UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended March 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ___________to__________
Commission file number 0-26850
First Defiance Financial Corp.
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(Exact name of registrant as specified in its charter)
Ohio 34-1803915
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Clinton Street, Defiance, Ohio 43512
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(Address or principal executive office) (Zip Code)
(419) 782-5015
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Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value -
8,123,168 shares outstanding at May 11, 1998.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - March 31, 1998 and December 31, 1997
Consolidated Condensed Statements of Income -
Three months ended March 31, 1998 and 1997
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Three months ended
March 31, 1998
Consolidated Condensed Statements of Cash Flows
- Three months ended Mach 31, 1998 and 1997
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ................... $ 5,387 $ 8,149
Interest-bearing deposits ..................... 2,617 848
-------- --------
8,004 8,997
Securities:
Available-for-sale, carried at fair value ..... 71,813 82,436
Held-to-maturity, carried at amortized cost
(approximate fair value $20,201 and $21,370
at March 31, 1998 and December 31,
1997, respectively) ....................... 19,745 20,953
-------- --------
91,558 103,389
Loans held for sale (at lower of cost or fair value,
approximate fair value $2,158 and $89 at March
31, 1998 and December 31, 1997, respectively) . 2,140 88
Loans receivable, net .............................. 448,796 441,823
Accrued interest receivable ........................ 3,429 3,480
Federal Home Loan Bank stock ....................... 3,832 3,764
Premises and equipment ............................. 17,820 16,799
Deferred federal income taxes ...................... 371 415
Real estate, mobile homes and other
assets held for sale .......................... 506 541
Other assets ....................................... 1,015 402
-------- --------
$577,471 $579,698
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ......................................... $ 402,797 $ 395,322
Advances from Federal Home Loan Bank ............. 66,521 71,665
Other liabilities ................................ 6,288 5,826
--------- ---------
Total liabilities ................................ 475,606 472,813
STOCKHOLDERS' EQUITY
Preferred stock, no par value per share:
5,000,000 shares authorized; no shares
issued ...................................... -- --
Common stock, $.01 par value per share:
20,000,000 shares authorized; 8,123,168 and
and 8,529,686 shares outstanding at March 31,
1998 and December 31, 1997, respectively .... 81 85
Additional paid-in capital ....................... 62,270 65,726
Stock acquired by ESOP ........................... (4,302) (4,534)
Stock acquired by Management
Recognition Plan ............................ (1,260) (1,387)
Net unrealized losses on available-for-sale
securities, net of income taxes
of $21 and $25 at March 31,1998
and December 31, 1997, respectively ........ (41) (50)
Retained earnings - substantially restricted ..... 45,117 47,045
--------- ---------
Total stockholders' equity ....................... 101,865 106,885
--------- ---------
Total liabilities and stockholders' equity ....... $ 577,471 $ 579,698
========= =========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
Three Months Ended
March 31
1998 1997
------- -------
<S> <C> <C>
Interest income:
Loans .................................... $ 9,753 $ 9,031
Securities ............................... 1,580 1,558
Interest-bearing deposits ................ 9 11
------- -------
Total interest income .......................... 11,342 10,601
Interest expense:
Deposits .................................. 4,556 4,347
Federal Home Loan Bank
advances and other borrowings ........... 971 619
------- -------
Total interest expense ......................... 5,527 4,966
------- -------
Net interest income ............................ 5,815 5,635
Provision for loan losses ...................... 448 365
------- -------
Net interest income after provision
for loan losses ........................... 5,367 5,270
Non-interest expense ........................... 3,559 3,254
Non-interest income ............................ 484 336
------- -------
Income before federal income taxes ............. 2,292 2,352
Federal income taxes ........................... 784 795
------- -------
Net income ..................................... $ 1,508 $ 1,557
======= =======
Earnings Per Share: (Note 4)
Basic ..................................... $ .20 $ .18
======= =======
Diluted ................................... $ .19 $ .17
======= =======
Dividends declared per share (Note 3) .......... $ .09 $ .08
======= =======
Average number of shares outstanding: (Note 4)
Basic ..................................... 7,606 8,597
======= =======
Diluted ................................... 7,985 8,911
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
Stock Acquired By
---------------------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ................... $ 85 $ 65,726 $ (4,534) $ (1,387)
Comprehensive income:
Net Income
Other comprehensive income, net of tax:
ESOP shares released ................ 180 232
Change in unrealized losses
net of income taxes of $4
Amortization of deferred compensation
of Management Recognition Plan ... 127
Total comprehensive income
Stock issued under Option Plan ................. 207
Purchase of common stock for
treasury ................................... (4) (3,843)
Dividends declared (Note 3)
-------- -------- -------- --------
Balance at March 31, 1998 ...................... $ 81 $ 62,270 $ (4,302) $ (1,260)
======== ======== ======== ========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
Net Unrealized
losses on Total
available-for- Retained Stockholders'
sale securities Earnings Equity
--------------- -------- ------
<S> <C> <C> <C>
Balance at December 31, 1997 .................. $ (50) $ 47,045 $106,885
Comprehensive income:
Net Income ................................. 1,508 1,508
Other comprehensive income, net of tax:
ESOP shares released ................ 412
Change in unrealized losses
net of income taxes of $4 ........ (9) (9)
Amortization of deferred compensation
of Management Recognition Plan ... 127
Total comprehensive income .................... 2,038
Stock issued under Option Plan ................ 207
Purchase of common stock for
treasury .................................. (6,598) (2,751)
Dividends declared (Note 3) ................... (685) (685)
-------- -------- --------
Balance at March 31, 1998 ..................... $ (41) $ 45,117 $101,865
======== ======== ========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Three Months
Ended March 31,
1998 1997
-------- --------
<S> <C> <C>
Operating Activities
Net income ............................................... $ 1,508 $ 1,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................... 446 365
Provision for depreciation, amortization of premiums
and accretion of discounts on securities ......... 257 109
Gain on sale or call of available-for-sale securities -- (7)
Gain on sale of loans ............................... (119) (31)
Amortization of Management Recognition Plan
deferred compensation ............................ 127 180
Release of ESOP Shares .............................. 412 235
Deferred federal income tax (credit) ................ 40 (169)
Proceeds from sale of loans ......................... 7,486 2,027
Originations of loans held for sale ................. (9,419) (2,079)
Increase in interest receivable and other assets .... (562) (195)
Increase in other liabilities ....................... 496 693
-------- --------
Net cash provided by operating activities ................ 672 2,685
Investing activities
Proceeds from maturities of held-to-maturity securities .. 1,193 1,216
Proceeds from maturities of available-for-sale securities 14,000 3,065
Proceeds from sales of available-for-sale securities ..... 48 1,100
Proceeds from sales of real estate, mobile homes, and
other assets held for sale .......................... 603 306
Purchases of available-for-sale securities ............... (3,398) (50)
Purchases of Federal Home Loan Bank stock ................ (68) (54)
Purchases of office properties and equipment ............. (1,276) (1,992)
Net increase in loans receivable ......................... (7,988) (6,106)
-------- --------
Net cash used in investing activities .................... 3,114 (2,515)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Three Months Ended
March 31,
1998 1997
------- -------
<S> <C> <C>
Financing Activities
Net increase (decrease) in deposits ............................ 7,475 (4,264)
Repayment of Federal Home Loan Bank long-term advances ......... (169) (169)
Net increase (decrease) in Federal Home Loan Bank
short-term advances ....................................... (4,975) 6,000
Purchase of common stock for treasury .......................... (6,598) (576)
Cash dividends paid ............................................ (719) (709)
Proceeds from exercise of stock options ........................ 207 5
------- -------
Net cash provided by financing activities ...................... (4,779) 287
------- -------
Increase (Decrease) in cash and cash equivalents ............... (993) 457
Cash and cash equivalents at beginning of period ............... 8,997 4,752
------- -------
Cash and cash equivalents at end of period ..................... $ 8,004 $ 5,209
======= =======
Supplemental cash flow information:
Interest paid $ ................................................ 5,773 $ 4,915
======= =======
Income taxes paid .............................................. $ -- $ --
======= =======
Transfers from loans to real estate, mobile homes
and other assets held for sale ............................ $ 568 $ 540
======= =======
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities ............. $ (4) $ 160
======= =======
Noncash investing activities:
Decrease (increase) in net unrealized loss on available-for-sale
securities ................................................ $ 13 $ (466)
======= =======
Noncash financing activities:
Cash dividends declared but not paid ........................... $ 685 $ 705
======= =======
</TABLE>
See accompanying notes.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at March 31, 1998)
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance" or "the Company") and its
wholly owned savings and loan, First Federal Savings and Loan ("First
Federal"). In the opinion of management, all significant intercompany
accounts and transactions have been eliminated in consolidation.
2. Basis of Presentation
The consolidated condensed statement of financial condition at December 31,
1997 has been derived from the audited financial statements at that date.
The accompanying consolidated condensed financial statements as of March
31, 1998 and for the three month periods ending March 31, 1998 and 1997
have been prepared by First Defiance without audit and do not include
information or footnotes necessary for the complete presentation of
financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in First Defiance's annual
report for the year ended December 31, 1997. However, in the opinion of
management, all adjustments, consisting of only normal recurring items,
necessary for the fair presentation of the financial statements have been
made. The results of operations for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for
the entire year.
3. Dividends on Common Stock
As of March 31, 1998, First Defiance had declared a quarterly cash dividend
of $.09 per share for the first quarter of 1998, payable April 23, 1998.
4. Earnings Per Share
Basic earnings per share as disclosed under Financial Accounting Standard
("FAS") No. 128 has been calculated by dividing net income by the weighted
average number of shares of common stock outstanding for the three month
periods ended March 31, 1998 and 1997. First Defiance accounts for the
shares issued to its Employee Stock Ownership Plan ("ESOP") in accordance
with Statement of Position 93-6 of the American Institute of Certified
Public Accountants ("AICPA"). As a result, shares controlled by the ESOP
are not considered in the weighted average number of shares of common stock
outstanding until the shares are committed for allocation to an employee's
individual account. In the calculation of diluted earnings per share as of
March 31, 1998 and 1997, the effect of shares issuable under stock option
plans and unvested shares under the Management Recognition Plan have been
accounted for using the Treasury Stock method.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 1998)
4. Earnings Per Share - continued
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------ ------
<S> <C> <C>
Numerator for basic and diluted earnings per
share - net income ................................. $1,508 $1,557
------ ------
Denominator:
Denominator for basic earnings per share -
weighted average shares ......................... 7,606 8,597
Effect of dilutive securities:
Employee stock options .......................... 268 218
Unvested Management Recognition Plan stock ...... 111 96
------ ------
Dilutive potential common shares .................. 379 314
------ ------
Denominator for diluted earnings per share -
Adjusted weighted average shares and assumed
Conversions ..................................... 7,985 8,911
------ ------
Basic earnings per share .......................... $ .20 $ .18
------ ------
Diluted earnings per share ........................ $ .19 $ .17
------ ------
</TABLE>
5. Stock Option Disclosures
FAS Statement No. 123, "Accounting for Stock-Based Compensation." requires
either: (a) recognition of compensation cost in earnings for stock-based
compensation plans based upon their fair value; or (b) pro forma
disclosures of what earnings and per share amounts would have been had the
fair value method been used for expense recognition. First Defiance has
elected to use the pro forma disclosure option. As provided in Statement
No. 123, the disclosure provisions for companies electing pro forma
disclosures are not required to be applied in interim reports which do not
include a complete set of financial statements.
6. New Accounting Standard
As of March 31, 1998 the Company adopted FAS No. 130, "Reporting
Comprehensive Income". This statement establishes standards for the
reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from transactions
with shareholders) and includes net income, net unrealized gains or losses
on available-for-sale securities, and reductions in the Management
Recognition Plan ("MRP") and Employee Stock Ownership Plan ("ESOP")
suspense accounts. As this new standard only requires additional
information in the financial statements, it does not affect the Company's
financial position or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First Defiance is a holding company which conducts business through its wholly
owned subsidiary, First Federal Savings and Loan, Defiance Ohio, which is
primarily engaged in attracting deposits from the general public through its
offices and using those and other available sources of funds to originate loans
primarily secured by single-family residences primarily located in the five
counties in which its offices are located and in contiguous Putnam County.
Single family residential mortgage loans amounted to $262.5 million or 57.2% of
First Defiance's total loan portfolio at March 31, 1998. To a lesser extent,
First Defiance originates other real estate loans secured by non-residential
real estate and construction loans, which amounted to $39.9 million or 8.7% of
total loans at March 31, 1998. Approximately 34.1% or $156.7 million of First
Defiance's loan portfolio as of March 31, 1998 consisted of non-real estate
loans including consumer finance loans, primarily automobile loans, which
amounted to $71.1 million or 15.5% of the total loan portfolio, commercial
loans, which amounted to $32.1 million or 7.0% of the total loan portfolio and
mobile home loans which amounted to $25.3 million or 5.5% of the total loan
portfolio.
First Defiance is an authorized seller/servicer for the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). First Defiance sold 101 and 27 loans
during the three months ended March 31, 1998 and 1997. The Company realized a
gain on sale of those loans of approximately $119,000 and $31,000 for three
months ended March 31, 1998 and 1997 respectively. Fixed rate loans with a
maturity of 20 years which meet the Freddie Mac underwriting guidelines are
classified as available-for-sale loans. First Defiance retains the servicing
rights on all mortgage loans sold. Mortgage servicing rights capitalized at
March 31, 1998 amounted to approximately $252,000.
First Defiance also invests in U.S. Treasury and federal government agency
obligations, money market mutual funds which are comprised of U.S. Treasury
obligations, obligations of the State of Ohio and its political subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent, collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). Management determines the appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
Securities are classified as held-to-maturity when First Federal has the
positive intent and ability to hold the security to maturity. Held-to-maturity
securities are stated at amortized cost and had a recorded value of $19.7
million at March 31, 1998. Securities not classified as held-to-maturity are
classified as available-for-sale, which are stated at fair value and had a
recorded value of $71.8 million at March 31, 1998. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($45.9 million), corporate bonds ($10.1
million), certain municipal obligations ($2.9 million), adjustable-rate mortgage
backed security mutual funds ($8.9 million) and CMOs and REMICs ($4.0 million).
In accordance with FASB Statement No. 115, unrealized holding gains and losses
on available-for-sale securities are reported in a separate component of
stockholders' equity and are not reported in earnings until realized. Net
unrealized holding losses on available-for-sale securities were $62,000 at March
31, 1998, $41,000 after considering the related deferred tax benefit. For the
three months ended March 31, 1998, unrealized losses have decreased by $13,000
($9,000 after tax).
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
The profitability of First Defiance is primarily dependent on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and securities, and interest expense
on interest-bearing deposits and Federal Home Loan Bank advances. First
Defiance's earnings also depend, to a lesser extent, on the provision for loan
losses, the level of its other income (including servicing fees and other fees)
and its non-interest expenses, such as employee compensation and benefits,
occupancy and equipment expense, deposit insurance premiums, and miscellaneous
other expenses, as well as federal income tax expense.
Changes in Financial Condition
At March 31, 1998, First Defiance's total assets, deposits and stockholders'
equity amounted to $577.5 million, $402.8 million and $101.9 million,
respectively, compared to $579.7 million, $395.3 million and $106.9 million,
respectively, at December 31, 1997. Net loans receivable have increased from
$441.8 million at December 31, 1997 to $448.8 million at March 31, 1998. This
increase was funded primarily with maturing securities. Securities decreased
from $103.4 million at December 31, 1997 to $91.6 million at March 31, 1998 as a
result of U.S. Agency securities being called prior to maturity. Proceeds from
those calls were used to fund loan growth and pay down advances from the Federal
Home Loan Bank ("FHLB") rather than being reinvested at current rates. As a
result, FHLB advances decreased from $71.7 million at December 31, 1997 to $66.5
million at March 31, 1998. First Defiance completed its sixth 5% stock
repurchase during the first quarter of 1998. As of March 31, 1998, First
Defiance has repurchased 426,384 shares of its own stock during 1998 for a total
cost of $6.6 million, an average of $15.47 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based on month-end balances.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $445,502 $9,753 8.76% $418,931 $9,031 8.62%
Securities 98,883 1,589 6.43 100,011 1,558 6.23
Dividends on FHLB stock 3,765 67 7.12 2,982 54 7.24
-------- ------ -------- ------
Total interest-earning assets 548,150 11,409 8.33 521,924 10,643 8.16
Non-interest-earning assets 27,622 21,642
-------- --------
Total assets $575,772 $543,566
======== ========
Interest-bearing liabilities:
Deposits $397,758 $4,556 4.58% $378,124 $4,347 4.60%
FHLB advances and other 66,797 971 5.81 43,795 619 5.65
-------- ------ -------- ------
Total interest-bearing liabilities 464,555 5,527 4.76 421,919 4,966 4.71
------ ---- ------ ----
Non-interest-bearing liabilities 5,783 3,981
-------- --------
Total liabilities 470,338 425,900
Stockholders' equity 105,434 117,590
-------- --------
Total liabilities and stock-
holders' equity $575,772 $543,566
======== ========
Net interest income; interest
rate spread $5,882 3.57% $5,677 3.45%
====== ===== ====== =====
Net interest margin (2) 4.29% 4.35%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 118% 123%
==== ====
- --------------
</TABLE>
(1) Annualized
(2) Net interest margin is net interest divided by average interest-earning
assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Results of Operations
Three Months Ended March 31, 1998 compared to Three Months Ended March 31, 1997
Net interest income, the difference between revenue generated from interest
earning assets and the interest cost of funding those assets, is First
Defiance's primary source of earnings. For the three-month period ending March
31, 1998, net interest income increased to $5,815,000 from $5,635,000 for the
same period in 1997. First Defiance's interest rate spread (the difference
between yield on average interest earning assets and the interest rate on
average interest-bearing liabilities) for the 1998 first quarter was 3.57%,
which was 12 basis points higher than the 1997 level of 3.45% for the same
quarter.
The increase in net interest income was due primarily to a $26.6 million
increase in the average balance of loans receivable for the quarter ended March
31, 1998 compared to the same period in 1997 and to an increase in the yield on
both loans and investment securities. The yield on loans increased to 8.76% for
the quarter ended March 31, 1998 compared to 8.62% for the same period in 1997.
During that same period, the yield on investment securities increased by 20
basis points to 6.43% from 6.23%. Total interest income plus dividends on
Federal Home Loan Bank stock was $11,409,000 for the three months ended March
31, 1998, a 7.2% increase from the same period in 1997 when the total was
$10,643,000. Interest from loans increased to $9,753,000 for the three months
ended March 31, 1998 from $9,031,000 for the three months ended March 31, 1997,
an increase of 8.0%. Because of higher yields, earnings from investment
securities increased slightly during the period compared to the year earlier
quarter despite a $1.1 million decline in the average balance of securities
outstanding for the quarter ended March 31, 1998 compared to the quarter ended
March 31, 1997.
Interest expense increased by $561,000 to $5,527,000 for the quarter ended March
31, 1998 compared to the same period in 1997. This increase was due to a $23.0
million increase in the average balance of Federal Home Loan Bank advances
outstanding, from $43.8 million for the three months ended March 31, 1997 to
$66.8 million for the same period in 1998. These advances, which are used to
fund loan growth, as well as other cash needs including stock repurchases,
actually decreased from $71.7 million at December 31, 1997 to $66.5 million at
March 31, 1998. The decrease in advances between December 31, 1997 and March 31,
1998 is primarily due to fact that the proceeds from agency securities which
were called during the quarter were generally used to pay down advances.
Interest expense also increased due to an increase in the average deposits
outstanding, which increased to $397.8 million for the three months ended March
31, 1998 from $378.1 million for the same period in 1997. The cost of those
deposits dropped two basis points, from an average of 4.60% in 1997 to an
average of 4.58% in 1998.
The increase in net interest income for the 1998 first quarter compared to the
same period in 1997 was partially offset by an increase in the provision from
loan losses, which was $448,000 for the three months ended March 31, 1998
compared to $365,000 for the first three months of 1997. Provisions for loan
losses are charged to earnings to bring the total allowance to the level deemed
appropriate by management based on historical experience, the volume and type of
lending conducted by First Defiance, industry standards, the amount of
non-performing assets and loan charge-off activity, general economic conditions,
particularly as they relate to First Defiance's market area, and other factors
related to the collectibility of First Defiance's loan portfolio.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
Non-performing assets, which include loans 90 days past due, loans deemed
impaired and repossessed assets totaled $1.8 million at March 31, 1998, which is
.31% of total assets. The allowance for loan losses at March 31, 1998 was $2.8
million compared to $2.7 million at December 31, 1997. For the quarter ended
March 31, 1998, First Defiance charged off $413,000 of loans against its
allowance and realized recoveries of $52,000 from loans previously charged off.
During the same quarter in 1997, First Defiance charged off $285,000 in loans
and realized recoveries of $31,000.
Total non-interest expense for the quarter ended March 31, 1998 was $3.6
million, compared to $3.3 million for the quarter ended March 31, 1997.
Occupancy costs increased by $176,000 to $410,000 for the quarter ended March
31, 1998 from $234,000 for the same period in 1997. The increase relates
primarily to depreciation expense on a major renovation to First Defiance's main
branch and headquarters building in Defiance, Ohio which was completed in June
of 1997. Also a new branch was opened in Hicksville, Ohio in February, 1998 and
a temporary facility was operated in Paulding, Ohio beginning in September 1997
while a new permanent branch in that community was being constructed. That
permanent branch was completed in April, 1998.
Other significant increases in non-interest expense were in mobile home loan
servicing, which increased by $46,000 for the three months ended March 31, 1998
compared to the same period in 1997, and SAIF insurance premiums, which were
$48,000 higher in the first quarter of 1998 compared to the first quarter of
1997. The increase in mobile home loan servicing was primarily the result of
increased costs associated with repossessed mobile homes. The SAIF premiums were
higher in 1998 than in 1997 because of the realization in the 1997 first quarter
of credits for payments made in the fourth quarter of 1996. Compensation and
benefits for the period were $1.80 million for the three months ended March 31,
1998, a slight decrease from the year earlier period when compensation and
benefits totalled $1.82 million. Compensation and benefits declined despite the
addition of the two new branches primarily because of lower contributions to the
Company's ESOP plan and the termination of the Company's defined benefit plan in
the fourth quarter of 1997.
Non-interest income was $485,000 for the quarter ended March 31, 1998 compared
to $336,000 during the comparable period in 1997. Most of the increase related
to gains on the sale of mortgage loans, which were $119,000 during the first
quarter of 1998 compared to $31,000 in the first quarter of 1997. Also, loan and
deposit fees increased to $274,000 in the first three months of of 1998 compared
to $231,000 during the same period in 1997.
The Company has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 34.2% for the
quarter ended March 31, 1998 compared to 33.8% for the first quarter of 1997.
As a result of the above factors, net income for the quarter ended March 31,
1998 was $1,508,000 compared to $1,557,000 for the quarter ended March 31, 1997.
On a per share basis, basic and diluted earnings per share for the three months
ended March 31, 1998 was $.20 and $.19 respectively compared to $.18 and $.17
for the same period in 1997. The increase in earnings per share is attributable
to a decrease in the average shares outstanding as a result of three five
percent stock buy backs completed since the beginning of 1997. Average shares
outstanding for the basic and diluted calculations were 7,606,000 and 7,985,000
respectively for the quarter ended March 31, 1998 compared to 8,597,000 and
8,911,000 respectively for the quarter ended March 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
First Defiance's board of directors declared a dividend of $.09 per common share
as of March 31, 1998. The dividend amounted to $731,085, including dividends on
unallocated ESOP shares. It was paid on April 23, 1998. Dividends are subject to
determination and declaration by the board of directors, which will take into
account First Defiance's financial condition and results of operations, economic
conditions, industry standards and regulatory restrictions which affect First
Defiance's ability to pay dividends.
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three-month period ended March 31, 1998.
First Defiance generated $672,000 of cash from operating activities during the
first three months of 1997. The Company's cash from operating activities results
from net income for the period, adjusted for various non-cash items, including
the provision for loan losses, depreciation and amortization, ESOP expense
related to release of shares, and changes in loans available for sale, interest
receivable and other assets, and other liabilities. The primary investing
activity of First Defiance is lending, which is funded with cash provided by
operations, proceeds from the amortization and prepayments of existing loans,
proceeds from the sale or maturity of securities, and borrowings from the
Federal Home Loan Bank.
At March 31, 1998, First Defiance had $21.5 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $25.4 million committed under existing consumer and
commercial lines of credit and standby letters of credit. At that date, the
total amount of certificates of deposit that are scheduled to mature by March
31, 1999 is $206.5 million. First Defiance believes that it has adequate
resources to fund commitments as they arise and that it can adjust the rate on
savings certificates to retain deposits in changing interest rate environments.
If First Defiance requires funds beyond its internal funding capabilities,
advances from the FHLB of Cincinnati are available as an additional source of
borrowings.
Currently First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities include agency step-up, REMIC and CMO investments. Such investments
are not classified as high risk at March 31, 1998 and do not present risk
significantly different than other mortgage-backed or agency securities. First
Defiance does not invest in off-balance sheet derivative securities.
First Federal is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible capital
requirement, a core capital requirement, and a risk-based capital requirement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Continued
The following table sets forth First Federal's compliance with each of the
capital requirements at March 31, 1998.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital (1)
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital ................ $ 82,191 $ 82,191 $ 84,511
Minimum required regulatory
capital ........................ 12,329 23,272 30,778
--------- --------- ---------
Excess regulatory capital ......... $ 69,862 $ 58,919 $ 53,733
========= ========= =========
Regulatory capital as a
percentage of assets (2) ....... 14.1% 14.1% 22.0%
Minimum capital required as
a percentage ................... 1.5 4.0 8.0
--------- --------- ---------
Excess regulatory capital as a
percentage in excess of
requirement .................... 12.6% 10.1% 14.0%
========= ========= =========
</TABLE>
- ------------
(1) Reflects fully phased-in deductions from total capital.
(2) Tangible and core capital are computed as a percentage of adjusted total
assets of $581.9 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $384.7 million.
FDIC Insurance
The deposits of First Federal are currently insured by the Savings Association
Insurance Fund ("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
for commercial bank deposits. Both the SAIF and the BIF are required by law to
attain and maintain a reserve ratio of 1.25% of insured deposits. First
Federal's deposit insurance premiums for 1998 are approximately $0.064 per $100
of deposits.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
DEFIANCE, OHIO
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
First Defiance is not engaged in any legal proceedings of a material
nature.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 22, 1998, in
Defiance, Ohio the shareholders elected directors and ratified the
appointment of Ernst & Young LLP as First Defiance's independent
auditors for 1998. The following is a tabulation of all votes timely
cast in person or by prosy by shareholders of First Defiance for the
annual meeting:
To elect directors to three-year terms:
NOMINEE FOR WITHHELD
Stephen L. Boomer 6,411,899 41,514
William J. Small 6,409,706 43,197
Peter A. Diehl 6,393,299 59,604
To ratify the appointment of Ernst & Young LLP as First Defiance's
independent auditor for 1998:
FOR 6,422,427
AGAINST 7,359
ABSTAIN 23,117
Item 5. Other Information
Not applicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Reports on Form 8-K. On April 17, 1998, First Defiance Financial
Corp. filed a current report on Form 8-K dated April 17, 1998,
reporting, pursuant to Item 5 of such form, that First Defiance
Financial Corp. and its wholly-owned subsidiary, First Federal
Savings and Loan, and The Leader Mortgage Company, an Ohio
corporation, entered into an Agreement and Plan of Reorganization
which provides for the acquisition of Leader by First Defiance
through the reverse merger of a subsidiary of First Defiance or
First Federal with and into Leader ("the Merger"). The
consummation of the Merger is subject to a number of conditions,
including, but not limited to, the approval of the appropriate
regulatory agencies and the approval of the requisite number of
shareholders of Leader. The Agreement may be terminated by the
Board of Directors of First Defiance or Leader if the Merger is
not consumated before December 31, 1998.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: May 12, 1998 By: /s/ Don C. Van Brackel
------------ -----------------------
Don C. Van Brackel
Chairman, President and
Chief Executive Officer
Date: May 12, 1998 By: /s/ John C. Wahl
------------ ----------------
John C. Wahl
Senior Vice President, Chief
Financial Officer
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,357
<INT-BEARING-DEPOSITS> 2,617
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,813
<INVESTMENTS-CARRYING> 19,745
<INVESTMENTS-MARKET> 20,201
<LOANS> 453,705
<ALLOWANCE> 2,772
<TOTAL-ASSETS> 511,471
<DEPOSITS> 402,797
<SHORT-TERM> 62,160
<LIABILITIES-OTHER> 6,288
<LONG-TERM> 4,361
0
0
<COMMON> 81
<OTHER-SE> 101,865
<TOTAL-LIABILITIES-AND-EQUITY> 577,471
<INTEREST-LOAN> 9,753
<INTEREST-INVEST> 1,580
<INTEREST-OTHER> 9
<INTEREST-TOTAL> 11,342
<INTEREST-DEPOSIT> 4,556
<INTEREST-EXPENSE> 5,527
<INTEREST-INCOME-NET> 5,527
<LOAN-LOSSES> 448
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,559
<INCOME-PRETAX> 2,292
<INCOME-PRE-EXTRAORDINARY> 2,292
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,505
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<YIELD-ACTUAL> 8.33
<LOANS-NON> 1,263
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,686
<CHARGE-OFFS> 413
<RECOVERIES> 52
<ALLOWANCE-CLOSE> 2,772
<ALLOWANCE-DOMESTIC> 2,772
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
