UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended June 30, 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.
- --------------------------------------------------------------------------------
(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 [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value --
9,067,316 shares outstanding at August 8, 1997.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.- FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - June 30, 1997 and December 31, 1996
Consolidated Condensed Statements of Income Three
months ended June 30, 1997 and 1996;
Six months ended June 30, 1997 and 1996
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Six months ended
June 30, 1997
Consolidated Condensed Statements of Cash Flows
- Six months ended June 30, 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)
June 30, December 31,
1997 1996
-------- --------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ................... $ 4,362 $ 3,102
Interest-bearing deposits ..................... 847 1,650
-------- --------
5,209 4,752
Securities:
Available-for-sale, carried at fair value ..... 71,138 77,407
Held-to-maturity, carried at amortized cost
(approximate fair value $23,994 and $26,325
at June 30, 1997 and December 31,
1996, respectively) ....................... 23,577 25,937
-------- --------
94,715 103,344
Loansheld for sale (at lower of cost or fair value,
approximate fair value $132 and $564 at
June 30, 1997 and December 31, 1996,
respectively) ................................. 129 559
Loans receivable, net .............................. 429,528 415,366
Accrued interest receivable ........................ 3,042 3,061
Federal Home Loan Bank stock ....................... 3,197 3,033
Office properties and equipment .................... 14,545 12,255
Deferred federal income taxes ...................... 651 550
Real estate, mobile homes and other
assets held for sale .......................... 265 266
Other assets ....................................... 944 225
-------- --------
$552,225 $543,411
======== ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
June 30, December 31,
1997 1996
--------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ....................................... $ 383,393 $ 382,525
Advances from Federal Home Loan Bank ........... 47,400 40,821
Other liabilities .............................. 3,690 3,500
--------- ---------
Total liabilities .............................. 434,483 426,846
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; 9,366,185 and
9,470,877 shares outstanding at June 30,
1997 and December 31, 1996, respectively .. 94 95
Additional paid-in capital ..................... 72,993 73,671
Stock acquired by ESOP ......................... (4,751) (5,093)
Stock acquired by Management
Recognition Plan .......................... (1,797) (2,173)
Net unrealized losses on available-for-sale
securities, net of income taxes of $185
and $203 at June 30, 1997 and
December 31, 1996, respectively ........... (345) (397)
Retained earnings - substantially restricted ... 51,548 50,462
--------- ---------
Total stockholders' equity ..................... 117,742 116,565
--------- ---------
Total liabilities and stockholders' equity ..... $ 552,225 $ 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 Six Months Ended
June 30 June 30
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
Interest income:
Mortgage and other loans ...... $ 9,220 $ 8,568 $18,251 $16,999
Investment securities ......... 1,501 1,636 3,059 3,366
Deposits with banks ........... 33 50 44 125
------- ------- ------- -------
Total interest income ............... 10,754 10,254 21,354 20,490
Interest expense:
Deposits ....................... 4,487 4,659 8,833 9,438
Federal Home Loan Bank
advances and other borrowings 697 119 1,316 235
------- ------- ------- -------
Total interest expense .............. 5,184 4,778 10,149 9,673
------- ------- ------- -------
Net interest income ................. 5,570 5,476 11,205 10,817
Provision for loan losses ........... 282 181 646 344
------- ------- ------- -------
Net interest income after provision
for loan losses ................ 5,288 5,295 10,559 10,473
Non-interest expense ................ 3,378 3,113 6,632 6,314
Non-interest income ................. 357 284 693 593
------- ------- ------- -------
Income before income taxes .......... 2,267 2,466 4,620 4,752
Income taxes ........................ 746 791 1,541 1,542
------- ------- ------- -------
Net income .......................... $ 1,521 $ 1,675 $ 3,079 $ 3,210
======= ======= ======= =======
Earnings per share (Note 4) ......... $ .16 $ .16 $ .33 $ .31
======= ======= ======= =======
Dividends declared per share (Note 3) $ .08 $ .07 $ .16 $ .14
======= ======= ======= =======
Average number of shares
outstanding (Note 4) ........... 9,307 10,257 9,224 10,381
======= ======= ======= =======
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
Stock Acquired By
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
Balance at December 31, 1996 ........ $ 95 $ 73,671 $ (5,093) $ (2,173)
Net Income
ESOP shares released ................ 146 342
Change in unrealized gains (losses)
net of income taxes of $28
Amortization of deferred compensation
of Management Recognition Plan .. 376
Stock issued under Option Plan ...... 16
Purchase of common stock for
treasury ........................ (1) (840)
Dividends declared (Note 3)
Balance at June 30, 1997 ............ $ 94 $ 72,993 $ (4,751) $ (1,797)
======== ======== ======== ========
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 .......................... 3,079 3,079
ESOP shares released ................ 488
Change in unrealized gains (losses)
net of income taxes of $28 ...... 52 52
Amortization of deferred compensation
of Management Recognition Plan .. 376
Stock issued under Option Plan ...... 16
Purchase of common stock for
treasury ........................ (582) (1,423)
Dividends declared (Note 5) ......... (1,411) (1,411)
Balance at June 30, 1997 ............ $ (345) $ 51,548 $117,742
======== ======== ========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Six Months
Ended June 30,
1997 1996
-------- --------
Operating Activities
Net income .................................................... $ 3,079 $ 3,210
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................ 646 344
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ............. 366 131
Gain on sale or call of available-for-sale securities .... (12) --
Gain on sale of loans .................................... (68) (87)
Amortization of Management Recognition Plan
deferred compensation ................................ 376 194
Release of ESOP Shares ................................... 488 343
(Gain) loss on disposal of office properties and equipment (3) 46
Unrealized loss on loans held for sale ................... -- 18
Deferred federal income tax credit ....................... (128) (79)
Proceeds from sale of loans .............................. 3,778 4,038
Originations of loans held for sale ...................... (3,280) (3,998)
Increase in interest receivable and other assets ......... (700) (1,231)
Increase in other liabilities ............................ 190 128
-------- --------
Net cash provided by operating activities ..................... 4,732 3,057
Investing activities
Proceeds from maturities of held-to-maturity securities ....... 2,339 2,844
Proceeds from maturities of available-for-sale securities ..... 4,121 15,897
Proceeds from sales of available-for-sale securities .......... 2,350 9,750
Proceeds from sales of real estate, mobile homes, and
other assets held for sale ............................... 727 565
Proceeds from sales of office properties and equipment ........ 3 --
Purchases of available-for-sale securities .................... (99) (10,449)
Purchases of Federal Home Loan Bank stock ..................... (164) (100)
Purchases of office properties and equipment .................. (2,644) (2,682)
Net increase in loans receivable .............................. (15,534) (12,903)
-------- --------
Net cash provided by (used in) investing activities ........... (8,901) 2,922
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Six Months Ended
June 30,
1997 1996
------- -------
Financing Activities
Net increase in deposits ................................. 868 2,825
Repayment of Federal Home Loan Bank long-term advances ... (735) (897)
Net increase in Federal Home Loan Bank short-term advances 7,314 --
Purchase of common stock for treasury .................... (1,423) (6,004)
Cash dividends paid ...................................... (1,414) (1,442)
Contribution to management recognition plan for purchase
of common stock .................................... -- (2,817)
Proceeds from exercise of stock options .................. 16 22
------- -------
Net cash provided by (used in) financing activities ...... 4,626 (8,313)
------- -------
Increase (decrease) in cash and cash equivalents ......... 457 (2,334)
Cash and cash equivalents at beginning of period ......... 4,752 8,685
------- -------
Cash and cash equivalents at end of period ............... $ 5,209 $ 6,351
======= =======
Supplemental cash flow information:
Interest paid $ .......................................... 9,841 $ 9,809
======= =======
Income taxes paid ........................................ $ 1,809 $ 1,488
======= =======
Transfers from loans to real estate, mobile homes
and other assets held for sale ...................... $ 726 $ 597
======= =======
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities ....... $ 27 $ 231
======= =======
Noncash investing activities:
Decrease (increase) in net unrealized loss on
available-for-sale securities ....................... $ 80 $ (446)
======= =======
Noncash financing activities:
Cash dividends declared but not paid ..................... $ 706 $ 683
======= =======
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at June 30, 1997)
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance" or "the Company")) 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 June 30,
1997 and for the three and six month periods ending June 30, 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 and six month periods ended
June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year.
3. Dividends on Common Stock
As of June 30, 1997, First Defiance had declared a quarterly cash dividend
of $.08 per share for the second quarter of 1997, payable July 24, 1997.
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings per Share, which is required to be adopted by
First Defiance 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 basic earnings per share, the dilutive effect of stock options
will be excluded. The impact is expected to result in increases in primary
earnings per share of $.01 per share for the second quarter ended June 30,
1997 and $.02 per share for the six months ended June 30, 1997. It is not
expected that there will be any impact for the quarter or six-month period
ended June 30, 1996. The impact of Statement No. 128 on the calculation of
fully diluted earnings per share for these periods is not expected to be
material.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 1997)
4. Earnings Per Share (cont.)
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 three and six month
periods ended June 30, 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, "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 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 is a holding company which conducts business through its wholly
owned subsidiary, First Federal Savings and Loan, Defiance Ohio, 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 $248.0 million or 56.8% of First
Defiance's total loan portfolio at June 30, 1997. To a lesser extent, First
Defiance originates other real estate loans secured by non-residential real
estate and construction loans, which amounted to $41.8 million or 9.6% of total
loans at June 30, 1997. Approximately 33.6% or $146.6 million of First
Defiance's loan portfolio as of June 30, 1997 consisted of non-real estate loans
including consumer finance loans, primarily automobile loans, which amounted to
$66.2 million or 15.2% of the total loan portfolio, commercial loans, which
amounted to $28.3 million or 6.5% of the total loan portfolio and mobile home
loans which amounted to $25.9 million or 5.9% 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 51 loans during
the three months ended June 30, 1997 and 1996 respectively (54 and 80 for the
six months ended June 30, 1997 and 1996). The Company realized a gain on sale of
those loans of approximately $37,000 and $28,000 for three months ended June 30,
1997 and 1996 respectively ($68,000 and $87,000 for the respective six month
periods). Loans with a 30-year maturity, which meet the Freddie Mac underwriting
guidelines, are classified as available-for-sale loans. First Defiance retains
the servicing rights on all mortgage loans sold. Mortgage servicing rights
capitalized at June 30, 1997 were approximately $154,000.
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 $23.6
million at June 30, 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 $71.1 million at June 30, 1997. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($40.4 million), fixed income mutual funds
($17.8 million) adjustable-rate mortgage backed security mutual funds ($10.5
million), CMOs and REMICs ($2.1 million) and money market mutual funds
($300,000). 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 $520,000 at June
30, 1997, $345,000 after considering the related deferred tax benefit. For the
six months ended June 30, 1997, unrealized losses decreased by $80,000 ($52,000
after tax).
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
The profitability of First Defiance is primarily dependent on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and securities, and interest expense
on interest-bearing deposits and Federal Home Loan Bank advances. First
Defiance's earnings also depend, to a lesser extent, on the provision for loan
losses, the level of its other income (including servicing fees and other fees)
and its non-interest expenses, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums, and miscellaneous
other expenses, as well as federal income tax expense.
Changes in Financial Condition
At June 30, 1997, First Defiance's total assets, deposits and stockholders'
equity amounted to $552.2 million, $383.4 million and $117.7 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
$415.37 million at December 31, 1996 to $429.5 million at June 30, 1997. This
increase was funded primarily with maturing or redeemed securities and through
additional advances from the Federal Home Loan Bank ("FHLB"). Securities
decreased from $103.3 million at December 31, 1996 to $94.7 million at June 30,
1997 and FHLB advances increased from $40.8 million at December 31, 1997 to
$47.4 million at June 30, 1997. First Defiance completed its third 5% stock
repurchase during the first quarter of 1997 and began its fourth 5% repurchase
during the second quarter of 1997. As of June 30, 1997, First Defiance has
acquired 107,448 shares of its own stock during 1997 at an average price of
$13.25 per share. First Defiance is authorized to purchase an additional 411,243
shares as of June 30, 1997.
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. Average balances for 1997 are based on daily balances while
1996 average balances are based on month-end balances.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Three Months Ended June 30,
---------------------------------------------------------------
1997 1996
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $425,263 $9,220 8.67% $394,525 $8,568 8.69%
Securities 96,200 1,534 6.38 109,797 1,686 6.14
Dividends on FHLB stock 3,106 56 7.21 2,918 51 6.99
-------- ------ -------- ------
Total interest-earning assets 524,569 10,810 8.24 507,240 10,305 8.13
Non-interest-earning assets 26,645 16,956
-------- --------
Total assets $551,214 $524,196
======== ========
Interest-bearing liabilities:
Deposits $380,665 $4,487 4.71% $383,431 $4,659 4.86%
FHLB advances and other 47,985 697 5.81 6,918 119 6.88
--------- ------ ------- ------
Total interest-bearing liabilities 428,650 5,184 4.83 390,349 4,778 4.90
------ ---- ------ ----
Non-interest-bearing liabilities 4,422 4,002
-------- --------
Total liabilities 433,072 394,351
Stockholders' equity 118,142 129,845
-------- ---------
Total liabilities and stock-
holders' equity $551,214 $524,196
======== ========
Net interest income; interest
rate spread $5,626 3.41% $5,527 3.23%
====== ===== ====== =====
Net interest margin (2) 4.29% 4.35%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 121% 130%
==== ====
- ----------------
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Six Months Ended June 30,
---------------------------------------------------------------
1997 1996
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $422,097 $18,251 8.65% $391,244 $16,999 8.69%
Securities 98,105 3,103 6.33 114,109 3,491 6.12
Dividends on FHLB stock 3,094 110 7.10 2,894 102 6.98
-------- ------ -------- --------
Total interest-earning assets 523,296 21,464 8.20 508,247 20,592 8.10
Non-interest-earning assets 24,094 16,150
-------- --------
Total assets $547,390 $524,397
======== ========
Interest-bearing liabilities:
Deposits $379,395 $8,833 4.66% $381,885 $9,438 4.94%
FHLB advances and other 45,900 1,316 5.73 6,860 235 6.85
--------- -------- ---------- ------
Total interest-bearing liabilities 425,295 10,149 4.77 388,745 9,673 4.98
------- ----- ----- -----
Non-interest-bearing liabilities 4,229 4,008
-------- --------
Total liabilities 429,524 392,753
Stockholders' equity 117,866 131,644
-------- -------
Total liabilities and stock-
holders' equity $547,390 $524,397
======== ========
Net interest income; interest
rate spread $11,315 3.43% $10,919 3.12%
======= ===== ======= =====
Net interest margin (2) 4.32% 4.30%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 123% 129%
==== ====
- -----------------
(1) Annualized
(2) Net interest margin is net interest incomedivided by average
interest-earning assets.
Results of Operations
Three Months Ended June 30, 1997 compared to Three Months Ended June 30, 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 June
30, 1997, net interest income increased to $5,570,000 from $5,476,000 for the
same period in 1996. First Defiance's interest rate spread (the difference
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
between yield on average interest earning assets and the interest rate on
average interest-bearing liabilities) for the 1997 second quarter was 3.41%,
which was 18 basis points higher than the 1996 second quarter level of 3.23%.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $524.6 million for the quarter ended June
30, 1997 compared to $507.2 million for the same period in 1996. The growth was
in First Defiance's loan portfolio, where the average balance increased to
$425.3 million for the three months ended June 30, 1997 compared to $394.5 for
the same period in 1996. Interest on those loans increased to $9,220,000 for the
three months ended June 30, 1997 compared to $8,568,000 for the same period in
1996. Earnings from investment securities declined during the 1997 second
quarter compared to the same period in 1996 because of a $13.6 million reduction
in the average balance of securities outstanding. Investment securities
maturities and redemptions were used to fund both a portion of the growth in
loans and the Company's stock repurchase activity since the second quarter of
1996.
The increase in interest income was substantially offset by an 8.5%, increase in
interest expense, to $5,184,000 for the quarter ended June 30, 1997 compared to
$4,778,000 for the same period in 1996. This increase was due to a $41.1 million
increase in the average balance of FHLB advances outstanding, from $6.9 million
for the three months ended June 30, 1997 to $48.0 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 leveraging strategy implemented
during the 1996 fourth quarter. Under that strategy, First Defiance 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 Company's deposit liabilities declined by $172,000
from the 1996 second quarter to the 1997 second quarter because of a 15 basis
point decline in the overall rate paid on deposits and because of a slight
decrease in the average balance outstanding.
The $94,000 increase in net interest income for the 1997 second quarter compared
to the same period in 1996 was offset by a $101,000 increase in the provision
for loan losses, which was $282,000 for the three months ended June 30, 1997
compared to $181,000 for the same period in 1996. Provisions for loan losses are
charged to earnings to bring the total allowance for loan losses to the level
deemed appropriate by management based on historical experience, the volume and
type of lending conducted by First Defiance, industry standards, the amount of
non-performing assets and loan charge-off activity, general economic conditions,
particularly as they relate to First Defiance's market area, and other factors
related to the collectibility of First Defiance's loan portfolio. The loan loss
provision increase reflects increased charge-off activity for the quarter when
compared to the same period in the prior year and further growth in consumer and
commercial loan portfolios, which by their nature have more risk than mortgage
loans.
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets totaled $2.5 million at June 30, 1997,
which is .45% of total assets. $986,000 in non-performing assets are commercial
loans that were not 90 days past due but which were deemed impaired because of
questions about the ability to fully collect amounts due under the loan
agreements. The allowance for loan losses at June 30, 1997 was $2.4 million
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
compared to $2.3 million at March 31, 1997 and $2.2 million at December 31,
1996. For the quarter ended June 30, 1997, First Defiance charged off $237,000
of loans against its allowance and realized recoveries of $53,000 from loans
previously charged off. During the same quarter in 1996, First Defiance charged
off $171,000 in loans and realized recoveries of $11,000.
Total non-interest expense for the quarter ended June 30, 1997 was $3.4 million,
compared to $3.1 million for the quarter ended June 30, 1996. Compensation and
benefits for the quarter ended June 30, 1997 were $1,796,000 compared to
$1,554,000 for the same period in 1996, an increase of 16%. The increase was due
to an increase in the number of full-time equivalent employees from 132 at June
30, 1996 to 147 at June 30, 1997, general salary increases, a $52,000 increase
in ESOP expense caused primarily by the increase in the value of First Defiance
stock, a $20,000 increase in Management Recognition Plan ("MRP") expense due to
only two months of expense relating to the 1996 plan being recognized during the
1996 second quarter, and an increase of $20,000 in pension expense.
Occupancy expense increased to $350,000 compared to $148,000. This increase was
due to the completion late in the first quarter and early in the second quarter
of renovations to the Company's headquarters and three of its branch facilities.
The total cost of the renovation projects was approximately $10 million.
Additional depreciation recorded during the 1997 second quarter related to the
renovation and expansion projects was approximately $180,000.
The increases in compensation and occupancy costs were offset by a $156,000
reduction in FDIC premiums and a $60,000 reduction in Ohio franchise tax.
Non-interest income, consisting primarily of fee income, dividends on FHLB
stock, and gains on mortgage loans sold was $357,000 for the quarter ended June
30, 1997 compared to $284,000 for the same period in 1996. The increase was due
primarily to increases in late charge fees and fees on checking accounts and an
increase in the gains on loans sold.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 32.9% for the
quarter ended June 30, 1997 compared to 32.1% for the same period in 1996.
As a result of the above factors, net income for the quarter ended June 30, 1997
was $1,521,000 compared to $1,675,000 for the comparable period in 1996. On a
per share basis, net income for both the quarters ended June 30, 1997 and 1996
was $.16. Per share earnings was positively impacted by a reduction in the
average shares outstanding due to the stock repurchases. The average shares
outstanding for the quarter ended June 30, 1997 were 9,307,000 compared to
10,257,000 for the same period in 1996
First Defiance's board of directors declared a dividend of $.08 per common share
as of June 30, 1997. The dividend amounted to $747,444, including dividends on
unallocated ESOP shares. It was paid on July 24, 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
For the six month period ended June 30, 1997, net interest income increased to
$11,205,000 from $10,817,000 for the same period in 1996. First Defiance's
interest rate spread for the six month period was 3.43%, which exceeded the
spread for the six month period ended June 30, 1996 by 31 basis points.
The increase in net interest income was due to an increase in the loan portfolio
and a reduction in the Company's overall cost of funds, especially the cost of
deposit liabilities.
First Defiance's average loans for the six months ended June 30, 1997 were
$422.1 million compared to $391.2 million for the same period in 1996. As a
result of the growth in the loan portfolio, interest earned on loans increased
to $18.3 million for the six months ended June 30, 1997 compared to $17.0
million for the first six months of 1996. Earnings from investments declined to
$3.1 million for the six months ended June 30, 1997 compared to $3.5 million for
the six months ended June 1996 because of a reduction in the average balance of
investment securities outstanding. The average balance of securities outstanding
was $98.1 million for the six months ended June 30, 1997 compared to $114.1
million for the same period in 1996. Investment securities were used both to
fund a portion of the growth in the loan portfolio and the repurchase of stock.
Interest expense increased to $10.1 million for the six-month period ended June
30, 1997 from $9.7 million for the first half of 1996. This increase was due to
a $39.0 million increase in the average balance of FHLB advances outstanding,
from $6.9 million for the first half of 1996 to $45.9 million for the first half
of 1997. These advances were used for the loan growth and stock repurchases
noted above and also as part of the leveraging strategy implemented during the
1996 fourth quarter. The cost of First Defiance's deposit liabilities declined
by $605,000 during the first half of 1997, to $8.8 million from $9.4 million for
the first six months of 1996, primarily because of a 28 basis point decline in
the overall rate paid on deposits (4.66% for the six months ended June 30, 1997
compared to 4.94% for the six months ended June 30, 1996). There also was a
slight decrease in the average balance outstanding in 1997 compared to 1996.
The increase in net interest income for the 1997 first half compared to 1996 was
offset by an increase in the provision for loan losses, which increased to
$646,000 for the first half of 1997 compared to $344,000 during the first half
of 1996. The loan loss provision reflects higher charge-off activity during the
first half of 1997 and also is reflective of continued growth in the higher risk
consumer and commercial portfolios. First Defiance charged off $522,000 of loans
against its allowance for loan losses during the first half of 1997 and realized
recoveries of $84,000 from loans previously charged off. During the same period
in 1996, First Defiance charged off $282,000 in loans and realized recoveries of
$62,000.
Total non-interest expense for the first half of 1997 was $6.6 million compared
to $6.3 million during the same period in 1996. Compensation and benefits for
the period increased to $3.6 million for the 1997 period from $3.1 million for
the same period in 1996. $182,000 of the increase is related to six months of
expense under the Company's 1996 MRP in 1997 compared to only two months during
the first half of 1996. Also expense for the Company's ESOP plan increased by
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
$104,000 during the first half of 1997 compared to the same period of 1996
because of an increase in the price of First Defiance stock. Occupancy costs
also increased during the first half of 1997, to $585,000 from $307,000 for the
first half of 1996. Of that increase, $229,000 is due to depreciation expense
recognized during the first half of 1997 on the renovation and expansion
projects.
A $359,000 reduction in First Defiance's FDIC premiums and a $137,000 reduction
in Ohio franchise taxes offset some of the increases in compensation and
benefits and in occupancy costs.
Non-interest income was $693,000 for the first half of 1997 compared to $593,000
for 1996. Substantially all of the increase in non-interest income was in fees
from late charges and checking accounts.
The Company has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 33.3% for the first
half of 1997 compared to 32.4% during the first half of 1996.
As a result of the above factors, net income for the six month period ended June
30, 1997 decreased to $3,079,000 from $3,210,000 for the six months ended June
30, 1996. However, because of the reduction in the average shares outstanding
related to the stock repurchase programs, on a per share basis, net income
increased to $.16 for the first half of 1997 compared to $.14 for the first half
of 1996. There were 9,224,000 average shares outstanding during the first half
of 1997 compared to 10,381,000 for the same period in 1996.
Through June 30, 1997, First Defiance has declared dividends totaling $.16 per
share.
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three-month period ended June 30, 1997.
First Defiance generated $4,732,000 of cash from operating activities during the
first six 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 FHLB.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
At June 30, 1997, First Defiance had $17.8 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $15.8 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 June 30,
1998 is $192.2 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 June 30, 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 June 30, 1997.
Tangible Core Risk-Based
Capital Capital Capital (1)(2)
--------- --------- ---------
(Dollars in Thousands)
Regulatory capital ................ $ 77,964 $ 77,964 $ 79,966
Minimum required regulatory
capital ........................ 8,220 16,441 27,858
--------- --------- ---------
Excess regulatory capital ......... $ 69,744 $ 61,523 $ 52,108
========= ========= =========
Regulatory capital as a
percentage of assets (3) ....... 14.2% 14.2% 23.0%
Minimum capital required as
a percentage of assets ......... 1.5 3.0 8.0
--------- --------- ---------
Excess regulatory capital as a
percentage in excess of
requirement .................... 12.7% 11.2% 15.0%
========= ========= =========
- ------------------
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, discussed above.
(2) Reflects fully phased-in deductions from total capital.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $548.0 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $348.2 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 at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable.
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: August 11, 1997 By: /s/ Don C. Van Brackel
--------------- ----------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: August 11, 1997 By: /s/ John C. Wahl
--------------- ----------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer