================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number ________________
FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
OHIO 34-1803915
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
601 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (419) 782-5015
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 30, 1999, there were issued and outstanding 7,157,362
shares of the Registrants common stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and ask price of such
stock as of March 26, 1999 was approximately $72.5 million.
-----------------
Documents Incorporated by References
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1998 are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
================================================================================
PART I
Item 1. Business
First Defiance Financial Corp. ("First Defiance" or the "Company") is a
unitary thrift holding company that, through is subsidiaries (the
"Subsidiaries") focuses on traditional banking, mortgage banking, and property
and casualty and life insurance products. The Company's traditional banking
activities include originating and servicing residential, commercial, and
consumer loans and providing a broad range of depository services. The Company's
mortgage banking activities consist primarily of purchasing and selling
residential mortgage loans, originating residential mortgages, and servicing
residential mortgage portfolios for investors. The Company's insurance
activities consist primarily of commissions relating to the sale of property and
casualty and life insurance products.
At December 31, 1998, the Company had consolidated assets of $785.4
million, consolidated deposits of $434.0 million, and consolidated stockholder's
equity $93.7 million. The Company was incorporated in Ohio in June of 1995. Its
principal executive offices are located at 601 N. Clinton Street, Defiance, Ohio
43512, and its telephone number is (419) 782-5015.
The Subsidiaries
The Company's core business operations are conducted through the
following Subsidiaries:
First Federal Savings and Loan: First Federal Savings and Loan ("First
Federal") is a federally chartered stock savings and loan headquartered in
Defiance, Ohio. It conducts operations through its main office and eleven full
service branch offices in Defiance, Fulton, Hancock, Henry, Paulding, Putnam,
and Williams Counties in northwest Ohio. First Federal's deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"). First Federal is a member of the Federal Home Loan Bank
System.
First Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences
(one-to-four-family units) primarily located in the seven counties in which its
offices are located. First Federal also originates other real estate loans
secured by nonresidential and multi-family residential real estate and
construction loans. First Federal also holds a significant number of non real
estate loans including commercial, home improvement and equity, consumer finance
loans, primarily automobile loans, and mobile home loans. In addition, First
Federal invests in U.S. Treasury and federal government agency obligations,
obligations of the State of Ohio and its political subdivisions, mortgage-backed
securities which are issued by federal agencies, commercial paper, and corporate
bonds.
The Leader Mortgage Company: The Leader Mortgage Company ("The Leader")
is a wholly owned subsidiary of First Federal. The Leader is a mortgage banking
company which specializes in servicing mortgage loans under various first-time
homebuyer programs sponsored by various state, county and municipal governmental
entities. The Leader's mortgage banking activities consist primarily of
originating or purchasing residential mortgage loans for either direct resale
into secondary markets or to be securitized under various Government National
Mortgage Association ("GNMA") bonds.
The Insurance Center of Defiance: The Insurance Center of Defiance
("the Insurance Center") is wholly owned subsidiary of First Defiance. The
Insurance Center is an insurance agency that does business in the Defiance, Ohio
area under the name of the Stauffer-Mendenhall Agency. The Stauffer-Mendenhall
Agency offers property and casualty and life insurance products.
Securities
Management determines the appropriate classification of debt securities
at the time of purchase. Debt securities are classified as held-to-maturity when
First Defiance has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Debt
securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are stated at
fair value.
First Defiance's securities portfolio is managed in accordance with a
written policy adopted by the Board of Directors and administered by the
Investment Committee. All securities transactions must be approved by the
Investment Committee and reported to the Board of Directors.
First Defiance's investment portfolio includes six CMO and REMIC issues
totaling $9.3 million, all of which are fully amortizing securities, and one
separate agency security totaling $2.0 million which has a step-up feature. All
such investments are considered derivative securities. None of First Defiance's
investments are considered to be high risk and management does not believe the
risks associated with these investments to be significantly different from risks
associated with other pass-through mortgage backed or agency securities. First
Defiance does not invest in off-balance sheet derivative securities.
The amortized cost and fair value of securities at December 31, 1998 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Money market mutual
funds and other mutual funds are not due at a single maturity date. For purposes
of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral.
The mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Contractually Maturing Total
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average
Year Rate Years Rate Years Rate Years Rate Amount Yield
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage-backed
securities $ -- --% $ 1,583 7.66% $ 350 9.03% $10,598 7.05% $12,531 7.18%
Corporate bonds 4,039 7.50 7,034 6.12 -- -- -- -- 11,073 6.62
REMICs and CMOs 5,423 7.50 -- -- 2,795 6.57 803 6.95 9,021 7.16
U.S. Government and
federal agency
obligations 1,998 6.00 1,018 6.24 4,005 6.57 -- -- 7,021 6.36
Obligations of
states and
political 112 6.76 814 5.41 4,219 5.57 1,117 5.01 6,262 5.47
subdivisions
Commercial paper 5,961 5.84 -- -- -- -- -- -- 5,961 5.84
------- ------- ------- ------- ------
Total $17,533 $10,449 $11,369 $12,518 51,869
======= ======= ======= ======= ======
Mutual funds 8,981
Unrealized loss
on securities
available for
sale 245
-------
Total $61,095
=======
The book value of investment securities is as follows:
December 31
1998 1997 1996
---------------- ----------------- -----------------
(In thousands)
Available-for-Sale Securities:
Corporate bonds $11,196 $10,113 $ -
U. S. Treasury and other U. S. Government
agencies and corporations 7,063 58,851 $44,234
Obligations of state and political subdivisions
5,286 550 -
Other 24,009 12,922 33,173
------- ------- -------
Totals $47,554 $82,436 $77,407
======= ======= =======
Held-to-Maturity Securities:
U. S. Treasury and other U. S. Government
agencies and corporations $12,531 $19,715 $24,513
Obligations of state and political subdivisions
1,010 1,238 1,424
------- ------- -------
Totals $13,541 $20,953 $25,937
======= ======= =======
For additional information regarding First Defiance's investment portfolio refer
to Note 4 to the consolidated financial statements.
Interest-Bearing Deposits
First Defiance has interest-bearing deposits in the FHLB of Cincinnati
amounting to $5.3 million and $1.6 million at December 31, l998 and l997.
Residential Loan Servicing Activities
Residential Mortgage Loan Servicing: First Federal and The Leader each
has its own mortgage servicing portfolio. At December 31, 1998, First Federal
serviced approximately $62 million of mortgage loans, while The Leader's
servicing portfolio amounted to approximately $4.8 billion.
Servicing mortgage loans involves a contractual right to receive a fee
for processing and administering loan payments. This processing involves
collecting monthly mortgage payments on behalf of investors, reporting
information to those investors on a monthly basis and maintaining custodial
escrow accounts for the payment of principal and interest to investors and
property taxes and insurance premiums on behalf of borrowers. These payments are
held in custodial escrow accounts at First Federal, where the money can be
invested by the Company in interest-earning assets at returns that historically
have been greater than could be realized by the Company using the custodial
escrow deposits as compensating balances to reduce the effective borrowing cost
on the Company's warehouse credit facilities.
As compensation for its mortgage servicing activities, the Company
receives servicing fees usually ranging from 0.25% to 0.44% per annum of the
loan balances serviced, plus any late charges collected from delinquent
borrowers and other fees incidental to the services provided. At December 31,
1998, the Company's weighted-average servicing fee was .41%. In the event of a
default by the borrower, the Company receives no servicing fees until the
default is cured.
Servicing is provided on mortgage loans on a recourse or nonrecourse
basis. The Company's policy is to accept only a limited number of servicing
assets on a recourse basis. As of December 31, 1998, on the basis of outstanding
principal balances, only .13% of the mortgage servicing contracts owned by the
Company involved recourse servicing. To the extent that servicing is done on a
recourse basis, the Company is exposed to credit risk with respect to the
underlying loan in the event of a repurchase. Additionally, many of the
nonrecourse mortgage servicing contracts owned by the Company require the
Company to advance all or part of the scheduled payments to the owner of the
mortgage loan in the event of a default by the borrower. Many owners of mortgage
loans also require the servicer to advance insurance premiums and tax payments
on schedule even though sufficient escrow funds may not be available. The
Company, therefore, must bear the funding costs associated with making such
advances. If the delinquent loan does not become current, these advances are
typically recovered at the time of the foreclosure sale. Foreclosure expenses
are generally not fully reimbursable by the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
the Government National Mortgage Association ("GNMA"), for whom the Company
provides significant amounts of mortgage loan servicing. As of December 31,
1998, the Company had advanced approximately $2.3 million in funds on behalf of
third-party investors.
Mortgage servicing rights represent a contractual right to service, and
not a beneficial ownership interest in, underlying mortgage loans. Failure to
service the loans in accordance with contract or other applicable requirements
may lead to the termination of the servicing rights and the loss of future
servicing fees. To date, there have been no terminations of mortgage servicing
rights by any mortgage loan owners because of the Company's failure to service
the loans in accordance with its obligations.
In order to track information on its servicing portfolio, The Leader
utilizes an in-house data processing system with an IBM AS/400 as its main
frame. Management believes that this system gives The Leader greater flexibility
to customize data for the end user and sufficient capacity to support
anticipated expansion of its residential mortgage loan servicing portfolio.
The following table sets forth certain information regarding the
composition of the Company's mortgage servicing portfolio (excluding loans
subserviced for others) as of the dates indicated:
As of December 31
1998 1997 1996
---------------- ----------------- -----------------
(In thousands)
FHA insured/VA guaranteed residential $3,616,245
Conventional loans 1,086,575 $17,844 $11,295
Other loans 153,049
---------- ------- -------
Total mortgage servicing portfolio $4,855,869 $17,844 $11,295
========== ======= =======
Fixed rate loans $4,847,764 $17,844 $11,295
Adjustable rate loans 8,105
---------- ------- -------
Total mortgage servicing portfolio $4,855,869 $17,844 $11,295
========== ======= =======
The following table shows the delinquency statistics for the mortgage loans
serviced by the Company (excluding loans subserviced for others) compared with
national average delinquency rates as of the dates presented:
As of December 31
---------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------
National National National
Company Average(1) Company Average(1) Company Average(1)
---------------------------------------------------------------------------------------------------------
Number Percentage Percentage Number Percentage Percentage Number Percentage Percentage
of of of of of of of of of
Loans Servicing Loans Loans Servicing Loans Loans Servicing Loans
Portfolio Portfolio Portfolio
(2) (2) (2)
---------------------------------------------------------------------------------------------------------
Loans delinquent
for:
30-59 days 5,155 6.23% 2.96% 5 1.78% 3.03% 2 1.12% 3.04%
60-89 days 1,435 1.73 .68 - .71 - - .71
90 days and
over 818 .99 .60 1 .36 .62 - - .62
---------------------------------------------------------------------------------------------------------
Total
delinquencies 7,408 8.95% 4.24% 6 2.14% 4.36% 2 1.12% 4.37%
=========================================================================================================
Foreclosures 2,161 2.61% - - - 1.11% - - 0.87%
=========================================================================================================
(1) Source: Mortgage Bankers Association, "Delinquency Rates of I to 4 Unit
Residential Mortgage Loans" (Seasonally Adjusted) (Data as of December 31,
1998, 1997 and 1996, respectively).
(2) Delinquencies and foreclosures generally exceed the national average due to
historically higher rates of delinquencies and foreclosures on FHA insured
and VA guarenteed Residential Mortgage loans.
The following table sets forth certain information regarding the number
and aggregate principal balance of the mortgage loans serviced by the Company,
including both fixed and adjustable rate loans (excluding loans subserviced for
others), at various mortgage interest rates:
As of December 31
---------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance
---- ---------------------------------------------------------------------------------------------------------
Less than 5.00% 1,144 $ 33,215 .68%
5.00% - 5.99% 9,510 565,162 11.64
6.00% - 6.99% 29,068 1,818,721 37.45
7.00% - 7.99% 30,383 1,718,098 35.38 54 $ 3,904 21.88% 34 $ 2,483 21.98%
8.00% - 8.99% 12,310 480,142 9.89 216 13,540 75.88% 133 8,370 74.10
9.00% and over 355 240,531 4.96 11 400 2.24 11 442 3.92
=========================================================================================================
Total 82,770 $4,855,869 100.00% 281 $17,844 100.00% 178 $11,295 100.00%
=========================================================================================================
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown. The changes in the
remaining maturities as a percentage of unpaid principal between 1998, 1997 and
1996, as reflected below, are the result of acquisitions of mortgage servicing
rights completed during 1998.
As of December 31
-------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------
Percentage Percentage
Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid
of of Number Principal Principal of of Number Principal Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount
-------- -------------------------------------------------------------------------------------------
(Dollars in thousands)
1-5 years 5,843 7.06% $ 147,446 3.04%
6-10 years 5,053 6.10 147,092 3.03
11-15 years 1,756 2.12 104,796 2.16
16-20 years 6,643 8.03 288,755 5.95
21-25 years 16,136 19.49 960,928 19.79
More than 25 years 47,339 57.20 3,206,852 66.03 281 100.00% $17,844 100.00%
===========================================================================================
Total 82,770 100.00% $4,855,869 100.00% 281 100.00% $17,844 100.00%
===========================================================================================
As of December 31
------------------------------------------------
1996
------------------------------------------------
Percentage
Number Percentage Unpaid Unpaid
of of Number Principal Principal
Maturity Loans of Loans Amount Amount
-------- ------------------------------------------------
(Dollars in thousands)
1-5 years
6-10 years
11-15 years
16-20 years
21-25 years
More than 25 years 178 100.00% $11,295 100.00%
================================================
Total 178 100.00% $11,295 100.00%
================================================
The following table sets forth the geographic distribution of the
mortgage loans (including delinquencies) serviced by the Company (excluding
loans subserviced for others) by state:
As of December 31
--------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------------------------
Percentage Percentage Percentage Percentage
of of of of
Number Aggregate Aggregate Total Number Aggregate Aggregate Total
of Principal Principal Delinqs. of Principal Principal Delinqs.
State Loans Balance Balance by State(1) Loans Balance Balance by State(1)
----- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Ohio 36,761 $2,153,287 44.34% 38.12% 281 $17,844 100.00% 100.00%
Florida 14,688 955,047 19.67 19.74
Louisiana 6,836 443,228 9.13 10.96
Other (2) 24,485 1,304,307 26.86 31.18
============================================================================================
Total 82,770 $4,855,869 100.00% 100.00% 281 $17,844 100.00% 100.00%
============================================================================================
As of December 31
-------------------------------------------------
1996
-------------------------------------------------
Percentage Percentage
of of
Number Aggregate Aggregate Total
of Principal Principal Delinqs.
State Loans Balance Balance by State(1)
----- -------------------------------------------------
(Dollars in thousands)
Ohio 178 $11,295 100.00% 100.00%
Florida
Louisiana
Other (2)
=================================================
Total 178 $11,295 100.00% 100.00%
=================================================
(1) In terms of number of loans outstanding.
(2) No other state accounted for greater than 6.00%, based on aggregate
principal balances of the Company's mortgage loan servicing portfolio as of
December 31, 1998.
Lending Activities
General. A savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. See "Regulation - Federal Regulation
of Savings Associations." At December 31, 1998, First Federal's limit on
loans-to-one borrower was $9.6 million and its five largest loans or groups of
loans to one borrower, including related entities, aggregated $7.0 million, $7.0
million, $6.7 million, $5.6 million and $3.7 million. All of these loans or
groups of loans were performing in accordance with their terms at December 31,
1998.
Loan Portfolio Composition. The net increase in net loans outstanding
over the prior year was $126.6 million, $26.0 million, and $30.7 million in
1998, 1997 and 1996, respectively. The loan portfolio contains no foreign loans
nor any concentrations to identified borrowers engaged in the same or similar
industries exceeding 10% of total loans.
The following table sets forth the composition of the Company's loan
portfolio by type of loan at the dates indicated.
December 31
--------------------------------------------------------------------------------------------
1998 1997 1996 1995
--------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate:
Single-family residential $365,116 62.7% $255,428 57.0% $241,787 57.1% $224,639 57.4%
Multi-family residential 13,763 2.4 9,363 2.1 9,175 2.2 16,929 4.3
Non-residential real estate 16,436 2.8 20,159 4.5 21,348 5.0 19,780 5.1
Construction 8,258 1.4 10,148 2.2 11,412 2.7 8,200 2.1
--------------------------------------------------------------------------------------------
Total real estate loans 403,573 69.3 295,098 65.8 283,722 67.0 269,548 68.9
Other:
Consumer finance 87,168 15.0 81,111 18.1 74,019 17.5 61,810 15.8
Commercial 70,109 12.0 29,758 6.6 26,674 6.3 23,647 6.0
Home equity and improvement 18,168 3.2 16,940 3.8 13,570 3.2 11,875 3.0
Mobile home 3,117 .5 25,424 5.7 25,199 6.0 24,671 6.3
--------------------------------------------------------------------------------------------
Total non-real estate loans 178,562 30.7 153,233 34.2 139,462 33.0 122,003 31.1
--------------------------------------------------------------------------------------------
Total loans 582,135 100.0% 448,331 100.0% 423,184 100.0% 391,551 100.0%
===== ===== ===== =====
Less:
Loans in process 3,250 3,087 4,474 3,971
Deferred loan origination fees 612 646 568 559
Allowance for loan losses 9,789 2,686 2,217 1,817
-------- -------- -------- --------
Net loans $568,484 $441,912 $415,925 $385,204
======== ======== ======== ========
December 31
---------------------
1994
---------------------
Amount %
---------------------
(Dollars in thousands)
Real estate:
Single-family residential $222,035 61.6%
Multi-family residential 7,577 2.1
Non-residential real estate 19,888 5.5
Construction 6,858 1.9
---------------------
Total real estate loans 256,358 71.1
Other:
Consumer finance 52,491 14.6
Commercial 17,436 4.8
Home equity and improvement 10,265 2.8
Mobile home 24,191 6.7
---------------------
Total non-real estate loans 104,383 28.9
---------------------
Total loans 360,741 100.0%
=====
Less:
Loans in process 3,440
Deferred loan origination fees 631
Allowance for loan losses 1,733
--------
Net loans $354,937
========
Included above, First Defiance had $119.9 million, $87,500, $558,600
and $3.8 million in loans classified as held for sale at December 31, 1998,
1997, 1996 and 1995, respectively. The fair value of such loans, which are all
single-family residential mortgage loans, exceeded their carrying value by
$187,000, $2,000, $5,000 and $64,000 as of December 31, 1998, 1997, 1996 and
1995, respectively.
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1998 regarding the dollar
amount of loans maturing in First Defiance's portfolio, based on the contractual
terms to maturity, before giving effect to net items. Demand loans, loans having
no stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.
Due 3-5 Due 5-10 Due 10-15 Due 15+
Due Due Years Years Years Years
Before Before After After After After
12/31/99 12/31/00 12/31/98 12/31/98 12/31/98 12/31/98 Total
---------------------------------------------------------------------------------------
(In thousands)
Real estate $123,290 $13,534 $ 51,125 $78,332 $63,237 $74,055 $403,573
Non-real estate:
Commercial 26,424 11,377 14,729 11,443 1,938 4,198 70,109
Home equity and
improvement 3,613 711 1,713 1,331 195 10,605 18,168
Mobile home 238 229 751 999 574 326 3,117
Consumer finance 28,718 22,401 34,854 1,146 49 - 87,168
---------------------------------------------------------------------------------------
Total $182,283 $48,252 $103,172 $93,251 $65,993 $89,184 $582,135
=======================================================================================
The schedule above does not reflect the actual life of the Company's
loan portfolio. The average life of loans is substantially less than their
contractual terms because of prepayments and due-on-sale clauses, which give
First Defiance the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid.
The following table sets forth the dollar amount of all loans, before
net items, due after one year from December 31, l998 which have fixed interest
rates or which have floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
-----------------------------------------------------
(In thousands)
Real estate $206,437 $73,846 $280,283
Non-real estate:
Commercial 35,370 8,315 43,685
Other 64,658 11,226 75,884
-----------------------------------------------------
$306,465 $93,387 $399,852
=====================================================
Originations, Purchases and Sales of Loans. The lending activities of
First Defiance are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Board of Directors
and management. Loan originations are obtained from a variety of sources,
including referrals from real estate brokers, developers, builders, and existing
customers; newspapers and radio advertising; and walk-in customers.
First Defiance's loan approval process for all types of loans is
intended to assess the borrowers ability to repay the loan, the viability of the
loan, and the adequacy of the value of the collateral that will secure the loan.
A commercial credit is first reviewed and underwritten by a commercial
loan officer, who may approve credits within their lending limit. Credits
exceeding an individual's lending limit may be approved by another loan officer
with limits sufficient to cover the exposure. All credits which exceed $100,000
in aggregate exposure must be presented for approval to the Senior Loan
Committee, a committee of senior lending personnel. Credits which exceed
$250,000 in aggregate exposure must be presented to for approval to the
Executive Loan Committee, a sub-committee of the Board of Directors.
A mortgage loan is initially reviewed by a mortgage loan originator.
Approval for conforming mortgage loans which are sold to the secondary market
occurs centrally by the Chief Underwriter or the Vice President of Mortgage
Lending. Non-conforming mortgage loans must be approved by either the Vice
President of Mortgage Lending or the Executive Vice President of Lending.
A consumer loan officer underwrites and may approve direct consumer
credits within their lending limits. Credits exceeding an officer's lending
limits may be approved by another loan officer with limits sufficient to cover
the exposure. All indirect consumer credits are underwritten and approved
centrally.
First Defiance offers adjustable-rate loans in order to decrease the
vulnerability of its operations to changes in interest rates. The demand for
adjustable-rate loans in First Defiance's primary market area has been a
function of several factors, including customer preference, the level of
interest rates, the expectations of changes in the level of interest rates and
the difference between the interest rates offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
Adjustable rate loans represented 14.0% of First Federal's total
originations of mortgage loans in 1998 compared to 34.7% and 26.0% during 1997
and 1996, respectively. First Defiance continues to hold adjustable-rate
securities in order to further reduce its interest-rate gap.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.
The following table shows total loans originated, loan reductions, and
the net increase in First Defiance's total loans during the periods indicated:
Year ended December 31
1998 1997 1996
-----------------------------------------------------
(In thousands)
Loan originations:
One to four family residential $163,355 $ 72,752 $ 70,494
Five or more family residential 2,168 1,464 1,414
Non-residential real estate 4,025 5,153 5,006
Construction 13,852 11,044 15,936
Commercial 98,148 31,435 25,298
Mobile home 3,083 5,945 6,465
Home equity and improvement 15,381 10,103 6,448
Consumer 60,068 54,994 53,698
-----------------------------------------------------
Total loans originated 360,080 192,890 184,759
Loans acquired through purchase of The Leader:
One to four family residential 127,170 - -
Five or more family residential 4,302 - -
-----------------------------------------------------
131,472 - -
Purchase of one to four family residential 596,681 - -
Loan reductions:
Loan pay-offs 185,793 106,840 87,879
Mortgage loans sold 674,066 8,242 13,332
Periodic principal repayments 94,570 52,661 51,915
-----------------------------------------------------
954,429 167,743 153,126
-----------------------------------------------------
Net increase in total loans $133,804 $ 25,147 $ 31,633
=====================================================
Asset Quality
First Defiance's credit policy establishes guidelines to manage credit
risk and asset quality. These guidelines include loan review and early
identification of problem loans to ensure sound credit decisions. First
Defiance's credit policies and review procedures are meant to minimize the risk
and uncertainties inherent in lending. In following the policies and procedures,
management must rely on estimates, appraisals and evaluations of loans and the
possibility that changes in these could occur because of changing economic
conditions.
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1998, in dollar amount and as a percentage of
First Defiance's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
Non-residential and
Single-family multi-family Home equity
residential residential Mobile home and improvement
----------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans delinquent for:
30-59 days $ 887 .15% $197 .03% $ 638 .11% $70 .01%
60-89 days 289 .05 267 .05
90 days and over 11,173 1.92 180 .03
====================================================================================================
Total delinquent loans $12,349 2.12% $197 .03% $1,085 .19% $70 .01%
====================================================================================================
Consumer
finance Commercial Total
-------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage
-------------------------------------------------------------------------
(Dollars in thousands)
Loans delinquent for:
30-59 days $1,378 .24% $ 925 .16% $ 4,095 .70%
60-89 days 392 .07 948 .17
90 days and over 171 .03 1,330 .23 12,854 2.21
=========================================================================
Total delinquent loans $1,941 .34% $2,255 .39% $17,897 3.08%
=========================================================================
Non-Performing Assets. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, First Defiance places all loans more than 90 days past due
on non-accrual status. When a loan is placed on non-accrual status, total unpaid
interest accrued to date is reserved. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. First Defiance
considers that a loan is impaired when, based on current information and events,
it is probable that they will be unable to collect all amounts due (both
principal and interest) according to the contractual terms of the loan
agreement. When a loan is impaired, First Defiance measures impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral, if collateral dependent. If the measure of the impaired loan
is less than the recorded investment, First Defiance will recognize an
impairment by creating a valuation allowance. This policy excludes large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment such as residential mortgage, consumer installment, and credit card
loans. Impairment of loans having recorded investments of $427,000, $537,000 and
$1.6 million has been recognized as of December 31, 1998, 1997 and 1996,
respectively. Interest received and recorded in income during 1998, 1997 and
1996 on impaired loans including interest received and recorded in income prior
to such impaired loan designation amounted to $155,000, $53,000 and $156,000,
respectively. Unrecorded interest income on these and all non-performing loans
in 1998, 1997 and 1996 was $36,000, $24,000 and $34,000, respectively. The
average recorded investment in impaired loans during 1998, 1997 and 1996 was
$427,000, $1.30 million and $1.45 million, respectively. The total allowance for
loan losses related to these loans was $277,000, $327,000 and $804,000 at
December 31, 1998, 1997 and 1996, respectively.
Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. In addition, First Defiance also repossesses
other assets securing loans, consisting primarily of automobiles and mobile
homes. When such property is acquired it is recorded at the lower of the
restated loan balance, less any allowance for loss, or fair value. Costs
relating to development and improvement of property are capitalized, whereas
costs relating to holding the property are expensed. Valuations are periodically
performed by management and an allowance for losses is established by a charge
to operations if the carrying value of property exceeds its estimated net
realizable value.
As of December 31, 1998, First Defiance's total non-performing loans
amounted to $12,854,000 or 2.21% of total loans, compared to $1,365,000 or .30%
of total loans, at December 31, 1997.
The following table sets forth the amounts and categories of First
Defiance's nonperforming assets and troubled debt restructurings at the dates
indicated.
December 31
1998 1997 1996 1995 1994
--------------------------------------------------------------
(Dollars in thousands)
Non-performing loans:
Single-family residential $ 171 $ 313 $ 88 $263 $207
Mortgage banking activities 11,002 - - - -
Non-residential and multi-family
residential real estate - - 19 - 18
Commercial 1,330 570 1,561 268 294
Mobile home 180 315 193 130 163
Consumer finance 171 167 111 111 16
--------------------------------------------------------------
Total non-performing loans 12,854 1,365 1,972 772 698
Real estate owned 1,337 18 - 1 3
Other repossessed assets 180 523 267 172 164
--------------------------------------------------------------
Total repossessed assets 1,517 541 267 173 167
==============================================================
Total non-performing assets $ 14,371 $1,906 $2,239 $945 $865
==============================================================
Troubled debt restructurings $ - $ - $ - $437 $443
==============================================================
Total non-performing assets as a
percentage of total assets 1.83% .33% .41% .18% .18%
==============================================================
Total non-performing loans and troubled
debt restructurings as a percentage of
total loans 2.47% .43% .53% .35% .36%
==============================================================
Total non-performing assets and troubled
debt restructurings as a percentage of
total assets 1.83% .33% .41% .26% .28%
==============================================================
Allowance for loan losses as a percent of
total non-performing assets
68.1% 140.9% 99.0% 192.3% 200.5%
==============================================================
Allowance for Loan Losses. It is management's policy to maintain an
allowance for loan losses based upon an assessment of prior loss experience, the
volume and type of lending conducted by First Defiance, industry standards, past
due loans, general economic conditions and other factors related to the
collectibility of the loan portfolio. Although management believes that it uses
the best information available to make such determinations, future adjustments
to allowances may be necessary, and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations.
At December 31, l998, First Defiance's allowance for loan losses
amounted to $9.8 million compared to $2.7 million at December 31, 1997. As of
December 31, 1998 and l997, $1,073,000 and $499,000, respectively, constituted
an allowance with respect to specific loans or assets held for sale. Charge-offs
in non-real estate loans increased $387,000 for the year ended December 31, 1998
over 1997 due to increases in lending and delinquencies in this area.
The following table sets forth the activity in First Defiance's
allowance for loan losses during the periods indicated.
Year Ended December 31
1998 1997 1996 1995 1994
--------------------------------------------------------------
(Dollars in thousands)
Allowance at beginning of year $2,686 $2,217 $1,817 $1,733 $1,662
Provisions 7,769 1,613 1,020 374 426
Acquired allowance of The Leader 1,194 - - - -
Charge-offs:
Single-family real estate 352 - - - 19
Non-real estate:
Consumer finance 1,053 1,078 430 230 222
Mobile home 620 259 334 91 159
Commercial 55 4 12 23 1
--------------------------------------------------------------
Total non-real estate 1,728 1,341 776 344 382
--------------------------------------------------------------
Total charge-offs 2,080 1,341 776 344 401
Recoveries:
Consumer finance 220 195 152 51 46
Commercial - - 4 - -
Mobile home - 2 - - -
Assets held for sale - - 3 -
--------------------------------------------------------------
Total 220 197 156 54 46
--------------------------------------------------------------
Allowance at end of year $9,789 $2,686 $2,217 $1,817 $1,733
==============================================================
Allowance for loan losses to total
non-performing loans at end of year 76.2% 196.8% 112.4% 235.4% 248.3%
Allowance for loan losses to total loans
at end of year 1.68% .60% .52% .46% .48%
Allowance for loan losses to net
chargeoffs for the year 470.63 234.79 357.58 626.55 515.77
Net charge offs for the year to average
loans .36 .27 .16 .08 .10
The following table sets forth information concerning the allocation of
First Defiance's allowance for loan losses by loan categories at the dates
indicated. For information about the percent of total loans in each category to
total loans, see "- Lending Activities - Loan Portfolio Composition."
December 31
1998 1997 1996
------------------------------------------------------------------------------
Percent of Percent of Percent of
total loans total loans total loans
Amount by category Amount by category Amount by category
------------------------------------------------------------------------------
(Dollars in thousands)
Real estate mortgage loans $1,654 69.3% $ 351 65.8% $ 307 67.0%
Other:
Commercial business loans 1,760 12.0 828 6.6 866 6.3
Mobile home loans 1,309 .5 361 5.7 208 6.0
Consumer and home equity
and improvement loans 5,066 18.2 1,146 21.9 836 20.7
==============================================================================
$9,789 100.0% $ 2,686 100.0% $ 2,217 100.0%
==============================================================================
Sources of Funds
General. Deposits are the primary source of First Defiance's funds for
lending and other investment purposes. In addition to deposits, First Defiance
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
from the Federal Home Loan Bank may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. First Defiance's deposits are attracted principally from
within First Defiance's primary market area through the offering of a broad
selection of deposit instruments, including NOW accounts, money market accounts,
regular savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$52.8 million at December 31, l998. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
Average balances and average rates paid on deposits are as follows:
Year ended December 31
1998 1997 1996
----------------------- ----------------------- ------------------------
Amount Rate Amount Rate Amount Rate
------------ ------------ ------------ ------------ ------------ -------------
(Dollars in thousands)
Noninterest bearing
demand deposits $ 2,547 - % $ 2,545 - % $ 1,902 - %
Interest bearing demand
deposits 66,806 2.65 48,766 2.88 45,649 2.45
Savings deposits 56,135 1.95 63,028 2.58 67,926 3.00
Time deposits 283,766 5.44 268,235 5.58 265,967 5.80
-------- ---- -------- ---- -------- ----
Totals $409,254 4.48% $382,574 4.70% $381,444 4.87%
======== ==== ======== ==== ======== ====
The following table sets forth the maturities of First Defiance's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1998.
(In thousands)
Certificates of deposit maturing in quarter ending:
March 31, 1999 $ 8,776
June 30, 1999 11,072
September 30, 1999 6,428
December 31, 1999 6,424
After December 31, 1999 12,381
--------
Total certificates of deposit with
balances of $100,000 or more $45,081
========
The following table details the deposit accrued interest payable as of December
31:
1998 1997
---------------- -----------------
(In thousands)
Demand, NOW and money market accounts $ 78 $ 72
Savings Accounts 2 4
Certificates 645 1,325
---- ------
$725 $1,401
==== ======
For additional information regarding First Defiance's deposits see Note 9 to the
financial statements.
Borrowings. First Defiance may obtain advances from the FHLB of
Cincinnati upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. See "Regulation
- - Federal Regulation of Savings Associations - Federal Home Loan Bank System."
The following table sets forth certain information as to First
Defiance's FHLB advances at the dates indicated.
December 31
1998 1997 1996
-----------------------------------------------------
(Dollars in thousands)
Long-term:
FHLB advances $98,497 $ 4,529 $ 5,601
Weighted average interest rate 4.93% 6.57% 6.58%
Short-term:
FHLB advances $69,645 $67,136 $35,220
Weighted average interest rate 5.18% 5.85% 6.28%
The following table sets forth the maximum month-end balance and
average balance of First Defiance's FHLB advances during the periods indicated.
Year ended December 31
1998 1997 1996
-----------------------------------------------------
(Dollars in thousands)
Long-term:
Maximum balance $98,497 $ 5,601 $ 6,842
Average balance 21,829 4,529 6,115
Weighted average interest rate of FHLB advances 5.87% 6.19% 6.59%
Short-term:
Maximum balance $69,645 $70,135 $35,220
Average balance 49,462 53,039 8,310
Weighted average interest rate of FHLB advances 5.43% 5.77% 5.59%
$2.2 million of First Defiance's outstanding long-term FHLB advances
were obtained in the first calendar quarter of 1992 as part of the Company's
asset and liability management strategy and $1.3 million were obtained in the
fourth quarter in 1995 as part of the FHLB's Affordable Housing Program. First
Defiance utilizes short-term advances from the FHLB to meet cash flow needs and
for short-term investment purposes. There were $69.6 and $67.1 million in
short-term advances outstanding at December 31, 1998 and 1997, respectively.
First Defiance borrows funds under a variety of programs at the FHLB. At
December 31, 1998, $68.0 million was outstanding under First Defiance's REPO
Advance line of credit. The total available under the REPO line is $150.0
million. Amounts are generally borrowed under the REPO line on an overnight
basis. The $1.6 million of other advances are borrowed under the FHLB's
short-term fixed or LIBOR based programs.
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar amounts
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates, and the net interest margin. Dividends received on
Federal Home Loan Bank stock are included as interest income. The table does not
reflect the effect of income taxes.
Year Ended December 31,
-----------------------------------------------------------------------------------
1998 1997
----------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate
------------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Interest-Earning Assets
Loans receivable $521,968 $43,369 8.31% $428,550 $37,302 8.70%
Securities 81,320 5,082 6.25 103,304 6,556 6.35
Interest bearing deposits 12,259 605 4.94 - - -
Dividends on FHLB stock 4,669 334 7.15 3,355 242 7.21
------------- ------------- ------------- ------------- ------------- -------------
Total interest-earning assets 620,216 49,390 7.96 535,209 44,100 8.24
Non-interest-earning assets 78,706 25,500
============= =============
Total assets $698,922 $560,709
============= =============
Interest-Bearing Liabilities
Deposits $409,254 18,340 4.48 $382,574 17,992 4.70
FHLB advances 75,062 4,171 5.56 58,100 3,394 5.84
Warehouse and term notes payable 87,668 4,435 5.06 - - -
------------- ------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities 571,984 26,946 4.71 440,674 21,386 4.85
Non-interest-bearing liabilities 23,046 4,804
------------- -------------
Total liabilities 595,030 445,478
Stockholders' equity 103,892 115,231
============= =============
Total liabilities and stockholders' equity $698,922 $560,709
============= =============
Net interest income; interest rate spread $22,444 3.25% $22,714 3.39%
============= =============
============= =============
Net interest margin (2) 3.62% 4.24%
============= =============
Average interest-earning assets to average
interest-bearing liabilities 108% 121%
============= =============
------------------------------------------
1996
------------------------------------------
Average Yield/
Balance Interest Rate
------------- ------------- --------------
(Dollars in thousands)
Interest-Earning Assets
Loans receivable $399,949 $34,635 8.66%
Securities 107,702 6,622 6.15
Interest bearing deposits - - -
Dividends on FHLB stock 2,955 207 7.00
------------- ------------- --------------
Total interest-earning assets 510,606 41,464 8.12
Non-interest-earning assets 18,257
=============
Total assets $528,863
=============
Interest-Bearing Liabilities
Deposits $381,444 $18,579 4.87
FHLB advances 15,828 880 5.56
Warehouse and term notes payable - - -
------------- ------------- --------------
Total interest-bearing liabilities 397,272 19,459 4.90
Non-interest-bearing liabilities 4,311
-------------
Total liabilities 401,583
Stockholders' equity 127,280
=============
Total liabilities and stockholders' equity $528,863
=============
Net interest income; interest rate spread $22,005 3.22%
============= ==============
Net interest margin (2) 4.31%
==============
Average interest-earning assets to average
interest-bearing liabilities 129%
==============
(1) At December 31, 1998, the yields earned and rates paid were as follows:
loans receivable, 7.81%; securities, 6.41%; other interest-earning assets,
7.00%; total interest-earning assets, 7.67%; deposits, 4.17%; FHLB
advances, 5.12%; total interest-bearing liabilities, 4.44%; and interest
rate spread 3.23%.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected First
Defiance's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) change in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
Year Ended December 31,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------------------- -----------------------------------------
Increase Increase Increase Increase
(decrease) (decrease) Total (decrease) (decrease) Total
due to due to increase due to due to increase
rate volume (decrease) rate volume (decrease)
------------- ------------- ------------- ------------- ------------- -------------
(In thousands)
Interest-Earning Assets
Loans $(2,064) $ 8,131 $ 6,067 $ 190 $2,477 $2,667
Securities (79) (1,395) (1,474) 204 (270) (66)
Interest bearing deposits - 605 605 - - -
FHLB stock (3) 95 92 7 28 35
============= ============= ============= ============= ============= =============
Total interest-earning assets $(2,146) $ 7,436 $ 5,290 $ 401 $2,235 $2,636
============= ============= ============= ============= ============= =============
Interest-Bearing Liabilities
Deposits $ (907) $ 1,255 $ 348 $(642) $ 55 $ (587)
FHLB advances (214) 991 777 164 2,350 2,514
Warehouse and term notes payable - 4,435 4,435 - - -
============= ============= ============= ============= ============= =============
Total interest-bearing liabilities $(1,121) $ 6,681 $ 5,560 $(478) $2,405 $1,927
============= ============= ============= ============= ============= =============
Increase (decrease) in net interest income $ (270) $ 709
============= =============
Year Ended December 31,
------------------------------------------
1996 vs. 1995
------------------------------------------
Increase Increase
(decrease) (decrease) Total
due to due to increase
rate volume (decrease)
------------- ------------- --------------
(In thousands)
Interest-Earning Assets
Loans $(146) $2,778 $2,632
Securities (29) 89 60
Interest bearing deposits - - -
FHLB stock 5 11 16
============= ============= ==============
Total interest-earning assets $(170) $2,878 $2,708
============= ============= ==============
Interest-Bearing Liabilities
Deposits $(522) $ 244 $ (278)
FHLB advances (335) (217) (552)
Warehouse and term notes payable - - -
============= ============= ==============
Total interest-bearing liabilities $(857) $ 27 $ (830)
============= ============= ==============
Increase (decrease) in net interest income $3,538
==============
Employees
First Defiance had 328 full-time employees at December 31, 1998. None
of these employees are represented by a collective bargaining agent, and First
Defiance believes that it enjoys good relations with its personnel.
Competition
The industries in which the Company operates are highly competitive.
The Company competes for the acquisition of mortgage loan servicing rights and
bulk loan portfolios mainly with mortgage companies, savings associations,
commercial banks and other institutional investors. The Company believes that it
has competed successfully for the acquisition of mortgage loan servicing rights
and bulk loan portfolios by relying on the advantages provided by its unique
corporate structure and the secondary marketing expertise of the employees in
each Subsidiary.
Competition in originating mortgage loans arises mainly from other
mortgage companies, savings associations and commercial banks. The distinction
among market participants is based primarily on price and, to a lesser extent,
the quality of customer service and name recognition. Aggressive pricing
policies of the Company's competitors, especially during a declining period of
mortgage loan originations, could in the future result in a decrease in the
Company's mortgage loan origination volume and/or a decrease in the
profitability of the Company's loan originations, thereby reducing the Company's
revenues and net income. The Company competes for loans by offering competitive
interest rates and product types and by seeking to provide a higher level of
personal service to mortgage brokers and borrowers than is furnished by
competitors. However, the First Federal does have a significant market share of
the lending markets in which it conducts operations.
Management believes that First Federal's most direct competition for
deposits comes from local financial institutions. The distinction among market
participants is based primarily on price and, to a lesser extent, the quality of
customer service and name recognition. First Federal's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities, as well as from money market mutual funds.
First Federal competes for conventional deposits by emphasizing quality of
service, extensive product lines and competitive pricing.
REGULATION
General. First Defiance, First Federal, and Leader are subject to
regulation, examination and oversight by the OTS. Because First Federal's
deposits are insured by the FDIC, First Federal is also subject to examination
and regulation by the FDIC. First Defiance and First Federal must file periodic
reports with the OTS and examinations are conducted periodically by the OTS and
the FDIC to determine whether First Federal is in compliance with various
regulatory requirements and is operating in a safe and sound manner. First
Federal is a member of the FHLB of Cincinnati.
First Federal and Leader are subject to various consumer protection and
fair lending laws. These laws govern, among other things, truth-in-lending
disclosure, equal credit opportunity, and, in the case of First Federal, fair
credit reporting and community reinvestment. Failure to abide by federal laws
and regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger transaction. Community
reinvestment regulations evaluate how well and to what extent an institution
lends and invests in its designated service area, with particular emphasis on
low-to-moderate income communities and borrowers in such areas. First Federal
has received a satisfactory examination rating under those regulations.
First Defiance is also subject to various Ohio laws which restrict
takeover bids, tender offers and control-share acquisitions involving public
companies which have significant ties to Ohio.
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. The following table
sets forth the amount and percentage level of regulatory capital of First
Federal at December 31, 1998, and the amount by which it exceeds the minimum
capital requirements. Tangible and core capital are reflected as a percentage of
adjusted total assets. Total (or risk-based) capital, which consists of core and
supplementary capital, is reflected as a percentage of risk-weighted assets.
Assets are weighted at percentage levels ranging from 0% to 100% depending on
their relative risk.
At December 31, 1998
-----------------------------------
Amount Percent
(In thousands)
Tangible capital $52,265 6.80%
Requirement 11,537 1.50
================= =================
Excess $40,728 5.30%
================= =================
Core capital $52,265 6.80%
Requirement 30,766 3.00
================= =================
Excess $21,499 3.80%
================= =================
Risk-based capital $82,187 14.82%
Risk-based requirement 44,363 8.00
================= =================
Excess $37,824 6.82%
================= =================
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital of 3.0% of adjusted total assets and
risk-based capital of 8% of risk-weighted assets. The OTS has proposed to amend
the core capital requirement so that those associations that do not have the
highest examination rating and exceed an acceptable level of risk will be
required to maintain core capital of from 4% to 5%, depending on the
association's examination rating and overall risk. First Federal does not
anticipate that it will be adversely affected if the core capital requirement
regulation is amended as proposed. First Federal's current core capital level is
6.80% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individual basis for
any association to take into account risks due to concentrations of credit and
non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (1) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (2) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of at least 8%,
core risk-based capital (consisting only of items that qualify for inclusion in
core capital) of at least 4% and core capital of at least 4% (except for
associations receiving the highest examination rating and with an acceptable
level of risk, in which case the level is at least 3%); (3) undercapitalized
associations are those that do not meet regulatory limits, but that are not
significantly undercapitalized; (4) significantly undercapitalized associations
have total risk-based capital of less than 6%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of less
than 3% or core capital of less than 3%; and (5) critically undercapitalized
associations are those with tangible equity of less than 2% of total assets. In
addition, the OTS generally can downgrade an association's capital category,
notwithstanding its capital level, if, after notice and opportunity for hearing,
the association is deemed to be engaging in an unsafe or unsound practice
because it has not corrected deficiencies that resulted in it receiving a less
than satisfactory examination rating on matters other than capital or it is
deemed to be in an unsafe or unsound condition. An undercapitalized association
must submit a capital restoration plan to the OTS and is subject to increased
monitoring and growth restrictions. Critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. First Federal's
capital at December 31, 1998, meets the standards for a well-capitalized
institution.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
to stock form is prohibited from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. OTS
regulations also establish a three-tier system limiting capital distributions
according to ratings of associations based on their capital level and
supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year equal to
the greater of 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. A Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association. Tier
2 consists of associations that before and after the proposed distribution meet
their current minimum, but not fully phased-in, capital requirements, as such
requirements are defined by OTS regulations. Associations in this category may
make capital distributions of up to 75% of net income over the four most recent
quarters. Tier 3 associations do not meet current minimum capital requirements
and must obtain OTS approval of any capital distribution.
First Federal meets the requirements for a Tier 1 Association and has
not been notified of any need for more than normal supervision. As a subsidiary
of First Defiance, First Federal is required to give the OTS 30 days notice
prior to declaring any dividend on its common shares. The OTS may object to the
dividend during that 30-day period based on safety and soundness concerns.
Moreover, the OTS may prohibit any capital distribution otherwise permitted by
regulation if the OTS determines that such distribution would constitute an
unsafe or unsound practice. First Federal paid dividends of $20 million to First
Defiance during 1998.
Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 4% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet liquidity
requirements. The eligible liquidity of First Federal, as computed under current
regulations, at December 31, 1998, was $48.3 million, or 10.01% and exceeded the
4.0% liquidity requirement by approximately $29 million.
Qualified Thrift Lender Test. Savings associations are required to meet
the Qualified Thrift Lender ("QTL") Test. Prior to September 30, 1996, the QTL
Test required savings associations to maintain a specified level of investments
in assets that are designated as qualifying thrift investments ("QTI"), which
are generally related to domestic residential real estate and manufactured
housing and include stock issued by any FHLB, the FHLMC or the FNMA. Under this
test 65% of an institution's "portfolio assets" (total assets less goodwill and
other intangibles, property used to conduct business and 20% of liquid assets)
must consist of QTI on a monthly average basis in 9 out of every 12 months.
Congress created a second QTL Test, effective September 30, 1996, pursuant to
which a savings association may also qualify as a QTL thrift if at least 60% of
the institution's assets (on a tax basis) consist of specified assets (generally
loans secured by residential real estate or deposits, educational loans, cash
and certain governmental obligations). The OTS may grant exceptions to the QTL
Test under certain circumstances. If a savings association fails to meet the QTL
Test, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
the QTL Test will not be eligible for new FHLB advances. At December 31, 1998,
First Federal met the QTL Test.
Lending Limits. OTS regulations generally limit the aggregate amount
that a savings association may lend to one borrower (the "Lending Limit") to an
amount equal to 15% of the savings association's total capital under the
regulatory capital requirements plus any additional loan reserve not included in
total capital (the "Lending Limit Capital"). A savings association may loan to
one borrower an additional amount not to exceed 10% of total capital plus
additional reserves if the additional loan amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to these limits.
In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At December 31, 1998, First Federal was in
compliance with this lending limit.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the Lending Limit, and the total of such loans cannot exceed the association's
Lending Limit Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject to
additional restrictions. First Federal was in compliance with such restrictions
at December 31, 1998.
All transactions between savings associations and their affiliates must
comport with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. First
Defiance is an affiliate of First Federal. Generally, Sections 23A and 23B of
the FRA (i) limit the extent to which a savings association or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, (ii) limit the aggregate
of all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. First Federal was
in compliance with these requirements and restrictions at December 31, 1998.
Federal Deposit Insurance Corporation Regulations. The FDIC has
examination authority over all insured depository institutions, including First
Federal, and has authority to initiate enforcement actions if the FDIC does not
believe the OTS has taken appropriate action to safeguard safety and soundness
and the deposit insurance fund.
The FDIC administers two separate insurance funds, the Bank Insurance
Fund ("BIF") for commercial banks and state savings banks and the SAIF for
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Federal legislation, which was effective September 30, 1996, provided
for the racapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase the SAIF
reserves to the level required by law. First Federal paid a special assessment
of $2.5 million, which was accounted for and recorded as of September 30, 1996.
FRB Reserve Requirements. FRB regulations currently require that
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $46.5
million (subject to an exemption of up to $4.9 million), and of 10% of net
transaction accounts in excess of $46.5 million. At December 31, 1998, First
Federal was in compliance with its reserve requirements.
Federal Home Loan Banks. The FHLBs provide credit to their members in
the form of advances. First Federal is a member of the FHLB of Cincinnati and
must maintain an investment in the capital stock of that FHLB in an amount equal
to the greater of 1.0% of the aggregate outstanding principal amount of First
Federal's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
First Federal is in compliance with this requirement with an investment in stock
of the FHLB of Cincinnati of $10.8 million at December 31, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
Holding Company Regulation. First Defiance is a unitary savings and
loan holding company and is subject to OTS regulations, examination, supervision
and reporting requirements.
There are generally no restrictions on the activities of unitary
savings and loan holding companies. The broad latitude to engage in activities
under current law can be restricted if the OTS determines that there is
reasonable cause to believe that the continuation of an activity by a savings
and loan holding company constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At December 31, 1998, First Federal met the QTL
Test.
Federal law generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. If First Defiance were to acquire control of another
savings institution, other than through a merger or other business combination
with First Federal, First Defiance would become a multiple savings and loan
holding company. Unless the acquisition is an emergency thrift acquisition and
each subsidiary savings association meets the QTL Test, the activities of First
Defiance and any of its subsidiaries (other than First Federal or other
subsidiary savings associations) would thereafter be limited generally to those
activities authorized by the FRB as permissible for bank holding companies,
unless the OTS by regulation prohibits or limits such activities for savings and
loan holding companies. Those activities must also be approved by the OTS prior
to being engaged in by a multiple holding company.
For several years, Congress has been considering various changes to the
powers, activities and regulation of banks and savings associations and their
holding companies and subsidiaries. First Defiance cannot predict at this time
whether and when Congress will actually adopt "financial modernization"
legislation or in what form it will be adopted. Proposals currently being
considered would expand the range of activities in which banks and their
affiliates may engage and restrict the range of activities in which savings
associations and their affiliates may engage. It is not anticipated that the
current activities of First Defiance and its subsidiaries will be materially
affected by any such legislation.
Mortgage Banking Operations. Because The Leader conducts business with
various government sponsored enterprises and government agencies, it is required
in those cases to utilize underwriting guidelines which, among other things,
include anti-discrimination provisions, require provisions for inspections,
appraisals and credit reports on prospective borrowers and fix maximum loan
amounts. Moreover, the Leader is required annually to submit to HUD, FNMA, GNMA
and FHLMC audited financial statements, and each regulatory entity maintains its
own financial guidelines for determining net worth and eligibility requirements.
The Leader's affairs are also subject to examination by HUD, FNMA, GNMA and
FHLMC at any time to assure compliance with the applicable regulations, policies
and procedures. Mortgage loan origination activities are subject to, among other
things, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the
Real Estate Settlement Procedures Act of 1974, as amended, and the regulations
promulgated thereunder that prohibit discrimination and require the disclosure
of certain basic information to mortgagors concerning credit terms and
settlement costs.
Additionally, there are various state and local laws and regulations
affecting the Leader's operations. The Leader is licensed in those states in
which it does business requiring such a license where failure to be licensed
would have a material adverse effect on First Defiance, The Leader, its
business, or its assets.
Mortgage origination operations also may be subject to state usury statutes.
Insurance Operations. The Insurance Center of Defiance and its agents
are appropriately licensed to sell property and casualty and life insurance
products. The Insurance Center is subject to the regulation by the Ohio
Department of Insurance.
TAXATION
Federal Taxation
The Company and its subsidiaries are each subject to the federal tax
laws and regulations which apply to corporations generally. Certain thrift
institutions, including First Federal, were prior to the enactment of the Small
Business Jobs Protection Act, which was signed into law on August 21, 1996,
allowed deductions for bad debts under methods more favorable than those granted
to other taxpayers. Qualified thrift institutions could compute deductions for
bad debts using either the specific charge off method of Section 166 of the
Code, or the reserve method of Section 593 of the Code under which a thrift
institution annually could elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax year 1995, First Federal used the
percentage of taxable income method.
Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that would
be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method. First for
purposes of this method, First Federal was treated as a large bank. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt treated such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves being taken into account
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (ie., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans and its reserve for losses on nonqualifying loans
as of the close of its last taxable year beginning before January 1, 1996, over
(ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the
thrift's reserves would have been at the close of its last year beginning before
January 1, 1996, had the thrift always used the experience method.
For taxable years that began after December 31, 1995, and before
January 1, 1998, if a thrift met the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year was
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year was
not less than its base amount. The "base amount" generally was the average of
the principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. First Federal met the
test for 1996 and 1997 and the Section 481(a) adjustment was suspended until
1998.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct, or improve the property.
In addition to the regular income tax, the Company and its subsidiaries
are subject to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1996, the Company and its subsidiaries are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2.0 million.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by First Federal to the Company is deemed paid out of its pre-1988 reserves
under these rules, the pre-1988 reserves would be reduced and First Federal's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of December 31, 1998, First Federal's pre-1988 reserves for tax purposes
totaled approximately $9.52 million.
The tax returns of First Federal have been audited or closed without
audit through the tax year ended December 31, 1994. The tax returns for The
Leader have been closed through their tax year ended September 30, 1994. In the
opinion of management, any examination of open returns would not result in a
deficiency which would have a material adverse effect on the financial condition
of First Defiance.
Ohio Taxation
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.4% times taxable net worth.
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock of First Federal after the
Conversion, as reflected on the balance sheet of the Company, in computing its
taxable net worth as long as it owns at least 25% of the issued and outstanding
capital stock of First Federal. The calculation of the exclusion from net worth
is based on the ratio of the excludable investment (net of any appreciation or
goodwill included in such investment) to total assets multiplied by the net
value of the stock. As a holding company, the Company may be entitled to various
other deductions in computing taxable net worth that are not generally available
to operating companies. Effective for the 1999 tax year, a corporation that
qualifies as a "qualifying holding company" is exempt from tax on the net worth
basis, to be considered a qualifying holding company, a corporation must satisfy
certain criteria and must make an annual election to be treated as a qualified
holding company for the purposes. Generally, to qualify as a qualifying holding
company, a large portion of a corporations assets and income must be
attributable to holdings in other corporations or business organizations.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of First
Federal's book net worth determined in accordance with GAAP. Effective for the
1999 tax year, the tax rate is 1.4% of book net worth. As a "financial
institution," First Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio. On December 31, 1998, The Leader was
converted to a single-member Limited Liability Corporation. As such, its
operations are not subject to state taxation as a separate entity.
Item 2. Properties
At December 31, 1998, First Federal conducted its business from its
main office at 601 Clinton Street, Defiance, Ohio, and eleven other full service
branches in northwestern Ohio. At December 31, 1998, The Leader conducted its
business from leased office space at 1015 Euclid Avenue, Cleveland, Ohio. The
Insurance Center of Defiance conducted its business from leased office space at
507 5th Street, Defiance, Ohio.
First Defiance maintains its headquarters in the main office of First
Federal at 601 Clinton Street, Defiance, Ohio.
The following table sets forth certain information with respect to the
office and other properties of the Company at December 31, l998. See Note 8 to
the Consolidated Financial Statements.
Net book value
Description/address Leased/owned of property Deposits
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Main Office
601 Clinton Street Owned $ 6,031 $183,805
Defiance, OH
Branch Offices
204 E. High Street Owned 1,209 80,049
Bryan, OH
211 S. Fulton Street Owned 857 42,332
Wauseon, OH
625 Scott Street Owned 1,729 64,378
Napoleon, OH
1050 East Main Street Owned 649 18,370
Montpelier, OH
926 East High Street Owned 120 7,073
Bryan, OH
1333 Woodlawn Owned 91 14,765
Napoleon, OH
825 N. Clinton Street Owned 420 8,889
Defiance, OH
Inside Super K-Mart Leased 153 3,974
190 Stadium Dr.
Defiance, OH
905 N. Williams St. Owned 1,179 7,358
Paulding, OH
201 E. High St. Owned 636 2,986
Hicksville, OH
Main Office, The Leader
1015 Euclid Avenue Leased 36 N/A
Cleveland, OH
Main Office, Insurance
Center of Defiance
507 5th Street Leased 3 N/A
Defiance, OH
========================================
$13,113 $433,979
========================================
Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of First Defiance.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of securities holders during the
fourth quarter of l998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference from page
40 of First Defiance's Annual Report to Stockholders for fiscal 1998 ("Annual
Report"), which is included herein as Exhibit 13.
Item 6. Selected Financial Data
The information required herein is incorporated by reference from pages
6 through 7 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages
8 through 16 of the Annual Report.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The information required herein is incorporated by reference from pages
12 and 13 of the Annual Report.
Item 8. Financial Statements and Supplementary Data
The financial statements and report of independent auditors required
herein are incorporated by reference from pages 17 through 40 of the Annual
Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from pages
6 through 13 of the definitive proxy statement dated March 22, 1999. Otherwise,
the requirements of this Item 10 are not applicable.
Item 11. Executive Compensation
The information required herein is incorporated by reference from page
13 of the definitive proxy statement dated March 22, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference from page
3 of the definitive proxy statement dated March 22, 1999.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page
20 of the definitive proxy statement dated March 22, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following financial statements and report of independent auditors
are incorporated herein by reference from pages 17 through 40 of the Annual
Report:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are included in the Notes to Financial Statements
incorporated herein by reference and therefore have been omitted.
(3) Exhibits
The following exhibits are either filed as a part of this report or are
incorporated herein by reference to documents previously filed as indicated
below:
Exhibit
Number Description
- ----------------------------------------------------------------------------
3.1 Articles of Incorporation *
3.2 Form of Code of Regulations *
3.2 Bylaws *
4.1 Specimen Stock Certificate *
10.1 1996 Stock Option Plan **
10.2 1996 Management Recognition Plan and Trust ***
10.3 1993 Management Recognition Plan and Trust *
10.4 1993 Stock Incentive Plan *
10.5 1993 Directors' Stock Option Plan *
10.6 Employment Agreement with Don C. Van Brackel *
13 Annual Report to Shareholders and Notice of
Annual Meeting of
Shareholders and Proxy Statement ****
21.1 List of Subsidiaries of the Company ****
23.1 Consent of Independent Auditors ****
* Incorporated herein by reference to the like numbered exhibit in the
Registrant's Form S-1 (File No. 33-93354).
** Incorporated herein by reference to Appendix A to the 1996 Proxy
Statement.
*** Incorporated herein by reference to Appendix B to the 1996 Proxy
Statement.
**** Included herein.
(b) Reports on Form 8-K
1. On October 30, 1998, First Defiance Financial Corp. ("First
Defiance") filed a current report on Form 8-K, dated October 30,
1998, reporting, pursuant to Item 5 of such form, entering into an
Agreement of Merger and Plan of Reorganization with the Insurance
Center of Defiance, Inc. ("the Agency"), and Ohio Corporation. The
Agreement provides for the formation by First Defiance of a
subsidiary that will be merged into the Agency, resulting in the
acquisition of the Agency by First Defiance. First Defiance also
announced on October 30, 1998, its intention to repurchase up to
15% of its outstanding shares, or 1,226,704 shares, in the open
market commencing no earlier than November 5, 1998.
2. On December 24, 1998, First Defiance filed a current report Form
8-K, dated December 24, 1998, reporting, pursuant to Item 5 of
such Form, the consummation of the acquisition of the Insurance
Center of Defiance. In payment for the Agency, First Defiance
issued 146,135 common shares to the Agency shareholders.
(c) See (a)(3) above for all exhibits filed herewith or incorporated herein
by reference to documents previously filed and the Exhibit Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to Stockholders
which are required to be included herein.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST DEFIANCE FINANCIAL CORP.
March 30, 1999 By: /s/ William J. Small
--------------------
William J. Small
Chairman, President, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 1999.
Signature Title
--------- -----
/s/ William J. Small
- -------------------- Chairman of the Board, President and
William J. Small CEO
- ------------------- Director, Executive Vice President,
P. Scott Carson President and COO, First Federal Savings
and Loan
/s/ John C. Wahl
- ---------------- Executive Vice President and CFO
John C. Wahl
/s/ Don C. Van Brachel
- ----------------------- Director, Vice Chairman
Don C. Van Brachel
/s/ Stephen L. Boomer Director
- ---------------------
Stephen L. Boomer
/s/ Dr. Douglas A. Burgei Director
- -------------------------
Dr. Douglas A. Burgei
Signature Title
--------- -----
/s/ Peter A. Diehl Director
- -------------------
Peter A. Diehl
/s/ Dr. John U. Fauster, III Director
- ----------------------------
Dr. John U. Fauster, III
/s/ Dr. Marvin J. Ludwig Director
- ------------------------
Dr. Marvin J. Ludwig
/s/ Gerald W. Monnin Director
- ---------------------
Gerald W. Monnin
/s/ Thomas A. Voigt Director
- -------------------
Thomas A. Voigt