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, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ___________to__________
Commission file number 0-26850
First Defiance Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1803915
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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 [ ]
<PAGE>
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.01 Par Value -
7,123,659 shares outstanding at May 12, 1999.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
INDEX
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - March 31,1999 and December 31, 1998
Consolidated Condensed Statements of Income -
Three months ended March 31,1999 and 1998
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Three months ended
March 31,1999
Consolidated Condensed Statements of Cash Flows
- Three months ended March 31,1999 and 1998
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
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 31,1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions ..................... $ 904 $ 16,137
Interest-bearing deposits ....................... 3,596 4,369
-------- --------
4,500 20,506
Securities:
Available-for-sale, carried at fair value ....... 42,718 47,554
Held-to-maturity, carried at amortized cost
(approximate fair value $12,542 and $13,753
at March 31,1999 and December 31,
1998, respectively) ......................... 12,348 13,541
-------- --------
55,066 61,095
Loansheld for sale (at lower of cost or fair value,
approximate fair value $120,800 and $120,097 at
March 31,1999 and December 31,1998, respectively) 120,796 119,910
Loans receivable, net ................................ 455,981 448,574
Mortgage servicing rights ............................ 79,352 76,452
Accrued interest receivable .......................... 3,595 3,605
Federal Home Loan Bank stock ......................... 11,744 10,826
Office properties and equipment ...................... 19,729 19,057
Real estate, mobile homes and other
assets held for sale ............................ 1,447 1,517
Goodwill, net ........................................ 13,276 13,333
Other assets ......................................... 11,054 10,524
-------- --------
Total assets ......................................... $776,540 $785,399
======== ========
</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 31,1999 December 31, 1998
------------- -----------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits ................................................... $ 473,042 $ 433,979
Advances from Federal Home Loan Bank ....................... 116,772 168,142
Advance payments by borrowers for taxes and insurance ...... 84,091 77,334
Notes payable .............................................. 328 368
Deferred taxes ............................................. 3,210 2,847
Other liabilities .......................................... 9,659 9,019
--------- ---------
Total liabilities .......................................... 687,102 691,689
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; 7,159 and
7,575 shares outstanding at March 31,1999 and
December 31, 1998, respectively ....................... 71 76
Additional paid-in capital ................................. 55,358 58,681
Stock acquired by ESOP ..................................... (3,877) (4,089)
Deferred compensation ...................................... (743) (843)
Accumulated other comprehensive income,
net of income taxes of $53
and $83 at March 31,1999 and
December 31, 1998, respectively ....................... 103 162
Retained earnings .......................................... 38,526 39,723
--------- ---------
Total stockholders' equity ................................. 89,438 93,710
--------- ---------
Total liabilities and stockholders' equity ................. $ 776,540 $ 785,399
========= =========
</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, 1999
1999 1998
------- -------
<S> <C> <C>
Interest income:
Loans .................................... $11,622 $ 9,753
Investment securities .................... 814 1,580
Other .................................... 45 9
------- -------
Total interest income .......................... 12,481 11,342
Interest expense:
Deposits .................................. 4,682 4,556
Federal Home Loan Bank
advances ................................ 1,982 971
Notes payable ............................. 93 --
------- -------
Total interest expense ......................... 6,757 5,527
------- -------
Net interest income ............................ 5,724 5,815
Provision for loan losses ...................... 512 448
------- -------
Net interest income after provision
for loan losses ........................... 5,212 5,367
Non-interest expense ........................... 11,115 3,559
Non-interest income ............................ 8,993 484
------- -------
Income before income taxes ..................... 3,090 2,292
Income taxes ................................... 1,132 784
------- -------
Net income ..................................... $ 1,958 $ 1,508
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Earnings per share: (Note 4)
Basic ..................................... $ .29 $ .20
======= =======
Diluted ................................... $ .28 $ .19
======= =======
Dividends declared per share (Note 3) .......... $ .10 $ .09
======= =======
Average number of shares
Outstanding: (Note 4)
Basic ............................ 6,705 7,606
======= =======
Diluted .......................... 6,925 7,985
======= =======
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
Stock Acquired By
--------------------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $76 $58,681 $(4,089) $ (843)
Comprehensive income:
Net Income
Change in unrealized gains (losses)
net of income taxes of $30
Total comprehensive income
ESOP shares released 116 212
Amortization of deferred compensation
of Management Recognition Plan 100
Shares issued under stock option plan 233
Purchase of common stock for
treasury (5) (3,672)
Dividends declared (Note 3)
---- ------- ------- -----
Balance at March 31,1999 $ 71 $55,358 $(3,877) $(743)
---- ------- ------- -----
</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
gains (losses) on Total
available-for- Retained Stockholders'
sale securities Earnings Equity
--------------- -------- ------
<S> <C> <C> <C>
Balance at December 31, 1998 $162 $39,723 $93,710
Comprehensive income:
Net Income 1,958 1,958
Change in unrealized gains (losses)
net of income taxes of $30 (59) (59)
----
Total comprehensive income 1,899
ESOP shares released 328
Amortization of deferred compensation
of Management Recognition Plan 100
Shares issued under stock option plan 233
Purchase of common stock for
treasury (2,486) (6,163)
Dividends declared (Note 3) (669) (669)
----- ------- -------
Balance at March 31, 1999 $ 103 $38,526 $89,438
===== ======= =======
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Three Month
Ended March 31,
1999 1998
--------- ----------
<S> <C> <C>
Operating Activities
Net income ....................................................... $ 1,958 $ 1,508
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ................................... 512 446
Provision for depreciation .................................. 410 255
Net securities amortization ................................. 13 2
Amortization of mortgage servicing rights .......... 3,257 5
Amortization of goodwill .................................... 183 --
Gain on sale of loans ....................................... (1,563) (119)
Amortization of Management Recognition Plan
deferred compensation ................................... 100 127
Release of ESOP Shares ...................................... 328 412
Gain on disposal of office properties and equipment ......... (1) --
Deferred federal income tax provision ....................... 393 40
Proceeds from sale of loans ................................. 312,593 7,486
Origination of mortgage servicing rights, net ...... (6,157) (68)
Origination of loans held for sale .......................... (303,118) (9,419)
Increase in interest receivable and other assets ............ (520) (499)
Net repurchase of loans serviced for others ................. (8,853) --
Increase in other liabilities ............................... 681 496
--------- ---------
Net cash provided by operating activities ........................ 216 672
Investing Activities
Proceeds from maturities of held-to-maturity securities .......... 1,172 1,193
Proceeds from maturities of available-for-sale securities ........ 11,944 14,048
Proceeds from sales of real estate, mobile homes, and
other assets held for sale .................................. 404 603
Proceeds from sales of office properties and equipment ........... 1 --
Purchases of available-for-sale securities ....................... (7,189) (3,398)
Purchases of Federal Home Loan Bank stock ........................ (918) (68)
Purchases of office properties and equipment ..................... (1,082) (1,276)
Adjustment of acquisition of Insurance Center .................... (126) --
Net increase in loans receivable ................................. (8,198) (7,988)
--------- ---------
Net cash (used in) provided by investing activities .............. (3,992) 3,114
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Financing Activities
Net increase in deposits and advance payments by borrowers
for taxes and insurance ....................................... 45,820 7,475
Repayment of Federal Home Loan Bank long-term advances ............. (725) (169)
Repayment of term notes payable .................................... (40)
Net decrease in Federal Home Loan Bank
short-term advances ........................................... (50,645) (4,975)
Purchase of common stock for treasury .............................. (6,163) (6,598)
Cash dividends paid ................................................ (710) (719)
Proceeds from exercise of stock options ............................ 233 207
-------- --------
Net cash used in financing activities .............................. (12,230) (4,779)
-------- --------
Decrease in cash and cash equivalents .............................. (16,006) (993)
Cash and cash equivalents at beginning of period ................... 20,506 8,997
-------- --------
Cash and cash equivalents at end of period ......................... $ 4,500 $ 8,004
======== ========
Supplemental cash flow information:
Interest paid ...................................................... $ 6,884 $ 5,773
======== ========
Income taxes paid .................................................. $ 425 $ --
======== ========
Transfers from loans to real estate, mobile homes
and other assets held for sale ................................ $ 307 $ 568
======== ========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities ................. $ (30) $ (4)
======== ========
Noncash investing activities:
(Decrease) increase in net unrealized gain or loss on
available-for-sale securities ................................. $ (59) $ 13
======== ========
Noncash financing activities:
Cash dividends declared but not paid ............................... $ 669 $ 685
======== ========
</TABLE>
See accompanying notes.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at March 31, 1999)
- --------------------------------------------------------------------------------
1. Principles of Consolidation
The consolidated condensed financial statements include the accounts of
First Defiance Financial Corp. ("First Defiance" or "the Company"), its two
wholly subsidiaries, First Federal Savings and Loan ("First Federal"), and
the Insurance Center of Defiance ("Insurance Center") and First Federal's
wholly owned mortgage banking company, The Leader Mortgage Co. ("The
Leader"). 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,
1998 has been derived from the audited financial statements at that date,
which were included in First Defiance's Annual Report on Form 10-K.
The accompanying consolidated condensed financial statements as of March
31, 1999 and for the three-month period ending March 31, 1999 and 1998 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 1998
annual report on Form 10K for the year ended December 31, 1998. 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, 1999 are not necessarily indicative of the results
that may be expected for the entire year.
3. Dividends on Common Stock
As of March 31, 1999, First Defiance had declared a quarterly cash dividend
of $.10 per share for the first quarter of 1999, payable April 23, 1999.
4. Earnings Per Share
Basic earnings per share as disclosed under Statement of 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-month period ended March 31, 1999 and 1998. 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 for the three-months ended March 31, 1999 and
1998, 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, 1999)
- --------------------------------------------------------------------------------
The following table sets forth the computation of basic and diluted earning
per share (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Numerator for basic and diluted
earnings per share - net income .................. $1,958 $1,508
====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares ................ 6,705 7,606
Effect of dilutive securities:
Employee stock options ......................... 157 268
Unvested Management Recognition
Plan stock ................................. 63 111
------ ------
Dilutive potential common shares ................. 220 379
====== ======
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions ................. 6,925 7,985
====== ======
Basic earnings per share ........................... $ .29 $ .20
====== ======
Diluted earnings per share ......................... $ .28 $ .19
====== ======
</TABLE>
5. Mortgage Servicing Rights
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Balance at beginning of period ............. $ 76,452 $ 188
Acquired in purchase of The Leader ......... -- 65,804
Purchases .................................. -- 3,417
Loans sold servicing retained .............. 6,157 12,428
Amortization ............................... (3,257) (5,385)
-------- --------
Balance at end of period ................... $ 79,352 $ 76,452
======== ========
</TABLE>
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 1999)
- --------------------------------------------------------------------------------
Accumulated amortization of mortgage servicing rights aggregated
approximately $8.6 million and $5.4 million at March 31, 1999 and December
31, 1998, respectively.
The Company's servicing portfolio (excluding subserviced loans) is
comprised of the following as of March 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Principal
Number Balance
of Loans Outstanding
---------- ----------
<S> <C> <C>
GNMA ................................. 58,698 $3,505,306
FNMA ................................. 11,029 679,682
FHLMC ................................ 2,536 102,853
Other VA, FHA and
Conventional loans ................... 12,714 741,346
------ ----------
84,977 $5,029,187
====== ==========
</TABLE>
6. Line of Business Reporting
First Defiance operates two major lines of business. Retail banking, which
consists of the operations of First Federal, includes direct and indirect
lending, deposit-gathering, small business services and consumer finance.
Mortgage banking, which consists of the operations of The Leader, includes
buying and selling mortgages to the secondary market and the subsequent
servicing of these sold loans. The channels through which the product or
service is delivered identify the business units. The retail-banking unit
funds the mortgage-banking unit and an investment/funding unit within the
retail-banking unit centrally manages interest rate risk. Transactions
between business units are primarily conducted at fair value, resulting in
profits that are eliminated for reporting consolidated results of
operations.
The parent unit is comprised of the operations of the Insurance Center and
inter-segment income elininations and unallocated expenses. Selected
segment information in the following table includes only the three-months
ended March 31, 1999, as there was only a retail banking segment for the
three months ended March 31, 1998.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 1999)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retail Mortgage
Consolidated Parent Banking Banking
------------ ------ ------- -------
<S> <C> <C> <C> <C>
Total interest income .... $ 12,481 $ (2,599) $ 12,721 $ 2,359
Total interest expense ... 6,757 (3,084) 8,165 1,676
--------- --------- --------- ---------
Net interest income ...... 5,724 485 4,556 683
Provision for loan losses 512 2 121 389
--------- --------- --------- ---------
Net interest income after
Provision ............ 5,212 483 4,435 294
Non-interest income ...... 8,993 (381) 1,716 7,658
Non-interest expense ..... 11,115 214 3,922 6,979
--------- --------- --------- ---------
Income before income taxes 3,090 (112) 2,229 973
Income taxes ............. 1,132 196 535 401
--------- --------- --------- ---------
Net income ............... $ 1,958 $ (308) $ 1,694 $ 572
========= ========= ========= =========
=========
Total assets ............. $ 776,540 $(257,923) $ 780,249 $ 254,214
========= ========= ========= =========
</TABLE>
7. Acquisitions
On July 1, 1998, First Federal completed the acquisition of The Leader, in
a cash transaction. At the date of acquisition, The Leader had assets of
$197.3 million and equity of $14.0 million. The cash price of $34.9
million, including $2 million held in escrow for indemnifiable claims,
exceed fair value of net assets acquired by approximately $11.3 million,
which was recorded as goodwill.
On December 24, 1998, First Defiance completed the acquisition of the
Insurance Center in a stock transaction valued at $2.1 million. The
acquisition has been accounted for as a purchase. First Defiance could be
subject to additional contingent consideration of up to $400,000 if certain
earning criteria are met.
Comparability of the three-months ended March 31, 1999 and 1998 is affected
substantially by the acquisition of The Leader, as the results of
operations for the three-months ended March 31, 1998 do not include any
effects of this transaction.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at March 31, 1999)
- --------------------------------------------------------------------------------
8. New Accounting Pronouncement
The FASB has released FAS No. 133, "Accounting for Derivative and Similar
Financial Instruments and for Hedging Activities". This statement
establishes accounting and reporting standards for derivative financial
instruments and it requires all derivatives to be measured at fair value
and to be recognized as either assets or liabilities in the statement of
financial position. The standard becomes effective for First Defiance for
the first quarter of the year 2000 and is not expected to have a material
impact on the Company's financial statements.
<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 two
wholly owned subsidiaries, First Federal Savings and Loan, Defiance Ohio ("First
Federal") and the Insurance Center of Defiance ("Insurance Center") and First
Federal's wholly owned subsidiary, The Leader Mortgage Company ("The Leader").
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 primarily in the six counties in which its offices are
located and in contiguous Putnam County. The Company's traditional banking
activities include originating and servicing residential, commercial and
consumer loans and providing a broad range of depository services. First Federal
is subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities. The Leader is a mortgage banking
company which specializes in servicing mortgage loans under first-time
home-buyer programs sponsored by various state, county and municipal
governmental entities. The Company's mortgage banking activities consist
primarily of originating or purchasing residential mortgage loans for either
direct resale into secondary markets or to be securitized under various
Government National Mortgage Association ("GNMA") bonds. The Insurance Center is
an insurance agency that does business in the Defiance, Ohio area under the name
of the Stauffer Mendenhall Agency. The Stauffer Mendenhall Agency offers
property and casualty and life insurance products.
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 $12.3
million at March 31, 1999. 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 $42.7 million at March 31, 1999. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($6.2 million), corporate bonds ($11.1
million), certain municipal obligations ($5.3 million), adjustable-rate mortgage
backed security mutual funds ($8.6 million), and CMOs and REMICs ($11.5
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 gains on available-for-sale securities were $156,000 at March
31, 1999, $103,000 after considering the related deferred tax benefit.
<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 and non-interest income. Net interest income is the difference between
interest and dividend income on interest-earning assets, principally loans and
securities, and interest expense on interest-bearing deposits, Federal Home Loan
Bank advances, and other borrowings. The Company's non-interest income includes
loan administration fees, gains on sales of mortgage loans, and the recognition
of mortgage servicing rights generated by The Leader and First Federal. First
Defiance's earnings also depend on the provision for loan losses 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, 1999, First Defiance's total assets, deposits (including customer's
escrow deposits) and stockholders' equity amounted to $776.5 million, $557.1
million and $89.4 million, respectively, compared to $785.4 million, $511.3
million and $93.7 million, respectively, at December 31, 1998.
Net loans receivable have increased from $448.6 million at December 31, 1998 to
$456.0 million at March 31, 1999. This increase was funded primarily with
maturing or redeemed securities. Loans held for sale increased from $119.9 at
December 31, 1998 to $120.8 million at March 31, 1999. This increase was
primarily the result of the operations of The Leader.
Securities decreased from $61.1 million at December 31, 1998 to $55.1 million at
March 31, 1999 as a result of U.S. Government Agency securities being called
prior to maturity. Proceeds from those calls were used to fund loan growth and
pay down advances from the Federal Home Loan Bank ("FHLB") rather than being
reinvested at current rates. In addition, deposits increased from $434.0 million
at December 31, 1998 to $473.0 million as of March 31, 1999. This increase was
primarily the result of obtaining brokered certificates of deposit, which were
used to pay down FHLB advances. As a result, FHLB advances decreased from $168.1
million at December 31, 1998 to $116.8 million at March 31, 1999.
First Defiance has completed six 5% and one 15% stock repurchases as of March
31, 1999. As of March 31, 1999, First Defiance has repurchased 456,570 shares of
its own stock during 1999 for a total cost of $6.2 million, an average of $13.50
per share.
Forward-Looking Information
- ---------------------------
Certain statements contained in this quarterly report that are not historical
facts, including but not limited to statements that can be identified by the use
of forward-looking terminology such as "may", "will", "expect", "anticipate", or
"continue" or the negative thereof or other variations thereon or comparable
terminology are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21B of the Securities Act
of 1934, as amended. Actual results could differ materially from those indicated
in such statements due to risks, uncertainties and changes with respect to a
variety of market and other factors.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
Average Balances, Net Interest Income and Yields Earned and Rates Paid
- ----------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. Dividends
received are included as interest income. The table does not reflect any effect
of income taxes. All average balances are based upon daily balances.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------
1999 1998
---------------------------- --------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $593,604 $11,622 7.83% $445,502 $ 9,753 8.76%
Securities 56,300 859 6.10 98,883 1,589 6.43
FHLB stock 11,410 197 6.91 3,765 67 7.12
-------- ------- -------- -------
Total interest-earning assets 661,314 12,678 7.67 548,150 11,409 8.33
Non-interest-earning assets 129,862 27,622
--------- --------
Total assets $791,176 $575,772
======== ========
Interest-bearing liabilities:
Deposits $457,111 $ 4,682 4.10% $397,758 $4,556 4.58%
FHLB advances and other 163,715 1,982 4.84 66,797 971 5.81
Notes payable 6,069 93 6.13 -
--------- ------- --------
Total interest-bearing liabilities 626,895 6,757 4.31 464,555 5,527 4.76
------- ---- -------- ------ ----
Non-interest-bearing liabilities 71,731 5,783
-------- --------
Total liabilities 698,895 470,338
Stockholders' equity 92,550 105,434
-------- ---------
Total liabilities and stock-
holders' equity $791,176 $575,772
======== ========
Net interest income; interest
rate spread $5,921 3.36% $5,882 3.57%
====== ===== ====== =====
Net interest margin (2) 3.58% 4.29%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 105% 118%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
Results of Operations
- ---------------------
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
The acquisition of The Leader Mortgage Company on July 1, 1998 has had a
fundamental impact on the consolidated operating results of First Defiance
Financial Corp., making period-to-period comparisons less meaningful.
On a consolidated basis, First Defiance had net income of $2.0 million for the
three months ended March 31, 1999 compared to $1.5 million for the same period
in 1998. On a per share basis, basic and diluted earnings per share were $.29
and $.28, respectively, for the 1999 first quarter compared to $.20 and $.19
basic and diluted per share earnings for the 1998 first quarter. The sources of
that income have changed dramatically with the acquisition of The Leader and
First Defiance on a consolidated basis has effectively exchanged a certain level
of net interest margin for an increase in fee income. The Leader's business is
mortgage banking and its revenues are generated primarily as a result of the
origination, sale and servicing of mortgage loans, all of which are reported as
non-interest income.
Net Interest Income. Net interest income before provision for loan losses
decreased to $5,724,000 for the three-month period ending March 31, 1999 from
$5,815,000 for the same period in 1998. The Company's net interest margin
decreased to 3.58% for the quarter ended March 31, 1999 as compared to 4.29% for
the quarter ended March 31, 1998. The Company's interest rate spread (the
difference between yield on average interest earning assets and the interest
rate on average interest-bearing liabilities) for the 1999 first quarter was
3.36%, which was 21 basis points lower than the 1998 first quarter level of
3.57%. The decrease in net interest margin is primarily a result of The Leader
using, on average, approximately $60.0 million of financing for mortgage
servicing rights which are a non-interest earning asset. The acquisition of The
Leader effectively exchanged interest margin for non-interest income.
Total interest income increased by $1.2 million, or 10.0%, from $11.3 million
for the three months ended March 31, 1998 to $12.5 million for the three months
ended March 31, 1999. The increase was due to a $148.1 million increase in the
average balance of loans outstanding for the first quarter of 1999 when compared
to the first quarter of 1998. The yield on those loans declined to 7.83% in 1999
versus 8.76% in 1998. The increase in loans receivable was primarily
attributable to the acquisition of The Leader's loans available for sale. Those
loans averaged $130.6 million for the three months ended March 31, 1999. The
inclusion of those loans also caused the reduced yield because of the below
market nature of loans originated under the first-time homebuyer programs.
Interest income was favorably impacted by the increase in the average balance in
commercial loans, which was $78.9 million as of March 31, 1998 compared to $30.3
million as of March 31, 1998. The increase in commercial loan balances occurred
after the hiring of three experienced commercial lenders and a commercial credit
analyst during the second half of 1998.
Interest earnings from the investment portfolio declined to $814,000 for the
three months ended March 31, 1999 compared to $1.6 million for the same period
in 1998. The decline in 1999 was due to a decrease in the average balance of
securities from $98.9 million as of March 31, 1998 to $56.3 million as of March
31, 1999. The decline was primarily due to agency securities with call
provisions being called during the low rate environment, particularly during the
second half of 1998. The yield on the average portfolio balance for the three
months ended March 31, 1999 was 6.10% compared to 6.43% for the same period in
1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
Interest expense increased by $1.3 million, or 22.3%, to $6.8 million for the
first quarter of 1999 compared to $5.5 million for the same period in 1998. The
increase is primarily due to the financing requirements of The Leader's
operations. When it was acquired, The Leader had debt arrangements with a
consortium of banks that provided financing for its mortgage loan warehouse and
also for the acquisition of mortgage servicing rights. Those debt agreements
were replaced during December 1998 with financing from First Federal Savings and
Loan, which was funded through both deposits and FHLB advances. The average
financing required to fund The Leader's operations for the three months ended
March 31, 1999 was approximately $186.6 million.
Interest expense also increased because of an increase in the average balance of
deposits outstanding, which increased to $457.1 million for the three months
ended March 31, 1999 compared to $397.8 million for the three months ended March
31, 1998. The average cost of those deposits declined by 48 basis points in the
first quarter of 1999, to 4.10% from 4.58% for the same period in 1998. The
average balance of FHLB advances increased to $163.7 million in for the three
months ended March 31, 1999 from $66.8 million for the comparable period in
1998. The average cost of those advances declined to 4.84% from 5.81% for the
three months ended March 31, 1999 and 1998, respectively. The balance in FHLB
advances increased substantially in December 1998, as they were used as the
primary source of funding to replace The Leader's bank debt.
Provision for Loan Losses. The provision for loan losses increased slightly
during the 1999 first quarter to $512,000 compared to $448,000 for the same
period in 1998. Provisions for loan losses are charged to earnings to bring the
total allowance for loan losses to the level deemed appropriate by management
based on historical experience, the volume and type of lending conducted by
First Defiance, industry standards, the 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.
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets totaled $4.0 million at March 31, 1999,
which is .51% of total assets. Non-performing loans and repossessed assets
reported do not include $19.4 million for mortgage loans 90 days or more past
due which have FHA insurance or VA guarantees. The risk of loss on these loans
is generally limited to the administrative cost of foreclosure actions, which is
provided for in the allowance for loan losses. The allowance for loan losses at
March 31, 1999 was $9.6 million compared to $2.8 million at March 31, 1998 and
$9.8 million at December 31, 1998. The Leader acquisition accounted for $1.2
million of the increase in the allowance from March 31, 1998 to March 31,1999.
During the fourth quarter of 1998, First Federal recorded a $5.4 million
adjustment to the Company's allowance for loan losses. Of this adjustment $3.6
million resulted from internal and external reviews of the Company's consumer
loan portfolio, specifically indirect lending. For the quarter ended March 31,
1999, First Defiance charged off $796,000 of loans against its allowance and
realized recoveries of $70,000 from loans previously charged off. During the
same quarter in 1998, First Defiance charged off $413,000 in loans and realized
recoveries of $52,000.
Non-Interest Income. Non-interest income increased substantially in the first
quarter of 1999, from $484,000 for the quarter ended March 31, 1998 to $9.0
million for the same period in 1999. The addition of The Leader contributed $7.7
million of the $8.5 million increase in non-interest income growth from the
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
first quarter of 1998 to the first quarter of 1999.
Loan and Deposit Servicing Fees. Loan and deposit servicing fees increased from
$274,000 for the quarter ended March 31, 1998 to $6.9 million for the same
period in 1999. The increase of $6.6 million from the quarter ended March 31,
1998 to 1999 was the result of growth in service fees on sold loans, late charge
income, and origination fees of $6.5 million, $813,000, and $483,000,
respectively, due to the addition of The Leader.
Gain on Sale of Loans. Gain on sale of loans increased from $119,000 for the
quarter ended March 31, 1998 to $1.6 million for the same period of 1999. This
was the result of increased secondary market activity at First Federal along
with gains on sales recorded by The Leader in its normal course of business. The
Leader recognized $1.1 million in gain on sale of loans for the first quarter of
1999, while First Federal recognized $468,000 in the same period.
Other Non-Interest Income. Other non-interest income, including dividends on
Federal Home Loan Bank stock, gains on sale of securities, insurance commission
income, and other miscellaneous charges, increased to $395,000 for the quarter
ended March 31, 1999 from $24,000 for the same period in 1998. The acquisition
of the Insurance Center accounted for $256,000 of the increase over the first
quarter of 1998.
Non-Interest Expense. Total non-interest expense increased $7.5 million from
$3.6 million for the quarter ended March 31, 1998 to $11.1 million for the same
period in 1999. The acquisition of The Leader resulted in $7.0 million of this
increase.
Compensation and Benefits. Compensation and benefits increased $2.5 million from
$1.8 million for the quarter ended March 31, 1998 to $4.3 million for the same
period in 1999. The addition of The Leader was responsible of $2.2 million of
this increase. Increases in overall staffing related to the Hicksville branch
and the Findlay commercial loan production office (which opened February and
August 1998, respectively) and the acquisition of the Insurance Center resulted
in an additional $327,000 increase in the Company's compensation expense.
Occupancy. Occupancy expense increased to $842,000 for the three-month period
ended March 31, 1999 from $410,000 for the three months ended March 31, 1998.
The Leader accounted for $259,000 of this increase. The remainder of the
increase was due to increased depreciation brought about by the addition of one
new branch, the cost of both the Findlay loan office and the Findlay branch
which opened in February, 1999 and continued upgrades to all of the Company's
computer hardware and software to improve services provided as well as to assure
Year 2000 compliance. Amortization of Mortgage Servicing Rights.
Amortization of mortgage servicing rights (MSRs) increased to $3.3 million for
the quarter ended March 31, 1999 from $5,000 for the same period in 1998. The
Leader accounted for $3.2 million of this increase.
Amortization of Goodwill and Other Acquisition Related Costs. Due to the
purchase of The Leader and the Insurance Center, $576,000 in amortization of
goodwill and other acquisition related costs was recognized in the first quarter
of 1999. Other Non-Interest Expenses. Other non-interest expenses (including
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
state franchise tax, data processing, deposit premiums, and loan servicing)
increased to $1.5 million for the quarter ended March 31, 1999 from $587,000 for
the same period in 1998. $781,000 of the increase was the result of The Leader's
normal operating activities for the first quarter. The remaining increase was
primarily due to increased data processing costs resulting from the
implementation of several new applications and increased state franchise taxes
at the holding company level.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 36.6% for the
quarter ended March 31, 1999 compared to 34.2% for the same period in 1998.
As a result of the above factors, net income for the quarter ended March 31,
1999 was $1,958,000 compared to $1,508,000 for the comparable period in 1998. On
a per share basis, basic and diluted earnings per share for the three months
ended March 31, 1999 was $.29 and $.28 respectively compared to $.20 and $.19,
respectively, for the same period in 1998. The increase in earnings per share is
attributable to the increased net income along with a decrease in the average
shares outstanding as a result of a five percent stock buy back and a fifteen
percent stock buy back completed since the beginning of 1998. Average shares
outstanding for the basic and diluted calculations were 6,705,000 and 6,925,000,
respectively, for the quarter ended March 31, 1999 compared to 7,606,000 and
7,985,000, respectively, for the quarter ended March 31, 1998. First Defiance's
board of directors announced a new five percent stock buy back commencing April
26, 1999 under which First Defiance will acquire an additional 358,000 shares of
its stock.
First Defiance's board of directors declared a dividend of $.10 per common share
as of March 31, 1999. The dividend amounted to $720,818, including dividends on
unallocated ESOP shares. It was paid on April 23, 1999. 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 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity substantially exceeded applicable liquidity
requirements throughout the three-month period ended March 31, 1999.
First Defiance generated $216,000 of cash from operating activities during the
first three months of 1999. 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, including
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
amortization of mortgage servicing rights, 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 the origination of loans (both for sale in the secondary market and to be
held in portfolio), which is funded with cash provided by operations, proceeds
from the amortization and prepayments of existing loans, the sale of loans,
proceeds from the sale or maturity of securities, borrowings from the FHLB, and
customer deposits.
At March 31, 1999, First Defiance had $24.7 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $45.0 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, 2000 is $258.9 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, 1999 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, 1999.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital (1)(2)
------- ------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $40,494 $40,494 $58,760
Minimum required regulatory
capital 11,136 29,696 44,526
------- ------- --------
Excess regulatory capital $29,358 $10,798 $14,234
======= ======= =======
Regulatory capital as a
percentage of assets (3) 5.5% 5.5% 10.6%
Minimum capital required as
a percentage of assets 1.5% 4.0% 8.0%
------- ------- ------
Excess regulatory capital as a
percentage in excess of
requirement 4.0% 1.5% 2.6%
====== ===== =====
</TABLE>
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, discussed above.
(2) Reflects fully phased-in deductions from total capital.
(3) Tangible and core capital are computed as a percentage of adjusted total
assets of $742.4 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $556.6 million.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
FDIC Insurance
The Deposits of First Federal are currently insured by the Savings Association
Insurance Fund("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
to commercial bank depositors. Both the SAIF and BIF are required by law to
attain and maintain a reserve ratio of 1.25% of insured deposits. First
Federal's deposit insurance premiums for 1999 are approximately $0.064 per $100
of deposits.
Year 2000 Readiness
All companies, including First Defiance and its subsidiaries, currently face
many risks associated with the ability of computer systems to properly recognize
calendar dates beginning in the year 2000. This potential problem could cause
systems which utilize date sensitive information to either not function at all,
or to provide incorrect data or information. First Federal and The Leader have
developed separate action plans to address the Year 2000 problem.
First Federal outsources the majority of its data processing needs to BISYS,
Inc. Applications maintained by BISYS include savings, checking, mortgage loans
and consumer and commercial loans. BISYS has represented to its customers that
these applications have been updated to properly process transactions that
reflect dates in the year 2000, and First Federal has successfully tested all of
First Federal's BISYS applications for a variety of key dates in 1999, 2000 and
beyond.
First Federal processes its general ledger on a system that is integrated with
the BISYS applications. Testing of the general ledger interface was performed by
management during the 1999 first quarter in conjunction with other system
testing.
First Federal's in-house computing environment consists of a Wide Area Network
("WAN") system that links together its 12 branches and is interfaced with the
BISYS applications. All hardware associated with the WAN has been tested and is
Year 2000 compliant.
In addition to BISYS, First Federal is dependent on a number of other third
parties to provide various processing. Management is in the process of testing
the interchange of data among and between these various third party providers
that include the Federal Reserve Bank of Cleveland, the Federal Home Loan Bank
of Cincinnati, the MAC ATM network, and various ACH providers. Management
anticipates all such testing will be completed by June 30, 1999.
Because its data processing functions are outsourced, the cost of Year 2000
remediation has not been material to First Federal. BISYS is assessing a fee of
less than $50,000 to cover the cost of the test bank established to provide for
the appropriate testing. Testing itself is being performed by individuals
responsible for the various applications and is being coordinated by First
Federal's internal auditor in coordination with First Federal's Sr. Vice
President of Operations. The cost of the individuals has not been quantified,
however the three primary individuals involved have devoted approximately 60% of
their time during the testing phase which was essentially completed during the
1999 first quarter. First Federal's total out of pocket expenses recognized in
conjunction with Year 2000 compliance are expected to be less than $100,000 in
1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
While First Federal outsources the majority of its applications, The Leader
processes its critical applications on an in-house system. All of The Leader's
hardware and software, both internally developed and purchased from third party
vendors, has been upgraded and tested and management believes it is functioning
properly and will continue to function properly in the Year 2000. The Company's
most mission critical systems, the loan servicing system and the wholesale bond
system, have been modified to process dates in the Year 2000 and are fully
operational.
The Leader is also dependent on a variety of third parties that provide software
or interface information with The Leader's system. The Leader has participated
in a Year 2000 readiness test in conjunction with the Mortgage Bankers of
America. As part of that test, The Leader has conducted data interchange testing
with Fannie Mae, Freddie Mac and GNMA. The MBA testing is scheduled to be
completed by June 30, 1999.
The estimated total cost of Year 2000 compliance by The Leader is approximately
$650,000 including the cost of hardware and software upgrades, programming
costs, and retention bonuses to key staff members involved in the Year 2000
project. Approximately 75% of the cost has been expended to date with the
majority of those costs being equipment upgrades. The portion of the costs
associated with hardware acquisitions is being capitalized while internal
programming costs and retention payments are being expensed. Estimated Year 2000
expense for The Leader for 1999 is not anticipated to exceed $300,000.
In addition to the mission critical systems identified by both First Federal and
The Leader, both entities have certain non-information technology systems that
may contain imbedded technology that is date dependent. Examples of such systems
include security systems, heating and cooling systems, telephone systems,
sprinkler systems, and elevators. To the extent possible, both First Federal and
The Leader have attempted to assess the risks associated with these systems. The
only significant system that management has identified as needing to be replaced
is the phone system at The Leader, which also includes the Interactive Voice
Response Unit and the Voice Mail components. Management is in the process of
evaluating options from various vendors and expects to have a replacement phone
system in place by June 30, 1999. The estimated cost of the replacement phone
system is included in The Leader's estimate of $650,000 in total Year 2000
costs.
The Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 projects and those of its critical
external relationships. While management believes that all critical Year 2000
issues will be resolved, it cannot guarantee that all such issues will be
resolved. Any critical unresolved Year 2000 issues could have a material adverse
effect on the Company's results of operations, liquidity or financial condition.
In addition to Year 2000 remediation efforts, the Company is developing
contingency/recovery plans aimed at ensuring the continuity of critical
functions. As part of this process, management is developing an assessment of
reasonably likely failure scenarios for its critical systems. Once this
assessment is completed, the Company will develop plans that are designed to
reduce the impact on the Company, and provide methods of returning to normal
operations, if one or more of those scenarios occur. A variety of automated and
manual fallback plans are under consideration, including the use of electronic
spreadsheets, resetting system dates, and manual workarounds. The Company
estimates that contingency planning will be complete by September 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
Readiness for the Year 2000 is also a concern for First Defiance's customers,
particularly its commercial lending customers. Management is assessing the
status of Year 2000 readiness for all commercial lending customers. The ability
to be Year 2000 compliant is one consideration taken into account during the
loan underwriting process. Also, to the extent possible, management is
considering the risk associated with not being Year 2000 compliant when
evaluating the adequacy of the allowance for loan losses for individual
commercial loan customers.
Statements made herein about the implementation of First Defiance's Year 2000
remediation, the costs expected to be associated with those efforts and the
results that First Defiance expects to achieve constitute forward looking
information. As noted above, there are many uncertainties involved in the year
2000 issue, including the extent to which First Defiance will be able to
successfully remediate systems and adequately provide for contingencies that may
arise, as well as the broader scope of the Year 2000 issues as it may affect
third parties that are not controlled by First Defiance. Accordingly, the costs
and results of First Defiance's Year 2000 program and the extent of any impact
on First Defiance's operations could vary materially from those stated herein.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
- -----------------------------------------------------------------
As discussed in detail in the 1998 Annual Report in Form 10-K, First Defiance's
ability to maximize net income is dependent on management's ability to plan and
control net interest income through management of the pricing and mix of assets
and liabilities. Because a large portion of assets and liabilities of First
Defiance are monitory in nature, changes in interest rates and monetary or
fiscal policy affect its financial condition and can have significant impact on
the net income of the Company. First Defiance and The Leader do not use off
balance sheet derivatives to enhance its risk management, nor does it engage in
trading activities beyond the sale of mortgage loans.
First Defiance monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyses the effect of a
presumed 100 basis point shift in interest rates (which is consistent with
management's estimate of the range of potential interest rate fluctuations) and
takes into account prepayment speeds on amortizing financial instruments, loan
and deposit volumes and rates, nonmaturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise or fall 100 basis points over a 12 month period, using
March 1999 amounts as a base case, First Defiance's net interest income would be
impacted by less than the board mandated guidelines of 10%.
The simulation model used by First Defiance measures the impact of rising and
falling interest rates on net interest income only. The Company also monitors
the potential change in the value of its mortgage-servicing portfolio given the
same 100 basis point shift in interest rates. At March 31, 1999, a 100 basis
point decrease in interest rate would require First Defiance to increase its
reserve for impairment of MSRs by approximately $415,000.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
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 20, 1999, in
Defiance, Ohio the shareholders elected three directors to three-year
terms. The following is a tabulation of all votes timely cast in
person or by proxy by shareholders of First Defiance for the annual
meeting:
NOMINEE FOR WITHHELD
John U. Fauster, III 5,087,219 103,849
Marvin J. Ludwig 5,056,722 134,346
Thomas A. Voigt 5,086,432 104,636
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
<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 14, 1999 By: /s/ William J. Small
------------ --------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: May 14, 1999 By: /s/ John C. Wahl
------------ ----------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 904
<INT-BEARING-DEPOSITS> 3,596
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,718
<INVESTMENTS-CARRYING> 12,348
<INVESTMENTS-MARKET> 12,542
<LOANS> 576,777
<ALLOWANCE> 9,575
<TOTAL-ASSETS> 776,540
<DEPOSITS> 473,042
<SHORT-TERM> 19,000
<LIABILITIES-OTHER> 97,288
<LONG-TERM> 97,772
0
0
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<INTEREST-DEPOSIT> 4,682
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<INCOME-PRE-EXTRAORDINARY> 3,090
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<EPS-PRIMARY> .29
<EPS-DILUTED> .28
<YIELD-ACTUAL> 7.67
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</TABLE>
