================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number ________________
FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
OHIO 34-1803915
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
601 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (419) 782-5015
Securities registered pursuant to Section 12(b) of the Act:
(None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
As of March 27, 1997, there were issued and outstanding 9,423,896
shares of the Registrants common stock.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and ask price of such
stock as of March 27, 1997 was approximately $130.8 million.
Documents Incorporated by References
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Registrants Annual Report to Stockholders for the fiscal
year ended December31, 1996 are incorporated into Part II, Items 5-8 of this
Form 10-K.
(2) Portions of the Registrants definitive proxy statement for its 1997 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
================================================================================
<PAGE>
PART I
Item 1. Business
First Defiance Financial Corp. (First Defiance or the Company) was
organized in June, 1995 and on September 29, 1995 became the parent company of
First Federal Savings and Loan, Defiance, Ohio (First Federal) when First
Federal and First Federal Mutual Holding Company, which at the time owned 59% of
the outstanding common stock of First Federal, completed a Conversion and
Reorganization from the mutual holding company form of ownership to full stock
ownership. In connection with the Conversion and Reorganization (the
Reorganization) First Defiance completed a Subscription and Community Stock
Offering (the Offering) in which it sold 6,476,914 shares of common stock
(equivalent to the 59% ownership of First Federal Mutual Holding Company) for
$10 per share. The outstanding public shares of common stock of First Federal
were converted into common shares of First Defiance in a ratio of 2.1590231
shares for every one share of First Federal.
First Federal had reorganized on June 19, 1993 from a mutual savings
and loan association to a mutual holding company known as First Federal Mutual
Holding Company (the Mutual Holding Company Reorganization). As part of the
Mutual Holding Company Reorganization First Federal Mutual Holding Company
organized a federally chartered stock savings and loan association (now First
Federal) and transferred all of its assets and liabilities to First Federal in
exchange for 3,000,000 shares of common stock which represented all of the
outstanding shares of First Federal upon completion of the Mutual Holding
Company Reorganization. Concurrent with the Mutual Holding Company
Reorganization, First Federal sold 2,080,000 additional shares of common stock
to members and employees of First Federal and to the public. On September 29,
1995, as part of the Reorganization, the 3,000,000 shares of First Federal held
by the Mutual Holding Company were canceled and the shares held by the public
were exchanged for shares of First Defiance in accordance with an exchange ratio
which assured they would maintain their existing 41.0% ownership.
The business of the Company and its subsidiaries will be discussed
herein as activities of the Company (on a consolidated basis), and references to
the Companys historical investment activities include the activities of First
Federal prior to September29, 1995 unless otherwise noted.
The Company employs executive officers and a support staff if and as
the need arises. Such personnel are provided by First Federal and are not paid
separate remuneration for such services. The Company reimburses First Federal
for the use of First Federal personnel, pursuant to an expense sharing agreement
between the Company and First Federal. First Federal provides the Company with
office space and is reimbursed for the use of the space through the expense
sharing agreement. At December 31, 1996, the Company had consolidated assets of
$543.4 million, consolidated deposits of $382.5 million, and consolidated
stockholders equity of $116.6 million. The Companys executive office is located
at 601 Clinton St., Defiance, Ohio 43512 and its telephone number is (419)
782-5015.
<PAGE>
First Federal Savings and Loan
First Federal is a federally chartered stock savings and loan
headquartered in Defiance, Ohio. It conducts operations through its main office,
eight full service branch offices and two loan origination offices in Defiance,
Fulton, Henry, Putnam and Williams Counties in northwest Ohio. First Federals
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) under
the Savings Association Insurance Fund (SAIF). First Federal is a member of the
Federal Home Loan Bank System.
First Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences
(one-to-four-family units) primarily located in the five counties in which its
offices are located and in contiguous Paulding County. First Federal also
originates other real estate loans secured by nonresidential and multi-family
residential real estate and construction loans. First Federal also holds a
significant number of non real estate loans including commercial, home
improvement and equity, consumer finance loans, primarily automobile loans, and
mobile home loans. First Federal also invests in U.S. Treasury and federal
government agency obligations, obligations of the State of Ohio and its
political subdivisions and mortgage-backed securities which are issued by
federal agencies.
Lending Activities
General. A savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. See Regulation - Federal Regulation of
Savings Associations. At December31, 1996, First Federals limit on loans-to-one
borrower was $11.2 million and its five largest loans or groups of loans to one
borrower, including related entities, aggregated $3.9 million, $3.4 million,
$3.1 million, $2.6 million and $2.5 million. All of these loans or groups of
loans were performing in accordance with their terms at December31, 1996.
Loan Portfolio Composition. Loan volume continues to be strong. The net
increase in net loans outstanding over the prior year was $33.9 million, $26.5
million, and $21.3 million in 1996, 1995 and 1994, respectively. The loan
portfolio contains no foreign loans nor any concentrations to identified
borrowers engaged in the same or similar industries exceeding 10% of total
loans.
<PAGE>
The following table sets forth the composition of the Companys loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------------
1996 1995 1994 1993
-------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Single-family residential $241,228 57.1% $220,880 56.9% $222,035 61.6% $219,435 64.7%
Multi-family residential 9,175 2.2 16,929 4.4 7,577 2.1 5,745 1.7
Non-residential real estate 21,348 5.0 19,780 5.1 19,888 5.5 18,596 5.5
Construction 11,412 2.7 8,200 2.1 6,858 1.9 6,954 2.1
-------------------------------------------------------------------------------------------
Total real estate loans 283,163 67.0 265,789 68.5 256,358 71.1 250,730 74.0
Non-real estate:
Consumer finance 74,019 17.5 61,810 15.9 52,491 14.6 41,041 12.1
Commercial 26,674 6.3 23,647 6.1 17,436 4.8 15,560 4.6
Mobile home 25,199 6.0 24,671 6.4 24,191 6.7 22,274 6.5
Home equity and improvement 13,570 3.2 11,875 3.1 10,265 2.8 9,464 2.8
-------------------------------------------------------------------------------------------
Total non-real estate loans 139,462 33.0 122,003 31.5 104,383 28.9 88,339 26.0
-------------------------------------------------------------------------------------------
Total loans 422,625 100.0% 387,792 100.0% 360,741 100.0% 339,069 100.0%
===== ===== ===== =====
Less:
Loans in process 4,474 3,971 3,440 2,860
Deferred loan origination fees 568 559 631 883
Allowance for loan losses 2,217 1,817 1,733 1,662
-------- -------- -------- --------
Net loans $415,366 $381,445 $354,937 $333,664
======== ======== ======== ========
<PAGE>
<CAPTION>
----------------------
1992
----------------------
Amount %
----------------------
(Dollars in thousands)
<S> <C> <C>
Real estate:
Single-family residential $215,666 65.9%
Multi-family residential 6,102 1.9
Non-residential real estate 20,935 6.4
Construction 5,591 1.7
----------------------
Total real estate loans 248,294 75.9
Non-real estate:
Consumer finance 33,473 10.2
Commercial 14,462 4.4
Mobile home 20,841 6.4
Home equity and improvement 10,025 3.1
----------------------
Total non-real estate loans 78,801 24.1
----------------------
Total loans 327,095 100.0%
=====
Less:
Loans in process 2,919
Deferred loan origination fees 1,082
Allowance for loan losses 1,185
--------
Net loans $321,909
========
</TABLE>
First Defiance also had $.6 million and $3.8 million in loans
classified as available-for-sale at December31, 1996 and 1995, respectively. The
fair value of such loans, which are all single-family residential mortgage
loans, exceeded their carrying value by $5,000 and $64,000 as of December 31,
1996 and 1995, respectively.
<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1996 regarding the dollar
amount of loans maturing in First Defiance's portfolio, based on the contractual
terms to maturity, before giving effect to net items. Demand loans, loans having
no stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10 Due 10-15 Due 15+
Due Due Years Years Years Years
Before Before After After After After
12/31/97 12/31/98 12/31/96 12/31/96 12/31/96 12/31/96 Total
---------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate $21,206 $16,207 $47,612 $78,089 $53,298 $66,750 $283,162
Non-real estate:
Commercial 14,174 5,045 6,429 785 241 -- 26,674
Home equity and
improvement 6,627 686 1,405 741 81 4,030 13,570
Mobile home 1,856 2,026 6,501 9,594 3,837 1,385 25,199
Consumer finance 25,401 18,901 29,067 602 32 17 74,020
---------------------------------------------------------------------------------
Total $69,264 $42,865 $91,014 $89,811 $57,489 $72,182 $422,625
===================================================================================
</TABLE>
The schedule above does not reflect the actual life of the Company's
loan portfolio. The average life of loans is substantially less than their
contractual terms because of prepayments and due-on-sale clauses, which give
First Defiance the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid.
The following table sets forth the dollar amount of all loans, before
net items, due after one year from December 31, l996 which have fixed interest
rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates Total
------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Real estate $191,446 $70,510 $261,956
Non-real estate:
Commercial 3,753 8,747 12,500
Other 74,574 4,331 78,905
------------------------------------------------------
$269,773 $83,588 $353,361
=====================================================
</TABLE>
<PAGE>
Originations, Purchases and Sales of Loans. The lending activities of
First Defiance are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Board of Directors
and management. Loan originations are obtained by a variety of sources,
including referrals from real estate brokers, developers, builders, and existing
customers; newspapers and radio advertising; and walk-in customers.
First Defiance's loan approval process is intended to assess the
borrowers ability to repay the loan, the viability of the loan, and the adequacy
of the value of the property that will secure the loan. A loan application is
first reviewed by a loan officer of First Defiance and then, if the loan exceeds
the loan officer's lending authority, the loan is submitted for approval to the
appropriate Vice President of Lending. All loans greater than $200,000, all
commercial loans and all employee loans are subject to the approval of the
executive committee of the Board of Directors. Loans is excess of $500,000
require approval by the full Board of Directors.
First Defiance offers adjustable rate loans in order to decrease the
vulnerability of its operations to changes in interest rates. The demand for
adjustable-rate loans in First Defiance's primary market area has been a
function of several factors, including customer preference, the level of
interest rates, the expectations of changes in the level of interest rates and
the difference between the interest rates offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate
residential loans that can be originated at any time is largely determined by
the demand for each in a competitive environment.
The general lowering of interest rates in 1996 has decreased the demand
for adjustable rate loans. Adjustable rate loans represented 26.0% of First
Federal's total originations of mortgage loans compared to 33.4% and 35.8%
during the year ended December 31, 1995 and 1994, respectively. First Defiance
continues to hold adjustable-rate securities in order to further reduce its
interest-rate gap.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.
First Defiance originated substantially all of the loans in its
portfolio. To better manage interest rate risk, First Defiance is an approved
seller/servicer for the Federal Home Loan Mortgage Corporation (Freddie Mac).
The Company sold $13.3 million and $86,000 in loans during the years ended
December 31, 1996 and 1995, respectively. First Defiance had identified $559,000
and $3.8 million in additional loans which were classified as held for sale as
of December 31, 1996 and 1995, respectively. All loans with a 30-year maturity
which meet the Freddie Mac underwriting guidelines are deemed
available-for-sale. Management intends to retain servicing rights on any loans
sold.
<PAGE>
The following table shows total loans originated, loan reductions, and
the net increase in First Defiance's total loans during the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
------------------------------------
(In thousands)
<S> <C> <C> <C>
Loan originations:
One to four family residential $ 70,494 $ 49,430 $ 42,188
Five or more family residential 1,414 2,564 2,313
Non-residential real estate 5,006 4,065 7,964
Construction 15,936 13,133 11,457
Commercial 25,298 23,854 14,698
Mobile home 6,465 5,982 7,263
Home equity and improvement 6,448 5,323 4,049
Consumer 53,698 42,700 41,918
------------------------------------
Total loans originated 184,759 147,051 131,850
Loan reductions:
Loan pay-offs 87,879 73,869 70,984
Mortgage loans sold 13,332 86 --
Periodic principal repayments 48,715 46,045 39,194
------------------------------------
149,926 120,000 110,178
------------------------------------
Net increase in total loans $ 34,833 $ 27,051 $ 21,672
====================================
</TABLE>
Asset Quality
First Defiances credit policy establishes guidelines to manage credit
risk and asset quality. These guidelines include loan review and early
identification of problem loans to ensure sound credit decisions. First
Defiances credit policies and review procedures are meant to minimize the risk
and uncertainties inherent in lending. In following the policies and procedures,
management must rely on estimates, appraisals and evaluations of loans and the
possibility that changes in these could occur because of changing economic
conditions.
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1996, in dollar amount and as a percentage of
First Defiances total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.
<TABLE>
<CAPTION>
Non-residential and
Single-family multi-family Home equity
residential residential Mobile home and improvement
--------------------------------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $2,183 .52% $725 .18% $1,461 .35% $58 .02%
60-89 days 524 .13 149 .03 408 .09 20 --
90 days and over 89 .02 18 -- 193 .05 -- --
--------------------------------------------------------------------------------------------------------
Total delinquent loans $2,796 .67% $892 .21% $2,062 .49% $78 .02%
========================================================================================================
<CAPTION>
Consumer
finance Commercial Total
-------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage
-------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $1,643 .39% $ 5 --% $6,075 1.46%
60-89 days 462 .11 63 .02 1,626 .38
90 days and over 111 .03 ( -- 411 .10
-------------------------------------------------------------------------
Total delinquent loans $2,216 .53% $68 .02% $8,112 1.94%
=========================================================================
</TABLE>
<PAGE>
Non-Performing Assets. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, First Defiance places all loans more than 90 days past due
on non-accrual status. When a loan is placed on non-accruing status, total
unpaid interest accrued to date is reserved. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan. First
Defiance considers that a loan is impaired when, based on current information
and events, it is probable that they will be unable to collect all amounts due
(both principal and interest) according to the contractual terms of the loan
agreement. When a loan is impaired, First Defiance measures impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral if collateral dependent. If the measure of the impaired loan
is less than the recorded investment, First Defiance will recognize an
impairment by creating a valuation allowance. This policy excludes large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment such as residential mortgage, consumer installment, and credit card
loans. During the fourth quarter of 1996 First Federal identified two commercial
loans which were impaired in the amount of $1.6 million. Interest received and
recorded in income during 1996 on impaired loans including interest received and
recorded in income prior to such impaired loan designation amounted to $156,198.
Unrecorded interest income on these and all non-performing loans in 1996 was
$34,000. The average recorded investment in impaired loans during 1996 and 1995
was $1.45 million and $-0-, respectively. The total allowance for loan losses
related to these loans was $804,000 on December 31, 1996.
Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. In addition, First Defiance also repossesses
other assets securing loans, consisting primarily of automobiles and mobile
homes. When such property is acquired it is recorded at the lower of the
restated loan balance, less any allowance for loss, or fair value. Costs
relating to development and improvement of property are capitalized, whereas
costs relating to holding the property are expensed. Valuations are periodically
performed by management and an allowance for losses is established by a charge
to operations if the carrying value of property exceeds its estimated net
realizable value.
As of December 31, 1996, First Defiance's total non-performing loans
amounted to $1,972,000, or .47% of total loans, compared to $772,000, or .20%
of total loans, at December 31, 1995.
<PAGE>
The following table sets forth the amounts and categories of First
Defiance's nonperforming assets and troubled debt restructurings at the dates
indicated.
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
--------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single-family residential $ 88 $263 $207 $ 150 $ 475
Non-residential and multi-family
residential real estate 19 - 18 209 131
Commercial 1,561 268 294 380 -
Mobile home 193 130 163 135 234
Home equity and improvement - - - - 49
Consumer finance 111 111 16 41 73
--------------------------------------------------------------
Total non-performing loans 1,972 772 698 915 962
Real estate owned - 1 3 29 218
Other repossessed assets 267 172 164 71 130
--------------------------------------------------------------
Total repossessed assets 267 173 167 100 348
--------------------------------------------------------------
Total non-performing assets $2,239 $945 $865 $1,015 $1,310
==============================================================
Troubled debt restructurings $ - $437 $443 $ 136 $ 348
==============================================================
Total non-performing assets as a percentage
of total assets .41% .18% .18% .22% .29%
==============================================================
Total non-performing loans and troubled
debt restructurings as a percentage of
total loans .47% .31% .32% .31% .40%
==============================================================
Total non-performing assets and troubled
debt restructurings as a percentage of
total assets .41% .26% .28% .25% .37%
==============================================================
Allowance for loan losses as a percent of
total non-performing assets
99.0% 192.3% 200.5% 164.0% 93.5%
==============================================================
</TABLE>
<PAGE>
Allowance for Loan Losses. It is management's policy to maintain an
allowance for loan losses based upon an assessment of prior loss experience, the
volume and type of lending conducted by First Defiance, industry standards, past
due loans, general economic conditions and other factors related to the
collectibility of the loan portfolio. Although management believes that it uses
the best information available to make such determinations, future adjustments
to allowances may be necessary, and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations.
At December 31, l996, First Defiance's allowance for loan losses
amounted to $2.2 million compared to $1.8 million at December 31, 1995. As of
December 31, l996, $837,000 constituted an allowance with respect to specific
loans or assets held for sale.
The following table sets forth the activity in First Defiance's
allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994 1993 1992
--------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $1,817 $1,733 $1,662 $1,185 $1,988
Provisions 1,020 374 426 829 1,496
Charge-offs:
Real estate:
Single-family - - 19 63 316
Nonresidential - - - - 8
--------------------------------------------------------------
Total real estate - - 19 63 324
Non-real estate:
Consumer finance 430 230 222 132 198
Mobile home 334 91 159 121 128
Commercial 12 23 1 86 1,694
--------------------------------------------------------------
Total non-real estate 776 344 382 339 2,020
--------------------------------------------------------------
Total charge-offs 776 344 401 402 2,344
Recoveries:
Consumer finance 152 51 46 50 39
Commercial 4 - - - 6
Assets held for sale - 3 - - -
--------------------------------------------------------------
Total 156 54 46 50 45
--------------------------------------------------------------
Allowance at end of period $2,217 $1,817 $1,733 $1,662 $1,185
==============================================================
Allowance for loan losses to total
non-performing loans at end of period
112.4% 235.4% 248.3% 181.6% 123.2%
Allowance for loan losses to total loans at
end of period .53% .47% .48% .49% .36%
</TABLE>
<PAGE>
The following table sets forth information concerning the allocation of
First Defiance's allowance for loan losses by loan categories at the dates
indicated. For information about the percent of total loans in each category to
total loans, see "- Lending Activities - Loan Portfolio Composition."
<TABLE>
<CAPTION>
December 31
1996 1995 1994
------------------------------------------------------------------------------
Percent of Percent of Percent of
total loans total loans total loans
Amount by category Amount by category Amount by category
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans $ 307,041 67.0% $ 431,133 68.5% $ 376,358 71.1%
Other:
Commercial business loans 866,185 6.3 687,122 6.1 775,085 4.8
Mobile home loans 208,095 6.0 191,646 6.4 240,521 6.7
Consumer and home equity
and improvement loans 835,701 20.7 507,043 19.0 341,447 17.4
------------------------------------------------------------------------------
$2,217,022 100.0% $1,816,944 100.0% $1,733,411 100.0%
==============================================================================
</TABLE>
Securities
Management determines the appropriate classification of debt securities
at the time of purchase. Debt securities are classified as held-to-maturity when
First Defiance has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Debt
securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available for-sale securities are stated at
fair value.
First Defiance's securities portfolio is managed in accordance with a
written policy adopted by the Board of Directors and administered by the
Investment Committee. All securities transactions must be approved by the
Investment Committee and reported to the Board of Directors.
First Defiance's investment portfolio includes four CMO and REMIC
issues totalling $2.3 million, all of which are fully amortizing securities, and
four separate agencies securities totalling $8.6 million which have a step-up
feature. All such investments are considered derivative securities. None of
First Defiance's investments are considered to be high risk and management does
not believe the risks associated with these investments to be significantly
different from risks associated with other pass-through mortgage backed or
agency securities. First Defiance does not invest in off-balance sheet
derivative securities.
<PAGE>
The amortized cost and fair value of securities at December 31, 1996 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. REMIC, collateralized
mortgage obligations, FHLMC certificates, FNMA certificates, GNMA certificates,
money market mutual funds and other mutual funds are not due at a single
maturity date. For purposes of the maturity table, mortgage-backed securities,
which are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of underlying
collateral. The mortgage-backed securities may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
<TABLE>
<CAPTION>
Contractually Maturing Total
-------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average
Year Rate Years Rate Years Rate Years Rate Amount Yield
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
obligations $10,000 5.95% $34,762 5.82% $ - - % $ - - % $ 44,762 5.89%
Obligations of
states and
political 188 6.45 607 6.53 269 7.18 360 7.38 1,424 7.14
subdivisions
Mortgage-backed
securities 1,080 7.81 2,587 7.04 2,815 8.10 18,031 7.27 24,513 7.29
REMICs and CMOs - - - - - - 2,259 6.15 2,259 6.15
-------------------------------------------------------------------------------------------------
Total $11,268 $37,956 $3,084 $20,650 72,958
======= ======= ====== =======
Mutual funds and
other 30,986
Unrealized loss
on securities
available for
sale (600)
----------
Total $103,344
==========
</TABLE>
For additional information regarding First Defiance's investment portfolio refer
to Note 3 to the financial statements.
Interest-Bearing Deposits
First Defiance has interest-bearing deposits in the FHLB of Cincinnati
amounting to $1.6 and $4.3 million at December 31, l996 and l995, respectively.
<PAGE>
Sources of Funds
General. Deposits are the primary source of First Defiance's funds for
lending and other investment purposes. In addition to deposits, First Defiance
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
from the Federal Home Loan Bank may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. First Defiance's deposits are attracted principally from
within First Defiance's primary market area through the offering of a broad
selection of deposit instruments, including NOW accounts, money market accounts,
regular savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$55.6 million at December 31, l996. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.
Historically, First Defiance has not advertised for deposits outside
its local market area or utilized the services of deposit brokers.
The following table sets forth the maturities of First Defiance's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1996.
Certificates of
deposit maturing in quarter ending:
- --------------------------------------------------------------------------------
(In thousands)
March 31, 1997 $ 4,248
June 30, 1997 5,249
September 30, 1997 2,650
December 31, 1997 2,702
After December 31, 1997 5,100
-------
Total certificates of deposit with balances of
$100,000 or more $19,949
=======
The following table details the deposit accrued interest payable as of December
31:
<TABLE>
<CAPTION>
1996 1995
----------------- ----------------
<S> <C> <C>
Checking and Money Market Accounts $ 49,502 $ 21,639
Passbook Accounts - 5,327
Certificates 166,811 247,209
================= ================
$216,313 $274,175
================= ================
</TABLE>
<PAGE>
For additional information regarding First Defiance's deposits see Note 8 to the
financial statements.
Borrowings. First Defiance may obtain advances from the FHLB of
Cincinnati upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. See "Regulation
- - Federal Regulation of Savings Associations - Federal Home Loan Bank System."
The following table sets forth certain information as to First
Defiance's FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
December 31
1996 1995 1994
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Long-term:
FHLB advances $ 5,601 $6,842 $12,741
Weighted average interest rate 6.58% 6.70% 7.38%
Short-term:
FHLB advances 35,220 - 11,000
Weighted average interest rate 6.28% - 7.00%
</TABLE>
The following table sets forth the maximum month-end balance and
average balance of First Defiance's FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Long-term:
Maximum balance $ 6,842 $12,641 $21,509
Average balance 6,115 9,881 15,646
Weighted average interest rate of FHLB advances
6.59% 7.28% 7.39%
Short-term:
Maximum balance 35,220 18,000 11,000
Average balance 8,310 8,154 4,231
Weighted average interest rate of FHLB advances 5.59% 6.19% 5.09%
</TABLE>
<PAGE>
$4.3 million of First Defiance's outstanding long-term FHLB advances
were obtained in the first calendar quarter of 1992 as part of the Company's
asset and liability management strategy and $1.3 million were obtained in the
fourth quarter in 1995 as part of the FHLB's Affordable Housing Program. First
Defiance utilizes short-term advances from the FHLB to meet cash flow needs and
for short-term investment purposes. There were $35.2 million in short-term
advances outstanding at December 31, 1996 (none at December 31, 1995). First
Defiance borrows funds under a variety of programs at FHLB. At December 31,
1996, $15 million was outstanding under First Defiance's REPO Advance line of
credit. The total available under the REPO line is $30 million. Amounts
are generally borrowed under the REPO line on an overnight basis. An additional
$15 million was borrowed under the FHLB's Cash Management Advance (CMA) program
at a variable rate. Amounts borrowed under the CMA program mature within 90
days. The $5.2 million of other advances are borrowed under the FHLB's
short-term fixed or LIBOR based programs.
Subsidiaries. The Company has two wholly-owned subsidiaries, First
Federal and First Defiance Service Company ("First Defiance Service"). First
Defiance was established to provide customers with certain uninsured financial
service products through an affiliation with a third party vendor. Total fees
collected in 1996 by First Defiance Service were less than $6,000.
Employees. First Defiance had 124 full-time employees and 30 part-time
employees at December 31, 1996. None of these employees are represented by a
collective bargaining agent, and First Defiance believes that it enjoys good
relations with its personnel.
Competition
First Defiance faces strong competition both in attracting deposits and
making real estate loans. Its most direct competition for deposits has
historically come from commercial banks and credit unions located in
northwestern Ohio, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, First
Defiance has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The ability of First Defiance to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
First Defiance experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. First Defiance competes for loans principally through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
<PAGE>
REGULATION
General
The Company, as the holding company of First Federal, is subject to
regulation, examination and oversight by the OTS and is required to submit
periodic reports to the OTS. As a savings association organized under the laws
of the United States, First Federal is also subject to regulatory oversight by
the OTS, and, because First Federal's deposits are insured by the FDIC, First
Federal is also subject to examination and regulation by the FDIC. First Federal
must file periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by the OTS and the FDIC to
determine whether First Federal is in compliance with various regulatory
requirements and is operating in a safe and sound manner. First Federal is a
member of the FHLB of Cincinnati.
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations, and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and First Federal
may be regulated under federal law as a bank or be required to change its
charter. Such change in regulation or charter would likely change the range of
activities in which First Federal may engage. In addition, the Company might
become subject to a different set of holding company regulations which may limit
the activities in which the Company may engage and subject the Company to other
additional regulatory requirements, including separate capital requirements. At
this time, the Company cannot predict when or whether Congress may actually pass
legislation regarding the Company's and First Federal's regulatory requirements
or charter.
Holding Company Regulation. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act (the "HOLA"). As such,
the Company registered with the OTS and is subject to OTS regulations,
examination, supervision and reporting requirements, in addition to the
reporting requirements of the Securities and Exchange Commission (the "SEC").
Congress is considering legislation which may require that the Company become or
be treated as a bank holding company regulated by the FRB. Bank holding
companies with more than $150 million in assets are subject to capital
requirements similar to those imposed on First Federal and have more extensive
interstate acquisition authority than savings and loan holding companies. They
are also subject to more restrictive activity and investment limits than savings
and loan holding companies. No assurances can be given that such legislation
will be enacted, and the Company cannot be certain of the legislation's impact
on its future operations until it is enacted.
<PAGE>
The Company is a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding company, and such companies are the only financial institution holding
companies which may engage in commercial, securities and insurance activities
without limitation. Congress is considering, however, either limiting unitary
savings and loan holding companies to the same activities as other financial
institution holding companies or permitting certain bank holding companies to
engage in commercial activities and expanded securities and insurance
activities. The Company cannot predict if and in what form these proposals might
become law. The broad latitude to engage in activities under current law can be
restricted, however, if the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association. The OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At December 31, 1996, First Federal met the QTL
Test. See "Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution
other than through a merger or other business combination with First Federal,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than
First Federal or other subsidiary savings associations) would thereafter be
subject to further restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence, or shall continue after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a subsidiary
savings institution, (ii) conducting an insurance agency or escrow business,
(iii) holding, managing or liquidating assets owned by or acquired from a
subsidiary savings institution, (iv) holding or managing properties used or
occupied by a subsidiary savings institution, (v) acting as trustee under deeds
of trust, (vi) those activities previously directly authorized by federal
regulation as of March 5, 1987, to be engaged in by multiple holding companies,
or (vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the OTS prior to being engaged in by a multiple holding
company.
<PAGE>
The OTS may also approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, if the multiple savings and loan holding company involved
controls a savings association which operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).
As under prior law, the OTS may approve an acquisition resulting in a multiple
savings and loan holding company controlling savings associations in more than
one state in the case of certain emergency thrift acquisitions.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program, and loans to executive officers are subject
to additional limitations. First Federal was in compliance with such
restrictions at December 31, 1996.
<PAGE>
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. The
Company is an affiliate of First Federal. Generally, Sections 23A and 23B of the
FRA (i) limit the extent to which a savings association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, (ii) limit the aggregate of
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. First Federal was
in compliance with these requirements and restrictions at December 31, 1996.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted.
Neither the Company nor First Federal has opted out of the protection afforded
by Chapter 1704.
<PAGE>
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3% or 50% of the outstanding voting securities of an Ohio corporation (a
"Control Share Acquisition") must be approved in advance by the holders of at
least a majority of the outstanding voting shares of such corporation
represented at a meeting at which a quorum is present and a majority of the
portion of the outstanding voting shares represented at such a meeting excluding
the voting shares owned by the acquiring shareholder. The Control Share
Acquisition Statute was intended, in part, to protect shareholders of Ohio
corporations from coercive tender offers.
Takeover Bid Statute. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offers of all information material to a decision to
accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
OTS Regulations
General. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all savings associations the
deposits of which are insured by the FDIC in the SAIF and all federally
chartered savings institutions. The OTS issues regulations governing the
operation of savings associations, regularly examines such institutions and
imposes assessments on savings associations based on their asset size to cover
the costs of this supervision and examination. It also promulgates regulations
that prescribe the permissible investments and activities of federally chartered
savings associations, including the type of lending that such associations may
engage in and the investments in real estate, subsidiaries and securities they
may make. The OTS also may initiate enforcement actions against savings
associations and certain persons affiliated with them for violations of laws or
regulations or for engaging in unsafe or unsound practices. If the grounds
provided by law exist, the OTS may appoint a conservator or receiver for a
savings association.
<PAGE>
Federally chartered savings associations are subject to regulatory
oversight by the OTS under various consumer protection and fair lending laws.
These laws govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to abide
by federal laws and regulations governing community reinvestment could limit the
ability of an association to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent an institution lends and invests in its designated service area, with
particular emphasis on low-to-moderate income areas and borrowers.
Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. These requirements
call for tangible capital of 1.5% of adjusted total assets, core capital (which
for First Federal is equal to tangible capital) of 3% of adjusted total assets,
and risk-based capital (which for First Federal consists of core capital and
general valuation allowances) equal to 8% of risk-weighted assets. Assets and
certain off balance sheet items are weighted at percentage levels ranging from
0% to 100% depending on their relative risk.
The OTS has proposed to amend the core capital requirement so that
those associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. First
Federal does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed. First Federal exceeded
all of its regulatory capital requirements at December 31, 1996.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component, and First Federal currently qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority to
impose a higher individualized capital requirement on any savings association it
deems to have excess interest rate risk. The OTS also may adjust the risk-based
capital requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
<PAGE>
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower capital category, an institution is
subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the OTS has less flexibility in determining how to
resolve the problems of the institution. In addition, the OTS can downgrade an
association's designation notwithstanding its capital level, based on less than
satisfactory examination ratings in areas other than capital or, after notice
and an opportunity for hearing, if the institution is deemed to be in an unsafe
or unsound condition or to be engaging in an unsafe or unsound practice. Each
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. A critically undercapitalized institution must be placed
in conservatorship or receivership within 90 days after reaching such
capitalization level, except under limited circumstances. First Federal's
capital at December 31, 1996, meets the standards for a well-capitalized
association.
Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with the terms of an
OTS-approved capital plan until the institution has been adequately capitalized
on an average during each of four consecutive calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (b) the amount which is necessary to bring the institution into compliance
with all capital standards applicable to such institution at the time the
institution fails to comply with its capital restoration plan.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions according to ratings of associations based on their capital level
and supervisory condition. Capital distributions, for purposes of such
regulation, include, without limitation, payments of cash dividends, repurchases
and certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other association.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of its net
income, current year-to-date, plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a Tier 2 association. The second
category, Tier 2, consists of associations that, before and after the proposed
capital distribution, meet their current minimum, but not fully phased-in
capital requirement. Associations in this category may make capital
distributions up to 75% of their net income over the most recent four quarters.
Tier 3 associations do not meet their current minimum capital requirement and
must obtain OTS approval of any capital distribution. A Tier 1 association
deemed to be in need of more than normal supervision by the OTS may be treated
as a Tier 2 or a Tier 3 association.
<PAGE>
First Federal meets the requirements for a Tier 1 association and has
not been notified of any need for more than normal supervision. As a subsidiary
of the Company, First Federal will also be required to give the OTS 30 days'
notice prior to declaring any dividend on its common shares. The OTS may object
to the dividend during that 30-day period based on safety and soundness
concerns. Moreover, the OTS may prohibit any capital distribution otherwise
permitted by regulation if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, an association not owned by a holding
company and having a CAMEL examination rating of 1 or 2 could make a capital
distribution without notice to the OTS, if it remains adequately capitalized, as
described above, after the distribution is made. Any other association seeking
to make a capital distribution that would not cause the association to fall
below the capital levels to qualify as adequately capitalized or better would
have to provide notice to the OTS. Except under limited circumstances and with
OTS approval, no capital distribution would be permitted if it would cause the
association to become undercapitalized or worse.
Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon member institutions failing to meet these
liquidity requirements. The eligible liquidity of First Federal, as computed
under current regulations, at December 31, 1996, was approximately $59.9
million, or 14.3%, and exceeded the then applicable 5% liquidity requirement by
approximately $38.9 million, or 9.3%.
Qualified Thrift Lender Test. Savings associations are required to
qualify as a qualified thrift lender ("QTL") in order to avoid certain
regulatory restrictions. If a savings association fails to meet the QTL test,
its holding company will be limited to the activities permitted for a multiple
savings and loan holding company and its savings association subsidiary that
fails to meet the QTL test will not be eligible for new FHLB advances. In order
to be a QTL prior to September 30, 1996, a savings association was required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTI"), which are generally related to domestic
residential real estate and manufactured housing and include credit card,
student and small business loans, stock issued by any FHLB, the FHLMC or the
FNMA. Under such test, 65% of an institution's "portfolio assets" (total assets
less goodwill and other intangibles, property used to conduct business and 20%
of liquid assets) must consist of QTI on a monthly average basis in 9 out of
every 12 months. Effective September 30, 1996, as an alternative to the
foregoing QTL test, a savings association may also qualify as a QTL if at least
60% of the institution's assets (on a tax basis) consist of specified assets
(generally loans secured by residential real estate or deposits, educational
loans, cash and certain governmental obligations). The OTS may grant exceptions
to the QTL test under certain circumstances. At December 31, 1996, First Federal
met the QTL test.
<PAGE>
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's total capital under the regulatory capital requirements plus
any additional loan reserve not included in total capital. A savings association
may loan to one borrower an additional amount not to exceed 10% of total capital
plus additional reserves if the additional loan amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Certain types of loans are not subject to these
limits. In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At December 31, 1996, First Federal was in
compliance with this lending limit.
FDIC Regulations
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of federally insured
banks and thrifts and safeguards the safety and soundness of the bank and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met.
First Federal is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including First Federal, and
has authority to initiate enforcement actions against federally insured savings
associations if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance each for members of the BIF and the SAIF.
The FDIC may increase assessment rates for either fund if necessary to restore
the fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such rates if such target level has been met.
The reserves of the SAIF are below the level required by law because a
significant portion of the assessments paid into the SAIF are used to pay the
cost of prior thrift failures. The BIF has, however, met its required reserve
level.
<PAGE>
The assessments paid by healthy savings associations exceeded those
paid by healthy BIF members by approximately $.19 per $100 in deposits for 1995,
and no BIF assessments were required of healthy commercial banks in 1996 except
a $2,000 minimum fee. Legislation to recapitalize the SAIF and eliminate the
significant premium disparity became effective September 30, 1996. The
recapitalization plan provides for a special assessment equal to $.657 per $100
of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. In addition, the cost of prior thrift failures will
be shared by both the SAIF and the BIF, which will increase BIF assessments in
1997. SAIF assessments for healthy savings associations will be approximately
$.064 per $100 in deposits in 1997 but can never be reduced below the level set
for healthy BIF institutions.
First Federal paid on November 27, 1996, an additional pre-tax
assessment of approximately $2.5 million. Such payment was recorded as an
expense and accounted for by First Federal as of September 30, 1996.
The recapitalization plan also provides for the merger of the SAIF and
the BIF effective January 1, 1999, assuming there are no savings associations
under federal law. Under separate proposed legislation, Congress is considering
the elimination of the federal thrift charter and the separate federal
regulation of thrifts. As a result, First Federal would have to convert to a
different financial institution charter and would be regulated under federal law
as a bank, including being subject to the more restrictive authority limitations
imposed on national banks.
In addition, the Company may become subject to more restrictive holding
company requirements, including activity limits and capital requirements similar
to those imposed on First Federal. The Company cannot predict the impact of the
conversion of First Federal to, or the regulation of First Federal as, a bank
until the legislation requiring such change is enacted.
FRB Regulations
Reserve Requirements. FRB regulations require savings associations to
maintain reserves against their transaction accounts (primarily NOW accounts) of
3% of deposits in net transaction accounts for that portion of accounts in
excess of $4.3 million up to $52 million, and to maintain reserves of 10% of
deposits in net transaction accounts against that portion of total transaction
accounts in excess of $52 million. These percentages are subject to adjustment
by the FRB. At December 31, 1996, First Federal was in compliance with its
reserve requirements.
Federal Home Loan Banks
The FHLBs, under the regulatory oversight of the Federal Housing
Financing Board, provide credit to their members in the form of advances. First
Federal is a member of the FHLB of Cincinnati and must maintain an investment in
the capital stock of the FHLB of Cincinnati in an amount equal to the greater of
1.0% of the aggregate outstanding principal amount of First Federal's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. First Federal
is in compliance with this requirement with an investment in FHLB of Cincinnati
stock of $3.0 million at December 31, 1996.
<PAGE>
FHLB advances to members such as First Federal who meet the QTL test
are generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. Upon the origination or renewal of
a loan or advance, the FHLB of Cincinnati is required by law to obtain and
maintain a security interest in collateral in one or more of the following
categories: fully disbursed, whole first mortgage loans on improved residential
property or securities representing a whole interest in such loans; securities
issued, insured or guaranteed by the United States government or an agency
thereof; deposits in any FHLB; or other real estate related collateral (up to
30% of the member association's capital) acceptable to the applicable FHLB, if
such collateral has a readily ascertainable value and the FHLB can perfect its
security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established an "Affordable
Housing Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. First Federal has $1.3 million in advances outstanding at December 31,
1996 resulting form a 1995 participation in this program. These funds were used
in accordance with the stipulations of the program.
TAXATION
Federal Taxation
The Company and First Federal are each subject to the federal tax laws
and regulations which apply to corporations generally. Certain thrift
institutions, including First Federal, were, however, prior to the enactment of
the Small Business Jobs Protection Act, which was signed into law on August 21,
1996, allowed deductions for bad debts under methods more favorable than those
granted to other taxpayers. Qualified thrift institutions could compute
deductions for bad debts using either the specific charge off method of Section
166 of the Code, or the reserve method of Section 593 of the Code under which a
thrift institution annually could elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax years 1995 and 1994, First Federal
used the percentage of taxable income method.
<PAGE>
Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that would
be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that becomes a large bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
becomes a small bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans and its reserve for losses on nonqualifying loans
as of the close of its last taxable year beginning before January 1, 1996, over
(ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the
thrift's reserves would have been at the close of its last year beginning before
January 1, 1996, had the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less then its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential real and church property and certain
mobile homes), but only to the extent that the loan is made to the owner of the
property to acquire, construct, or improve the property.
<PAGE>
In addition to the regular income tax, the Company and First Federal
are subject to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1996, the Company and First Federal are also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (excess to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by First Federal to the Company is deemed paid out of its pre-1988 reserves
under these rules, the pre-1988 reserves would be reduced and First Federal's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of December 31, 1996, First Federal's pre-1988 reserves for tax purposes
totaled approximately $9.5 million.
The tax returns of First Federal have been audited or closed without
audit through the tax year ended December 31, 1992. In the opinion of
management, any examination of open returns would not result in a deficiency
which could have a material adverse effect on the financial condition of First
Federal.
Ohio Taxation
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.582% times taxable net worth.
<PAGE>
In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock of First Federal after the
Conversion, as reflected on the balance sheet of the Company, in computing its
taxable net worth as long as it owns at least 25% of the issued and outstanding
capital stock of First Federal. The calculation of the exclusion from net worth
is based on the ratio of the excludable investment (net of any appreciation or
goodwill included in such investment) to total assets multiplied by the net
value of the stock. As a holding company, the Company may be entitled to various
other deductions in computing taxable net worth that are not generally available
to operating companies.
A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of First
Federal's book net worth determined in accordance with GAAP. As a "financial
institution," First Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio.
Item 2. Properties
At December 31, 1996, First Federal conducted its business from its
main office at 601 Clinton Street, Defiance, Ohio, and eight other full service
branches in northwestern Ohio. It also operates two loan origination offices
which were opened in 1995.
First Defiance maintains its headquarters in the main office of First
Federal at 601 Clinton Street, Defiance, Ohio.
<PAGE>
The following table sets forth certain information with respect to the
office and other properties of the Company at December 31, l996. See Note 7 to
the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Net book value
Description/address Leased/owned of property Deposits
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Main Office Owned $1,476 $155,037
601 Clinton Street
Defiance, OH
Branch Offices
204 E. High Street Owned 359 77,645
Bryan, OH
211 S. Fulton Street Owned 132 37,856
Wauseon, OH
625 Scott Street Owned 579 65,443
Napoleon, OH
1050 East Main Street Owned 672 16,384
Montpelier, OH
926 East High Street Owned 131 7,348
Bryan, OH
1333 Woodlawn Owned 85 12,839
Napoleon, OH
825 N. Clinton Street Owned 372 8,231
Defiance, OH
Inside Super K-Mart Leased 200 1,742
190 Stadium Dr.
Defiance, OH
14241 Airport Highway Leased - *
Swanton, OH
1017 N. Williams St. Leased - *
Paulding, OH
----------------------------------------
$4,006 $382,525
========================================
</TABLE>
* -- Loan origination office only
Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of First Defiance.
<PAGE>
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted to a vote of securities holders during the
fourth quarter of l996.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference from page
36 of First Defiance's Annual Report to Stockholders for fiscal 1996 ("Annual
Report"), which is included herein as Exhibit 13.
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page
3 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required herein is incorporated by reference from pages
4 through 14 of the Annual Report.
Item 8. Financial Statements and Supplementary Data
The financial statements required herein are incorporated by reference
from pages 15 through 35 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from page
7 through 11 of the definitive proxy statement dated March 24, 1997. Otherwise,
the requirements of this Item 10 are not applicable.
Item 11. Executive Compensation
The information required herein is incorporated by reference from page
14 of the definitive proxy statement dated March 24, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference from page
3 of the definitive proxy statement dated March 24, 1997.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from page
23 of the definitive proxy statement dated March 24, 1997.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following financial statements are incorporated herein by reference
from pages 15 through 35 of the Annual Report:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are included in the Notes to Financial Statements
incorporated herein by reference and therefore have been omitted.
(3) Exhibits
<PAGE>
The following exhibits are either filed as a part of this report or are
incorporated herein by reference to documents previously filed as indicated
below:
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation *
3.2 Form of Code of Regulations *
3.2 Bylaws *
4.1 Specimen Stock Certificate *
10.1 1996 Stock Option Plan **
10.2 1996 Management Recognition Plan and Trust ***
10.3 1993 Management Recognition Plan and Trust *
10.4 1993 Stock Incentive Plan *
10.5 1993 Directors' Stock Option Plan *
10.6 Employment Agreement with Don C. Van Brackel *
10.7 Employment Agreement with Marvin K. Rabe (also the form of the *
Employment Agreement with John W. Boesling)
13 Annual Report to Shareholders and Notice of Annual Meeting of
Shareholders and Proxy Statement
21.1 List of Subsidiaries of the Company
23.1 Consent of Independent Auditors
* Incorporated herein by reference to the like numbered exhibit in the Registrant's Form S-1 (File No. 33-93354).
** Incorporated herein by reference to Appendix A to the Proxy Statement.
*** Incorporated herein by reference to Appendix B to the Proxy Statement.
</TABLE>
(b) Reports on Form 8-K
None
(c) See (a)(3) above for all exhibits filed herewith or incorporated herein by
reference to documents previously filed and the Exhibit Index.
(d) There are no other financial statements and financial statement schedules
which were excluded from the Annual Report to Stockholders which are
required to be included herein.
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST DEFIANCE FINANCIAL CORP.
March 28, 1997 By: /s/ Don C. Van Brackel
-------------------------
Don C. Van Brackel
Chairman, President, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 1997.
Signature Title
--------- -----
/s/ Don C. Van Brackel Chairman of the Board, President and
- ----------------------------- CEO
Don C. Van Brackel
/s/ John C. Wahl Senior Vice President and CFO
- -----------------------------
John C. Wahl
/s/ Edwin S. Charles Director, Vice Chairman
- -----------------------------
Edwin S. Charles
/s/ Stephen L. Boomer Director
- -----------------------------
Stephen L. Boomer
/s/ Dr. Douglas A. Burgei Director
- -----------------------------
Dr. Douglas A. Burgei
/s/ Erwin L. Clemens, Esq. Director, Secretary
- -----------------------------
Erwin L. Clemens, Esq.
<PAGE>
Signature Title
--------- -----
/s/ Dr. John U. Fauster, III Director
- -----------------------------
Dr. John U. Fauster, III
/s/ Dr. Marvin J. Ludwig Director
- -----------------------------
Dr. Marvin J. Ludwig
/s/ Thomas A. Voigt Director
- -----------------------------
Thomas A. Voigt
/s/ James M. Zachrich Director
- -----------------------------
James M. Zachrich
Exhibit 13
Annual Report to Shareholders
<PAGE>
BUSINESS
General
First Defiance Financial Corp. ("First Defiance" or the "Company") conducts
business primarily through its wholly subsidiary, First Federal Savings and Loan
(First Federal), which is a federally chartered savings and loan association
which conducts business in Defiance, Ohio, and neighboring communities in
northwestern Ohio. It currently has nine full service offices and a loan
origination office located in Defiance, Fulton, Henry, Williams and Paulding
counties. At December 31, 1996, First Defiance had $543.4 million of total
assets, $426.8 million of total liabilities, including $382.5 million of
deposits and $116.6 million of stockholders' equity.
As a savings and loan, First Federal is primarily engaged in attracting deposits
from the general public through its nine branch offices and using those and
other available sources of funds to originate loans. As a member of the thrift
industry, First Defiance has traditionally emphasized mortgage lending. However,
the Company also has a large non-mortgage loan portfolio. First Defiance
anticipates that its operations in the future will be conducted in a manner and
scope which is consistent with its past practices.
First Defiance was organized in June, 1995 and on September 29, 1995 became the
parent company of First Federal when First Federal and First Federal Mutual
Holding Company, which at the time owned 59% of the outstanding common stock of
First Federal, completed a Conversion and Reorganization from the mutual holding
company form of ownership to full stock ownership. In connection with the
Conversion and Reorganization ("the Reorganization"), First Defiance completed a
Subscription and Community Stock Offering ("the Offering") in which it sold
6,476,914 shares of common stock for $ 10 per share.
First Federal had reorganized, on July 19, 1993, from a mutual savings and loan
association to a mutual holding company known as First Federal Mutual Holding
Company (the "Mutual Holding Company Reorganization"). As part of the Mutual
Holding Company Reorganization, First Federal Mutual Holding Company organized a
federally chartered stock savings and loan association (now First Federal) and
transferred all of its assets and liabilities to First Federal in exchange for
3,000,000 shares of common stock which represented all of the outstanding shares
of First Federal upon completion of the Mutual Holding Company Reorganization.
Concurrent with the Mutual Holding Company Reorganization, First Federal sold
2,080,000 additional shares of common stock to members and employees of First
Federal and to the public. On September 29, 1995, as part of the Reorganization,
the 3,000,000 shares held by the mutual holding company were canceled and the
shares held by the public were converted into common shares of First Defiance in
a ratio of 2.1590231 shares for every one share of First Federal.
<PAGE>
Due to the Company's capital position, and because First Defiance stock was
trading at less than book value, in May, 1996, First Defiance initiated the
first of three five percent stock repurchases. As of December 31, 1996,
1,518,688 shares of First Defiance stock had been purchased from the public at
an average price of $11.07 per share and placed in treasury. As a result of the
stock repurchases, First Defiance had 9,470,877 shares of common stock
outstanding at December 31, 1996.
First Federal is subject to regulation by the Office of Thrift Supervision
("OTS"), as its primary federal regulator and by the Federal Deposit Insurance
Corporation ("FDIC"), which, through the Savings Association Insurance Fund
("SAIF") administered by it, insures First Federal's depositors up to applicable
limits. First Federal is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati, which is one of the 12 banks which comprise the FHLB System.
As a member of the SAIF, First Federal was required to pay a one- time
assessment of $2,460,977 to fully capitalize the SAIF during 1996. As a result
of the assessment, First Federal's annual insurance fees have fallen from $.23
annually on each $100 of deposits to $.064 per $100 of deposits. After
considering the tax benefit of the SAIF assessment, First Defiance's net income
was reduced by $1.6 million or $.16 per share in 1996.
<PAGE>
SELECTED FINANCIAL DATA
Dollars in Thousands, Except per share data
The following tables set forth certain financial and other data of First
Defiance at the dates and for the periods indicated. For additional information
about First Defiance, reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of First Defiance and related notes included elsewhere herein.
<TABLE>
<CAPTION>
As Of Or For The Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
================================================================
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Total Interest income ........................................ $ 41,257 $ 38,565 $ 35,260 $ 36,461 $ 38,884
Total interest expense ....................................... 19,459 20,269 16,926 16,413 21,849
----------------------------------------------------------------
Net interest income ........................................ 21,798 18,276 18,332 16,046 17,035
Provision for loan losses .................................... 1,020 374 465 975 1,619
----------------------------------------------------------------
Net interest income after provision for loan losses .......... 20,776 17,902 17,667 17,073 15,416
Non-interest income .......................................... 1,327 1,035 1,001 1,043 666
Non-interest expenses(1) ..................................... 15,957 10,560 9,930 8,631 7,224
----------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle .......................... 6,148 8,377 8,938 9,485 9,058
Federal income taxes ......................................... 1,997 2,856 2,985 3,052 3,045
----------------------------------------------------------------
Income before cumulative effect of change in
accounting principle ....................................... 4,151 5,521 5,953 6,433 6,013
Cumulative effect of the change in accounting for
postretirement benefit costs ............................... -- -- -- -- 309
----------------------------------------------------------------
Net income(l) ................................................ $ 4,151 $ 5,521 $ 5,953 $ 8,433 $ 5,704
================================================================
Earnings per share(1,2) ...................................... $ .42 $ .53 $ .58 $ .29 N/A
================================================================
Cash dividends declared per share (3) ........................ $ .29 $ .28 $ .28 $ .13 N/A
================================================================
Dividend payout ratio ........................................ 69.05% 52.83% 46.26% 44.83% N/A
================================================================
SELECTED FINANCIAL CONDITION DATA
Total assets ................................................. $543,411 $525,550 $471,461 $467,400 $447,889
Securities available-for-sale ................................ 77,407 93,041 65,604 77,069 --
Securities held-to maturity .................................. 25,937 26,073 30,632 39,351 100,379
Loans receivable held-to-maturity ............................ 415,366 361,444 354,937 333,664 321,909
Loans receivable held-for-sale ............................... 559 3,759 -- -- --
Deposits ..................................................... 382,525 361,779 375,690 376,261 378,540
FHLB advances ................................................ 40,821 6,842 23,741 21,509 25,949
Stockholders' equity (substantially restricted) .............. 116,685 133,506 66,396 65,681 41,474
<PAGE>
<CAPTION>
As Of Or For The Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
================================================================
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS (4)
Return on average assets(1) .................................. 0.78% 1.13% 1.26% 1.40% 1.31%
Return on average equity(1) .................................. 3.26 6.14 8.67 12.30 1473
Equity to assets(5) .......................................... 24.07 16.36 14.40 11.41 889
Interest rate spread (5) ..................................... 3.22 3.01 3.50 3.59 3.66
Net interest margin (5) ...................................... 4.31 3.67 4.06 4.06 4.05
Non-performing assets and troubled debt
restructuring to total assets at end of period (5) ......... 0.41 0.24 0 28 0.25 0 37
Non-performing loans and troubled debt
restructuring to total loans (6) ........................... 0.54 0.28 0.32 0.31 0.40
Average interest-earning assets to average
interest-bearing liabilities ............................... 129 120 114 111 107
Net interest income after provision for loan
losses and of her income to total other expenses ........... 139 179 190 210 225
Non-interest expenses to average total assets ................ 3.02 2.16 2.13 1.88 1.66
<FN>
- ------------------
(1) Non-interest expense for 1996 includes a one-time charge of $2.461 million
to recapitalize the Savings Association Insurance Fund (SAIF). Without the
SAIF change, net income would have been $5.995 million, or $.58 per share,
return on average assets would have been 1.09% and return on average equity
would have been 4.55%.
(2) Earnings per share for 1993-1994 have been restated to reflect the
Reorganization. Earnings per share for 1993 are based on the weighted
average number of shares outstanding (as adjusted) and net income since
July 19, 1993, the date of the Mutual Holding Company Reorganization. See
Notes 1 and 2 to the Consolidated Financial Statements.
(3) Cash dividends declared per share for 1993-1994 have been restated to
reflect shares in the Reorganization since July 19, 1993. See Note 1 to the
Consolidated Financial Statements.
(4) With the exception of end of period ratios, all ratios are based on average
monthly balances during the periods.
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets. The ratio of
equity to assets and the interest rate spread are calculated based on
average balances.
(6) Non-performing loans consist of non-accrual loans that are contractually
past due 90 days or more and loans that are deemed impaired under criteria
of FASB Statement No. 114. Non-performing assets consist of non-performing
loans and real estate, mobile homes and other assets acquired by
foreclosure or deed-in-lieu thereof.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Defiance, through First Federal, its wholly owned subsidiary, attracts
deposits from the general public and uses those and other available sources of
funds to originate loans. Loans secured by single-family residences located
primarily in the five counties in which its offices are located and in
contiguous Putnam County amounted to $241.2 million, or 57.6% of the total loan
portfolio at December 31, 1996. To a lesser extent, First Defiance originates
other real estate and construction loans, which, net of undisbursed loan funds
amounted to $37.5 million or 8.9% of the total loan portfolio at December 31,
1996. Approximately 33.3% or $139.5 million of First Defiance's loan portfolio
at December 31, 1996 consisted of non-real estate loans including automobile
loans which amounted to $62.1 million or 14.7% of the total loan portfolio;
commercial loans which amounted to $26.7 million or 6.4% of the total loan
portfolio; and mobile home loans which amounted to $25.2 million or 6.0% of the
total loan portfolio.
To more effectively manage interest rate risk, First Defiance became an
authorized seller/servicer for the Federal Home Loan Mortgage Corporation
("Freddie Mac"). Loans with total principal balances of approximately $13.5
million were sold during 1996 and a gain of $209,000 was recognized. First
Defiance retains the servicing rights for all loans sold on the secondary
market. At December 31, 1996, $11.3 million of loans were being serviced for
others and mortgage servicing rights of $123,000 were recorded. All loans with a
30-year maturity which meet the Freddie Mac underwriting guidelines are
classified as loans held-for-sale. At December 31, 1996, the balance of loans
held-for-sale was $559,000.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, fixed income mutual funds, adjustable rate mortgage mutual funds,
money market mutual funds, 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.
Securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities, which are comprised of mortgage-backed securities and municipal
obligations, are stated at amortized cost and had a recorded value of $25.9
million at December 31, 1996. Securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are stated at
fair value and had a recorded value of $77.4 million at December 31, 1996. First
Defiance does not engage in securities trading.
As of December 31, 1996, First Defiance's investment in adjustable-rate
mortgage-backed mutual funds consisted of investments in two funds, one of which
invests solely in mortgage-backed securities issued by U.S. Government agencies
and which had a carrying value of $5.8 million at such date, and the other of
which had a carrying value of $5.3 million and which invests in privately issued
mortgage-backed securities and in securities issued by U.S. Government agencies.
The risk of loss with privately-issued mortgage-backed securities may be greater
than the risk associated with mortgage-backed securities insured or guaranteed
by U.S. Government agencies. The investment in fixed income mutual funds
consists of a $15.0 million investment in a fund which invests in asset-backed
securities and corporate bonds, and $3.9 million in mutual funds which invest
primarily in U.S. Treasury obligations.
<PAGE>
The profitability of First Defiance depends primarily on its net interest
income, which is the difference between interest income on loans and securities
and interest expense on interest-bearing deposits and borrowings. First
Defiance's net interest income is significantly affected by general economic
conditions and policies of regulatory authorities. First Defiance's net income
also is dependent on the level of non-interest 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, Ohio
franchise tax, and miscellaneous other expenses, as well as federal income tax
expense.
Historically, First Defiance has experienced relatively low levels of
non-performing assets. First Defiance's total non-performing assets and
troubled-debt restructurings as percentage of total assets amounted to .41%,
0.24% and 0.28% at December 31, 1996, 1995 and 1994 respectively. The Company's
ratio of net charge-offs to average loans outstanding amounted to 0.15%, 0.08%
and 0.12% for the years ended December 31, 1996, 1995 and 1994 respectively.
ASSET/LIABILITY MANAGEMENT
First Defiance's ability to maximize net interest income is largely dependent
upon management's ability to plan and control net interest income through
management of the pricing and mix of assets and liabilities. Due to the fact
that the assets and liabilities of a financial institution are monetary in
nature, changes in interest rates and monetary or fiscal policy affect its
financial condition and have potentially the greatest impact on the net income
of the Company.
The following table shows First Defiance's interest sensitivity analysis as of
December 31, 1996. This analysis shows the cumulative gap and interest
sensitivity over the next two years. The interest rate gaps reported in the
table result when assets are funded with liabilities having different repricing
intervals. The traditional gap approach shows the Company to be liability
sensitive to rate changes at December 31,1996. In 1996, the impact on interest
income due to changing interest rates was a net increase of $687,000.
These gaps are actively managed and change frequently as adjustments are made to
interest rate views, market outlooks and balance sheet cash flows. The Company's
gap position at the end of any period may not be reflective of interest rate
views in subsequent periods, and the Company's active management dictates that
longer-term economic views are balanced against short-term interest rate
changes.
At December 31, 1995, First Defiance had a one year cumulative gap of 4.13%. The
year-to-year fluctuation is due to the fact that proceeds from the September,
1995 stock offering were invested in short-term investments at December 31,
1995. Those proceeds are now invested in longer term assets or were used to
repurchase company stock. Also, management changed its approach to measuring its
gap during 1996. For interest rate sensitivity analysis, interest bearing
checking accounts and savings accounts are considered to be only 60% sensitive
to interest rate changes; therefore if short term interest rates were to change
by 100 basis points the interest rates on these products would change by 60
basis points. In prior years, these non-maturity deposits were considered to
have the market sensitivity approximately the same as 2.5 year or 3.5 year
treasury bonds.
<PAGE>
<TABLE>
<CAPTION>
Over Over Over
Less than 3 through 6 6 Months 1 through 2 Over
3 Months Months through 1 Year Years 2 Years Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, gross ............................... $ 67,754 $ 31,464 $ 63,304 $ 29,078 $ 227,110 $ 418,710
Securities ................................. 3,534 2,784 14,557 30,678 54,824 106,377
Other assets ............................... 1,650 -- -- -- 16,674 18,324
-------------------------------------------------------------------------------------
Total Assets ............................... $ 72,938 $ 34,248 $ 77,861 $ 59,756 $ 298,608 $ 543,411
=====================================================================================
LIABILITIES
Passbook savings, NOW accounts,
checking & money market
demand accounts (1)......................... $ 68,957 -- -- -- $ 45,871 $ 114,928
Certificates of deposit .................... 97,508 53,599 72,508 27,106 14,883 265,601
FHLB advances .............................. 36,988 157 321 979 3,478 40,621
Other liabilities .......................... -- 613 -- -- 4,883 5,496
-------------------------------------------------------------------------------------
Total liabilities .......................... 202,353 54,368 72,827 28,085 69,213 426,846
Stockholders equity ........................ -- -- -- -- 116,565 116,565
=====================================================================================
Total sources of funds ..................... $ 202,353 $ 54,368 $ 72,827 $ 28,085 $ 185,778 $ 543,411
=====================================================================================
Interest rate sensitivity gap .............. $(129,415) $ (20,120) $ 5,034 $ 31,671 $ 112,830
=====================================================================================
Cumulative interest rate sensitivity gap ... $(129,416) $(149,535) $(144,501) $(112,630)
=====================================================================================
Percentage of cumulative gap to total assets (23.82%) (27.52%) (26.59%) (20.76%)
=====================================================================================
<FN>
(1) Non maturity deposits are assumed to be 60% rate sensitive.
</FN>
</TABLE>
<PAGE>
In addition to gap, First Defiance has recently begun to monitor interest rate
risk through simulation analysis which measures the impact changes in interest
rates can have on net income. The simulation technique analyzes the effect of a
presumed 100 basis point shift in interest rates. Management does not believe
such a shift will have a significant adverse effect on net interest income. The
Company continues to expand its interest rate risk measurement system to more
sophisticated simulation methods that will monitor the impact interest rate
changes have on net interest income. Such measurements will be made on a monthly
basis.
First Defiance also utilized the "market value of portfolio equity" ("NPV")
methodology which the OTS has adopted as part of its capital regulations. Under
the NPV methodology, interest rate risk exposure ("IRR") is assessed by
reviewing the estimated changes in First Federal's Net Interest Income ("NII")
and NPV which would hypothetically occur if interest rates rapidly rise or fall
along the yield curve. Projected values of NII and NPV at both higher and lower
regulatory defined rate scenarios are compared to base case values (no change in
rates) to determine the sensitivity to changing interest rates. For 1996 the
results of such projections were within the limits set by the Company's board of
directors.
Specific steps that First Defiance has taken to better manage its interest rate
exposure include establishing a policy of selling all newly originated 30-year
fixed rate mortgages. First Defiance is an approved seller/servicer for Freddie
Mac and in 1996 sold loans with balances of $13.5 million. First Defiance also
has continued to focus on growth in the consumer and commercial portfolios,
which by their nature have less exposure to interest rate fluctuations. The
balances of First Defiance automobile loans increased from $51.1 million as of
December 31, 1995 to $62.1 million at December 31, 1996. During that same period
the commercial portfolio increased from $23.6 million to $26.7 million.
Management of First Defiance also has tried to reduce the impact of interest
rate changes on its deposits by emphasizing low interest rate deposit products
and by maintaining competitive pricing on longer-term certificates of deposit.
CHANGES IN FINANCIAL CONDITION
At December 31, 1996, First Defiance's total assets, deposits and stockholders'
equity amounted to $543.4 million, $382.5 million and $116.6 million
respectively, compared to $525.6 million, $381.8 million and $133.5 million
respectively at December 31, 1995.
The increase in assets is due to growth in the loan portfolio and the
implementation during the fourth quarter of 1996 of $20 million of leveraging
strategies where the Company utilized overnight and adjustable rate advances
from the Federal Home Loan Bank ("FHLB") to purchase shares of a short-term
income mutual fund and adjustable rate mortgage-backed securities. The decline
in equity is due to the repurchase by the Company of 1,518,688 shares of its own
common stock. The shares were acquired in open market purchases totalling
$16,815,187, or $11.07 per share. At December 31, 1996 First Defiance's common
stock had a book value per share of $12.31. Equity also was reduced when the
Company funded its Management Recognition Plan through the acquisition of
259,076 shares of its stock for $2,817,452.
<PAGE>
For the year, net loans receivable, including loans held for sale, have
increased $30.7 million. Net mortgage loans, including loans held for sale,
increased by $14.7 million to $278.6 million from $263.9 million, and
non-mortgage loans increased $16.0 million, to $137.3 million from $121.3
million. The most significant increases in non-mortgage loans were in automobile
loans, which increased from $51.1 million at December 31, 1995 to $62.1 million
at December 31, 1996, commercial loans, which increased from $23.6 million to
$26.7 million during that same period, and home equity and improvement loans,
which increased from $11.9 million to $13.6 million.
The growth in the loan portfolios was funded in part with proceeds from maturing
investment securities. Total investment securities declined from $119.1 million
at December 31, 1995 to $103.3 million at December 31, 1996. The overall decline
in investment securities of $15.8 million includes the acquisition of
approximately $20 million in investment securities as part of the previously
mentioned leveraging strategy. Without the purchase of securities associated
with that strategy, the investment portfolio actually declined by $35.8 million.
In addition to funding loan growth, certain available-for-sale securities were
liquidated to fund a portion of the stock repurchase programs. The overall
decline in the securities balance was primarily in the available-for-sale
portfolio, which declined from $93.0 million at December 31, 1995 to $77.4
million at December 31, 1996. The available-for-sale portfolio was also
negatively impacted by a $370,000 decrease in the market value of the securities
during 1996 which was recorded in accordance with FASB Statement No. 115. The
declining market values of these securities was the result of slightly rising
interest rates during the year. Held-to-maturity securities declined during
1996, from $26.1 million at December 31, 1995 to $25.9 million at December 31,
1996. The balance actually declined by $5.1 million without taking into account
the acquisition of $5 million in adjustable-rate mortgage-backed securities as
part of the Company's leveraging strategy. The decline in held-to-maturity
balances is due to maturities and prepayments of certain mortgage-backed
securities.
First Defiance also had an increase in office properties and equipment, which
increased from $6.3 million to $12.3 million. The increase in property and
equipment is due to substantial additions and renovations to the main offices in
Defiance, Bryan, Napoleon and Wauseon. The December 31, 1996 balance includes
construction in progress on the renovations of $7.6 million. Management
estimates the cost to complete the renovation projects to be approximately $2.9
million. It is anticipated that the projects will all be substantially completed
during the first quarter of 1997.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar amounts
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates, and the net interest margin. Dividends received on
Federal Home Loan Bank stock are included as interest income. The table does not
reflect the effect of income taxes.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate
==============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable $399,949 $34,635 8.66% $367,773 $32,003 8.70% $343,523 $29,180 8.49%
Securities 107,702 6,622 6.15 106,120 6,562 6.18 108,762 6,080 5.59
Dividends on FHLB stock 2,955 207 7.00 2,798 191 6.82 2,818 182 5.75
-----------------------------------------------------------------------------------------------
Total interest-earning assets 510,606 41,464 8.12 476,691 38,756 8.13 455,101 35,422 7.78
Non-interest earning assets 18,257 12,937 11,174
------ ------ ------
Total assets $528,863 $489,628 $466,275
======== ======== ========
INTEREST-BEARING LIABILITIES
Deposits $381,444 $16,579 4.87 $376,864 $18,857 5.00 $374,615 $15,480 4 13
FHLB advances 15,828 880 5.58 19,036 1,432 7.52 21,169 1,448 684
-----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 397,272 19,459 4.90 395,900 20,289 5.12 395,784 16,928 4.28
Non-interest-bearing liabilities 4,311 3,855 3,355
----- ----- -----
Total liabilities 401,583 399,755 399,139
Stockholders' equity 127,280 89,873 67,136
======= ====== ======
Total liabilities and
stockholders' equity $528,863 $489,626 $466,275
Net interest income; interest
rate spread $22,005 3.22% $16,467 3.01% $18,494 3.50%
======= ==== ======= ==== ======= ====
Net interest margin (2) 4.31% 3.87% 4.06%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 129% 120% 114%
=== === ===
<PAGE>
<FN>
(1) At December 31, 1996, the yields earned and rates paid were as follows:
loans receivable, 8.62%; securities, 6.22%; other interest-earning assets,
7.03%; total interest-earning assets, 8.14%; deposits, 4.73%; FHLB
advances, 5.73%; total interest-bearing liabilities, 4.83%; and interest
rate spread, 3.31%.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
</FN>
</TABLE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in volume of interest-related assets and liabilities have affected First
Defiance's interest income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) change in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs.1994 1994 vs. 1993
----------------------------------------------------------------------------------------------
Increase Increase Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total (Decrease) (Decrease) Total
Due to Due to Increase Due to Due to Increase Due to Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans ............................ $ (146) $ 2,778 $ 2,632 $ 732 $ 2,091 $ 2,623 $(2,039) $ 1,603 $ (436)
Securities ....................... (29) 89 60 632 (150) 482 (152) (613) (765)
FHLB stock ....................... 5 11 16 30 (1) 29 35 3 36
----------------------------------------------------------------------------------------------
Total interest-earning assets .... $ (170) $ 2,878 $ 2,708 $ 1,394 $ 1,940 $ 3,334 $(2,156) $ 993 $(1,163)
==============================================================================================
INTEREST-BEARING LIABILITIES
Deposits ......................... $ (522) $ 244 $ (278) $ 3,283 $ 94 $ 3,377 $(1,033) $ (165) $(1,198)
FHLB advances .................... (335) (217) (552) 137 (153) (16) (113) (173) (286)
Total interest-bearing liabilities $ (857) $ 27 $ (830) $ 3,420 $ (59) $ 3,361 $(1,146) $ (338) $(1,484)
==============================================================================================
Increase (decrease) in net interest
income ........................... $ 3,538 $ (27) $ 321
======= ======= =======
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1996 and December 31, 1995
General -- First Defiance reported net income of $4.2 million for the year ended
December 31, 1996 compared to $5.5 million for the year ended December 31, 1995,
a decrease of $1.3 million or 24.8%. The 1996 results were impacted during the
third quarter by a one-time assessment of $2.5 million to recapitalize the SAIF.
The after-tax impact of the SAIF charge was a reduction in net income by $1.6
million. Without the SAIF charge, First Defiance would have had net income for
the year of $5.8 million, an increase of $254,000 or 4.6%. Net interest income
after the provision for loan losses was $20.8 million for the year ended
December 31, 1996 compared to $17.9 million for 1995, an increase of 16%.
However, non interest expense increased to $16.0 million for 1996 from $10.6
million in 1995, an increase of 51.1%. Excluding the effect of the $2.5 million
SAIF charge which is included in non-interest expense for 1996, non-interest
expense increased by $2.9 million, or 27.8% during 1996.
Net interest margin, or net yield on average interest-earning assets was 4.31%
in 1996 compared to 3.87% in 1995. The yield on interest earning assets declined
slightly to 8.12% for 1996 compared to 8.13% for 1995. The Company's cost of
funds declined to 4.90% for the year ended December 31, 1996 from 5.12% for the
same period in 1995 because of the use of proceeds from the September 1995 stock
offering for a full year in 1996 compared to only three months in 1995. As a
result, the interest rate spread increased to 3.22% for 1996 compared to 3.01%
for 1995.
Net Interest Income -- First Defiance's net interest income is determined by its
interest rate spread (i.e., the difference between the yields on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Total interest income increased by $2.7 million, or 7.0% from $38.6 million for
1995 to $41.3 million for 1996. The increase was due to a $32.2 million increase
in the average balance of loans outstanding. The yields on those loans fell
slightly, to 8.66% for 1996 compared to 8.70% for 1995. First Defiance
experienced strong growth in both mortgage and non-mortgage loans during 1996.
The average balance in other interest-earning assets, primarily
available-for-sale and held-to-maturity securities changed only slightly in 1996
compared to 1995.
Interest expense in 1996 decreased by $830,000 or 4.1% to $19.5 million compared
to $20.3 million in 1995. The decline was due primarily to a decrease in the
average outstanding balance of advances from the FHLB, which averaged $15.8
million for the year ended December 31, 1996 compared to $19.0 million for 1995.
The cost of deposits was slightly less in 1996 ($18.6 million) than it was in
1995 ($18.9 million) because of a 13 basis point decline in the average rate
paid on deposits. The average balance of deposits outstanding actually increased
slightly in 1996 compared to 1995. Interest expense was also favorably impacted
by a lower average rate paid on FHLB advances in 1996 compared to 1995. Interest
expense in 1995 also included an interest penalty of approximately $123,000 to
pay off a high rate fixed-rate advance in December, 1995.
As a result of the foregoing, First Defiance net interest income was $21.8
million for 1996 compared to $18.3 million for 1995.
<PAGE>
Provision for Loan Losses -- First Defiance's provision for loan losses was $1.0
million for the year ended December 31, 1996 compared to $374,000 for 1995.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level deemed appropriate by management. Factors considered
by management include historical experience, the volume and type of lending
conducted by First Defiance, industry standards, the amount of non-performing
assets, including loans which meet the Financial Accounting Standards Board
("FASB") Statement No. 114's definition of impaired, 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.
The increase in the provision for loan losses can be attributable to the overall
growth in the loan portfolio and the continued emphasis on consumer and
commercial lending, which have inherently greater credit risk than mortgage
lending. At December 31, 1996, two borrowers with total loans outstanding of
$1.6 million met the FAS Statement No. 114 definition for impairment. The total
allowance for loan losses related to those specific loans was $804,000 at
December 31, 1996. Other non-performing assets, which consist of loans 90 days
past-due and repossessed assets totaled $678,000 at December 31, 1996. The total
allowance for loan losses at December 31, 1996 was $2.2 million.
Non-interest Income -- First Defiance's non-interest income amounted to $1.3
million for the year ended December 31, 1996 compared to $1.0 million for the
year ended December 31, 1995. Service fees and other charges increased by
$153,000, primarily due to increases in fees on NSF checks. Non-interest income
also includes gains on sales of mortgage loans and service fees related to the
servicing of those loans in 1996 of $221,000. First Defiance had less than
$2,000 of such gains in 1995 as they became a Freddie Mac seller/service in
December, 1995. Non-interest income in 1996 also included a gain on sale of
available-for-sale investments of $26,000 compared to a loss in 1995 of $75,000.
In addition, non-interest income for 1995 included the gain on the disposal of
investment properties of $110,000.
Non-Interest Expenses -- Total non-interest expense for the year ended December
31, 1996 was $16.0 million. Excluding the $2.5 million SAIF assessment,
non-interest expense for 1996 was $13.5 million compared to $10.6 million for
the year ended December 31, 1995, an increase of $2.9 million or 27.8%. The
increase is primarily due to a $1.6 million increase in compensation and
benefits costs, a $695,000 increase in Ohio franchise taxes, a $123,000 increase
in data processing costs, and a $462,000 increase in non-interest expense --
other.
The increase in compensation costs was due to an increase in salaries and wages
of $665,000, a 21% increase from 1995. This increase is due to the expansion of
staffing, both at headquarters and in the branches, to meet increased workloads
and to build the appropriate infrastructure, inflationary wage increases, and
merit increases. Compensation costs also increased by $577,000 due to the
amortization of the additional shares acquired by the Management Recognition
Plan in 1996, by $161,000 due to increases in ESOP expense because of increases
in the price of First Defiance's common stock, and an increase in pension plan
expense of $126,000.
<PAGE>
Ohio franchise taxes are calculated based on beginning of year equity and
increased in 1996 because of the proceeds from the September 1995 stock
offering. Data processing costs increased due to the upgrade of systems and the
addition of several new applications. Non-interest expense -- other increased in
part because of increases in charitable contributions by $163,000 and in
appraisal fees by $93,000. Appraisal fees increased because First Defiance began
outsourcing a majority of their real estate appraisals in mid-1996. That
increase is offset by an increase in fees charged to loan customers.
Federal Income Taxes -- Income tax expense amounted to $2.0 million in 1996
compared to $2.9 million in 1995. The effective tax rates for 1996 and 1995 were
32.5% and 34.1% respectively.
Comparison of the Years Ended December 31, 1995 and December 31, 1994.
General -- First Defiance reported net income of $5.5 million for the year ended
December 31, 1995 compared to $6.0 million for the year ended December 31, 1994,
a decrease of $500,000 or 7.3%. Net interest income after the provision for loan
losses was $17.9 million for both 1995 and 1994. However, non-interest expense
increased to $10.6 million in 1995 from $9.9 million in 1994, an increase of
6.3%.
Net interest margin, or net yield on average interest-earning assets was 3.87%
in 1995 compared to 4.06% in 1994. The yield on interest earning assets
increased 35 basis points from 1994 to 1995 while the Company's cost of funds
increased by 84 basis points during the same period. As a result, the interest
rate spread decreased to 3.01% in 1995 from 3.50% in 1994.
Net Interest Income -- Total interest income increased by $3.3 million, or 9.4%
from $35.3 million for 1994 to $38.6 million for 1995. The increase was due both
to a 21 basis point increase on the average yield on loans receivable and a
$24.2 million increase in the average outstanding balance of loans receivable.
The increase in the yields on loans is primarily reflective of the continued
growth in the higher rate non-mortgage loan portfolio at a faster pace than the
growth of the mortgage loan portfolio.
The increase in interest income was offset by a similar increase in interest
expense, which rose from $16.9 million for the year ended December 31, 1994 to
$20.3 million for the year ended December 31, 1995, a $3.4 million or 20.1%
increase. The increase is due primarily to an 87 basis point increase in the
average rate paid on deposits. The rates were increased for certain certificates
of deposit early in 1995 in order to remain competitive with other local banks.
The cost of FHLB advances was $1.4 million for both 1995 and 1994, despite the
fact that short-term advances were paid off with the proceeds of the stock
offering.
The Company utilized a higher balance of FHLB advances during 1995 prior to the
stock offering however, and the average balance of FHLB advances outstanding for
the year was $21.2 million for 1994 compared to $19.0 million for 1995. The 1995
expense also includes an interest penalty of approximately $123,000 to pay off a
high rate fixed-rate advance in December, 1995.
As a result of the foregoing, First Defiance's net interest income was $18.3
million for both 1995 and 1994, despite the decrease in the interest rate spread
to 3.01% in 1995 from 3.5% in 1994.
<PAGE>
Provision for Loan Losses -- First Defiance's provision for loan losses was
$374,000 for the year ended December 31, 1995 compared to $465,000 for 1994.
First Defiance's allowance for loan losses was $1.8 million at December 31, 1995
compared to $1.7 million at December 31, 1994.
Non-interest Income -- First Defiance's non-interest income amounted to $1.0
million for both the year ended December 31, 1995 and 1994. Loan service fees
and dividends from the FHLB both increased during 1995 and First Defiance
realized a one-time gain of $110,000 from the disposal of certain investment
properties during the fourth quarter of 1995. These increases were offset by
gains and losses on the disposal of available-for-sale securities as First
Defiance realized a $75,000 loss on such securities during 1995 compared to a
gain of $63,000 on similar securities during 1994.
Non-interest Expenses -- Total non-interest expense was $10.6 million for the
year ended December 31, 1995 compared to $9.9 million for the year ended
December 31, 1994, an increase of $630,000 or 6.3%. The increase is primarily
due to a $321,000 increase in compensation and benefits costs, an $80,000
increase in occupancy costs and an increase in non-interest expense -- other of
$125,000.
The increase in compensation costs was due to staffing increases related to the
start-up of the Defiance Super K-Mart branch and the two loan origination
offices; a full years' salary for two executive level positions filled in
mid-1994; and an $80,000 increase in the Company's group life and health
insurance cost.
Occupancy costs increased primarily because of the new Super K-Mart branch as
well as the two new loan origination offices. The major components in the
non-interest other increases were advertising costs, which increased by $55,000,
and printing and office supplies and telephone costs which each increased by
$24,000 in 1995 compared to 1994. Those increases were primarily attributable to
the start-up of the Super K-Mart branch and a change in focus in the Company's
overall advertising programs.
Federal Income Taxes -- Income tax expense amounted to $2.9 million compared to
$3.0 million in 1994. The effective tax rate for 1995 and 1994 was 34.1% and
33.4% respectively.
NEW ACCOUNTING PRONOUNCEMENT
In June 1996, FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Statement No.
125 provides new accounting and reporting standards for sales, securitizations,
and servicing of receivables and other financial assets, for certain secured
borrowing and collateral transactions, and for extinguishments of liabilities.
The statement is generally effective for transactions occurring after December
31, 1996, although certain provisions that deal with securities lending,
repurchase and dollar repurchase agreements, and the recognition of collateral
have been postponed until 1998. Management does not believe the provisions of
Statement No. 125 will have a material effect of the financial statements of
First Defiance.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity -- First Defiance's principle sources of funds are deposits, advances
from the FHLB of Cincinnati, repayments on loans and mortgage-backed securities,
maturities of investment securities, proceeds from the sale of
available-for-sale securities and funds provided by operations. While scheduled
loan and mortgage-backed security amortization, maturing interest-bearing
deposits and investment securities are relatively predictable sources of funds,
deposit flows and loan and mortgage-backed security prepayments are greatly
influenced by economic conditions, the general level of interest rates and
competition. First Defiance generally manages the pricing of its deposits to
maintain a steady deposit balance. When necessary First Defiance will supplement
deposits with longer term and/or less expensive alternative sources of funds
such as advances from the FHLB.
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Treasury, federal agency and other investments having maturities of five years
or less. Current OTS regulations require than 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 1996 and at December 31, 1996.
Cash was generated by First Defiance's operating activities during the years
ended December 31, 1996, 1995 and 1994, primarily as a result of net income. The
adjustments to reconcile net income to net cash provided by operations during
the periods presented consisted primarily of proceeds from the sale of loans
(less the originations of loans held for sale), the provision for loan losses,
depreciation and amortization expense, ESOP expense related to the release of
ESOP shares in accordance with AICPA SOP 93-6 and increases and decreases in
other assets and other liabilities. The primary investing activity of First
Defiance is lending, which is funded with cash provided from operations and
financing activities, as well as proceeds from amortization and prepayments on
existing loans and proceeds from maturities of securities and, in 1995 from
proceeds from a public stock offering. For additional information about cash
flows from First Defiance's operating, investing and financing activities, see
the Statements of Cash Flows included in the Financial Statements.
At December 31, 1996, First Defiance had an aggregate of $31.5 million in
unfunded commitments to originate loans (including unused portions of lines of
credit and letters of credit) and no commitments to purchase securities. At the
same date, the total amount of certificates of deposit which are scheduled to
mature by December 31, 1997 was $210.1 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 FHLB are available.
<PAGE>
Capital -- 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 regular capital sufficient to meet a tangible capital
requirement, a core capital requirement and a risk-based capital requirement. At
December 31, 1996, First Federal's tangible and core capital totaled $74.9
million or 13.97% of adjusted total assets, which exceeded the respective
minimum requirements at that date by approximately $58.8 million and $66.9
million, respectively, or 12.47% and 10.97% of adjusted total assets
respectively. First Federal's risk-based capital totaled $76.6 million at
December 31, 1996, or 22.43% of risk-weighted assets, which exceeded the current
requirement of 8.0% by approximately $49.3 million, or 14.43% of risk-weighted
assets. First Federal's capital was reduced in December, 1996 with the
declaration of a $30 million dividend to its parent, First Defiance Financial
Corp. For additional information about First Federal's capital requirements, see
Note 12 to the Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with Generally Accepted Accounting
Principles, which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of First Defiance's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
<PAGE>
Report of Independent Auditors
To the Stockholders and the Board of Directors
First Defiance Financial Corp.
We have audited the consolidated statements of financial condition of First
Defiance Financial Corp. as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Defiance
Financial Corp. at December 31, 1996 and 1995, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Toledo, Ohio
January 17, 1997
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
December 31
1996 1995
-----------------------------------------
<S> <C> <C>
Assets Cash and cash equivalents:
Cash and amounts due from depository institutions $ 3,102,385 $ 4,393,833
Interest-bearing deposits 1,649,801 4,291,348
-----------------------------------------
4,752,186 8,685,181
Investment securities:
Available-for-sale, carried at fair value 77,407,019 93,040,937
Held-to-maturity, carried at amortized cost (approximate
fair value $26,324,936 and $26,691,928 at December 31,
1996 and 1995, respectively)
25,936,547 26,072,523
-----------------------------------------
103,343,566 119,113,460
Loans for sale (approximate fair value -
$563,642 and $3,823,000 at December 31,
1996 and 1995, respectively)
558,550 3,758,572
Loans receivable, net of allowance of $2,217,022
and $1,816,944 at December 31, 1996 and 1995,
respectively 415,366,199 381,444,265
Accrued interest receivable 3,061,133 2,827,176
Federal Home Loan Bank stock 3,033,300 2,830,000
Premises and equipment 12,254,660 6,284,524
Deferred federal income taxes 550,000 222,000
Real estate, mobile homes and other assets held
for sale 266,521 172,904
Other assets 224,606 211,970
-----------------------------------------
Total assets $543,410,721 $525,550,052
=========================================
<PAGE>
<CAPTION>
December 31
1996 1995
-----------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Liabilities:
Deposits $382,525,366 $381,779,140
Advances from the Federal Home Loan Bank 40,820,664 6,842,438
Accrued expenses and other liabilities 2,886,535 2,787,460
Advance payments by borrowers for taxes and insurance
613,494 634,525
-----------------------------------------
Total liabilities 426,846,059 392,043,563
Stockholders' equity:
Preferred stock, no par value per share:
5,000,000 shares authorized; no shares issued
Common stock, $.01 par value per share:
20,000,000 shares authorized; 9,470,877 and 10,976,612
shares outstanding, respectively 94,709 109,766
Additional paid-in capital 73,670,607 83,458,280
Stock acquired by ESOP (5,092,569) (5,702,364)
Stock acquired by Management Recognition Plan (2,172,987) (97,257)
Net unrealized losses on available-for-sale securities, net
of tax of $203,000 and $78,000, respectively
(397,056) (151,637)
Retained earnings--substantially restricted 50,461,958 55,889,701
-----------------------------------------
Total stockholders' equity 116,564,662 133,506,489
=========================================
Total liabilities and stockholders' equity $543,410,721 $525,550,052
=========================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Income
Years ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Interest income:
Mortgage and other loans $34,635,111 $32,002,983 $29,179,761
Investment securities 6,429,590 5,915,313 5,960,203
Deposits with banks 192,200 646,405 120,168
-----------------------------------------------------
Total interest income 41,256,901 38,564,701 35,260,132
Interest expense:
Deposits 18,579,237 18,857,219 15,480,148
Federal Home Loan Bank advances
and other 879,565 1,431,751 1,448,075
-----------------------------------------------------
Total interest expense 19,458,802 20,288,970 16,928,223
-----------------------------------------------------
Net interest income 21,798,099 18,275,731 18,331,909
Provision for loan losses 1,019,813 373,741 465,064
-----------------------------------------------------
Net interest income after provision for
loan losses 20,778,286 17,901,990 17,866,845
Non-interest income:
Service fees and other charges 824,239 671,602 609,006
Dividends on Federal Home Loan
Bank stock 206,941 190,861 161,650
Net gain (loss) on sale of available-for-sale
securities 25,527 (75,158) 62,864
Other 270,684 248,018 166,986
-----------------------------------------------------
1,327,391 1,035,323 1,000,506
Non-interest expenses:
Compensation and benefits 6,899,701 5,329,669 5,008,681
Occupancy 645,166 600,413 519,158
SAIF deposit insurance premiums 871,611 858,765 855,272
SAIF special assessment 2,460,977 - -
State franchise tax 1,721,329 1,025,947 985,214
Data processing 721,132 598,556 562,831
Mobile home loan servicing 433,331 404,313 382,696
Other 2,204,388 1,742,315 1,615,632
-----------------------------------------------------
15,957,635 10,559,978 9,929,484
-----------------------------------------------------
<PAGE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Income
Years ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Income before income taxes 6,148,042 8,377,335 8,937,867
Income taxes 1,997,000 2,856,000 2,985,000
-----------------------------------------------------
Net income $ 4,151,042 $ 5,521,335 $ 5,952,867
=====================================================
Earnings per share $ .42 $ .53 $ .58
=====================================================
Dividends declared per share $ .29 $ .28 $ .28
=====================================================
Average number of shares outstanding 9,993,818 10,413,589 10,284,811
=====================================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Common Stock Additional
------------------------------ Paid-In
Shares Amount Capital
---------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1994 10,967,036 $ 109,670 $ 19,855,003
Amortization of deferred compensation of
Management Recognition Plan -- -- --
ESOP shares released -- -- 171,100
Change in net unrealized gains (losses),
net of income taxes of $1,517,000 -- -- --
Shares issued under stock option plan 9,175 92 42,408
Dividends declared -- -- --
Net income -- -- --
---------- ------------- -------------
Balance at December 31, 1994 10,976,211 109,762 20,068,511
Amortization of deferred compensation of
Management Recognition Plan -- -- --
ESOP shares released -- -- 102,601
Shares issued under stock option plan 539 5 2,495
Organization of First Defiance Financial Corp.:
Cancellation of shares held by First Federal
Mutual Holding Company (6,476,914) (64,769) 64,769
Proceeds from issuance of 6,476,914 shares of
First Defiance Financial Corp. common stock on
September 29, 1995, net of 138 fractional
shares acquired, and net of stock offering
costs of $1,684,468 6,476,776 64,768 63,019,904
First Federal Mutual Holding Company Equity -- -- 200,000
Change in net unrealized gains (losses), net of
income taxes of $1,206,000 -- -- --
Dividends declared -- -- --
Net income -- -- --
---------- ------------- -------------
Balance at December 31, 1995 10,976,612 109,766 83,458,280
Amortization of deferred compensation of
Management Recognition Plan -- -- --
ESOP shares released -- -- 133,381
Shares issued under stock option plan 12,953 130 59,843
Acquisition of common stock for Management
Recognition Plan -- -- --
Acquisition of common stock for treasury (1,518,688) (15,187) (9,980,897)
Change in net unrealized gains (losses),
net of income taxes of $125,000 -- -- --
Dividends declared -- -- --
Net income -- -- --
---------- ------------- -------------
Balance at December 31, 1996 9,470,877 $ 94,709 $ 73,670,607
========== ============= =============
<PAGE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Stock Acquired By Net Unrealized
------------------------------- Gains
Management (Losses) on
Recognition Available-For-
ESOP Plan Sale Securities
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1994 $ (1,400,000) $ (514,031) $ 451,189
Amortization of deferred compensation of
Management Recognition Plan -- 251,936 --
ESOP shares released 400,000 -- --
Change in net unrealized gains (losses),
net of income taxes of $1,517,000 -- -- (2,944,199)
Shares issued under stock option plan -- -- --
Dividends declared -- -- --
Net income -- -- --
------------- ------------- -------------
Balance at December 31, 1994 (1,000,000) (262,095) (2,493,010)
Amortization of deferred compensation of
Management Recognition Plan -- 164,838 --
ESOP shares released 479,166 -- --
Shares issued under stock option plan -- -- --
Organization of First Defiance Financial Corp.:
Cancellation of shares held by First Federal
Mutual Holding Company -- -- --
Proceeds from issuance of 6,476,914 shares of
First Defiance Financial Corp. common stock on
September 29, 1995, net of 138 fractional
shares acquired, and net of stock offering
costs of $1,684,468 (5,181,530) -- --
First Federal Mutual Holding Company Equity -- -- --
Change in net unrealized gains (losses), net of
income taxes of $1,206,000 -- -- 2,341,373
Dividends declared -- -- --
Net income -- -- --
------------- ------------- -------------
Balance at December 31, 1995 (5,702,364) (97,257) (151,637)
Amortization of deferred compensation of
Management Recognition Plan -- 741,722 --
ESOP shares released 609,795 -- --
Shares issued under stock option plan -- -- --
Acquisition of common stock for Management
Recognition Plan -- (2,817,452) --
Acquisition of common stock for treasury -- -- --
Change in net unrealized gains (losses),
net of income taxes of $125,000 -- -- (245,419)
Dividends declared -- -- --
Net income -- -- --
------------- ------------- -------------
Balance at December 31, 1996 $ (5,092,569) $ (2,172,987) $ (397,056)
============= ============= =============
<PAGE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Total
Retained Stockholders'
Earnings Equity
------------- -------------
<S> <C> <C>
Balance at January 1, 1994 $ 47,179,093 $ 65,680,924
Amortization of deferred compensation of
Management Recognition Plan -- 251,936
ESOP shares released -- 571,100
Change in net unrealized gains (losses),
net of income taxes of $1,517,000 -- (2,944,199)
Shares issued under stock option plan -- 42,500
Dividends declared (1,158,675) (1,158,675)
Net income 5,952,867 5,952,867
------------- -------------
Balance at December 31, 1994 51,973,285 68,396,453
Amortization of deferred compensation of
Management Recognition Plan -- 164,838
ESOP shares released -- 581,767
Shares issued under stock option plan -- 2,500
Organization of First Defiance Financial Corp.:
Cancellation of shares held by First Federal
Mutual Holding Company -- --
Proceeds from issuance of 6,476,914 shares of
First Defiance Financial Corp. common stock on
September 29, 1995, net of 138 fractional
shares acquired, and net of stock offering
costs of $1,684,468 -- 57,903,142
First Federal Mutual Holding Company Equity -- 200,000
Change in net unrealized gains (losses), net of
income taxes of $1,206,000 -- 2,341,373
Dividends declared (1,604,919) (1,604,919)
Net income 5,521,335 5,521,335
------------- -------------
Balance at December 31, 1995 55,889,701 133,506,489
Amortization of deferred compensation of
Management Recognition Plan -- 741,722
ESOP shares released -- 743,176
Shares issued under stock option plan -- 59,973
Acquisition of common stock for Management
Recognition Plan -- (2,817,452)
Acquisition of common stock for treasury (6,819,103) (16,815,187)
Change in net unrealized gains (losses),
net of income taxes of $125,000 -- (245,419)
Dividends declared (2,759,682) (2,759,682)
Net income 4,151,042 4,151,042
------------- -------------
Balance at December 31, 1996 $ 50,461,958 $ 116,564,662
============= =============
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Cash Flows
Years ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 4,151,042 $ 5,521,335 $ 5,952,867
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,019,813 373,741 465,064
Provision for depreciation 256,713 239,164 207,823
Amortization of deferred compensation of
Management Recognition Plan 741,722 164,838 251,936
Release of ESOP shares 743,176 381,767 171,100
Loss on sale of office properties and equipment 44,575 7,275 -
Gain on sale of investment properties - (110,881) -
(Gain) loss on sale of securities (25,527) 75,158 (62,864)
Gain on sale of loans (209,458) (1,658) -
Amortization of premiums and accretion of
discounts on available-for-sale and
held-to-maturity securities 9,704 33,309 97,639
Deferred federal income taxes (credit) (203,000) 176,000 200,000
(Increase) decrease in interest receivable and
other assets (246,593) (369,012) 96,305
Proceeds from sale of loans 13,541,259 87,599 -
Originations of loans held for sale (10,131,779) (3,847,829)
Increase in accrued interest and other expenses 89,540 126,261 39,570
-----------------------------------------------------
Net cash provided by operating activities 9,781,187 2,857,067 7,419,440
Investing activities
Proceeds from maturities of available-for-sale
securities 19,613,796 5,604,170 13,956,685
Proceeds from sale of available-for-sale securities 27,247,132 2,921,719 4,003,437
Purchases of available-for-sale securities (36,747,804) (32,500,000) (10,891,250)
Proceeds from maturities of held-to-maturity
securities 5,302,174 4,535,734 8,619,381
Proceeds from sale of real estate, mobile homes and
other assets held for sale 1,336,585 1,043,797 237,196
Proceeds from sale of Federal Home Loan Bank stock - 209,700 128,900
Proceeds from sale of office properties and
equipment and investment properties 1,600 315,675 -
Purchases of Federal Home Loan Bank stock (203,300) (186,500) (147,800)
Purchases of office properties and equipment (6,273,024) (3,616,879) (249,120)
Net increase in mortgage and other loans (36,371,949) (27,928,124) (22,044,698)
-----------------------------------------------------
Net cash used in investing activities (26,094,790) (49,600,708) (6,387,269)
<PAGE>
<CAPTION>
First Defiance Financial Corp.
Consolidated Statements of Cash Flows (continued)
Years ended December 31
1996 1995 1994
-----------------------------------------------------
Financing activities
Net increase (decrease) in deposits and advance
payments by borrowers for taxes and insurance 746,227 6,288,692 (532,403)
Net increase (decrease) in Federal Home Loan Bank
short-term advances 35,220,000 (11,000,000) 11,000,000
Proceeds from Federal Home Loan Bank long-term
advances - 1,364,000 -
Repayment of Federal Home Loan Bank long-term
advances (1,241,774) (7,262,204) (8,768,378)
Loan to ESOP - (5,981,530) -
Purchase of common stock for treasury (16,815,187) - -
Contribution to Management Recognition Plan for
purchase of common stock (2,817,451) - -
Cash dividends paid (2,771,179) (1,178,625) (1,152,037)
Proceeds from exercise of stock options 59,972 2,500 42,500
Net proceeds from issuance of common stock - 63,084,672 -
-----------------------------------------------------
Net cash provided by financing activities 12,380,608 45,317,505 589,682
-----------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,932,995) (1,426,136) 1,621,853
Cash and cash equivalents at beginning of period 8,685,181 10,111,317 8,489,464
-----------------------------------------------------
Cash and cash equivalents at end of period $ 4,752,186 $ 8,685,181 $10,111,317
=====================================================
Supplemental cash flow information:
Interest paid $19,652,287 $20,473,789 $17,049,662
=====================================================
Income taxes paid $ 2,364,000 $ 2,612,434 $ 2,985,433
=====================================================
Transfers from loans to real estate, mobile
homes and other assets held for sale $ 1,430,202 $ 1,047,107 $ 345,509
=====================================================
Noncash operating activities:
Change in deferred taxes on net unrealized gains
or losses on available-for-sale securities $ (125,000) $ (1,206,000) $ 1,517,000
=====================================================
Noncash investing activities:
Change in net unrealized gain (loss) on
available-for-sale securities $ (370,419) $ 3,547,373 $ (4,461,199)
=====================================================
Land acquired with notes payable $ - $ 236,400 $ -
=====================================================
Land formerly included in investment properties $ - $ 186,842 $ -
=====================================================
Noncash financing activities:
Cash dividends declared but not paid $ 757,675 $ 720,928 $ 294,638
=====================================================
Repayment of ESOP obligation guaranteed by First
Federal $ - $ 1,000,000 $ 400,000
=====================================================
Transfer of equity of Mutual Holding Company $ - $ 200,000 $ -
=====================================================
</TABLE>
See accompanying notes.
<PAGE>
First Defiance Financial Corp.
Notes to Consolidated Financial Statements
December 31, 1996
1. Basis of Presentation and Reorganization
The consolidated financial statements include the accounts of First Defiance
Financial Corp. ("First Defiance" or "the Company") and First Federal Savings
and Loan ("First Federal"), its wholly-owned subsidiary. First Federal operates
nine branches and two loan origination offices in northwestern Ohio as a
federally chartered savings and loan. First Federal focuses primarily on single
family residential mortgage lending, consumer and business loans to customers.
First Federal is subject to the regulations of certain federal agencies and
undergoes periodic examinations by those regulatory authorities. All significant
intercompany transactions and balances are eliminated in consolidation.
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 3,000,000 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 with and 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 41.0% ownership of First
Defiance, the 2,184,500 outstanding shares of First Federal were exchanged for
approximately 4,500,000 shares of First Defiance. Concurrent with the
Reorganization, First Defiance sold 6,476,914 additional shares to members of
the Mutual Holding Company, employees of First Federal and the public at a price
of $10.00 per share. Reorganization and stock offering costs of approximately
$1,685,000 resulted in net proceeds from the offering of approximately
$63,085,000.
Each depositor of First Federal as of the effective date of the Conversion will
have upon liquidation of First Federal a right to his pro rata interest in a
liquidation account established for the benefit of such depositors. Records are
maintained to ensure such rights receive statutory priority as required by OTS
regulations. The reorganization was accounted for as a change in corporate form
with the historic basis of accounting for First Federal unchanged.
<PAGE>
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Most significantly, First Defiance uses estimates in determining the
value of the allowance for loan losses.
Earnings Per Share
Earnings per share are based on the weighted average number of shares of common
stock including shares subject to stock options, which are deemed common stock
equivalents. As discussed in Note 14, First Defiance accounts for the 850,332
shares held by its Employee Stock Ownership Plan ("ESOP") in accordance with
Statement of Position 93-6. 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 employees' accounts.
While the number of outstanding shares has been restated for all periods to
reflect the Reorganization, earnings on the proceeds from the Reorganization are
reflected only in the fourth quarter of 1995 and thereafter. Had the
Reorganization occurred at January 1, 1994 and assuming the net proceeds were
used to repay advances and invested in medium-term investment securities,
pro-forma net income (unaudited) would have been $6,327,000 and $6,927,000 for
the years ended December 31, 1995 and 1994, respectively. Pro-forma earnings per
share (unaudited) for those periods would have been $.61 and $.67, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from banks and overnight
investments with the Federal Home Loan Bank ("FHLB").
Investment Securities
Management determines the appropriate classification of debt securities at the
time of purchase and evaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when First Defiance has the
positive intent and ability to
<PAGE>
2. Statement of Accounting Policies (continued)
hold the securities to maturity and are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest method
over the period to maturity.
Debt securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity until realized.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gains (losses) on sale of securities. The
cost of mutual funds sold is based on the average cost method. The cost of all
other securities sold is based on the specific identification method.
Currently, First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities are disclosed in Note 3 and include agency step-up, REMIC and CMO
investments. Such investments are not classified as high risk at December 31,
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.
Investments Required by Regulations
As a member of the FHLB System, First Federal is required to own stock of the
FHLB of Cincinnati in an amount principally equal to at least 1% of its net home
mortgage loans, subject to periodic redemption at par if the stock owned is over
the minimum requirement. FHLB stock is a restricted equity security that does
not have a readily determinable fair value and is carried at cost.
Loans Receivable
Investment in real estate mortgage loans consists principally of long-term
conventional loans collateralized by first mortgages on single-family
residences, other residential property, and commercial and industrial property.
Such loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.
<PAGE>
2. Statement of Accounting Policies (continued)
Mortgage loans originated and intended for the secondary market are carried at
the lower of cost or estimated market value in the aggregate.
Nonrefundable fees and related costs associated with originating or acquiring
real estate mortgage and other loans are capitalized and recognized as an
adjustment of the yield of the related loan.
Interest receivable is accrued on loans and credited to income as earned. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is fully reserved.
Interest income is subsequently recognized only to the extent cash payments are
received.
Management's determination of the adequacy of the allowance for loan losses is
based on an evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth and composition of the loan portfolio, and
other relevant factors. The allowance is increased by provisions for loan losses
charged against earnings and decreased by charge-offs (net of recoveries).
Loan Servicing Rights
In May 1995, the Financial Accounting Standards Board ("FASB") issued FAS 122,
"Accounting for Mortgage Servicing Rights." This Statement amends certain
provisions of Statement 65, "Accounting for Certain Mortgage Banking
Activities," and requires enterprises engaging in mortgage banking activities to
recognize as separate assets rights to service mortgage loans for loans
originated by the enterprise. The adoption of FAS 122 has had no significant
impact on the results of operations.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the risk characteristics of the underlying loans. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.
<PAGE>
2. Statement of Accounting Policies (continued)
Real Estate, Mobile Homes and Other Assets Held for Sale
Assets held for sale are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair value at time of foreclosure or insubstance
foreclosure. Loan losses arising from the acquisition of such property are
charged against the allowance for loan losses.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method over the following
estimated useful lives:
Buildings and improvements 20 to 50 years
Furniture, fixtures and equipment 5 to 15 years
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Effect of New Accounting Standards
In October 1995, the FASB issued FAS 123, "Accounting for Stock-Based
Compensation" which is effective for the year ending December 31, 1996. FAS 123
defines a fair value-based method of accounting for stock-based employee
compensation plans. Under the fair value-based method, compensation costs is
measured at the grant date based upon the value of the award and is recognized
over the service period. While the standard encourages entities to adopt this
method of accounting for employee stock compensation plans, it also allows an
entity to continue to measure compensation costs for its plans as prescribed in
APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." First
Defiance has elected to continue to apply APB 25 and has disclosed the pro forma
effect on earnings in Note 15.
<PAGE>
2. Statement of Accounting Policies (continued)
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." Under FASB's "financial
components" approach, both the transferor and transferee would recognize the
asset and liabilities (or components thereof) that it controls in a physical
sense and "derecognize" the assets and liabilities that were surrendered or
extinguished in the transfer. Prior rules emphasize the economic risks or
rewards of ownership of the assets. This Statement is effective for transactions
occurring after December 31, 1996. First Defiance does not anticipate any impact
on results of operations and financial condition from the adoption of this
Statement.
<PAGE>
3. Investment Securities
The following is a summary of available-for-sale and held-to-maturity
securities:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and obligations of
U. S. Government corporations and agencies $44,762,114 $ 13,681 $541,513 $44,234,282
Fixed income mutual funds 18,856,749 56,918 - 18,913,667
Adjustable rate mortgage-backed security
mutual funds 11,255,372 7,083 159,752 11,102,703
Money market mutual funds 750,000 - - 750,000
REMIC 1,160,983 - 19,812 1,141,171
Collateralized mortgage obligations 1,097,593 34,507 - 1,132,100
Other 124,264 8,832 - 133,096
==========================================================
Totals $78,007,075 $121,021 $721,077 $77,407,019
==========================================================
Held-to-Maturity Securities
FHLMC certificates $11,795,121 $261,891 $ 48,933 $12,008,079
FNMA certificates 9,628,002 104,518 177,919 9,554,601
GNMA certificates 3,089,882 90,538 2,922 3,177,498
Obligations of states and political
subdivisions 1,423,542 161,316 100 1,584,758
----------------------------------------------------------
Totals $25,936,547 $618,263 $229,874 $26,324,936
==========================================================
<PAGE>
<CAPTION>
3. Investment Securities (continued)
December 31, 1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and obligations of
U. S. Government corporations and agencies
$53,762,782 $119,028 $255,935 $53,625,875
Money market mutual funds 25,500,000 - - 25,500,000
Adjustable rate mortgage-backed security
mutual funds 8,981,304 - 177,776 8,803,528
REMIC 3,776,078 39,612 3,954 3,811,736
Collateralized mortgage obligations 1,126,146 38,019 - 1,164,165
Other 124,264 11,369 - 135,633
----------------------------------------------------------
Totals $93,270,574 $208,028 $437,665 $93,040,937
==========================================================
Held-to-Maturity Securities
FHLMC certificates $12,540,831 $315,713 $ 51,197 $12,805,347
FNMA certificates 8,274,592 170,662 121,555 8,323,699
GNMA certificates 3,648,488 110,058 3,526 3,755,020
Obligations of states and political
subdivisions 1,608,612 199,421 171 1,807,862
----------------------------------------------------------
Totals $26,072,523 $795,854 $176,449 $26,691,928
==========================================================
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, available-for-sale
securities with fair values of $27.2, $2.9 and $4 million, respectively, were
sold with realized gains (losses) of $25,500, ($75,000) and ($15,000),
respectively. In addition, available-for-sale securities which were called in
1994 resulted in gross realized gains totaling $78,000.
The amortized cost and fair value of securities at December 31, 1996 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. REMIC, collateralized
mortgage obligations, FHLMC certificates, FNMA certificates, GNMA certificates,
money market mutual funds and other mutual funds are not due at a single
maturity date; periodic payments are received on the securities based on the
payment patterns of the underlying collateral or have no stated maturity date.
<PAGE>
3. Investment Securities (continued)
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
Amortized Amortized
Cost Fair Value Cost Fair Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $12,999,860 $12,902,180 $ 187,689 $ 193,430
Due after one year through five
years 31,762,254 31,332,102 607,176 649,766
Due after five years through ten
years - - 268,677 313,414
Due after ten years - - 360,000 428,148
----------------------------------------------------------------------
44,762,114 44,234,282 1,423,542 1,584,758
Fixed income mutual funds 18,856,749 18,913,667 - -
Adjustable rate mortgage-backed
security mutual funds 11,255,372 11,102,703 - -
Money market mutual funds and other
874,264 883,096 - -
REMIC and collateralized mortgage
obligations 2,258,576 2,273,271 - -
FHLMC, FNMA, GNMA certificates and
other - - 24,513,005 24,740,178
----------------------------------------------------------------------
Totals $78,007,075 $77,407,019 $25,936,547 $26,324,936
======================================================================
</TABLE>
4. Loan Commitments and Delinquencies
Loan commitments are made to accommodate the financial needs of First Defiance's
customers. The associated credit risk is essentially the same as that involved
in extending loans to customers and are subject to First Defiance's normal
credit policies. Collateral such as mortgages on property and equipment,
receivables and inventory is obtained based on management's credit assessment of
the customer. At December 31, 1996, First Defiance's outstanding commitments to
fund long-term mortgage loans amounted to approximately $5,961,000 which were
comprised of approximately 65% fixed rate and 35% adjustable rate loans with
rates ranging from 6.75% to 10.25%. First Defiance's maximum exposure to credit
loss for loan commitments (unfunded loans, unused lines of credit and letters of
credit) was $31,454,000 and $28,027,000 at December 31, 1996 and 1995,
respectively.
Unpaid balances of mortgage and installment loans with contractual payments
delinquent 90 days or more totaled $411,000 at December 31, 1996 and $663,000 at
December 31, 1995. First Federal does not anticipate any significant losses in
the collection of these delinquent loans in excess of the allowance for loan
losses.
<PAGE>
4. Loan Commitments and Delinquencies (continued)
Impairment of loans having recorded investments of $1.6 million at December 31,
1996 and $-0- at December 31, 1995 has been recognized in conformity with FAS
Statement No. 114, as amended by FAS Statement No. 118. The average recorded
investment in impaired loans during 1996 and 1995 was $1.45 million and $-0-,
respectively. The total allowance for loan losses related to these loans was
$804,000 at December 31, 1996.
Loans having carrying values of $1.4 million and $1.0 million were transferred
to real estate, mobile homes and other assets held for sale in 1996 and 1995,
respectively.
First Defiance is not committed to lend additional funds to debtors whose loans
have been modified.
<PAGE>
5. Loans Receivable
<TABLE>
<CAPTION>
December 31
1996 1995
----------------------------------------
<S> <C> <C>
Loans receivable consist of the following at December 31:
Mortgage loans:
Secured by one-to-four-family residences $241,227,635 $220,879,740
Secured by other properties 28,438,585 35,071,107
Construction loans 11,412,465 8,200,507
Other mortgage loans 2,084,060 1,637,720
----------------------------------------
283,162,745 265,789,074
Other loans:
Automobile 62,089,625 51,147,640
Mobile home 25,198,701 24,671,093
Commercial 26,674,342 23,647,432
Home equity and improvement 13,570,255 11,875,308
Other 11,929,499 10,661,500
----------------------------------------
139,462,422 122,002,973
----------------------------------------
Total mortgage and other loans 422,625,167 387,792,047
Deduct:
Undisbursed loan funds 4,473,780 3,971,252
Net deferred loan origination fees and costs 568,166 559,586
Allowance for loan losses 2,217,022 1,816,944
----------------------------------------
Totals $415,366,199 $381,444,265
========================================
</TABLE>
Changes in the allowance for mortgage and other loan losses were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $1,816,944 $1,733,411 $1,661,941
Charge-offs (775,399) (344,563) (401,091)
Recoveries 155,664 51,355 46,208
-----------------------------------------------------
Net charge-offs (619,735) (293,208) (354,883)
Provision charged to income 1,019,813 376,741 426,353
-----------------------------------------------------
Balance at end of period $2,217,022 $1,816,944 $1,733,411
=====================================================
</TABLE>
<PAGE>
5. Loans Receivable (continued)
Interest income on mortgage and other loans for the years ended December 31, is
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Mortgage loans $22,272,502 $21,039,898 $20,345,137
Other loans 12,362,609 10,963,085 8,834,624
=====================================================
Totals $34,635,111 $32,002,983 $29,179,761
=====================================================
</TABLE>
6. Mortgage Banking
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was approximately $11.3 million and $86,000
at December 31, 1996 and 1995, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing, and included in
demand deposits, were approximately $46,000 at December 31, 1996.
In accordance with FAS Statement No. 122, mortgage servicing rights of $122,925
were capitalized during the year ended December 31, 1996. The book value of
mortgage servicing rights was approximately $122,000 at December 31, 1996.
Amortization of mortgage servicing rights was $1,456 in the year ended December
31, 1996.
The components of mortgage banking income (included in other non-interest
income) are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Gain on sale of loans $209,458 $1,658 $ -
Loan servicing fee income, net of
amortization 11,406 - -
-----------------------------------------------------
$220,864 $1,658 $ -
=====================================================
</TABLE>
<PAGE>
7. Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------------
<S> <C> <C>
Cost:
Land $ 1,850,427 $1,603,994
Buildings 3,604,775 3,489,538
Leasehold improvements 235,714 235,714
Furniture, fixtures and equipment 1,833,311 1,476,645
Construction in process (estimate to complete at
December 31, 1996 - $2.9 million) 7,616,060 2,172,241
-----------------------------------
15,140,287 8,978,132
Less allowances for depreciation and amortization
2,885,627 2,693,608
-----------------------------------
$12,254,660 $6,284,524
===================================
</TABLE>
Interest capitalized on construction projects amounted to approximately $213,000
in 1996.
8. Deposits
The following schedule sets forth interest expense for the years ended December
31 by type of savings deposit (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- ----------------
<S> <C> <C> <C>
Checking and money market accounts $ 1,119 $ 1,126 $ 1,292
Passbook accounts 2,036 2,139 2,220
Certificates 15,638 15,613 11,968
----------------- ----------------- ----------------
18,793 18,878 15,480
Less interest capitalized (214) (21) -
----------------- ----------------- ----------------
Totals $18,579 $18,857 $15,480
================= ================= ================
</TABLE>
<PAGE>
8. Deposits (continued)
A summary of deposit balances is as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------------
<S> <C> <C>
Passbooks $ 68,865 $ 67,069
N.O.W. accounts 32,184 30,847
Money Market demand accounts 15,875 16,726
Certificates of deposit 265,601 267,137
-----------------------------------
$382,525 $381,779
===================================
The amount of deposits included
above of $100,000 or more $ 24,631 $ 23,670
===================================
</TABLE>
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows (in thousands):
1997 $210,075
1998 40,158
1999 8,958
2000 3,835
2001 and thereafter 2,575
==============
Total $265,601
==============
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Act) was
enacted. The Act provided for a special assessment to be calculated for
depository institutions on deposit, accrued interest and escrow data from the
base date of March 31, 1995. The assessment of $2,460,977 was assessed at
September 30, 1996 and was subsequently paid when due to the Federal Deposit
Insurance Corporation in November 1996.
<PAGE>
9. Advances from Federal Home Loan Bank
First Federal has the ability to borrow funds from the FHLB. First Federal
pledges its single-family residential mortgage loan portfolio as security for
these advances. At December 31, 1996, the total available for collateral
amounted to approximately $241.2 million. Collateral must exceed borrowings by
150%. The total level of borrowing is also limited to 25% of total assets. This
would give First Federal a maximum potential to acquire advances of
approximately $134.1 million from the FHLB.
The FHLB made a series of fixed rate long-term advances to First Defiance during
1992 and a long-term fixed rate advance under the FHLB Affordable Housing
Program in 1995. The total FHLB long-term advances bear a weighted average
interest rate of 6.58% at December 31, 1996. Future minimum payments by fiscal
year are as follows:
1997 $ 971,884
1998 863,945
1999 769,056
2000 685,639
2001 612,308
Thereafter 3,194,054
--------------------
Total minimum payments 7,096,886
Less amounts representing interest 1,496,223
--------------------
Totals $5,600,663
====================
<PAGE>
First Defiance also utilizes short-term advances from the FHLB to meet cash flow
needs and for short-term investment purposes. There were $35.2 million in
short-term advances outstanding at December 31, 1996 (none at December 31,
1995). First Defiance borrows funds under a variety of programs at FHLB. At
December 31, 1996, $15 million was outstanding under First Defiance's REPO
Advance line of credit. The total available under the REPO line is $30 million.
Amounts are generally borrowed under the REPO line on an overnight basis. An
additional $15 million was borrowed under the FHLB's Cash Management Advance
("CMA") program at a variable rate. Amounts borrowed under the CMA program
mature within 90 days. The $5.2 million of other advances are borrowed under the
FHLB's short-term fixed or LIBOR based programs. Information concerning
short-term advances is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------
<S> <C> <C>
Average balance during the year $ 8,309,801 $ 8,286,290
Maximum month-end balance during the year 35,220,000 17,000,000
Average interest rate during the year 5.59% 6.15%
</TABLE>
10. Postretirement Benefits
The Company sponsors a defined benefit postretirement plan that is intended to
supplement Medicare coverage and provide full medical benefits to all retirees
who have completed 20 years of service after age 40. Coverage for retirees and
their spouse is fully paid for by First Defiance. Upon the retiree's death, his
or her spouse may continue their coverage for one year, after which coverage may
be continued provided the spouse pays 50% of the average cost. For employees who
complete 15 years of service after age 40 and retire after age 55, coverage is
provided for the retiree and their spouse for one year after which coverage may
be continued provided the retiree pays 50% of the average cost. Deductibles paid
by retirees are $100 per person and $200 per family. The plan also contains a
coinsurance provision of 20% for the first $2,000 of medical expenditures.
The plan is not currently funded. The following table sets forth the amount
recorded in the Company's consolidated statement of financial condition at
December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $270,191 $242,098
Active employees fully eligible for benefits 274,329 245,806
Other active plan participants 190,264 170,481
---------------------------------------
734,784 658,385
Unrecognized net gain (loss) (44,155) (41,750)
---------------------------------------
Accrued postretirement benefit obligation included in
accrued interest and other expenses in consolidated
statement of financial condition $690,629 $616,635
=======================================
</TABLE>
<PAGE>
10. Postretirement Benefits (continued)
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits attributable to service
during the period $43,902 $21,980 $33,536
Interest cost on accumulated postretirement benefit
obligation 47,200 35,283 40,033
Net amortization and deferral - (8,807) -
-----------------------------------------------------
Net periodic postretirement benefit cost $91,102 $48,456 $73,569
=====================================================
</TABLE>
For measurement purposes, an 8.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1996 and 1995; the rate was
assumed to decrease gradually to 5.5% for the year 2001 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rate by 1 percentage point for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $110,000 and the
aggregate of the service and interest cost for the year then ended by $19,000.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for 1996 and 1995 and 8.5% for 1994.
11. Pension Plan
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during the last five years of employment. The Company's policy is
to fund pension costs as accrued and to amortize past service costs over
approximately twenty years.
<PAGE>
11. Pension Plan (continued)
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the
period $311,459 $225,175 $187,417
Interest cost on projected benefit
obligation 244,186 234,485 181,135
Actual return on plan assets 66,041 (142,619) (22,633)
Net amortization and deferral (53,727) 124,958 (1,638)
-----------------------------------------------------
Net periodic pension cost $567,959 $441,999 $344,281
=====================================================
Weighted average discount rate 5.75% 7% 7%
Rate of increase in future compensation
levels 4% 4% 4%
Expected long-term rate of return on plan
assets 5.5% 5.5% 5.5%
</TABLE>
<PAGE>
11. Pension Plan (continued)
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated statement of financial condition.
<TABLE>
<CAPTION>
December 31
1996 1995
----------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,733,744 and $2,341,128 $3,026,043 $2,565,599
========================================
Projected benefit obligation for service rendered to date
$4,849,273 $4,246,719
Plan assets (guaranteed insurance contracts and money market
certificates) at fair value (2,284,964) (1,973,769)
----------------------------------------
Projected benefit obligation in excess of plan
assets 2,564,309 2,272,950
Unrecognized net loss from experience different than that
assumed and effects of changes in assumptions
(2,350,987) (2,159,945)
Unrecognized net obligation at transition (125,662) (143,304)
Adjustment required to recognize minimum liability
653,419 256,099
----------------------------------------
Accrued pension liability recorded in accrued interest and
other expenses in statement of financial condition
$ 741,079 $ 225,800
========================================
</TABLE>
12. Regulatory Matters
First Defiance is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on First Defiance's financial statements. Under capital
guidelines and the regulatory framework for prompt corrective action, First
Federal must meet specific capital guidelines that involve quantitative measures
of First Federal's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. First Federal's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
<PAGE>
12. Regulatory Matters (continued)
Quantitative measures established by regulation to ensure capital adequacy
require First Federal to maintain minimum amounts and ratios of Tier I and total
capital to risk-weighted assets and of Tier I capital to average assets. As of
December 31, 1996 and 1995, First Federal meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Federal Savings and Loan Insurance
Corporation categorized First Federal as well capitalized under the regulatory
framework. To be categorized as well capitalized First Federal must maintain
minimum Tangible, Core and Risk-Based Capital ratios as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed First Federal's ranking.
The following schedule presents First Federal's regulatory capital ratios as of
December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Regulatory Capital Standards
Actual Required
Amount Ratio Amount Ratio
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Tangible Capital $ 74,942 13.97% $16,098 1.5%
Core Capital 74,942 13.97 8,049 3.0
Risk-Based Capital 76,617 22.43 27,332 8.0
As of December 31, 1995:
Tangible Capital $102,701 20.54% $15,002 1.5%
Core Capital 102,701 20.54 7,501 3.0
Risk-Based Capital 104,482 33.94 24,627 8.0
</TABLE>
13. Federal Income Taxes
The components of federal income tax expense are as follows:
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Current $2,200,000 $2,680,000 $2,785,000
Deferred (credit) (203,000) 176,000 200,000
-----------------------------------------------------
$1,997,000 $2,856,000 $2,985,000
=====================================================
</TABLE>
<PAGE>
13. Federal Income Taxes (continued)
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $2,090,000 $2,848,000 $3,039,000
Increases (decreases) in taxes from:
ESOP accounting (76,000) 63,000 89,000
Tax exempt interest income (39,000) (41,000) (48,000)
Other 22,000 (14,000) (95,000)
-----------------------------------------------------
Totals $1,997,000 $2,856,000 $2,985,000
=====================================================
</TABLE>
<PAGE>
13. Federal Income Taxes (continued)
Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of First Defiance's deferred federal income tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------------------
<S> <C> <C>
Deferred federal income tax assets:
Net unrealized losses on
available-for-sale securities $ 203,000 $ 78,000
Allowance for loan losses 218,000 184,000
Postretirement benefit costs 233,000 208,000
Deferred compensation and
management recognition plans 403,000 163,000
Deferred loan origination fees and
costs (net) - 6,000
Other 105,000 54,000
-----------------------------------
Total deferred federal income tax assets 1,162,000 693,000
Deferred federal income tax liabilities:
FHLB stock dividends 532,000 461,000
Deferred loan origination fees and costs (net) 80,000 -
Other - 10,000
-----------------------------------
Total deferred federal income tax liabilities 612,000 471,000
===================================
Net deferred federal income tax assets $ 550,000 $222,000
===================================
</TABLE>
No valuation allowance was required at December 31, 1996 or 1995.
Retained earnings at December 31, 1996 include financial statement tax bad debt
reserves of $10.6 million. The Small Business Job Protection Act of 1996 passed
on August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of First Federal's reserve over its base year reserve as of December 31,
1987. The recapture tax is to be paid in six equal annual installments beginning
after December 31, 1996. However, deferral of these
<PAGE>
13. Federal Income Taxes (continued)
payments will be permitted for up to two years, contingent upon satisfying a
specified mortgage origination test for 1996 and/or 1997. At December 31, 1996,
First Federal had $1.037 million in excess of the base year reserves. Deferred
taxes have been provided related to this item. No provision is required to be
made for the $9.52 million of base year reserves.
14. Employee Stock Ownership and Management Recognition Plans
The Company has established an Employee Stock Ownership Plan ("ESOP") covering
all employees age 21 or older who have at least one year of credited service.
The ESOP will be funded by First Defiance's contributions made in cash or common
stock. Benefits may be paid either in shares of common stock or in cash. The
Company accounts for its ESOP in accordance with Statement of Position 93-6.
In conjunction with First Federal's initial offering of common stock in 1993,
the ESOP borrowed $1,600,000 from an unaffiliated lender to purchase 160,000
shares of First Federal common stock (exchanged for 345,443 shares of First
Defiance stock in 1995). The remaining loan was paid in connection with the
Reorganization. Also in conjunction with the Reorganization, the ESOP acquired
an additional 518,153 shares of common stock of the Company.
First Defiance makes contributions to the ESOP in amounts sufficient to pay
obligations maturing under the loan made to the ESOP. As principal and interest
on the loan is paid, shares are released from collateral and committed for
allocation to active employees, based on the proportion of debt service paid in
the year. Shares held by the ESOP which have not been released for allocation
are reported as stock acquired by the ESOP plan in the statement of financial
condition. As shares are released, First Defiance reports compensation expense
equal to the average fair value of the shares over the period in which the
shares were earned. Also, the shares are included in average shares outstanding
for earnings per share computations. Dividends on allocated shares are recorded
as a reduction of retained earnings and dividends on unallocated shares are
recorded as a reduction of the loan and accrued interest. ESOP compensation
expense was $735,000, $582,000 and $571,100 for 1996, 1995 and 1994,
respectively. As of December 31, 1996, 274,584 ESOP shares have been released
for allocation of which 260,576 were allocated to participants. The 589,012
unreleased shares have a fair value of $7.3 million at December 31, 1996.
<PAGE>
14. Employee Stock Ownership and Management Recognition Plans (continued)
The Shareholders of First Defiance approved and established Management
Recognition Plans ("MRP") in 1993 and 1996 to provide directors, officers and
employees with a proprietary interest in First Defiance as incentive to
contribute to its success. Cash was contributed to the MRP in the form of
prepaid compensation amounting to $800,000 in 1993 and $2,817,452 in 1996. The
$800,000 contributed in 1993 was used to purchase 80,000 shares of First Federal
common stock (exchanged for 172,722 shares of First Defiance common stock in
1995). The $2,817,452 contributed in 1996 was used to purchase 259,076 shares of
First Defiance common stock. At the discretion of a committee appointed by the
Board of Directors, all 172,722 shares acquired in 1993 were granted on July 19,
1993. Also at the committee's discretion, 204,462 shares acquired in 1996 were
granted on April 19, 1996 and 20,200 shares were granted on July 15, 1996. The
shares vest at a rate of 20% per year over 5 years. First Defiance is amortizing
the prepaid compensation and recording additions to stockholder's equity as the
shares vest. Compensation expense attributable to the MRP amounted to $741,722,
$164,838 and $251,936 in 1996, 1995 and 1994, respectively.
15. Incentive Stock Option Plans
First Defiance has established incentive stock option plans for its directors
and its employees and has reserved 1,056,810 shares of common stock for issuance
under the plans. A total of 754,560 shares are reserved for employees and
302,250 shares are reserved for directors. As of December 31, 1996, 894,339
options (662,037 for employees and 232,302 for directors) have been granted at
option prices based on the market value of the underlying shares on the date the
options were granted. The 362,303 options granted under the 1993 plan are
currently excercisable while the 532,036 options granted under the 1996 plan
vest at 20% per year beginning in 1997. All options expire ten years from date
of grant. All options granted to date are considered compensatory stock options.
As previously discussed, First Defiance accounts for stock options in accordance
with APB 25. The following proforma information regarding net income and
earnings per share assumes the adoption of Statement No. 123 for stock options
granted subsequent to December 31, 1994. The estimated fair value of the option
is amortized to expense over the option and vesting period. The fair value was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1996: risk-free interest rate of
6.62%; a dividend yield of 2.66%; volatility factors of the expected market
price of First Defiance's common stock of .341% and a weighted-average expected
life of 7.35 years.
<PAGE>
15. Incentive Stock Option Plans (continued)
Based upon the above assumptions, pro forma net income and earnings per share
for the year ended December 31, 1996 are $3,783,000 and $.38, respectively if
the fair value provision of Statement No. 123 had been used. No options were
granted in 1995, thus pro forma disclosures are not required. The pro forma
effects for 1996 are not likely to be representative of the pro forma effects
for future years.
Because Statement No. 123 is applicable only to options granted subsequent to
Decem-ber 31, 1994, options granted prior to December 31, 1994 do not have fair
value pro forma information provided.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
First Defiance's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<PAGE>
15. Incentive Stock Option Plans (continued)
The following table summarizes stock option activity for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
Range of Range of
Option Option Option Option
Shares Prices Shares Prices
------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 325,456 $4.63 to $6.95 326,534 $4.63 to $6.95
Granted 582,836 $10.375 to $10.6875 - -
Exercised (12,953) 4.63 (539) 4.63
Expired or cancelled (1,000) 10.50 (539) 4.63
------------------------------------------------------------------------
Outstanding at December 31, 1996
(all exercisable) 894,339 $4.63 to $10.6875 325,456 $4.63 to $6.95
========================================================================
Exercisable to:
2004 312,503 $4.63 to $6.95 325,456 $4.63 to $6.95
2006 581,836 $10.375 to $10.6875
------------------------------------------------------------------------
894,339 $4.63 to $10.6875 325,456 $4.63 to $6.95
========================================================================
Available for future grant at
December 3l 162,471 96,633
========================================================================
</TABLE>
<PAGE>
16. Condensed Financial Statements of First Defiance Financial Corp.
(Parent Only)
First Defiance Financial Corp. was organized in June 1995 and began operations
on September 29, 1995. The Company's balance sheet as of December 31, 1996 and
1995 and related statements of income and cash flows for the year ended December
31, 1996 and from inception to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
Balance Sheet 1996 1995
--------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 344,476 $ 221,328
Investment securities available-for-sale 6,927,616 25,500,000
Investment in First Federal Savings and Loan 74,558,462 102,549,568
Subordinated debt receivable from First Federal Savings and
Loan 30,000,000 -
Loan receivable from First Federal Employee Stock Ownership
Plan 5,438,254 5,897,208
Other assets 36,442 141,054
--------------------------------------------
Total assets $117,305,250 $134,309,158
============================================
Liabilities and Stockholders' Equity
Accrued liabilities $ 740,588 $ 802,669
Stockholders' equity 116,564,662 133,506,489
--------------------------------------------
Total liabilities and stockholders' equity $117,305,250 $134,309,158
============================================
<CAPTION>
Year ended
December 31, September 29, 1995
1996 to December 31, 1995
--------------------------------------------
<S> <C> <C>
Statement of Income
Interest income $ 955,190 $ 96,675
Interest on loan to ESOP 499,044 131,654
Gain on sale of investments 25,527 -
Noninterest expense (582,384) (72,814)
--------------------------------------------
Income before income taxes and equity in
earnings of subsidiary 897,377 155,515
Income tax expense 363,000 20,000
--------------------------------------------
Income before equity in earnings of subsidiary 534,377 135,515
Equity in earnings of First Federal Savings and
Loan 3,616,665 1,732,273
============================================
Net income $ 4,151,042 $ 1,867,788
============================================
<PAGE>
<CAPTION>
16. Condensed Financial Statements of First Defiance Financial Corp. (Parent Only) (continued)
Year ended
December 31, September 29, 1995
1996 to December 31, 1995
--------------------------------------------
<S> <C> <C>
Statement of Cash Flows
Operating activities
Net income $ 4,151,042 $ 1,867,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of securities (25,527) -
Deferred federal income taxes (credit) (37,000) -
Equity in earnings of First Federal Savings and Loan
(3,616,665) (1,732,273)
Dividends received from subsidiary 30,000,000 25,560,806
Change in other assets and liabilities 74,028 (59,315)
--------------------------------------------
Net cash provided by operating activities 30,545,878 25,637,006
Investing activities
Loan to subsidiary (30,000,000) -
Proceeds from sale of available-for-sale securities 27,247,132 -
Investment in subsidiary - (57,103,142)
Loan to ESOP - (5,981,530)
Principal payments received on ESOP loan 458,954 84,322
Purchase of available-for-sale securities (8,602,422) (25,500,000)
--------------------------------------------
Net cash used in investing activities (10,896,336) (88,500,350)
Financing activities
Proceeds from sale of common stock - 63,084,672
Stock options exercised 59,972 -
Purchase of common stock for treasury (16,815,187) -
Cash dividends paid (2,771,179) -
--------------------------------------------
Net cash (used in) provided by financing activities (19,526,394) 63,084,672
--------------------------------------------
Net increase in cash and cash equivalents 123,148 221,328
Cash equivalents at beginning of year 221,328 -
--------------------------------------------
Cash equivalents at end of year $ 344,476 $ 221,328
============================================
Noncash financing activities--cash dividends
declared but not paid $ 757,675 $ 720,928
============================================
</TABLE>
<PAGE>
17. Fair Value Statement of Consolidated Financial Condition
The following is a comparative condensed consolidated statement of financial
condition based on carrying and estimated fair values of financial instruments
as of December 31, 1996 and 1995 (dollars in thousands). In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of First Defiance
Financial Corp.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------- ------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Values Value Fair Values
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 4,752 $ 4,752 $ 8,685 $ 8,685
Investment securities 103,344 103,732 119,113 119,733
Loans, net 415,925 417,977 385,203 380,760
-------------------------------------------------------------------------
524,021 $526,461 513,001 $509,178
================== ==================
Other assets 19,390 12,549
================= ==================
Total assets $543,411 $525,550
================= ==================
Liabilities and stockholders'
equity
Deposits $382,525 $383,273 $381,779 $382,808
Advances from Federal Home Loan
Bank 40,821 41,000 6,842 6,661
-------------------------------------------------------------------------
423,346 $424,273 388,621 $389,469
================== ==================
Other liabilities 3,500 3,423
----------------- ------------------
426,846 392,044
Stockholders' equity 116,565 133,506
----------------- ------------------
Total liabilities and
stockholders' equity $543,411 $525,550
================= ==================
</TABLE>
<PAGE>
18. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations
for 1996 and 1995 (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
1996 Three months ended
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $10,237 $10,254 $10,263 $10,503
Interest expense 4,895 4,778 4,782 5,004
----------------------------------------------------------------------
Net interest income 5,342 5,476 5,481 5,499
Provision for loan losses 163 181 264 412
----------------------------------------------------------------------
Net interest income after
provision for loan losses 5,179 5,295 5,217 5,087
Gain on sale of securities - - - 26
Non-interest income 308 284 366 343
Non-interest expenses 3,201 3,113 5,963 3,680
----------------------------------------------------------------------
Income (loss) before income taxes
2,286 2,466 (380) 1,776
Income taxes (credit) 751 791 (145) 600
----------------------------------------------------------------------
Net income (loss) $ 1,535 $ 1,675 $ (235) $ 1,176
======================================================================
Earnings (loss) per share $ 0.15 $ 0.16 $ (0.02) $ 0.12
======================================================================
Average shares outstanding 10,506 10,257 9,830 9,382
======================================================================
<PAGE>
<CAPTION>
18. Quarterly Consolidated Results of Operations (Unaudited) (continued)
1995 Three months ended
March 31 June 30 September 30 December 31
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 9,143 $ 9,376 $ 9,740 $10,306
Interest expense 4,701 5,054 5,406 5,128
----------------------------------------------------------------------
Net interest income 4,442 4,322 4,334 5,178
Provision for loan losses (credit)
80 107 246 (59)
----------------------------------------------------------------------
Net interest income after
provision for loan losses 4,362 4,215 4,088 5,237
Loss on sale of securities 75 - - -
Non-interest income 229 234 263 384
Non-interest expenses 2,580 2,590 2,618 2,772
----------------------------------------------------------------------
Income before income taxes 1,936 1,859 1,733 2,849
Income taxes 660 630 585 981
----------------------------------------------------------------------
Net income $ 1,276 $ 1,229 $ 1,148 $ 1,868
======================================================================
Earnings per share $ .12 $ .12 $ .11 $ .18
======================================================================
Average shares outstanding 10,324 10,385 10,447 10,480
======================================================================
</TABLE>
Exhibit 21.1
List of Subsidiaries of First Defiance Financial Corp.
First Federal Savings and Loan
First Defiance Service Company
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of First Defiance Financial Corp. of our report dated January 17, 1997, included
in the 1996 Annual Report to Shareholders of First Defiance Financial Corp.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1993 Stock Incentive Plan and the 1993 Directors'
Stock Option Plan of First Defiance Financial Corp. of our report dated January
17, 1997, with respect to the consolidated financial statements of First
Defiance Financial Corp. incorporated by reference in the Annual Report (Form
10-K) for the Year ended December 31, 1996.
Ernst & Young LLP
Toledo, Ohio
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,102
<INT-BEARING-DEPOSITS> 1,650
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,407
<INVESTMENTS-CARRYING> 25,937
<INVESTMENTS-MARKET> 26,325
<LOANS> 415,925
<ALLOWANCE> 2,217
<TOTAL-ASSETS> 543,411
<DEPOSITS> 382,525
<SHORT-TERM> 35,220
<LIABILITIES-OTHER> 0
<LONG-TERM> 5,601
0
0
<COMMON> 95
<OTHER-SE> 116,470
<TOTAL-LIABILITIES-AND-EQUITY> 543,411
<INTEREST-LOAN> 34,635
<INTEREST-INVEST> 6,430
<INTEREST-OTHER> 192
<INTEREST-TOTAL> 41,257
<INTEREST-DEPOSIT> 18,579
<INTEREST-EXPENSE> 19,459
<INTEREST-INCOME-NET> 21,798
<LOAN-LOSSES> 1,020
<SECURITIES-GAINS> 25
<EXPENSE-OTHER> 15,958
<INCOME-PRETAX> 6,148
<INCOME-PRE-EXTRAORDINARY> 4,151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,151
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<YIELD-ACTUAL> 8.12
<LOANS-NON> 411
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,817
<CHARGE-OFFS> 775
<RECOVERIES> 156
<ALLOWANCE-CLOSE> 2,217
<ALLOWANCE-DOMESTIC> 2,217
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
