UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For Period Ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from ___________to__________
Commission file number 0-26850
First Defiance Financial Corp.
------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1803915
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification) Number)
601 Clinton Street, Defiance, Ohio 43512
- ---------------------------------- ----------
(Address or principal executive office) (Zip Code)
Registrant's telephone number, including area code: (419) 782-5015
--------------
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value --
8,157,870 shares outstanding at August 7, 1998.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - June 30, 1998 and December 31, 1997
Consolidated Condensed Statements of Income Three
months ended June 30, 1998 and 1997;
Six months ended June 30, 1998 and 1997
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Six months ended
June 30, 1998
Consolidated Condensed Statements of Cash Flows
- Six months ended June 30, 1998 and 1997
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
June 30, 1998 December 31, 1997
------------- -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from
depository institutions ..................... $ 5,666 $ 8,149
Interest-bearing deposits ....................... -- 848
-------- --------
5,666 8,997
Securities:
Available-for-sale, carried at fair value ....... 66,670 82,436
Held-to-maturity, carried at amortized cost
(approximate fair value $16,977 and $21,370
at June 30, 1998 and December 31,
1997, respectively) ......................... 16,660 20,953
-------- --------
83,330 103,389
Loans held for sale (at lower of cost or fair value,
approximate fair value
$3,358 and $89 at June 30,
1998 and December 31,1997, respectively) ........ 3,309 88
Loans receivable, net ................................ 462,229 441,823
Accrued interest receivable .......................... 3,293 3,480
Federal Home Loan Bank stock ......................... 3,901 3,764
Office properties and equipment ...................... 18,114 16,799
Deferred federal income taxes ........................ 234 415
Real estate, mobile homes and other
assets held for sale ............................ 465 541
Other assets ......................................... 1,583 402
-------- --------
$582,124 $579,698
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ......................................... $ 404,493 $ 395,322
Advances from Federal Home Loan Bank ............. 66,140 71,665
Other liabilities ................................ 8,219 5,826
--------- ---------
Total liabilities ................................ 478,852 472,813
STOCKHOLDERS' EQUITY
Preferred stock, no par value per share:
5,000,000 shares authorized; no shares
issued ...................................... -- --
Common stock, $.01 par value per share:
20,000,000 shares authorized; 8,157,867 and
8,527,683 shares outstanding at June 30,
1998 and December 31, 1997, respectively .... 82 85
Additional paid-in capital ....................... 62,536 65,726
Stock acquired by ESOP ........................... (4,196) (4,534)
Stock acquired by Management
Recognition Plan ............................ (1,111) (1,387)
Net unrealized losses on available-for-sale
securities, net of income taxes of $7
and $25 at June 30, 1998 and
December 31, 1997, respectively ............. (14) (50)
Retained earnings - substantially restricted ..... 45,975 47,045
--------- ---------
Total stockholders' equity ....................... 103,272 106,885
--------- ---------
Total liabilities and stockholders' equity ....... $ 582,124 $ 579,698
========= =========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Mortgage and other loans ............. $ 9,894 $ 9,220 $19,647 $18,251
Investment securities ................ 1,425 1,501 3,005 3,059
Deposits with banks .................. 3 33 12 44
------- ------- ------- -------
Total interest income ...................... 11,322 10,754 22,664 21,354
Interest expense:
Deposits .............................. 4,625 4,487 9,180 8,833
Federal Home Loan Bank
advances and other borrowings ....... 964 697 1,935 1,316
------- ------- ------- -------
Total interest expense ..................... 5,589 5,184 11,115 10,149
------- ------- ------- -------
Net interest income ........................ 5,733 5,570 11,549 11,205
Provision for loan losses .................. 239 282 688 646
------- ------- ------- -------
Net interest income after provision
for loan losses ....................... 5,494 5,288 10,861 10,559
Non-interest expense ....................... 3,763 3,378 7,322 6,632
Non-interest income ........................ 585 357 1,069 693
------- ------- ------- -------
Income before income taxes ................. 2,316 2,267 4,608 4,620
Income taxes ............................... 771 746 1,555 1,541
------- ------- ------- -------
Net income ................................. $ 1,545 $ 1,521 $ 3,053 $ 3,079
======= ======= ======= =======
Earnings per share: (Note 4)
Basic ................................. $ .21 $ .18 $ .40 $ .36
======= ======= ======= =======
Diluted ............................... $ .20 $ .17 $ .39 $ .34
======= ======= ======= =======
Dividends declared per share (Note 3) ...... $ .09 $ .08 $ .18 $ .16
======= ======= ======= =======
Average number of shares
Outstanding: (Note 4)
Basic ........................ 7,464 8,622 7,553 8,612
======= ======= ======= =======
Diluted ...................... 7,814 8,937 7,917 8,926
======= ======= ======= =======
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
Stock Acquired By
-----------------------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ................. $ 85 $ 65,726 $ (4,534) $ (1,387)
Comprehensive income:
Net Income
Other comprehensive income, net of tax
ESOP shares released ................ 261 338
Change in unrealized gains (losses)
net of income taxes of $18
Amortization of deferred compensation
of Management Recognition Plan 276
Total comprehensive income
Stock issued under Option Plan ............... 1 392
Purchase of common stock for
treasury ................................. (4) (3,843)
Dividends declared (Note 3)
-------- -------- -------- --------
Balance at June 30, 1998 ..................... $ 82 $ 62,536 $ (4,196) $ (1,111)
======== ======== ======== ========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
Net Unrealized
losses on Total
available-for- Retained Stockholders'
sale securities Earnings Equity
--------------- -------- ------
<S> <C> <C> <C>
Balance at December 31, 1997 ................... $ (50) $ 47,045 $106,885
Comprehensive income:
Net Income ................................ 3,053 3,053
Other comprehensive income, net of tax:
ESOP shares released .................. 599
Change in unrealized gains (losses)
net of income taxes of $18 ....... 36 36
Amortization of deferred compensation
of Management Recognition Plan ... 276
--------
Total comprehensive income ..................... 3,964
Stock issued under Option Plan ................. 393
Purchase of common stock for
treasury ................................... (2,751) (6,598)
Dividends declared (Note 3) .................... (1,372) (1,372)
-------- -------- --------
Balance at June 30, 1998 ....................... $ (14) $ 45,975 $103,272
======== ======== ========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Six Months
Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Operating Activities
Net income ............................................... $ 3,053 $ 3,079
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................... 688 646
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ........ 506 366
Gain on sale or call of available-for-sale securities -- (12)
Gain on sale of loans ............................... (263) (68)
Amortization of Management Recognition Plan
deferred compensation ........................... 276 376
Release of ESOP Shares .............................. 599 488
Gain on disposal of office properties and equipment . (1) (3)
Deferred federal income tax provision (credit) ...... 163 (128)
Proceeds from sale of loans ......................... 15,107 3,778
Originations of loans held for sale ................. (18,065) (3,280)
Increase in interest receivable and other assets .... (994) (700)
Increase in other liabilities ....................... 2,425 190
-------- --------
Net cash provided by operating activities ................ 3,494 4,732
Investing Activities
Proceeds from maturities of held-to-maturity securities .. 4,274 2,339
Proceeds from maturities of available-for-sale securities 22,167 4,121
Proceeds from sales of available-for-sale securities ..... -- 2,350
Proceeds from sales of real estate, mobile homes, and
other assets held for sale .......................... 943 727
Proceeds from sales of office properties and equipment ... 15 3
Purchases of available-for-sale securities ............... (6,316) (99)
Purchases of Federal Home Loan Bank stock ................ (137) (164)
Purchases of office properties and equipment ............. (1,846) (2,644)
Net increase in loans receivable ......................... (21,961) (15,534)
-------- --------
Net cash used in investing activities .................... (2,861) (8,901)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Six Months Ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
Financing Activities
Net increase in deposits .............................. 9,171 868
Repayment of Federal Home Loan Bank long-term advances (725) (735)
Proceeds from Federal Home Loan Bank long-term advances 25,000 --
Net (decrease) increase in Federal Home Loan Bank
short-term advances .............................. (29,800) 7,314
Purchase of common stock for treasury ................. (6,598) (1,423)
Cash dividends paid ................................... (1,405) (1,414)
Proceeds from exercise of stock options ............... 393 16
-------- --------
Net cash (used in) provided by financing activities ... (3,964) 4,626
-------- --------
(Decrease) increase in cash and cash equivalents ...... (3,331) 457
Cash and cash equivalents at beginning of period ...... 8,997 4,752
-------- --------
Cash and cash equivalents at end of period ............ $ 5,666 $ 5,209
======== ========
Supplemental cash flow information:
Interest paid ......................................... $ 11,379 $ 9,841
======== ========
Income taxes paid ..................................... $ 1,354 $ 1,809
======== ========
Transfers from loans to real estate, mobile homes
and other assets held for sale ................... $ 867 $ 726
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities .... $ (18) $ (27)
======== ========
Noncash investing activities:
Decrease in net unrealized loss on
available-for-sale securities .................... $ 54 $ 80
======== ========
Noncash financing activities:
Cash dividends declared but not paid .................. $ 687 $ 706
======== ========
</TABLE>
See accompanying notes.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at June 30, 1998)
- --------------------------------------------------------------------------------
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance" or "the Company")) and its
wholly owned savings and loan, First Federal Savings and Loan ("First
Federal"). In the opinion of management, all significant intercompany
accounts and transactions have been eliminated in consolidation.
2. Basis of Presentation
The consolidated condensed statement of financial condition at December 31,
1997 has been derived from the audited financial statements at that date.
The accompanying consolidated condensed financial statements as of June 30,
1998 and for the three and six month periods ending June 30, 1998 and 1997
have been prepared by First Defiance without audit and do not include
information or footnotes necessary for the complete presentation of
financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in First Defiance's annual
report for the year ended December 31, 1997. However, in the opinion of
management, all adjustments, consisting of only normal recurring items,
necessary for the fair presentation of the financial statements have been
made. The results of operations for the three and six month periods ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year.
3. Dividends on Common Stock
As of June 30, 1998, First Defiance had declared a quarterly cash dividend
of $.09 per share for the second quarter of 1998, payable July 22, 1998.
4. Earnings Per Share
Basic earnings per share as disclosed under Financial Accounting Standard
("FAS") No. 128 has been calculated by dividing net income by the weighted
average number of shares of common stock outstanding for the three month
and six month periods ended June 30, 1998 and 1997. First Defiance accounts
for the shares issued to its Employee Stock Ownership Plan ("ESOP") in
accordance with Statement of Position 93-6 of the American Institute of
Certified Public Accountants ("AICPA"). As a result, shares controlled by
the ESOP are not considered in the weighted average number of shares of
common stock outstanding until the shares are committed for allocation to
an employee's individual account. In the calculation of diluted earnings
per share as of June 30, 1998 and 1997, the effect of shares issuable under
stock option plans and unvested shares under the Management Recognition
Plan have been accounted for using the Treasury Stock method.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 1997)
- --------------------------------------------------------------------------------
4. Earnings Per Share (cont.)
The following table sets forth the computation of basic and diluted earning
per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share - net income ....... $1,545 $1,521 $3,053 $3,079
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted average shares ..... 7,464 8,622 7,553 8,612
Effect of dilutive securities:
Employee stock options .............. 257 230 263 224
Unvested Management Recognition
Plan stock ...................... 93 85 101 90
------ ------ ------ ------
Dilutive potential common shares ...... 350 315 364 314
------ ------ ------ ------
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions ...... 7,814 8,937 7,917 8,926
------ ------ ------ ------
Basic earnings per share ................ $ .21 $ .18 $ .40 $ .36
------ ------ ------ ------
Diluted earnings per share .............. $ .20 $ .17 $ .39 $ .34
------ ------ ------ ------
</TABLE>
5. Stock Option Disclosures
FASB Statement No. 123, "Accounting for Stock-Based Compensation." requires
either: (a) recognition of compensation cost in earnings for stock-based
compensation plans based upon their fair value; or (b) pro forma
disclosures of what earnings and per share amounts would have been had the
fair value method been used for expense recognition. First Defiance has
elected to use the pro forma disclosure option. As provided in Statement
No. 123, the disclosure provisions for companies electing pro forma
disclosures are not required to be applied in interim reports which do not
include a complete set of financial statements.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 1997)
- --------------------------------------------------------------------------------
6. New Accounting Pronouncement
The Company has adopted FAS No. 130, "Reporting Comprehensive Income". This
statement establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income encompasses all changes in shareholders'
equity (except those arising from transactions with shareholders) and
includes net income, net unrealized gains or losses on available-for-sale
securities, and reductions in the Management Recognition Plan ("MRP") and
Employee Stock Ownership Plan ("ESOP") suspense accounts. As this new
standard only requires additional information in the financial statements,
it does not affect the Company's financial position or results of
operations. Comprehensive income for the three-month periods ended June 30,
1998 and 1997 was $1,926,000 and $2,329,000 respectively. Comprehensive
income for the six-month periods ended June 30, 1998 and 1997 was
$3,964,000 and $3,995,000 respectively.
The FASB has released Statement No. 133, "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities". This statement
establishes accounting and reporting standards for derivative financial
instruments and it requires all derivatives to be measured at fair value
and to be recognized as either assets or liabilities in the statement of
financial position. The standard becomes effective for First Defiance for
the first quarter of the year 2000 and is not expected to have a material
impact on the Company's financial statements.
7. Subsequent Events
On July 1, 1998, the Company completed the acquisition of The Leader
Mortgage Company ("Leader"). The total purchase price for Leader, including
certain non-compete payments, was approximately $39.6 million. Leader
specializes in servicing loans made under various first-time homebuyer
programs offered by certain state or local agencies. At June 30, 1998
Leader serviced approximately 81,000 loans with a balance of $4.7 billion.
The acquisition will be accounted for as a purchase.
On July 30, 1998, the Company sold the majority of loans in its mobile home
portfolio in a private sale. The pre-tax gain on the sale, net of costs,
was slightly more than $200,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
First Defiance is a holding company which conducts business through its wholly
owned subsidiary, First Federal Savings and Loan, Defiance Ohio, which is
primarily engaged in attracting deposits from the general public through its
offices and using those and other available sources of funds to originate loans
primarily in the five counties in which its offices are located and in
contiguous Putnam County. Single family residential mortgage loans amounted to
$270.8 million or 57.0% of First Defiance's total loan portfolio at June 30,
1998. To a lesser extent, First Defiance originates other real estate loans
secured by non-residential real estate and construction loans, which amounted to
$39.3 million or 8.3% of total loans at June 30, 1998. Approximately 34.7% or
$164.6 million of First Defiance's loan portfolio as of June 30, 1998 consisted
of non-real estate loans including consumer finance loans, primarily automobile
loans, which amounted to $74.9 million or 15.8% of the total loan portfolio,
commercial loans, which amounted to $36.0 million or 7.6% of the total loan
portfolio and mobile home loans which amounted to $25.1 million or 5.3% of the
total loan portfolio. (See Note 7, Subsequent Events)
First Defiance is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). First Defiance sold 100 and 27 loans
during the three months ended June 30, 1998 and 1997 respectively (201 and 54
for the six months ended June 30, 1998 and 1997). The Company realized a gain on
sale of those loans of approximately $144,000 and $37,000 for three months ended
June 30, 1998 and 1997 respectively ($263,000 and $68,000 for the respective six
month periods). Fixed rate loans with a maturity of at least twenty years, which
meet the Freddie Mac underwriting guidelines, are classified as
available-for-sale loans. First Defiance retains the servicing rights on all
mortgage loans sold. Mortgage servicing rights capitalized at June 30, 1998 were
approximately $305,000.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Securities are classified as held-to-maturity when First Federal has the
positive intent and ability to hold the security to maturity. Held-to-maturity
securities are stated at amortized cost and had a recorded value of $16.7
million at June 30, 1998. Securities not classified as held-to-maturity are
classified as available-for-sale, which are stated at fair value and had a
recorded value of $66.7 million at June 30, 1998. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($40.2 million), corporate bonds ($10.1
million), certain municipal obligations ($3.5 million), adjustable-rate mortgage
backed security mutual funds ($8.9 million), and CMOs and REMICs ($4.0 million).
In accordance with FASB Statement No. 115, unrealized holding gains and losses
on available-for-sale securities are reported in a separate component of
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
stockholders' equity and are not reported in earnings until realized. Net
unrealized holding losses on available-for-sale securities were $21,000 at June
30, 1998, $14,000 after considering the related deferred tax benefit. For the
six months ended June 30, 1998, unrealized losses decreased by $54,000 ($36,000
after tax).
The profitability of First Defiance is primarily dependent on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and securities, and interest expense
on interest-bearing deposits and Federal Home Loan Bank advances. First
Defiance's earnings also depend, to a lesser extent, on the provision for loan
losses, the level of its other income (including servicing fees and other fees)
and its non-interest expenses, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums, and miscellaneous
other expenses, as well as federal income tax expense.
Changes in Financial Condition
At June 30, 1998, First Defiance's total assets, deposits and stockholders'
equity amounted to $582.1 million, $404.5 million and $103.3 million,
respectively, compared to $579.7 million, $395.3 million and $106.9 million,
respectively, at December 31, 1997. Net loans receivable have increased from
$441.8 million at December 31, 1997 to $462.2 million at June 30, 1998. This
increase was funded primarily with maturing or redeemed securities. Securities
decreased from $103.4 million at December 31, 1997 to $83.3 million at June 30,
1998 as a result of U.S. Government Agency securities being called prior to
maturity. Proceeds from those calls were used to fund loan growth and pay down
advances from the Federal Home Loan Bank ("FHLB") rather than being reinvested
at current rates. As a result, FHLB advances decreased from $71.7 million at
December 31, 1997 to $66.1 million at June 30, 1998. First Defiance has
completed six 5% stock repurchases as of June 30, 1998. As of June 30, 1998,
First Defiance has repurchased 426,384 shares of its own stock during 1998 for a
total cost of $6.6 million, an average of $15.47 per share.
Subsequent Events
On July 1, 1998 First Defiance completed its acquisition of The Leader Mortgage
Company for $39.6 million, including non-compete agreements. The Cleveland-based
company specializes in servicing mortgage loans of state and municipal agencies
under various first-time homebuyer programs. The acquisition of The Leader
Mortgage Company will be accounted for as a purchase.
On July 30, 1998 First Defiance completed a sale of approximately $22 million of
the mobile home loans held in its portfolio. The sale resulted in a pretax gain
of approximately $200,000 which will be recorded in the 1998 third quarter
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based upon daily balances.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------
1998 1997
----------------------------- ---------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $458,935 $9,894 8.62% $425,263 $9,220 8.67%
Securities 90,115 1,428 6.34 96,200 1,534 6.38
Dividends on FHLB stock 3,832 69 7.20 3,106 56 7.21
-------- ------ -------- ------
Total interest-earning assets 552,882 11,392 8.24 524,569 10,810 8.24
Non-interest-earning assets 28,922 26,645
-------- --------
Total assets $581,804 $551,214
======== ========
Interest-bearing liabilities:
Deposits $405,870 $4,625 4.56% $380,665 $4,487 4.71%
FHLB advances and other 66,703 964 5.78 47,985 697 5.81
--------- ------ -------- ------
Total interest-bearing liabilities 472,573 5,589 4.73 428,650 5,184 4.84
------ ---- ------ ----
Non-interest-bearing liabilities 6,030 4,422
-------- --------
Total liabilities 478,603 433,072
Stockholders' equity 103,201 118,142
-------- ---------
Total liabilities and stock-
holders' equity $581,804 $551,214
======== ========
Net interest income; interest
rate spread $5,803 3.51% $5,626 3.41%
====== ===== ====== =====
Net interest margin (2) 4.20% 4.29%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 117% 122%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------
1998 1997
------------------------------ --------------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $452,218 $19,647 8.69% $422,097 $18,251 8.65%
Securities 94,499 3,017 6.39 98,105 3,103 6.33
Dividends on FHLB stock 3,799 137 7.21 3,094 110 7.11
-------- ------ -------- -------
Total interest-earning assets 550,516 22,801 8.28 523,296 21,464 8.20
Non-interest-earning assets 28,272 24,094
-------- --------
Total assets $578,788 $547,390
======== ========
Interest-bearing liabilities:
Deposits $401,814 $9,181 4.57% $379,395 $8,833 4.66%
FHLB advances and other 66,750 1,935 5.80 45,900 1,316 5.73
--------- -------- -------- -------
Total interest-bearing liabilities 468,564 11,116 4.74 425,295 10,149 4.77
------- ----- -----
Non-interest-bearing liabilities 5,907 4,229
-------- --------
Total liabilities 474,471 429,524
Stockholders' equity 104,317 117,866
-------- -------
Total liabilities and stock-
holders' equity $578,788 $547,390
======== ========
Net interest income; interest
rate spread $11,685 3.54% $11,315 3.43%
======= ===== ======= =====
Net interest margin (2) 4.25% 4.32%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 117% 123%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
Results of Operations
Three Months Ended June 30, 1998 compared to Three Months Ended June 30, 1997
- ------------------------------------------------------------------------------
Net interest income, the difference between revenue generated from interest
earning assets and the interest cost of funding those assets, is First
Defiance's primary source of earnings. For the three-month period ending June
30, 1998, net interest income increased to $5,733,000 from $5,570,000 for the
same period in 1997. First Defiance's interest rate spread (the difference
between yield on average interest earning assets and the interest rate on
average interest-bearing liabilities) for the 1998 second quarter was 3.51%,
which was 10 basis points higher than the 1997 second quarter level of 3.41%.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $552.9 million for the quarter ended June
30, 1998 compared to $524.6 million for the same period in 1997. The growth was
in First Defiance's loan portfolio, where the average balance increased to
$458.9 million for the three months ended June 30, 1998 compared to $425.3 for
the same period in 1997. Interest on those loans increased to $9,894,000 for the
three months ended June 30, 1998 compared to $9,220,000 for the same period in
1997. Earnings from investment securities declined during the 1998 second
quarter compared to the same period in 1997 because of a $6.1 million reduction
in the average balance of securities outstanding. Investment security maturities
and redemptions were used to fund a portion of the growth in loans. First
Defiance's yield on earning assets was 8.24% for both of the three month periods
ended June 30, 1998 and 1997 despite of the fact that the individual yields on
loans and investment securities decreased for the 1998 period compared to 1997.
This resulted from the replacing of lower yielding investment securities with
higher yielding loans.
The increase in interest income was substantially offset by an 7.8%, increase in
interest expense, to $5,589,000 for the quarter ended June 30, 1998 compared to
$5,184,000 for the same period in 1997. This increase was due to a $18.7 million
increase in the average balance of FHLB advances outstanding, from $48.0 million
for the three months ended June 30, 1998 to $66.7 million for the same period in
1998. These advances, which are used to fund loan growth, as well as other cash
needs including stock repurchases, actually decreased from the $71.7 million
ending balance at December 31, 1997 to $66.1 million at June 30, 1998. The
decrease in advances between December 31, 1997 and June 30, 1998 is primarily
due to the fact that the proceeds from agency securities which were called
during the period were used to pay down advances. Interest expense also
increased due to an increase in the average deposits outstanding, which
increased to $405.9 million for the three months ended June 30, 1998 from $380.7
million for the same period in 1997. The average rate paid on those deposits
dropped fifteen basis points, from an average of 4.71% in 1997 to an average of
4.56% in 1998.
In addition to a slight increase in net interest income, First Defiance had a
slightly lower provision for loan losses during the 1998 second quarter
($239,000) compared to the same period in 1997 ($282,000). Provisions for loan
losses are charged to earnings to bring the total allowance for loan losses to
the level deemed appropriate by management based on historical experience, the
volume and type of lending conducted by First Defiance, industry standards, the
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
amount of non-performing assets and loan charge-off activity, general economic
conditions, particularly as they relate to First Defiance's market area, and
other factors related to the collectibility of First Defiance's loan portfolio.
The decrease in the provision reflects a decrease in charge-offs in the second
quarter of 1998 compared to the relatively high levels experienced in 1997.
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets totaled $1.7 million at June 30, 1998,
which is .29% of total assets. The allowance for loan losses at June 30, 1998
was $2.9 million compared to $2.8 million at March 31, 1998 and $2.7 million at
December 31, 1997. For the quarter ended June 30, 1998, First Defiance charged
off $190,000 of loans against its allowance and realized recoveries of $59,000
from loans previously charged off. During the same quarter in 1997, First
Defiance charged off $237,000 in loans and realized recoveries of $53,000.
Total non-interest expense for the quarter ended June 30, 1998 was $3.8 million,
compared to $3.4 million for the quarter ended June 30, 1997. Compensation and
benefits for the quarter ended June 30, 1998 were $1,968,000 compared to
$1,796,000 for the same period in 1997, an increase of 9.6%. The increase in
compensation and benefits was due primarily to the addition of two new branches,
in Paulding Ohio, which opened in September, 1997, and Hicksville Ohio, which
opened in February 1998. This increase in compensation for the quarter ended
June 30, 1998 as compared to the same period of 1997 was partially offset by a
$45,000 reduction in expense related to the Company's ESOP plan, primarily due
to a reduction in contributions, and a $59,000 reduction in the Management
Recognition Plan expense due to accelerated expense recognition for such awards.
Occupancy expense increased to $431,000 compared to $350,000. This increase was
due to increased depreciation brought about by the addition of the two new
branches along with continued upgrades to all of the Company's computer hardware
and software to assure Year 2000 compliance.
Data processing expense for the quarter ended June 30, 1998 was $247,000
compared to $175,000 for the same period in 1997. This increase was primarily
due to the implementation of several new applications beginning in 1997.
Non-interest income, consisting primarily of fee income, dividends on FHLB
stock, and gains on mortgage loans sold was $585,000 for the quarter ended June
30, 1998 compared to $357,000 for the same period in 1996. The increase was due
primarily to a $106,000 increase in the gains on loans sold as well as increases
in other fees.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 33.3% for the
quarter ended June 30, 1998 compared to 32.9% for the same period in 1996.
As a result of the above factors, net income for the quarter ended June 30, 1998
was $1,545,000 compared to $1,521,000 for the comparable period in 1997. On a
per share basis, basic and diluted earnings per share for the three months ended
June 30, 1998 was $.21 and $.20 respectively compared to $.18 and $.17 for the
same period in 1997. The increase in earnings per share is attributable to a
decrease in the average shares outstanding as a result of three five percent
stock buy backs completed since the beginning of 1997. Average shares
outstanding for the basic and diluted calculations were 7,464,000 and 7,814,000
respectively for the quarter ended June 30, 1998 compared to 8,612,000 and
8,926,000 respectively for the quarter ended June 30, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
First Defiance's board of directors declared a dividend of $.09 per common share
as of June 30, 1997. The dividend amounted to $734,208, including dividends on
unallocated ESOP shares. It was paid on July 22, 1998. Dividends are subject to
determination and declaration by the board of directors, which will take into
account First Defiance's financial condition and results of operations, economic
conditions, industry standards and regulatory restrictions which affect First
Defiance's ability to pay dividends.
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
For the six month period ended June 30, 1998, net interest income increased to
$11,549,000 from $11,205,000 for the same period in 1997. First Defiance's
interest rate spread for the six-month period was 3.54%, which exceeded the
spread for the six month period ended June 30, 1997 by 11 basis points.
The increase in net interest income was due to an increase in the loan portfolio
and a reduction in the Company's overall cost of funds, especially the cost of
deposit liabilities.
First Defiance's average loans for the six months ended June 30, 1997 were
$452.2 million compared to $422.1 million for the same period in 1997. As a
result of the growth in the loan portfolio and a four basis point increase in
the average yield on loans, interest earned on loans increased to $19.6 million
for the six months ended June 30, 1998 compared to $18.3 million for the first
six months of 1997. Earnings from investments decreased slightly to $3.0 million
for the six months ended June 30, 1998 compared to $3.1 million for the six
months ended June 1997 because of a reduction in the average balance of
investment securities outstanding of $3.6 million partially offset by a six
basis point increase in the average yield on investment securities. The average
balance of securities outstanding was $94.5 million for the six months ended
June 30, 1998 compared to $98.1 million for the same period in 1997. Investment
securities were used both to fund a portion of the growth in the loan portfolio
and the repurchase of stock.
Interest expense increased to $11.1 million for the six-month period ended June
30, 1998 from $10.1 million for the first half of 1997. This increase was due to
a $20.9 million increase in the average balance of FHLB advances outstanding,
from $45.9 million for the first half of 1997 to $66.8 million for the first
half of 1998. These advances were used to fund the loan growth and stock
repurchases noted above. The cost of First Defiance's deposit liabilities
increased from $8.8 million for the six-month period ended June 30, 1997 to $9.2
million for the same period in 1998. This increase was the result of the average
outstanding deposit balance increasing to $401.8 million for the six-months
ended June 30, 1998 from $379.4 million for the same period in 1997. This
increase in deposit interest expense was partially offset by the decrease in the
average cost of deposits from 4.66% for the six months ended June 30, 1997 to
4.57% for the same period in 1998.
The provision for loan losses increased to $688,000 for the first half of 1998
compared to $646,000 during the first half of 1997. The loan loss provision is
reflective of continued growth in the higher risk consumer and commercial
portfolios along with a slight increase in the year to date net charge offs of
1998 compared to 1997. First Defiance charged off $603,000 of loans against its
allowance for loan losses during the first half of 1998 and realized recoveries
of $111,000 from loans previously charged off. During the same period in 1997,
First Defiance charged off $522,000 in loans and realized recoveries of $84,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
Total non-interest expense for the first half of 1998 was $7.3 million compared
to $6.6 million during the same period in 1997. Compensation and benefits
increased to $3.8 million for the 1998 period from $3.6 million for the same
period in 1996. Occupancy costs also increased during the first half of 1998, to
$840,000 from $585,000 for the first half of 1997. In addition data processing
costs increased to $471,000 for the first half of 1998 compared to $372,000 for
the same period in 1997. In addition to the reasons noted in the discussion of
the results of operations for the three month periods above, occupancy costs
increased for the six-month period in 1998 because of a full six months of
depreciation on major office renovations completed during the first half of
1997.
Non-interest income was $1,069,000 for the first half of 1998 compared to
$693,000 for 1997. $195,000 of this increase was the result of increased gains
on the sale of mortgage loans. The remaining increase was due to increases in
the fees on deposit accounts and dividends on Federal Home Loan Bank stock.
The Company has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 33.7% for the first
half of 1998 compared to 33.3% during the first half of 1997.
As a result of the above factors, net income for the six-month period ended June
30, 1998 decreased slightly to $3,053,000 from $3,079,000 for the six months
ended June 30, 1997. However, because of the reduction in the average shares
outstanding related to the stock repurchase programs, on a per share basis,
basic and diluted earnings per share for the six months ended June 30, 1998
increased to $.40 and $.39 respectively compared to $.36 and $.34 for the same
period in 1997. Average shares outstanding for the basic and diluted
calculations were 7,553,000 and 7,917,000 respectively for the six-months ended
June 30, 1998 compared to 8,622,000 and 8,937,000 respectively for the
six-months ended June 30, 1997.
Through June 30, 1997, First Defiance has declared dividends totaling $.18 per
share.
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three-month period ended June 30, 1998.
First Defiance generated $3,494,000 of cash from operating activities during the
first six months of 1998. The Company's cash from operating activities results
from net income for the period, adjusted for various non-cash items, including
the provision for loan losses, depreciation and amortization, ESOP expense
related to release of shares, and changes in loans available for sale, interest
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
receivable and other assets, and other liabilities. The primary investing
activity of First Defiance is lending, which is funded with cash provided by
operations, proceeds from the amortization and prepayments of existing loans,
proceeds from the sale or maturity of securities, borrowings from the FHLB, and
customer deposits.
At June 30, 1998, First Defiance had $8.5 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $28.7 million committed under existing consumer and
commercial lines of credit and standby letters of credit. At that date, the
total amount of certificates of deposit that are scheduled to mature by June 30,
1999 is $224.7 million. First Defiance believes that it has adequate resources
to fund commitments as they arise and that it can adjust the rate on savings
certificates to retain deposits in changing interest rate environments. If First
Defiance requires funds beyond its internal funding capabilities, advances from
the FHLB of Cincinnati are available as an additional source of borrowings.
Currently First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities include agency step-up, REMIC and CMO investments. Such investments
are not classified as high risk at June 30, 1998 and do not present risk
significantly different than other mortgage-backed or agency securities. First
Defiance does not invest in off-balance sheet derivative securities.
First Federal is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible capital
requirement, a core capital requirement, and a risk-based capital requirement.
The following table sets forth First Federal's compliance with each of the
capital requirements at June 30, 1998.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital (1)(2)
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital ................ $ 84,112 $ 84,112 $ 86,541
Minimum required regulatory
capital ........................ 8,689 23,169 31,234
--------- --------- ---------
Excess regulatory capital ......... $ 75,423 $ 60,943 $ 55,307
========= ========= =========
Regulatory capital as a
percentage of assets (3) ....... 14.5% 14.5% 21.5%
Minimum capital required as
a percentage of assets ......... 1.5% 4.0% 8.0%
--------- --------- ---------
Excess regulatory capital as a
percentage in excess of
requirement .................... 13.0% 10.5% 13.5%
========= ========= =========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Continued
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, discussed above.
(2) Reflects fully phased-in deductions from total capital.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $581.9 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $384.7 million.
FDIC Insurance
The Deposits of First Federal are currently insured by the Savings Association
Insurance Fund("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
to commercial bank deposits. Both the SAIF and BIF are required by law to attain
and maintain a reserve ratio of 1.25% of insured deposits. First Federal's
deposit insurance premiums for 1998 are approximately $0.064 per $100 of
deposits.
Technology Risk
In order to limit its technology risk, First Defiance has outsourced the
majority of its computer processing tasks to a variety of third-party vendors.
An ongoing assessment of technology risk includes an assessment of third party
vendors readiness for processing in the year 2000. Management is coordinating
with its primary data processing provider, BISYS, Inc. to perform testing of all
mission critical applications during the third and fourth quarters of 1998.
Management also has reviewed all existing hardware and software that it
maintains in house. Certain older personal computers which are not Year 2000
compliant are being replaced and certain software applications require upgrades
which are readily available. The Company has implemented a contingency plan
which includes the replacement of its principal data processing provider should
mission critical applications not be fully tested and verified as being Year
2000 compliant by specified dates. Management believes that all vendors will be
compliant and that mission critical applications will be tested by the end of
1998.
Management does not believe that the cost of being Year 2000 compliant will be
material to the financial statements of First Defiance.
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
DEFIANCE, OHIO
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a material
nature.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Reports on form 8-K. On July 16, 1998 First Defiance filed a
current report on Form 8-K, dated July 16, 1998, reporting,
pursuant to Item 5 of such form, that First Defiance completed
the acquisition of The Leader Mortgage Company effective July 1,
1998.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: August 13, 1998 By: /s/ Don C. Van Brackel
--------------- ----------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: August 13, 1998 By: /s/ John C. Wahl
-------------- -------------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,666
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,670
<INVESTMENTS-CARRYING> 16,660
<INVESTMENTS-MARKET> 16,977
<LOANS> 468,419
<ALLOWANCE> 2,881
<TOTAL-ASSETS> 582,124
<DEPOSITS> 404,493
<SHORT-TERM> 37,335
<LIABILITIES-OTHER> 8,219
<LONG-TERM> 28,805
0
0
<COMMON> 82
<OTHER-SE> 103,190
<TOTAL-LIABILITIES-AND-EQUITY> 582,124
<INTEREST-LOAN> 19,647
<INTEREST-INVEST> 3,005
<INTEREST-OTHER> 12
<INTEREST-TOTAL> 22,664
<INTEREST-DEPOSIT> 9,180
<INTEREST-EXPENSE> 11,115
<INTEREST-INCOME-NET> 11,549
<LOAN-LOSSES> 688
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,322
<INCOME-PRETAX> 4,608
<INCOME-PRE-EXTRAORDINARY> 4,608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,053
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
<YIELD-ACTUAL> 8.28
<LOANS-NON> 1,218
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,686
<CHARGE-OFFS> 604
<RECOVERIES> 111
<ALLOWANCE-CLOSE> 2,881
<ALLOWANCE-DOMESTIC> 2,881
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
