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, 1996
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)
(419) 782-5015
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes____ No____
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value -- 10,432,479 shares outstanding at August 2, 1996.
<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, 1996
and December 31, 1995
Consolidated Condensed Statements of Income Three months ended
June 30, 1996 and 1995;
Six months ended June 30, 1996 and 1995
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Six
months ended June 30, 1996
Consolidated Condensed Statements of Cash Flows
- Six months ended June 30, 1996 and 1995
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. Consolidated Financial Statements
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ............................. $ 3,539 $ 4,394
Interest-bearing deposits ............................... 2,812 4,291
-------- --------
6,351 8,685
Securities:
Available-for-sale, carried at fair value ............... 77,176 93,041
Held-to-maturity, carried at amortized cost
(approximate fair value $23,462 and $26,692
at June 30, 1996 and December 31, 1995,
respectively) ....................................... 23,210 26,072
-------- --------
100,386 119,113
Loans:
Loans held for sale (at lower of cost or fair value, cost
is $3,833 at June 30, 1996, fair value is $3,806
at December 31, 1995) ............................... 3,788 3,759
Loans receivable, net ................................... 393,446 381,444
-------- --------
397,234 385,203
Accrued interest receivable .................................. 2,987 2,827
Federal Home Loan Bank stock ................................. 2,930 2,830
Real estate, mobile homes and other
assets held for sale .................................... 165 173
Office properties and equipment .............................. 8,798 6,285
Deferred federal income taxes ................................ 532 222
Other assets ................................................. 1,283 212
-------- --------
$520,666 $525,550
======== ========
</TABLE>
See accompanying notes.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ---------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ............................................. $ 384,604 $ 381,779
Advances from Federal Home Loan Bank ................. 5,945 6,842
Other liabilities .................................... 3,512 3,423
--------- ---------
Total liabilities .................................... 394,061 392,044
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; 10,432,479 and
10,976,615 shares outstanding at June 30, 1996
and December 31, 1995, respectively ............. 104 110
Additional paid-in capital ........................... 79,967 83,458
Stock acquired by ESOP ............................... (5,418) (5,703)
Stock acquired by Management
Recognition Plan ................................ (2,720) (97)
Net unrealized losses on available-for-sale
securities, net of income taxes
of $309 and $78 at June 30,
1996 and December 31, 1995, respectively ........ (598) (152)
Retained earnings - substantially restricted ......... 55,270 55,890
--------- ---------
Total stockholders' equity ........................... 126,605 133,506
--------- ---------
Total liabilities and stockholders' equity ........... $ 520,666 $ 525,550
========= =========
</TABLE>
See accompanying notes
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Loans ................................................ $ 8,568 $ 7,858 $16,999 $15,492
Securities ........................................... 1,636 1,473 3,366 2,931
Interest-bearing deposits ............................ 50 45 125 95
------- ------- ------- -------
Total interest income ...................................... 10,254 9,376 20,490 18,518
Interest expense:
Deposits .............................................. 4,659 4,689 9,438 9,017
Federal Home Loan Bank
advances and other borrowings ....................... 119 365 235 737
------- ------- ------- -------
Total interest expense ..................................... 4,778 5,054 9,673 9,754
------- ------- ------- -------
Net interest income ........................................ 5,476 4,322 10,817 8,764
Provision for loan losses .................................. 181 107 344 187
------- ------- ------- -------
Net interest income after provision
for loan losses ....................................... 5,295 4,215 10,473 8,577
Non-interest expense ....................................... 3,113 2,590 6,314 5,170
Non-interest income ........................................ 284 234 593 389
------- ------- ------- -------
Income before income federal taxes ......................... 2,466 1,859 4,752 3,796
Federal income taxes ....................................... 791 630 1,542 1,290
------- ------- ------- -------
Net income ................................................. $ 1,675 $ 1,229 $ 3,210 $ 2,506
======= ======= ======= =======
Earnings per share (Note 4) ................................ $ .16 $ .12 $ .31 $ .24
======= ======= ======= =======
Dividends declared per share (Note 5) ...................... $ .07 $ .07 $ .14 $ .14
======= ======= ======= =======
Average number of shares
outstanding (Notes 4 and 5) ........................... 10,257 10,394 10,381 10,364
======= ======= ======= =======
</TABLE>
See accompanying notes
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Stock Acquired By
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ---------- ---- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $110 $83,458 $(5,703) $ (97)
Net income
ESOP shares released 58 285
Change in unrealized gains (losses) net
of income taxes of $231
Contribution to Management Recognition
Plan for purchase of common stock (2,817)
Amortization of deferred compensation
of Management Recognition Plan 194
Stock issued under Option Plan 22
Purchase of common stock for
treasury (6) (3,571)
Dividends declared (Note 4)
Balance at June 30, 1996 $ 104 $79,967 $(5,418) $(2,720)
======= ======= ======= =======
Shares outstanding 110,432
=======
See accompanying notes.
<PAGE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
(continued)
Net unrealized
gains (losses) on Total
available-for- Retained Stockholders'
sale securities Earnings Equity
---------------- -------- --------
<S> <C> <C> <C>
Balance at December 31, 1995 $(152) $ 55,890 $ 133,506
Net income 3,210 3,210
ESOP shares released 343
Change in unrealized gains (losses) net
of income taxes of $231 (446) (446)
Contribution to Management Recognition
Plan for purchase of common stock (2,817)
Amortization of deferred compensation
of Management Recognition Plan 194
Stock issued under Option Plan 22
Purchase of common stock for
treasury (2,427) (6,004)
Dividends declared (Note 4) (1,403) (1,403)
- ------ ------
Balance at June 30, 1996 $(598) $ 55,270 $ 126,605
===== ======== =========
Shares outstanding
</TABLE>
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1996 1995
-------- --------
<S> <C> <C>
Operating Activities
Net income ............................................... $ 3,210 $ 2,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................... 344 187
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ... 131 129
Loss on sale or call of available-for-sale securities -- 75
Amortization of Management Recognition Plan
deferred compensation ...................... 194 104
Release of ESOP Shares .............................. 343 76
Loss on disposal of office properties and equipment . 46 8
Unrealized loss on loans held for sale .............. 18 --
Deferred federal income tax credit .................. (79) (19)
Increase in loans available for sale ................ (47) --
Increase in interest receivable and other assets .... (1,231) (1,117)
Increase (decrease) in other liabilities ............ 128 (32)
-------- --------
Net cash provided by operating activities ................ 3,057 1,917
Investing activities
Proceeds from maturities of held-to-maturity securities .. 2,844 1,740
Proceeds from maturities of available-for-sale securities 15,897 2,125
Proceeds from sales of available-for-sale securities ..... 9,750 2,922
Proceeds from sales of real estate, mobile homes, and
other assets held for sale .......................... 565 604
Purchases of available-for-sale securities ............... (10,449) (3,000)
Proceeds from sales of Federal Home Loan Bank stock ...... -- 210
Purchases of Federal Home Loan Bank stock ................ (100) (93)
Purchases of office properties and equipment ............. (2,682) (729)
Net increase in loans receivable ......................... (12,903) (12,319)
-------- --------
Net cash provided by (used in) investing activities ...... (2,922) (8,540)
</TABLE>
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended June
1996 1995
-------- --------
<S> <C> <C>
Financing Activities
Net increase in deposits ................................. 2,825 2,859
Repayment of Federal Home Loan Bank long-term advances ... (897) (4,053)
Net decrease in Federal Home Loan Bank short-term advances -- 2,000
Purchase of common stock for treasury .................... (6,004) --
Cash dividends paid ...................................... (1,442) (589)
Contribution to management recognition plan for purchase
of common stock .................................... (2,817) --
Proceeds from exercise of stock options .................. 22 3
-------- --------
Net cash provided by (used in) financing activities ...... (8,313) 220
-------- --------
Decrease in cash and cash equivalents .................... (2,334) (6,403)
Cash and cash equivalents at beginning of period ......... 8,685 10,111
-------- --------
Cash and cash equivalents at end of period ............... $ 6,351 $ 3,708
======== ========
Supplemental cash flow information:
Interest paid ............................................ $ 9,809 $ 9,751
======== ========
Income taxes paid ........................................ $ 1,488 $ 1,367
======== ========
Transfers from loans to real estate, mobile homes
and other assets held for sale ...................... $ 557 $ 526
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities ....... $ 231 $ 961
======== ========
Noncash investing activities:
Increase in net unrealized loss on available-for-sale
securities .......................................... $ (446) $ (2,826)
======== ========
Noncash financing activities:
Cash dividends declared but not paid ..................... $ 683 $ 295
======== ========
Repayment of ESOP obligation recorded as reduction
of deferred compensation ............................ $ -- $ 200
======== ========
</TABLE>
See accompanying notes.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance") and its wholly-owned
savings and loan, First Federal Savings and Loan ("First Federal"). In the
opinion of management, all significant intercompany accounts and
transactions have been eliminated in consolidation.
2. Basis of Presentation
The consolidated condensed statement of financial condition at December 31,
1995 has been derived from the audited financial statements at that date.
The accompanying consolidated condensed financial statements as of June 30,
1996 and for the six month periods ending June 30, 1996 and 1995 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, 1995. 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 six months ended June 30, 1996 are not necessarily
indicative of the results which may be expected for the entire year.
3. Reorganization and Change of Corporate Form
On September 29, 1995, First Federal and First Federal Mutual Holding
Company ("the Mutual Holding Company") completed a second step conversion
(the "Reorganization"). As part of the Reorganization, First Defiance was
formed as a first-tier wholly owned subsidiary of First Federal. The Mutual
Holding Company was converted to an interim Federal stock savings
association and simultaneously merged with and into First Federal, at which
point the Mutual Holding Company ceased to exist and three million shares
or 59% of the outstanding First Federal common stock held by the Mutual
Holding Company was cancelled. A second interim savings and loan
association ("Interim") formed by First Defiance solely for the
reorganization was then merged with and into First Federal. As a result of
the merger of Interim into First Federal, First Federal became a wholly
owned subsidiary of First Defiance. Pursuant to an exchange ratio of
2.1590231 shares for each share of First Federal stock, which assured that
the public shareholders of First Federal maintained their 41% ownership of
First Defiance, the 2,184,500 outstanding shares of First Federal were
exchanged for approximately 4,716,000 shares of First Defiance. Concurrent
with the Reorganization, First Defiance sold 6,476,914 additional shares to
Mutual Holding Company members, First Federal employees and the public at a
price of $10 per share. Reorganization and stock offering costs of
approximately $1,685,000 resulted in net proceeds of $63,085,000.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Condensed Financial Statements
4. Earnings Per Share
Earnings per share has been calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the
quarter and six month period ended June 30, 1996. The effect of shares
issuable under stock options has been accounted for using the Treasury
Stock method. First Defiance accounts for the shares issued to its Employee
Stock Ownership Plan ("ESOP") in accordance with Statement of Position 93-6
of the American Institute of Certified Public Accountants ("AICPA"). As a
result, shares controlled by the ESOP are not considered in the weighted
average number of shares of common stock outstanding until the shares are
committed for allocation to an employee's individual account. All per share
amounts and outstanding shares previously reported for First Federal have
been adjusted to reflect the Reorganization using the exchange ratio of
2.1590231 and adjusted for additional shares acquired by the ESOP.
4. Dividends on Common Stock
As of June 30, 1996, First Defiance had declared a quarterly cash dividend
of $.07 per share for the second quarter of 1996, payable July 26, 1996.
5. Adoption of New Accounting Pronouncements
Effective January 1, 1996, First Defiance adopted the provisions of
Financial Accounting Standards Board ("FASB") Statement No. 122,
"Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement
No. 65." The statement requires that companies engaged in mortgage banking
activities recognize mortgage servicing rights as an asset, which is
amortized over the period of estimated net servicing income. As a result of
the adoption of Statement No. 122, First Defiance has recorded mortgage
servicing rights totalling $59,000. First Defiance does not recognize
mortgage servicing rights as a separate asset until the related loans are
sold.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." This statement 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>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First Defiance Financial Corp. ("First Defiance") is a holding company which
conducts business through its wholly owned subsidiary, First Federal Savings and
Loan, Defiance, Ohio ("First Federal") which is primarily engaged in attracting
deposits from the general public through its offices and using those and other
available sources of funds to originate loans secured by single-family
residences primarily located in the five counties in which its offices are
located and in contiguous Putnam County. Single family residential mortgage
loans amounted to $236.7 million or 58.3% of First Defiance's total loan
portfolio at June 30, 1996. To a lesser extent, First Defiance originates other
real estate loans secured by non-residential real estate and construction loans,
which amounted to $40.9 million or 10.1% of total loans at June 30, 1996.
Approximately 31.6% or $128.5 million of First Federal's loan portfolio as of
June 30, 1996 consisted of non-real estate loans including consumer finance
loans, primarily automobile loans, which amounted to $56.4 million or 13.9% of
the total loan portfolio, commercial loans, which amounted to $24.7 million or
6.1% of the total loan portfolio and mobile home loans which amounted to $24.8
million or 6.1% of the total loan portfolio.
In order to more effectively manage interest rate risk, First Defiance is an
authorized seller/servicer for the Federal Home Loan Mortgage Corporation
("Freddie Mac"). First Defiance sold loans during the first half of 1996 and
realized a gain on sale of those loans of approximately $87,000. Loans with a
30-year maturity which meet the Freddie Mac underwriting guidelines are
classified by management as available-for-sale. At June 30, 1996, First Defiance
held $3.8 million of available-for-sale loans.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Securities are classified as held-to-maturity when First Federal has
the positive intent and ability to hold the security to maturity.
Held-to-maturity securities are stated at amortized cost and had a recorded
value of $23.2 million at June 30, 1996. 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 $77.2 million at June 30, 1996. The
available-for-sale portfolio consists of U.S. Treasury securities and
obligations of U.S. Government corporations and agencies ($47.0 million), money
market mutual funds ($18.3 million) adjustable rate mortgage backed security
mutual funds ($8.9 million) and CMOs and REMICs ($3.0 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
stockholders' equity and are not reported in earnings until realized. Net
unrealized holding losses on available-for-sale securities were $907,000 at June
30, 1996, $598,000 after considering the related deferred tax benefit. For the
six months ended June 30, 1996, unrealized losses increased by $677,000
($446,000 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
<PAGE>
securities, and interest expense on interest-bearing deposits and Federal Home
Loan Bank advances. First Defiance's earnings also depend, to a lesser extent,
on the provision for loan losses, the level of its other income (including
servicing fees and other fees) and its non-interest expenses, such as employee
compensation and benefits, occupancy and equipment expense, deposit insurance
premiums, and miscellaneous other expense, as well as federal income tax
expense.
Changes in Financial Condition
At June 30, 1996, First Federal's total assets, deposits and stockholders'
equity amounted to $520.7 million, $384.6 million and $126.6 million,
respectively, compared to $525.6 million, $381.8 million and $133.5 million,
respectively, at December 31, 1995. Total assets and stockholders' equity
decreased because of the purchase of 548,992 shares of treasury stock for $6.0
million during May of 1996. Net loans receivable have increased from $385.2
million at December 31, 1995 to $397.2 million at June 30, 1996. This increase
was funded primarily with maturing or redeemed securities. Securities decreased
from $119.1 million at December 31, 1995 to $100.4 million at June 30, 1996.
<PAGE>
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based on month-end balances.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $394,525 $8,568 8.69% $361,815 $7,858 8.69%
Securities 109,797 1,686 6.14 97,461 1,518 6.23
Dividends on FHLB stock 2,918 51 6.99 2,724 45 6.61
-------- ------ -------- ------
Total interest-earning assets 507,240 10,305 8.13 462,000 9,421 8.16
Non-interest-earning assets 16,956 11,378
-------- --------
Total assets $524,196 $473,378
======== ========
Interest-bearing liabilities:
Deposits $383,431 $4,659 4.86% $377,045 $4,689 4.97%
FHLB advances and other 6,918 119 6.88 21,641 365 6.73
-------- ------ -------- ------
Total interest-bearing liabilities 390,349 4,778 4.90 398,686 5,054 5.07
------ ---- ------ ----
Non-interest-bearing liabilities 4,002 3,443
-------- --------
Total liabilities 394,351 402,129
Stockholders' equity 129,845 71,249
-------- --------
Total liabilities and stock-
holders' equity $524,196 $473,378
======== ========
Net interest income; interest
rate spread $5,527 3.23% $4,367 3.09%
====== ===== ====== =====
Net interest margin (2) 4.35% 3.78%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 130% 116%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest 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,
---------------------------------------------------------------
1996 1995
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $391,244 $16,999 8.69% $359,179 $15,492 8.63%
Securities 114,109 3,491 6.12 97,819 3,026 6.19
Dividends on FHLB stock 2,894 102 6.98 2,793 92 6.59
-------- ------ -------- ------
Total interest-earning assets 508,247 20,592 8.10 459,791 18,610 8.09
Non-interest-earning assets 16,150 11,529
-------- --------
Total assets $524,397 $471,320
======== ========
Interest-bearing liabilities:
Deposits $381,885 $9,438 4.94% $375,634 $9,017 4.80%
FHLB advances and other 6,860 235 6.85 22,069 737 6.68
-------- ------ ------- ------
Total interest-bearing liabilities 388,745 9,673 4.98 397,703 9,754 4.91
------ ----- ------ -----
Non-interest-bearing liabilities 4,008 3,404
-------- --------
Total liabilities 392,753 401,107
Stockholders' equity 131,644 70,213
-------- --------
Total liabilities and stock-
holders' equity $524,397 $471,320
======== ========
Net interest income; interest
rate spread $10,919 3.12% $8,856 3.18%
======= ===== ====== =====
Net interest margin (2) 4.30% 3.85%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 129% 116%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest 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, 1996 compared to Three Months Ended June 30, 1995
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, 1996, net interest income increased to $5,476,000 from $4,322,000 for the
same period in 1995. 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 quarter was 3.23%, which was 14
basis points higher than the 1995 level of 3.09% for the same quarter.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $507.2 million for the quarter ended June
30, 1996 compared to $462.0 million for the same period in 1995. That growth was
due to the receipt of $63 million in proceeds from the stock offering completed
on September 29, 1995. Average loans receivable increased to $394.5 million for
the quarter ended June 30, 1996 from $361.8 million for the same period in 1995.
The average yield on loans was 8.69% for both quarters ended June 30, 1996 and
1995. Average securities outstanding for the quarter ended June 30, 1996 were
$109.8 million compared to $97.5 million for the same period in 1995 and the
yield on those securities decreased slightly, to 6.14% for the three months
ended June 30, 1996 compared to 6.23% for the three months ended June 30, 1995.
Total interest income plus dividends on Federal Home Loan Bank stock was
$10,305,000 for the three months ended June 30, 1996, a 9.4% increase from the
same period in 1995 when the total was $9,421,000.
Net interest income for the quarter ended June 30, 1996 was also improved by a
$276,000 decrease in total interest expense, which was $4,778,000 for the three
months ended June 30, 1996 compared to $5,054,000 for the three months ended
June 30, 1995. A portion of the proceeds from the September 1995 stock offering
was used to repay approximately $18 million of advances from the Federal Home
Loan Bank. Average advances outstanding therefore declined from $21.6 million
for the three months ended June 30, 1995 to $6.9 million for the three months
ended June 30, 1996. Interest expense on those advances declined to $119,000 for
the three months ended June 30, 1996 compared to $365,000 for the quarter ended
June 30, 1995. Interest paid on deposits decreased slightly for the period, to
$4,659,000 for the quarter ended June 30, 1996 from $4,689,000 for the quarter
ended June 30, 1995. The decrease was primarily due to an 11 basis point
decrease in interest rates, to 4.86% for the quarter ended June 30, 1996
compared to 4.97% for the same period in 1995. This decrease in rates was
partially offset by increases in the average balance of deposits outstanding for
the quarter, $383.4 million for the June 30, 1996 quarter compared to $377.0
million for the 1995 comparable period.
First Defiance's provision for loan losses was $181,000 for the quarter ended
June 30, 1996 compared to $107,000 for the same period in 1995. Provisions for
loan losses are charged to earnings to bring the total allowance to the level
deemed appropriate by management based on historical experience, the volume and
type of lending conducted by First Defiance, industry standards, the amount of
non-performing assets and loan charge-off activity, general economic conditions,
particularly as they relate to First Defiance's market area, and other factors
related to the collectability of First Defiance's loan portfolio.
Due to the continued low level of non-performing assets, which were $960,000 at
June 30, 1996 compared to $945,000 at December 31, 1995, management deemed its
<PAGE>
June 30, 1996 allowance of $1.94 million to be appropriate. At June 30, 1996
First Defiance's allowance for loan losses amounted to 202.3% of non-performing
assets and .48% of total loans compared to 223.2% and .47% at December 31, 1995.
For the quarter, First Defiance charged off $171,000 of loans against its
allowance and realized recoveries of $37,000 from loans previously charged off.
During the same quarter in 1995, First Defiance charged off $73,000 in loans and
realized recoveries of $11,000.
Total non-interest expense for the quarter ended June 30, 1996 was $3,113,000,
compared to $2,590,000 for the quarter ended June 30, 1995, an increase of
20.4%. The most significant increases were in compensation and benefits, which
increased by $265,000 or 21.0% from the quarter ended June 30, 1995 to the
comparable period in 1996. That increase was due to an increase in ESOP expense
due to the September, 1995 stock offering, additional personnel in the
compliance and human resource areas, the staffing of the new Super K-Mart branch
beginning in the second quarter of 1995, the opening of two loan origination
offices in mid-1995, and increases in health insurance costs and in pension
expense. Ohio franchise tax expense, which is based on beginning of year equity,
increased $112,000 from the quarter ended June 30, 1995 to the quarter ended
June 30, 1996. Also, data processing costs increased by $40,000 which resulted
from an overall upgrading of equipment and software.
Non-interest income increased to $284,000 for the quarter ended June 30, 1996
from $234,000 for the same period in 1995. The increase was primarily due to a
$40,000 increase in loan servicing fees and other charges, from $154,000 for the
quarter ended June 30, 1995 to $194,000 for 1996.
As a result of the above factors, net income for the quarter ended June 30, 1996
increased to $1,675,000 ($.16 per share) from $1,229,000 ($.12 per share) for
the quarter ended June 30, 1995
First Defiance's board of directors has declared a dividend of $.07 per common
share as of June 30, 1996. The dividend amounted to $682,917 and was paid on
July 26, 1996. 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, 1996 compared to Six Months Ended June 30, 1995
For the six month period ended June 30, 1996, net interest income increased to
$10,817,000 from $8,764,000 for the same period in 1995. First Defiance's
interest rate spread for the six month period was 3.12%, which was 6 basis
points less than the 1995 level of 3.18% for the same period.
The increase in net interest income was due primarily to the increase in the
average interest-earning assets, to $508.2 million for the six months ended June
30, 1996 compared to $459.8 million for the same period in 1995. That growth was
due to the receipt of $63 million in proceeds from the stock offering completed
on September 29, 1995. Average loans receivable increased to $391.2 million for
the six months ended June 30, 1996 from $359.2 million for the same period in
1995. The average yield on loans was 8.69% for the six months ended June 30,
1996 and 8.63% for the comparable period in 1995. Average securities outstanding
for the six months ended June 30, 1996 were $114.1 million compared to $97.8
million for the same period in 1995 and the yield on those securities decreased
slightly, to 6.12% for the six months ended June 30, 1996 compared to 6.19% for
the comparable period in 1995. Total interest income and dividends on Federal
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Home Loan Bank stock was $20,592,000 for the six months ended June 30, 1996, a
10.7% increase from the same period in 1995 when total earnings were
$18,610,000.
Interest expense for the six month period decreased slightly, from $9,754,000
for the six month period ended June 30, 1995 to $9,673,000 for the comparable
period in 1996. Interest paid on deposits increased by $421,000, to $9,438,000
for the six months ended June 30, 1996 from $9,017,000 for the six months ended
June 30, 1995. The increase was due to the increase in average balance and cost
of funds for deposits outstanding from $375.6 million and 4.80%, respectively,
for the six month period ended June 30, 1995 to $381.9 million and 4.94% for the
six months ended June 30, 1996. The increase in interest paid on deposits was
offset by the $502,000 decrease in interest expense on Federal Home Loan Bank
advances, from $737,000 for the six months ended June 30, 1995 to $235,000 for
the comparable period in 1996. The decrease in interest expense on FHLB advances
resulted from the use of a portion of the funds from the September stock
offering to repay approximately $18 million of advances from the Federal Home
Loan Bank.
First Defiance's provision for loan losses was $344,000 for the six months ended
June 30, 1996 compared to $187,000 for the same period in 1995. The increase was
due to the growth in the loan portfolio and the continued change in loan mix
between mortgage and consumer and commercial lending. First Defiance charged off
$282,000 of loans against its reserve and realized recoveries of $64,000 from
loans previously charged off. During the same period in 1995, First Defiance
charged off $114,000 in loans and realized recoveries of $20,000.
Total non-interest expense for the six month period ended June 30, 1996 was $6.3
million, compared to $5.2 million for the same period in 1995, an increase of
22.1%. The most significant increases were in compensation and benefits, which
increased by $504,000 or 19.7% from 1995 to 1996. That increase was due to
enhancements in the Company's Employee Stock Ownership Plan and Management
Recognition Plan as a result of the 1995 stock offering and staffing increases.
Also, because of the additional equity generated by the stock offering, the
Company's Ohio Franchise Tax increased by $235,000.
Non-interest income increased to $593,000 for the six months ended June 30, 1996
from $389,000 for the same period in 1995. The increase was due to the
recognition of $87,000 in gains on the sale of loans to the secondary market and
the recognition during 1995 of a $75,000 loss on the sale of marketable
securities.
The Company has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 32.4% for the six
months ended June 30, 1996 compared to 34.0% for the same period in 1995.
As a result of the above factors, net income for the six months ended June 30,
1996 increased to $3,210,000 ($.31 per share) from $2,506,000 ($.24 per share)
for the same period in 1995.
Through June 30, 1995, First Defiance has declared dividends totaling $.14 per
share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three month period ended June 30, 1996.
First Defiance generated $3,057,000 of cash from operating activities during the
first six months of 1996. The Company's cash from operating activities results
from net income for the period, adjusted for various non-cash items, including
the provision for loan losses, depreciation and amortization, ESOP expense
related to release of shares, and changes in loans available for sale, interest
receivable and other assets, and other liabilities. The primary investing
activity of First Defiance is lending, which is funded with cash provided by
operations, proceeds from the amortization and prepayments of existing loans,
proceeds from the sale or maturity of securities, and borrowings from the
Federal Home Loan Bank.
At June 30, 1996, First Defiance had $17.6 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $18.8 million committed under existing consumer and
commercial lines of credit and standby letters of credit. At that date, the
total amount of certificates of deposit which are scheduled to mature by June
30, 1997 is $199.6 million. First Defiance believes that it has adequate
resources to fund commitments as they arise and that it can adjust the rate on
savings certificates to retain deposits in changing interest rate environments.
If First Defiance requires funds beyond its internal funding capabilities,
advances from the FHLB of Cincinnati are available as an additional source of
borrowings. At June 30, 1996 First Federal had no outstanding short-term
advances from the FHLB.
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, 1996 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.
In August 1993 the OTS adopted final regulations which incorporate an interest
rate risk ("IRR") component into the current risk-based capital requirement. The
IRR component is a dollar amount to be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement. The IRR
component will be equal to one-half of the difference between an institution's
"measured exposure" and a "normal" level of exposure, in each case as measured
in terms of the sensitivity of an institution's net portfolio value ("NPV") to
changes in interest rates. The OTS will calculate changes in an institution's
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
NPV based on financial data submitted by the institution on a quarterly basis
and guidance provided by the OTS. An institution's measured IRR is expressed as
the change that occurs in its NPV as a result of a hypothetical 200 basis point
increase or decrease in interest rates (whichever leads to a lower NPV) divided
by the estimated economic value (present value) of its assets. An institution
with a "normal" level of interest rate risk is defined as one whose measured IRR
is less than 2%, as estimated by the OTS model, and only institutions whose
measured IRR exceeds 2% will be required to maintain an IRR component.
The Director of the OTS has delayed the implementation of the capital deduction
for interest rate risk pending the testing of the appeals process set forth in
OTS Thrift Bulletin 67. Had the IRR component been required as of June 30, 1996,
risk based capital would have been reduced by $975,000 (the lowest of the three
prior quarters' component). First Federal would still have exceeded the
regulatory capital requirement by $79.9 million.
The following table sets forth First Federal's compliance with each of the
capital requirements at June 30, 1996.
<TABLE>
<CAPTION>
Risk-Based
Tangible Core Capital (1)(2)
Capital Capital (Dollars in Thousands)
------- ------- ----------------------
<S> <C> <C> <C>
Regulatory capital $103,254 $103,254 $105,113
Minimum required regulatory
capital 7,542 15,083 25,585
------- ------- -------
Excess regulatory capital $ 95,712 $ 88,171 $ 79,528
======== ======== ========
Regulatory capital as a
percentage of assets (3) 20.6% 20.6% 32.9%
Minimum capital required as
a percentage 1.5 3.0 8.0
-------- -------- -------
Excess regulatory capital as a
percentage in excess of
requirement 19.1% 17.6% 24.9%
======== ======== ========
</TABLE>
(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 $502.2 million. Risk-based capital is computed as a percentage
of total risk-weighted assets of $319.8 million.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
The deposits of First Federal are currently insured by the Savings Association
Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance Fund ("BIF"), the
federal deposit insurance fund that covers commercial bank deposits, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The BIF has achieved a fully funded status in contrast to the
SAIF and, therefore, the FDIC has reduced the deposit insurance premium paid by
commercial banks to as little as $2,000 annually. First Federal pays
approximately $860,000 in annual SAIF premiums.
Legislation to, among other things, recapitalize the SAIF and address the
resulting premium disparity had been included in various versions of the fiscal
1996 federal budget bill, but was eliminated prior to the bill being enacted on
April 26, 1996. If ultimately enacted as proposed, the legislation would have
required savings institutions like First Federal to pay a one-time charge of
$.85 to $.95 for every $100 of insured deposits to recapitalize the depleted
SAIF. Based on total insured deposits of $380.9 million at March 31, 1995 (which
was the anticipated measurement date for deposits), First Federal would have
incurred a one-time charge of between $3.2 million to $3.6 million ($2.1 million
to $2.4 million or $.20 to $.23 per share after tax). Management does not
believe such a one-time charge, if incurred, would have a material adverse
impact on First Federal's or First Defiance's overall financial condition.
The previously proposed legislation also contemplated the merger of the BIF and
SAIF, and the required conversion of savings institutions like First Federal
into commercial banks.
Absent a legislative solution to the premium disparity issue, management will
explore other options, including migrating existing deposits out of SAIF. First
Defiance cannot presently predict with any degree of certainty how the deposit
insurance premium disparity issue will be resolved or the resulting consequences
of any such resolution.
<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 at the present time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable.
<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 2, 1996 By: /s/ Don C. Van Brackel
-------------- -------------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: August 2, 1996 By: /s/ Marvin K. Rabe
-------------- ---------------------
Marvin K. Rabe
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-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,539
<INT-BEARING-DEPOSITS> 2,812
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,176
<INVESTMENTS-CARRYING> 23,210
<INVESTMENTS-MARKET> 23,462
<LOANS> 399,176
<ALLOWANCE> 1,942
<TOTAL-ASSETS> 520,666
<DEPOSITS> 384,604
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,512
<LONG-TERM> 5,945
0
0
<COMMON> 104
<OTHER-SE> 126,501
<TOTAL-LIABILITIES-AND-EQUITY> 520,666
<INTEREST-LOAN> 16,999
<INTEREST-INVEST> 3,366
<INTEREST-OTHER> 125
<INTEREST-TOTAL> 20,490
<INTEREST-DEPOSIT> 9,438
<INTEREST-EXPENSE> 9,673
<INTEREST-INCOME-NET> 10,817
<LOAN-LOSSES> 344
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,314
<INCOME-PRETAX> 4,752
<INCOME-PRE-EXTRAORDINARY> 3,210
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,210
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 4.35
<LOANS-NON> 795
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,817
<CHARGE-OFFS> 282
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 1,942
<ALLOWANCE-DOMESTIC> 1,942
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
