UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended September 30, 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 --
8,648,491 shares outstanding at November 10, 1997.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - September 30, 1997 and December 31, 1996
Consolidated Condensed Statements of Income Three
months ended September 30, 1997 and 1996;
Nine months ended September 30, 1997 and 1996
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Nine months ended
September 30, 1997
Consolidated Condensed Statements of Cash Flows
- Nine months ended September 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)
September 30, December 31,
1997 1996
-------- --------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ................... $ 4,251 $ 3,102
Interest-bearing deposits ..................... 328 1,650
-------- --------
4,579 4,752
Securities:
Available-for-sale, carried at fair value ..... 88,920 77,407
Held-to-maturity, carried at amortized cost
(approximate fair value $22,998 and $26,325
at September 30, 1997 and December 31,
1996, respectively) ....................... 22,521 25,937
-------- --------
111,441 103,344
Loansheld for sale (at lower of cost or fair value,
approximate fair value $310 and $564 at
September 30, 1997 and December 31,1996,
respectively) ................................. 302 559
Loans receivable, net .............................. 433,286 415,366
Accrued interest receivable ........................ 3,566 3,061
Federal Home Loan Bank stock ....................... 3,697 3,033
Office properties and equipment .................... 15,836 12,255
Deferred federal income taxes ...................... 662 550
Real estate, mobile homes and other
assets held for sale .......................... 360 266
Other assets ....................................... 635 225
-------- --------
Total Assets ....................................... $574,364 $543,411
======== ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
September 30, December 31,
1997 1996
--------- ---------
LIABILITIES
Deposits ......................................... $ 383,997 $ 382,525
Advances from Federal Home Loan Bank ............. 72,531 40,821
Other liabilities ................................ 4,930 3,500
--------- ---------
Total liabilities ................................ 461,458 426,846
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; 8,956,764 and
9,470,877 shares outstanding at September 30,
1997 and December 31, 1996, respectively .... 90 95
Additional paid-in capital ....................... 69,486 73,671
Stock acquired by ESOP ........................... (4,580) (5,093)
Stock acquired by Management
Recognition Plan ............................ (1,593) (2,173)
Net unrealized losses on available-for-sale
securities, net of income taxes of $106
and $203 at September 30, 1997 and
December 31, 1996, respectively ............. (206) (397)
Retained earnings - substantially restricted ..... 49,709 50,462
--------- ---------
Total stockholders' equity ....................... 112,906 116,565
--------- ---------
Total liabilities and stockholders' equity ....... $ 574,364 $ 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 Nine Months Ended
September 30 September 30
--------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
Mortgage and other loans $ 9,464 $ 8,745 $ 27,716 $ 25,743
Investment securities 1,796 1,482 4,855 4,849
Deposits with banks 36 36 80 161
-------- -------- -------- --------
Total interest income 11,296 10,263 32,651 30,753
Interest expense:
Deposits 4,559 4,605 13,392 14,043
Federal Home Loan Bank
advances and other borrowings 1,030 177 2,347 412
-------- -------- -------- --------
Total interest expense 5,589 4,782 15,739 14,455
-------- -------- -------- --------
Net interest income 5,707 5,481 16,912 16,298
Provision for loan losses 514 264 1,160 608
------ ------- --------- --------
Net interest income after provision
for loan losses 5,193 5,217 15,752 15,690
SAIF special assessment (Note 7) - 2,461 - 2,461
Other non-interest expense 3,487 3,502 10,119 9,815
Non-interest income 446 366 1,139 959
-------- -------- -------- --------
Income (loss) before income taxes 2,152 (380) 6,772 4,373
Income taxes (credit) 769 (145) 2,310 1,397
-------- --------- ------- --------
Net income (loss) $ 1,383 $ (235) $ 4,462 $ 2,976
======= ======= ======= ========
Earnings (loss) per share (Note 4) $ .15 $ (.02) $ .49 $ .29
======= ====== ======= ========
Dividends declared per share (Note 3) $ .08 $ .07 $ .24 $ .21
======= ====== ======= ========
Average number of shares
outstanding (Note 4) 8,932 9,830 9,075 10,198
======= ====== ======= ========
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 256 513
Change in unrealized gains (losses)
net of income taxes of $97
Amortization of deferred compensation
of Management Recognition Plan 580
Stock issued under Option Plan 26
Purchase of common stock for
treasury (5) (4,467)
Dividends declared (Note 3)
---- ------- ------- -------
Balance at September 30, 1997 $ 90 $69,486 $(4,580) $(1,593)
==== ======= ======= =======
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 4,462 4,462
ESOP shares released 769
Change in unrealized gains (losses)
net of income taxes of $97 191 191
Amortization of deferred compensation
of Management Recognition Plan 580
Stock issued under Option Plan 26
Purchase of common stock for
treasury (3,142) (7,614)
Dividends declared (Note 3) (2,073) (2,073)
------ ------- --------
Balance at September 30, 1997 $ (206) $49,709 $112,906
====== ======= ========
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Nine Months
Ended September 30,
1997 1996
-------- --------
Operating Activities
Net income ............................................................. $ 4,462 $ 2,976
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ......................................... 1,160 608
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ...................... 529 192
Gain on sale or call of available-for-sale securities ............. (76) --
Gain on sale of loans ............................................. (117) (172)
Amortization of Management Recognition Plan
deferred compensation ......................................... 580 465
Release of ESOP Shares ............................................ 769 540
(Gain) loss on disposal of office properties and equipment ........ (3) 46
Deferred federal income tax credit ................................ (209) (183)
Proceeds from sale of loans ....................................... 5,959 7,058
Originations of loans held for sale ............................... (5,585) (3,242)
Increase in interest receivable and other assets .................. (915) (902)
Increase in other liabilities ..................................... 1,472 1,754
-------- --------
Net cash provided by operating activities .............................. 8,026 9,140
Investing activities
Proceeds from maturities of held-to-maturity securities ................ 3,372 3,814
Proceeds from maturities of available-for-sale securities .............. 6,172 16,466
Proceeds from sales of available-for-sale securities ................... 17,052 21,550
Proceeds from sales of real estate, mobile homes, and
other assets held for sale ........................................ 1,104 881
Proceeds from sales of office properties and equipment ................. 3 --
Purchases of available-for-sale securities ............................. (34,293) (16,500)
Purchases of Federal Home Loan Bank stock .............................. (664) (151)
Purchases of office properties and equipment ........................... (4,148) (4,272)
Net increase in loans receivable ....................................... (20,277) (28,007)
-------- --------
Net cash used in investing activities .................................. (31,679) (6,219)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Nine Months Ended
September 30,
1997 1996
-------- --------
Financing Activities
Net increase (decrease) in deposits .................................. 1,472 (1,019)
Repayment of Federal Home Loan Bank long-term advances ............... (905) (1,065)
Net increase in Federal Home Loan Bank short-term advances ........... 32,615 12,000
Purchase of common stock for treasury ................................ (7,614) (11,606)
Cash dividends paid .................................................. (2,114) (2,125)
Contribution to Management Recognition Plan for purchase
of common stock ................................................ -- (2,817)
Proceeds from exercise of stock options .............................. 26 27
-------- --------
Net cash provided by (used in) financing activities .................. 23,480 (6,605)
-------- --------
Decrease in cash and cash equivalents ................................ (173) (3,684)
Cash and cash equivalents at beginning of period ..................... 4,752 8,685
-------- --------
Cash and cash equivalents at end of period ........................... $ 4,579 $ 5,001
======== ========
Supplemental cash flow information:
Interest paid ........................................................ $ 15,014 $ 14,608
======== ========
Income taxes paid .................................................... $ 1,946 $ 2,181
======== ========
Transfers from loans to real estate, mobile homes
and other assets held for sale .................................. $ 1,197 $ 924
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities ................... $ 97 $ 223
======== ========
Noncash investing activities:
Decrease (increase) in net unrealized loss on
available-for-sale securities ................................... $ 288 $ (433)
======== ========
Noncash financing activities:
Cash dividends declared but not paid ................................. $ 668 $ 646
======== ========
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at September 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
September 30, 1997 and for the three and nine month periods ending
September 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 nine month periods ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the entire year.
3. Dividends on Common Stock
As of September 30, 1997, First Defiance had declared a quarterly cash
dividend of $.08 per share for the third quarter of 1997, payable October
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
(basic) earnings per share of $.01 per share for the quarter ended
September 30, 1997 and $.02 per share for the nine months ended September
30, 1997. It is not expected that there will be any impact for the quarter
or nine-month period ended September 30, 1996. The impact of Statement No.
128 on the calculation of 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 September 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 nine month
periods ended September 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.
7. SAIF Assessment
The deposits of First Federal are currently insures by the Savings
Association Insurance Fund ("SAIF") which is administered by the FDIC. On
September 30, 1996, legislation was enacted to recapitalize the SAIF to the
mandated reserve ratio of 1.25% of insured deposits through a one-time
special assessment on SAIF-insured deposits as of March 31, 1995. First
Federal's assessment amounted to $2.5 million ($1.6 million, net of income
tax benefit).
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
primarily 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 $250.7 million or 56.8% of
First Defiance's total loan portfolio at September 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 $36.7 million or 8.4% of
total loans at September 30, 1997. Approximately 34.2% or $149.4 million of
First Defiance's loan portfolio as of September 30, 1997 consisted of non-real
estate loans including consumer finance loans, primarily automobile loans, which
amounted to $67.0 million or 15.3% of the total loan portfolio, commercial
loans, which amounted to $28.5 million or 6.5% of the total loan portfolio and
mobile home loans which amounted to $25.8 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 44 and 80 loans during
the three months ended September 30, 1997 and 1996 respectively (98 and 160 for
the nine months ended September 30, 1997 and 1996). The Company realized a gain
on sale of those loans of approximately $49,000 and $85,000 for three months
ended September 30, 1997 and 1996 respectively ($117,000 and $172,000 for the
respective nine month periods). Fixed rate loans with a maturity of 30 years
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 September 30, 1997
amounted to approximately $182,000.
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 $22.5
million at September 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 $88.9 million at September 30, 1997. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($60.7 million), fixed income mutual funds
($5.2 million) adjustable-rate mortgage backed security mutual funds ($8.8
million) and CMOs and REMICs ($4.1 million). In accordance with FASB Statement
No. 115, unrealized holding gains and losses on available-for-sale securities
are reported in a separate component of stockholders' equity and are not
reported in earnings until realized. Net unrealized holding losses on
available-for-sale securities were $312,000 at
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
September 30, 1997, $206,000 after considering the related deferred tax benefit.
For the nine months ended June 30, 1997, unrealized losses have decreased by
$288,000 ($191,000 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 expenses, as well as federal income tax expense.
Changes in Financial Condition
At September 30, 1997, First Defiance's total assets, deposits and stockholders'
equity amounted to $574.4 million, $384.0 million and $112.9 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 $433.3 million at September 30, 1997.
This increase was funded primarily with maturing securities and through
additional advances from the Federal Home Loan Bank ("FHLB"). Securities
increased from $103.3 million at December 31, 1996 to $111.4 million at
September 30, 1997, but that increase includes $21.8 million in agency
securities purchased as part of a leveraged growth strategy during the third
quarter of 1997. FHLB advances increased from $40.8 million at December 31, 1997
to $72.6 million at September 30, 1997 with $21.8 million of those increased
advances used to fund the leveraged growth strategy and the balance used to fund
loan growth. First Defiance completed its fourth 5% stock repurchase during the
third quarter of 1997. As of September 30, 1997, First Defiance has repurchased
518,691 shares of its own stock during 1997 for a total cost of $7.6 million, an
average of $14.68 per share. First Defiance is authorized to purchase an
additional 447,828 shares as of September 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
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.
Three Months Ended September 30,
---------------------------------------------------------------
1997 1996
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $431,441 $9,464 8.77% $403,352 $8,745 8.67%
Securities 110,651 1,832 6.62 98,618 1,518 6.16
Dividends on FHLB stock 3,536 65 7.35 2,968 53 7.14
-------- ------ -------- ------
Total interest-earning assets 545,628 11,361 8.32 504,938 10,316 8.17
Non-interest-earning assets 26,467 19,047
-------- --------
Total assets $572,095 $523,985
======== ========
Interest-bearing liabilities:
Deposits $383,025 4,559 4.76 $381,312 4,605 4.83
FHLB advances and other 69,234 1,030 5.95 12,237 177 5.79
-------- ------ -------- ------
Total interest-bearing liabilities 452,259 5,589 4.94 393,549 4,782 4.86
------ ---- ------ ----
Non-interest-bearing liabilities 4,591 4,537
-------- --------
Total liabilities 456,850 398,086
Stockholders' equity 115,245 125,900
-------- ---------
Total liabilities and stock-
holders' equity $572,095 $523,985
======== ========
Net interest income; interest
rate spread $5,772 3.38% $5,534 3.31%
====== ===== ====== =====
Net interest margin (2) 4.23% 4.38%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 121% 128%
==== ====
(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
Nine Months Ended September 30,
--------------------------------------------------------------
1997 1996
----------------------------- ---------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans receivable $425,211 $27,716 8.69% $395,489 $25,743 8.68%
Securities 102,287 4,935 6.43 109,003 5,010 6.13
Dividends on FHLB stock 3,241 175 7.20 2,920 154 7.03
-------- ------ -------- -------
Total interest-earning assets 530,739 32,826 8.25 507,412 30,907 8.12
Non-interest-earning assets 24,886 17,193
-------- --------
Total assets $555,625 $524,605
======== ========
Interest-bearing liabilities:
Deposits $380,605 13,392 4.69 $381,384 14,043 4.91
FHLB advances and other 53,671 2,347 5.83 9,102 412 6.04
-------- ------ -------- -------
Total interest-bearing liabilities 434,276 15,739 4.83 390,486 14,455 4.94
------ ---- ------ ----
Non-interest-bearing liabilities 4,357 4,269
-------- --------
Total liabilities 438,633 394,755
Stockholders' equity 116,992 129,850
-------- -------
Total liabilities and stock-
holders' equity $555,625 $524,605
======== ========
Net interest income; interest
rate spread $17,087 3.42% $16,452 3.18%
======= ===== ======= =====
Net interest margin (2) 4.29% 4.32%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 122% 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
Results of Operations
Three Months Ended September 30, 1997 compared to Three Months Ended September
30, 1996
During the 1996 third quarter, First Defiance incurred a special one-time
assessment of $2.5 million to recapitalize the Savings Association Insurance
Fund ("SAIF", see note 7 to the Financial Statements). Without the special
assessment, which amounted to $1.6 million or $.16 after tax, First Defiance had
income for the period of $1.4 million or $.15 per share for the 1996 third
quarter. All analysis in management's discussion and analysis will reflect 1996
quarterly results before deducting the net charge for the SAIF assessment.
Net interest income, the difference between revenue generated from interest
earning assets and the interest cost of funding those assets, is First
Defiance's primary source of earnings. For the three month period ending
September 30, 1997, net interest income increased to $5,707,000 from $5,481,000
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 third quarter was
3.38%, which was seven basis points higher than the 1996 third quarter level of
3.31%.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $545.6 million for the quarter ended
September 30, 1997 compared to $504.9 million for the same period in 1996. The
growth was in First Defiance's loan portfolio, where the average balance
increased to $431.4 million for the three months ended September 30, 1997
compared to $403.4 for the same period in 1996. Interest on those loans
increased to $9,464,000 for the three months ended September 30, 1997 compared
to $8,745,000 for the same period in 1996. Earnings from investment securities
also increased to $1,796,000 for the three months ended September 30, 1997
compared to $1,482,000 for the same period in 1996. This increase was due to a
$12.0 million increase in the average balance of securities outstanding and an
increase in the overall yield on those securities. During the 1997 third
quarter, the Company entered into a leveraged growth strategy in which they
borrowed $21.8 million in advances from the FHLB and invested those advances in
agency securities. Similar strategies totaling approximately $20 million were
entered into during the fourth quarter of 1996.
The increase in interest income was substantially offset by an 16.9%, increase
in interest expense, to $5,589,000 for the quarter ended September 30, 1997
compared to $4,782,000 for the same period in 1996. This increase was due to a
$57.0 million increase in the average balance of FHLB advances outstanding, from
$12.2 million for the three months ended September 30, 1996 to $69.2 for the
same period in 1997. These advances were used to fund the leveraged growth
strategies mentioned above. Also, FHLB advances have also been used to fund a
portion of the above mentioned loan growth and stock repurchases. The cost of
the Company's deposit liabilities declined by $46,000 from the 1996 third
quarter to the 1997 third quarter because of a seven basis point decline in the
overall rate paid on deposits. The average balance of deposits outstanding
during the third quarter of 1997 was slightly higher than the average balance of
deposits during the same period in 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
The $226,000 increase in net interest income for the 1997 third quarter compared
to the same period in 1996 was offset by a $250,000 increase in the provision
for loan losses, which was $514,000 for the three months ended September 30,
1997 compared to $264,000 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 $2.6 million at September 30,
1997, which is .45% of total assets. $969,000 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 September 30, 1997 was $2.6
million compared to $2.4 million at June 30, 1997 and $2.2 million at December
31, 1996. For the quarter ended September 30, 1997, First Defiance charged off
$443,000 of loans against its allowance and realized recoveries of $68,000 from
loans previously charged off. During the same quarter in 1996, First Defiance
charged off $220,000 in loans and realized recoveries of $33,000.
Total non-interest expense for the quarter ended September 30, 1997 was $3.5
million, which was the same as the 1996 third quarter. Compensation and benefits
and occupancy costs increased by $170,000 and $185,000 respectively in the third
quarter of 1997 when compared to the same period in 1996. Compensation and
benefits increased because of an increase in staffing, increases in wages for
existing staff, the start-up of a new branch operation in Paulding, Ohio, and
increases in ESOP costs associated with the increase in the value of First
Defiance's common stock. Occupancy costs increased primarily because of
depreciation expense recorded on major renovations to First Defiance's four main
branch facilities which were completed during the first half of 1997. The total
cost of those renovations was approximately $10 million.
Those increases were offset by a $160,000 decrease in FDIC premium costs for the
three months ended September 30, 1997 compared to the same period in 1996. Also,
Ohio franchise taxes were reduced by $180,000 for the 1997 third quarter
compared to the same period in 1996. In addition, the 1996 third quarter
included the accrual for a large one-time charitable contribution of $150,000.
Non-interest income, consisting primarily of fee income, dividends on FHLB
stock, and gains on mortgage loans sold was $446,000 for the quarter ended
September 30, 1997 compared to $366,000 for the same period in 1996. The
increase was due primarily to the realization of $63,000 in gains on disposal of
investment securities and increases in late charge fees and fees on checking
accounts. Those increases were offset by a slightly lower gain on the sale of
mortgage loans during the 1997 third quarter than was realized during the same
period in 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
First Defiance has computed income tax expense in accordance with FASB Statement
No. 109 which resulted in an effective tax rate of 35.7% for the quarter ended
September 30, 1997 compared to 33.3% for the same period in 1996, excluding the
SAIF assessment.
As a result of the above factors, net income for the quarter ended September 30,
1997 was $1,383,000 compared to $1,389,000 for the comparable period in 1996,
excluding the SAIF assessment. On a per share basis, net income for the quarter
ended September 30, 1997 was $.15 while per share income for the third quarter
of 1996 was $.14 after adding back the SAIF assessment. 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
September 30, 1997 were 8,932,000 compared to 9,830,000 for the same period in
1996
First Defiance's board of directors declared a dividend of $.08 per common share
as of September 30, 1997. The dividend amounted to $716,541, including dividends
on unallocated ESOP shares. It was paid on October 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.
Nine Months Ended September 30, 1997 compared to Nine Months Ended September 30,
1996
For the nine-month period ended September 30, 1997, net interest income
increased to $16,912,000 from $16,298,000 for the same period in 1996. First
Defiance's interest rate spread for the nine-month period was 3.42%, which
exceeded the spread for the nine month period ended September 30, 1996 by 24
basis points.
The increase in net interest income was due to a $29.7 million increase in the
average loan portfolio balance and a reduction in the Company's overall cost of
funds, especially the cost of deposit liabilities, which on average cost 4.69%
for the nine months ended September 30, 1997 compared to 4.91% for the nine
months ended September 30, 1996.
As a result of the growth in the loan portfolio, interest earned on loans
increased to $27.7 million for the nine months ended September 30, 1997 compared
to $25.7 million for the first nine months of 1996. Earnings from investments
and deposits with banks declined slightly to $4.9 million for the nine months
ended September 30, 1997 compared to $5.0 million for the nine months ended
September 1996 because of a reduction in the average balance of investment
securities outstanding. The average balance of securities outstanding was $102.3
million for the nine months ended September 30, 1997 compared to $109.0 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. The
average balance of investment securities was increased as a result of leveraged
growth strategies entered into during the fourth quarter of 1996 and the third
quarter of 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Interest expense increased to $15.7 million for the nine-month period ended
September 30, 1997 from $14.5 million for the first nine months of 1996. This
increase was due to a $44.6 million increase in the average balance of FHLB
advances outstanding, from $9.1 million for the first nine months of 1996 to
$53.7 million for the same period in 1997. These advances were used for the loan
growth and stock repurchases noted above and also as part of the leveraged
growth strategies implemented during the 1996 fourth quarter and the 1997 third
quarter. The cost of First Defiance's deposit liabilities declined by $651,000
during the first nine months of 1997, to $13.4 million from $14.0 million for
the first nine months of 1996, primarily because of a 22 basis point decline in
the overall rate paid on deposits (4.69% for the nine months ended September 30,
1997 compared to 4.91% for the same period in 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 first nine months of 1997 compared
to 1996 was offset by an increase in the provision for loan losses, which
increased to $1,160,000 for the first nine months of 1997 compared to $608,000
during the first nine months 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 $965,000 of loans against its allowance for loan losses
during the first nine months of 1997 and realized recoveries of $152,000 from
loans previously charged off. During the same period in 1996, First Defiance
charged off $502,000 in loans and realized recoveries of $95,000.
Total non-interest expense for the first nine months of 1997 was $10.1 million
compared to $9.8 million during the same period in 1996, excluding the SAIF
assessment. Compensation and benefits and occupancy costs increased by $670,000
and $463,000 respectively for the nine months ended September 30, 1997 compared
to the same period in 1996. Compensation and benefits increased because of an
increase in staffing, increases in wages for existing staff, nine months of MRP
expense in 1997 compared to only five months in 1996, and increases in ESOP
costs associated with the increase in the value of First Defiance's common
stock. Occupancy costs increased because of the completion of the four office
renovation projects and also because of depreciation recorded during 1997 on an
upgraded computer system.
A $519,000 reduction in First Defiance's FDIC premiums and a $320,000 reduction
in Ohio franchise taxes offset some of the increases in compensation and
benefits and in occupancy costs.
Non-interest income was $1,139,000 for the first nine months of 1997 compared to
$959,000 for 1996. Substantially all of the increase in non-interest income
related to fees from late charges and checking accounts (increased by $135,000),
and gains from sales of investment securities ($76,000). Gains from the sale of
mortgage loans during the first nine months of 1997 declined by $56,000 when
compared to the first nine months of 1996
The Company has computed income tax expense in accordance with FASB Statement
No. 109 which resulted in an effective tax rate of 34.1% for the first nine
months of 1997 compared to 32.7% during the first nine months of 1996, excluding
the SAIF assessment.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
As a result of the above factors, net income for the nine-month period ended
September 30, 1997 decreased to $4,462,000 from $4,600,000 for the nine months
ended September 30, 1996, excluding the SAIF charge. Net income for the 1996
period after the SAIF assessment was $2,976,000. Because of the reduction in the
average shares outstanding related to the stock repurchase programs, on a per
share basis, net income increased to $.49 for the first nine months of 1997
compared to $.45 for the first nine months of 1996 before the SAIF assessment
($.29 after the SAIF assessment). There were 9,075,000 average shares
outstanding during the first nine months of 1997 compared to 10,198,000 for the
same period in 1996.
Through September 30, 1997, First Defiance has declared dividends totaling $.24
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 and nine-month periods ended September
30, 1997.
First Defiance generated $8,026,000 of cash from operating activities during the
first nine 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.
At September 30, 1997, First Defiance had $19.6 million in outstanding mortgage
loan commitments and loans in process to be funded generally within the next six
months and an additional $17.9 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
September 30, 1998 is $160.0 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 September 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Management of First Defiance is in the process of assessing the risks related to
all computer systems being compliant with year 2000 processing. Management
believes all systems will be compliant and that the cost of such compliance will
not be significant.
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 September 30, 1997.
Tangible Core Risk-Based
Capital Capital Capital (1)
-------- -------- -------
(Dollars in Thousands)
Regulatory capital $78,527 $78,527 $80,665
Minimum required regulatory
capital 8,620 17,240 29,548
-------- -------- -------
Excess regulatory capital $69,907 $61,287 $51,117
======= ======= =======
Regulatory capital as a
percentage of assets (2) 13.7% 13.7% 21.8%
Minimum capital required as
a percentage of assets 1.5 3.0 8.0
-------- -------- -------
Excess regulatory capital as a
percentage in excess of
requirement 12.2% 10.7% 13.8%
======== ======== ========
(1) Reflects fully phased-in deductions from total capital.
(2) Tangible and core capital are computed as a percentage of adjusted total
assets of $574.7.0 million. Risk-based capital is computed as a percentage
of total risk-weighted assets of $369.4 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: November 13, 1997 By: /s/ Don C. Van Brackel
----------------- ----------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: November 13, 1997 By: /s/ John C. Wahl
----------------- ----------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer