have been had the fair
value method been used for expense recognition. First Defiance has elected to
use the pro forma disclosure option. As provided in Statement No. 123, the
disclosure provisions for companies electing pro forma disclosures are not
required to be applied in interim reports which do not include a complete set of
financial statements.
6. New Accounting Pronouncement
Effective January 1, 1997, First Defiance has adopted the provisions of
FASB Statement No. 125, iAccounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities.i The statement 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 provisions
of Statement No. 125 did not have a material effect on the financial statements
of First Defiance.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First Defiance Financial Corp. ("First Defiance") is a holding company which
conducts business through its wholly owned subsidiary, First Federal Savings and
Loan, Defiance, Ohio ("First Federal") which is primarily engaged in attracting
deposits from the general public through its offices and using those and other
available sources of funds to originate loans secured by single-family
residences primarily located in the five counties in which its offices are
located and in contiguous Putnam County. Single family residential mortgage
loans amounted to $242.4 million or 57.1% of First Defiance's total loan
portfolio at March 31, 1997. To a lesser extent, First Defiance originates other
real estate loans secured by non-residential real estate and construction loans,
which amounted to $38.3 million or 9.0% of total loans at March 31, 1997.
Approximately 33.8% or $143.4 million of First Federal's loan portfolio as of
March 31, 1997 consisted of non-real estate loans including consumer finance
loans, primarily automobile loans, which amounted to $64.6 million or 15.2% of
the total loan portfolio, commercial loans, which amounted to $27.7 million or
6.5% of the total loan portfolio and mobile home loans which amounted to $25.5
million or 6.0% of the total loan portfolio.
First Defiance is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). First Defiance sold 27 and 29 loans during
the three months ended March 31, 1997 and 1996 respectively and realized a gain
on sale of those loans of approximately $31,000 and $59,000 respectively for
those periods. Loans with a 30-year maturity, which meet the Freddie Mac
underwriting guidelines, are classified as available-for-sale. At March 31, 1997
First Defiance held $641,000 of available-for-sale loans. First Defiance retains
the servicing rights on all mortgage loans sold. Mortgage servicing rights
capitalized at March 31, 1997 were approximately $136,000.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Securities are classified as held-to-maturity when First Federal has
the positive intent and ability to hold the security to maturity.
Held-to-maturity securities are stated at amortized cost and had a recorded
value of $24.7 million at March 31, 1997. Securities not classified as
held-to-maturity are classified as available-for-sale, which are stated at fair
value and had a recorded value of $72.8 million at March 31, 1997. The
available-for-sale portfolio consists of U.S. Treasury securities and
obligations of U.S. Government corporations and agencies ($41.0 million), fixed
income mutual funds ($18.3 million), adjustable rate mortgage backed security
mutual funds ($10.9 million), CMOs and REMICs ($2.2 million) and money market
mutual funds ($500,000). In accordance with FASB Statement No. 115, unrealized
holding gains and losses on available-for-sale securities are reported in a
separate component of stockholders' equity and are not reported in earnings
until realized. Net unrealized holding losses on available-for-sale securities
were $1.1 million at March 31, 1997, $703,000 after considering the related
deferred tax benefit. For the three months ended March 31, 1997, unrealized
losses increased by $466,000 ($306,000 after tax).
The profitability of First Defiance is primarily dependent on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and securities, and interest expense
on interest-bearing deposits and Federal Home Loan Bank advances. First
Defiance's earnings also depend, to a lesser extent, on the provision for loan
losses, the level of its other income (including servicing fees and other fees)
and its non-interest, expenses, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums, and miscellaneous
other expense, as well as federal income tax expense.
Changes in Financial Condition
At March 31, 1997, First Federal's total assets, deposits and stockholders'
equity amounted to $546.1 million, $378.3 million and $117.0 million,
respectively, compared to $543.4 million, $382.5 million and $116.6 million,
respectively, at December 31, 1996. Net loans receivable have increased from
$415.4 million at December 31, 1996 to $420.6 million at March 31, 1997. This
increase was funded primarily with maturing or redeemed securities and through
additional advances from the Federal Home Loan Bank. Securities decreased from
$103.3 million at December 31, 1996 to $97.6 million at March 31, 1997 and FHLB
advances increased from $40.8 million at December 31, 1996 to $46.7 million at
March 31, 1997. First Defiance completed its third 5% stock repurchase during
the first quarter of 1997 by acquiring 47,523 shares at an average price of
$12.13 per share.
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based on month-end balances.
Three Months Ended March 31,
------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable.......................... $418,931 $9,031 8.62% $388,121 $ 8,431 8.69%
Securities ............................... 100,011 1,558 6.23 119,381 1,806 6.05
Dividends on FHLB stock .................. 2,982 54 7.24 2,868 50 6.97
-------- -------- -------- -------
Total interest-earning assets ............ 521,924 10,643 8.16 510,369 10,287 8.06
Non-interest-earning assets ....................... 21,642 15,148
-------- --------
Total assets ............................. $543,566 $525,517
======== ========
Interest-bearing liabilities:
Deposits ................................. $378,124 $ 4,347 4.60% $380,796 $ 4,779 5.02%
FHLB advances and other .................. 43,795 619 5.65 6,753 116 6.87
-------- -------- -------- -------
Total interest-bearing liabilities........ 421,919 4,966 4.71 387,548 4,895 5.05
-------- ---- ------- ----
Non-interest-bearing liabilities .................. 3,981 3,880
-------- --------
Total liabilities ........................ 425,900 391,428
Stockholders' equity .............................. 117,590 134,089
-------- --------
Total liabilities and stock-
holders' equity ................. $543,566 $525,517
======== ========
Net interest income; interest
rate spread .............................. $ 5,677 3.45% $ 5,392 3.01%
======== ==== ======= ====
Net interest margin (2) ........................... 4.35% 4.23%
== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities .............................. 123% 130%
=== ===
- --------------------
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
Results of Operations
Three Months Ended March 31, 1997 compared to Three Months Ended March 31, 1996
Net interest income, the difference between revenue generated from interest
earning assets and the interest cost of funding those assets, is First
Defiance's primary source of earnings. For the three-month period ending March
31, 1997, net interest income increased to $5,635,000 from $5,342,000 for the
same period in 1996. First Defiance's interest rate spread (the difference
between yield on average interest earning assets and the interest rate on
average interest-bearing liabilities) for the 1997 first quarter was 3.45%,
which was 44 basis points higher than the 1996 level of 3.01% for the same
quarter.
The increase in net interest income was due primarily to a $30 million increase
in the average balance of loans receivable for the quarter ended March 31, 1997
compared to the same period in 1996 and to a decline in First Defianceis cost of
funds for the first quarter 1997 compared to the first quarter of 1996. Total
interest income plus dividends on Federal Home Loan Bank stock was $10,643,000
for the three months ended March 31, 1997, a 3.6% increase from the same period
in 1996 when the total was $10,287,000. Interest from loans increased to
$9,031,000 for the three months ended March 31, 1997 from $8,431,000 for the
three months ended March 31, 1996, an increase of 7.1%. Earnings from investment
securities declined during the period because of a $19 million reduction in the
average balance of securities outstanding for the first quarter of 1997 compared
to 1996. Investment securities were used to fund both a portion of the growth in
loans and three five percent stock repurchases since the second quarter of 1996,
the last of which was completed during January, 1997.
Interest expense increased by $71,000 to $4,966,000 for the quarter ended March
31, 1997 compared to the same period in 1996. This increase was due to a $37.0
million increase in the average balance of Federal Home Loan Bank advances
outstanding, from $6.8 million for the three months ended March 31, 1996 to
$43.8 million for the same period in 1997. These advances were used to fund a
portion of the above mentioned loan growth and stock repurchases and also as
part of a part of a leveraging strategy implemented during the 1996 fourth
quarter. Under that strategy, the Company used $20 million in overnight and
adjustable rate advances from the FHLB to purchase shares of a short-term income
mutual fund and adjustable rate mortgage-backed securities. The cost of the
Companyis deposit liabilities declined by $432,000 from the 1996 first quarter
to the 1997 first quarter because of a 42 basis point decline in the overall
rate paid on deposits (4.60% for the three months ended March 31, 1997 compared
to 5.02% for the same three month period in 1996) and also because of a slight
decrease in the average balance outstanding.
The increase in net interest income for the 1997 first quarter compared to the
same period in 1996 was partially offset by an increase in the provision for
loan losses, which was $365,000 for the three months ended March 31, 1997
compared to $163,000 for the first three months of 1996. Provisions for loan
losses are charged to earnings to bring the total allowance to the level deemed
appropriate by management based on historical experience, the volume and type of
lending conducted by First Defiance, industry standards, the amount of
non-performing assets and loan charge-off activity, general economic conditions,
particularly as they relate to First Defiance's market area, and other factors
related to the collectibility of First Defiance's loan portfolio. The loan loss
provision increase reflects increased charge off activity for the quarter and a
continual growth in the higher risk consumer and commercial loan portfolios.
Non-performing assets, which include loans 90 days past due, loans deemed
impaired and repossessed assets totaled $2.5 million at March 31, 1997, which is
.45% of total assets. $1.5 million in non-performing assets are commercial loans
that are not 90 days past but which were deemed impaired because of questions
about the ability to fully collect amounts due under the contracts. The
allowance for loan losses at March 31, 1997 was $2.3 million compared to $2.2
million at December 31, 1996. For the quarter ended March 31, 1997, First
Defiance charged off $285,000 of loans against its allowance and realized
recoveries of $31,000 from loans previously charged off. During the same quarter
in 1996, First Defiance charged off $111,000 in loans and realized recoveries of
$27,000.
Total non-interest expense for the quarter ended March 31, 1997 was $3.3
million, compared to $3.2 million for the quarter ended March 31, 1996.
Compensation and benefits for the period increased to $1.82 million for the
three months ended March 31, 1997 compared to $1.56 million for the quarter
ended March 31, 1996. The increase is due primarily to the expensing of the
Companyis 1996 Management Recognition Plan, which was approved during the second
quarter of 1996. Compensation and benefits also increased because of an increase
in the expense related to the ESOP due to the rise in value of First Defiance
common stock. Occupancy costs also increased for the quarter ended March 31,
1997, to $234,000 compared to $159,000 for the same period in 1996. The 1997
occupancy costs included approximately $30,000 of additional depreciation
expense related to the completion of renovations at three branch facilities
during the first quarter of 1997. A large addition and renovation project at the
Companyis main office in Defiance was completed early in the second quarter of
1997 and it is anticipated that depreciation expense will increase by at least
an additional $120,000 per quarter beginning with the second quarter of 1997.
The increases in compensation and benefits and in occupancy costs were offset by
a $160,000 reduction in First Defiance's FDIC premiums and a $75,000 reduction
in Ohio franchise tax expense.
Non-interest income, consisting primarily of fee income and dividends on FHLB
stock, was $336,000 for the quarter ended March 31, 1997 compared to $308,000
during the comparable period in 1996.
The Company has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 33.8% for the
quarter ended March 31, 1997 compared to 32.9% for the first quarter of 1996.
As a result of the above factors, net income for the quarter ended March 31,
1997 increased to $1,557,000 from $1,535,000 for the quarter ended March 31,
1996. On a per share basis, net income for the three months ended March 31, 1997
was $.17 compared to $.15 for the same period in 1996. The increase in earnings
per share is attributable to the acquisition of 1.57 million shares of treasury
stock by First Defiance since the second quarter of 1996. The average shares
outstanding for the quarter ended March 31, 1997 was 9,141,000 compared to
10,506,000 for the same period in 1996.
First Defiance's board of directors declared a dividend of $.08 per common share
as of March 31, 1997. The dividend amounted to $753,955, including dividends on
unallocated ESOP shares. It was paid on April 25, 1997. Dividends are subject to
determination and declaration by the board of directors, which will take into
account First Defiance's financial condition and results of operations, economic
conditions, industry standards and regulatory restrictions which affect First
Defiance's ability to pay dividends.
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three-month period ended March 31, 1997.
First Defiance generated $2,686,000 of cash from operating activities during the
first three months of 1997. The Company's cash from operating activities results
from net income for the period, adjusted for various non-cash items, including
the provision for loan losses, depreciation and amortization, ESOP expense
related to release of shares, and changes in loans available for sale, interest
receivable and other assets, and other liabilities. The primary investing
activity of First Defiance is lending, which is funded with cash provided by
operations, proceeds from the amortization and prepayments of existing loans,
proceeds from the sale or maturity of securities, and borrowings from the
Federal Home Loan Bank.
At March 31, 1997, First Defiance had $13.3 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $14.3 million committed under existing consumer and
commercial lines of credit and standby letters of credit. At that date, the
total amount of certificates of deposit that are scheduled to mature by March
31, 1998 is $163.6 million. First Defiance believes that it has adequate
resources to fund commitments as they arise and that it can adjust the rate on
savings certificates to retain deposits in changing interest rate environments.
If First Defiance requires funds beyond its internal funding capabilities,
advances from the FHLB of Cincinnati are available as an additional source of
borrowings.
Currently First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities include agency step-up, REMIC and CMO investments. Such investments
are not classified as high risk at March 31, 1997 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.
First Federal is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible capital
requirement, a core capital requirement, and a risk-based capital requirement.
The following table sets forth First Federal's compliance with each of the
capital requirements at March 31, 1997.
Tangible Core Risk-Based
Capital Capital Capital (1)(2)
(Dollars in Thousands)
Regulatory capital ................. $ 76,480 $ 76,480 $ 78,230
Minimum required regulatory
capital ................... 8,108 16,216 27,183
--------- --------- ---------
Excess regulatory capital .......... $ 68,372 $ 60,264 $ 51,047
========= ========= =========
Regulatory capital as a
percentage of assets (3) .. 12.6% 12.6% 23.0%
Minimum capital required as
a percentage .............. 1.5 3.0 8.0
Excess regulatory capital as a
percentage in excess of
requirement ............... 11.1% 9.6% 15.0%
==== ==== ====
- --------------------
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, the implementation of which has been delayed by OTS.
(2) Reflects fully phased-in deductions from total capital.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $540.6 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $339.8 million.
FIRST FEDERAL SAVINGS AND LOAN
DEFIANCE, OHIO
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a material
nature.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 22, 1997,
in Defiance, Ohio the shareholders elected directors and ratified the
appointment of Ernst & Young LLP as First Defianceis independent auditors for
1997. The following is a tabulation of all votes timely cast in person or by
proxy by shareholders of First Defiance for the annual meeting:
To elect directors to three-year terms:
NOMINEE FOR WITHHELD
------- --- --------
Don C. Van Brackel 7,686,899 62,612
Dr. Douglas A. Burgei 7,686,814 62,697
Gerald W. Monnin 7,653,283 96,228
To ratify the appointment of Ernst & Young LLP as First
Defiance's independent auditor for 1997:
FOR 7,718,320
AGAINST 12,197
ABSTAIN 18,994
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable.
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: May 12, 1997 By: /s/ Don C. Van Brackel
----------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: May 12, 1997 By: /s/ John C. Wahl
-----------------
John C. Wahl
Senior Vice President, Chief
Financial Officer