UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended June 30, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ___________to__________
Commission file number 0-26850
First Defiance Financial Corp.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1803915
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
601 Clinton Street, Defiance, Ohio 43512
--------------------------------------------------------------------------------
(Address or principal executive office) (Zip Code)
(419) 782-5015
--------------------------------------------------------------------------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ] No [ ] <PAGE>
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
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 -
6,891,549 shares outstanding at August 11, 2000.
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
INDEX
Page Number
PART I.-FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited):
Consolidated Condensed Statements of Financial
Condition - June 30, 2000 and December 31, 1999 1
Consolidated Condensed Statements of Income - Three
months ended June 30, 2000 and 1999;
Six months ended June 30, 2000 and 1999 3
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Six months ended
June 30, 2000 4
Consolidated Condensed Statements of Cash Flows
- Six months ended June 30, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 29
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
<PAGE>
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
--------------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 8,324 $ 13,102
Interest-bearing deposits 5,027 3,134
-------- --------
13,351 16,236
Securities:
Available-for-sale, carried at fair value 53,427 53,946
Trading, carried at fair value 240 29,805
Held-to-maturity, carried at amortized cost
(approximate fair value $8,661 and $9,953
at June 30, 2000 and December 31,
1999, respectively) 8,658 9,895
-------- --------
62,325 93,646
Loans held for sale (at lower of cost or fair value,
approximate fair value $197,707 and $237,622 at
June 30, 1999 and December 31,1998, respectively) 197,707 237,622
Loans receivable, net 511,384 465,321
Mortgage servicing rights 114,304 97,519
Accrued interest receivable 5,567 3,868
Federal Home Loan Bank stock 14,692 14,181
Office properties and equipment 21,427 21,311
Real estate, mobile homes and other
assets held for sale 1,132 2,557
Goodwill, net 14,361 14,699
Other assets 23,512 21,034
-------- --------
Total assets $979,762 $987,994
======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except for share data)
------------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
------------ -----------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $ 562,707 $ 502,969
Advances from Federal Home Loan Bank 220,967 265,410
Warehouse and term notes payable 16,156 53,504
Advance payments by borrowers for taxes and insurance 71,109 61,542
Deferred taxes 1,603 2,232
Other liabilities 13,746 12,921
--------- ---------
Total liabilities 886,288 898,578
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; 6,891,000 and
6,814,000 shares outstanding at June 30, 2000
and December 31,1999, respectively 69 68
Additional paid-in capital 53,609 53,181
Stock acquired by ESOP (3,345) (3,664)
Deferred compensation (329) (458)
Accumulated other comprehensive income,
net of income taxes of $(592)
and $(565), respectively (1,151) (1,096)
Retained earnings 44,621 41,385
--------- ---------
Total stockholders' equity 93,474 89,416
--------- ---------
Total liabilities and stockholders' equity $ 979,762 $ 987,994
========= =========
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except per share data)
-------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------- --------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Loans $14,206 $11,869 $28,514 $23,491
Investment securities 1,003 760 2,474 1,574
Other 150 17 201 62
------- ------- ------- -------
Total interest income 15,359 12,646 31,189 25,127
Interest expense:
Deposits 6,153 4,849 11,776 9,531
Federal Home Loan Bank
advances 2,842 2,107 5,729 4,089
Notes payable 1,230 166 2,362 258
------- ------- ------- -------
Total interest expense 10,225 7,122 19,867 13,878
------- ------- ------- -------
Net interest income 5,134 5,524 11,322 11,249
Provision for loan losses 581 202 1,989 712
------- ------- ------- -------
Net interest income after provision
for loan losses 4,553 5,322 9,333 10,537
Non-interest income:
Mortgage banking income 8,599 6,609 16,703 13,118
Gain on sale of loans 2,587 1,633 4,531 3,196
Other non-interest income 1,932 1,604 3,727 2,524
------- ------- ------- -------
Total non-interest income 13,118 9,846 24,961 18,838
Non-interest expense 13,814 11,556 27,063 22,673
------- ------- ------- -------
Income before income taxes 3,857 3,612 7,231 6,702
Income taxes 1,399 1,241 2,573 2,373
------- ------- ------- -------
Net income $ 2,458 $ 2,371 $ 4,658 $ 4,329
======= ======= ======= =======
Earnings per share: (Note 4)
Basic $ .39 $ .37 $ .74 $ .66
======= ======= ======= =======
Diluted $ .38 $ .35 $ .73 $ .63
======= ======= ======= =======
Dividends declared per share (Note 3) $ .11 $ .10 $ .22 $ .20
======= ======= ======= =======
Average number of shares
Outstanding: (Note 4)
Basic 6,305 6,489 6,272 6,614
======= ======= ======= =======
Diluted 6,407 6,670 6,394 6,835
======= ======= ======= =======
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity
(UNAUDITED)
(Amounts in Thousands)
-------------------------------------------------------------------------------------------------------------------
2000
-------------------------
Stock Acquired By
--------------------------
Additional Management
Common Paid-in Recognition
Stock Capital ESOP Plan
----- ------- ---- ----
<S> <C> <C> <C> <C>
Balance at January 1 $68 $53,181 $(3,664) $ (458)
Comprehensive income:
Net Income
Change in unrealized gains (losses)
net of income taxes of $27 and
$258 for 2000 and 1999, respectively
Total comprehensive income
ESOP shares released 70 319
Amortization of deferred compensation
of Management Recognition Plan 129
Shares issued under stock option plan 1 363
Purchase of common stock for
treasury (5)
Dividends declared (Note 3)
---- ------- ------- -----
Balance at June 30 $ 69 $53,609 $(3,345) $(329)
==== ======= ======= =====
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
(UNAUDITED)
(Amounts in Thousands)
-------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------
Net Unrealized
gains (losses) on Total Total
available-for- Retained Stockholders' Stockholder's
sale securities Earnings Equity Equity
--------------- -------- ------ ------
<S> <C> <C> <C> <C>
Balance at January 1 $(1,096) $41,385 $89,416 $93,710
Comprehensive income:
Net Income 4,658 4,658 4,329
Change in unrealized gains (losses)
net of income taxes of $27 and
$258 for 2000 and 1999, respectively (55) (55) (503)
---- -------
Total comprehensive income 4,603 3,826
ESOP shares released 389 481
Amortization of deferred compensation
of Management Recognition Plan 129 199
Shares issued under stock option plan 364 257
Purchase of common stock for
treasury (4) (9) (6,784)
Dividends declared (Note 3) (1,418) (1,418) (1,333)
------------------------------------------ -------
Balance at June 30 $(1,151) $44,621 $93,474 $90,356
========================================== =======
</TABLE>
See accompanying notes
5
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
-------------------------------------------------------------------------------------------------------------------
Six Months
Ended June 30,
2000 1999
-------------------
<S> <C> <C>
Net income $ 4,658 $ 4,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,989 712
Provision for depreciation 998 851
Net securities amortization 31 67
Amortization of mortgage servicing rights 7,243 6,353
Amortization of goodwill 338 271
Gain on sale of loans (4,531) (3,196)
Gain on sale of mortgage servicing rights - (479)
Amortization of Management Recognition Plan
deferred compensation 129 199
Release of ESOP Shares 389 481
(Gain) loss on disposal of office properties and equipment (60) 3
Deferred federal income tax credit (602) (605)
Proceeds from sale of loans 1,171,145 676,360
Proceeds from sale of mortgage servicing rights - 2,610
Origination of mortgage servicing rights, net (24,028) (13,449)
Origination of loans held for sale (1,126,699) (709,781)
Increase in interest receivable and other assets (4,177) (3,067)
Net repurchase of loans serviced for others (6,151) (14,344)
Increase in other liabilities 815 1,111
---------- --------
Net cash provided by (used in) operating activities 21,487 (51,574)
Investing Activities
Proceeds from maturities of held-to-maturity securities 1,220 2,232
Proceeds from maturities of available-for-sale securities 2,817 16,729
Proceeds from sale of trading securities 29,563 -
Proceeds from sales of real estate, mobile homes, and
other assets held for sale 1,967 1,054
Proceeds from sales of office properties and equipment 323 8
Purchases of available-for-sale securities (2,392) (16,224)
Purchases of Federal Home Loan Bank stock (511) (1,116)
Purchases of office properties and equipment (1,377) (2,117)
Adjustment of acquisition of First Insurance - (126)
Acquisition of Moreland Greens, net of cash received - 243
Net increase in loans receivable (42,443) (6,559)
---------- --------
Net used in investing activities (10,833) (5,876)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
----------------------------------------------------------------------------------------
Six Months Ended
June 30,
2000 1999
--------- ---------
<S> <C> <C>
Financing Activities
Net increase in deposits and advance payments by borrowers
for taxes and insurance 69,305 18,357
Repayment of Federal Home Loan Bank long-term advances (100,443) (843)
Repayment of term notes payable (305) (55)
Net increase in Federal Home Loan Bank
short-term advances 56,000 31,854
Proceeds from short term line of credit 10,000 --
Decrease in warehouse loans (47,043) --
Purchase of common stock for treasury (9) (6,784)
Cash dividends paid (1,408) (1,379)
Proceeds from exercise of stock options 364 257
--------- ---------
Net cash (used in) provided by financing activities (13,539) 41,407
--------- ---------
Decrease in cash and cash equivalents (2,885) (16,043)
Cash and cash equivalents at beginning of period 16,236 20,506
--------- ---------
Cash and cash equivalents at end of period $ 13,351 $ 4,463
========= =========
Supplemental cash flow information:
Interest paid $19,558 $ 13,981
========= =========
Income taxes paid $ 3,200 $ 3,125
========= =========
Transfers from loans to real estate, mobile homes
and other assets held for sale $ 234 $ 1,793
========= =========
Noncash operating activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ 27 $ (258)
========= =========
Noncash investing activities:
(Decrease) increase in net unrealized gain or loss on
available-for-sale securities $ 55 $ (761)
========= =========
Exchange of debt for equity position in Moreland Greens $ -- $ 3,701
========= =========
Noncash financing activities:
Cash dividends declared but not paid $ 713 $ 664
========= =========
</TABLE>
See accompanying notes.
7
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at June 30, 2000 and 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 Bank of the Midwest ("First Federal"),
and First Insurance and Investments ("First Insurance") and First Federal's
wholly owned mortgage banking company, The Leader Mortgage Company LLC.
("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,
1999 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 June 30,
2000 and for the three-month and six-month periods ending June 30, 2000 and
1999 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 1999
annual report on Form 10-K for the year ended December 31, 1999. 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
and six-month periods ended June 30, 2000 are not necessarily indicative of
the results that may be expected for the entire year.
3. Dividends on Common Stock
As of June 30, 2000, First Defiance had declared a quarterly cash dividend
of $.11 per share for the second quarter of 2000, payable July 28, 2000.
8
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2000 and 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 and six-month periods ended June 30, 2000 and 1999. 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 and six-months ended June 30, 2000
and 1999, 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.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share - net income $2,458 $2,371 $4,659 $4,329
====== ====== ====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 6,305 6,489 6,272 6,614
Effect of dilutive securities:
Employee stock options 38 101 47 129
Unvested Management Recognition
Plan stock 64 80 75 92
------ ------ ------ ------
Dilutive potential common shares 102 181 122 221
====== ====== ====== ======
Denominator for diluted earnings
per share - adjusted weighted average
shares and assumed conversions 6,407 6,670 6,394 6,835
====== ====== ====== ======
Basic earnings per share $ .39 $ .37 $ .74 $ .66
====== ====== ====== ======
Diluted earnings per share $ .38 $ .35 $ .73 $ .63
====== ====== ====== ======
</TABLE>
9
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2000)
--------------------------------------------------------------------------------
5. Mortgage Servicing Rights
The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Balance at beginning of period $ 97,519 $ 76,452
Purchases 24,028 35,909
Sale of servicing rights, net - (2,610)
Loans sold servicing retained - 479
Amortization (7,243) (12,711)
-------- --------
Balance at end of period $114,304 $ 97,519
======== ========
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated
approximately $24.7 million and $17.5 million at June 30, 2000 and December
31, 1999, respectively.
The Company's servicing portfolio (excluding subserviced loans) is
comprised of the following as of June 30, 2000 (dollars in thousands):
Principal
Number Balance
of Loans Outstanding
-------- -----------
GNMA 75,843 $5,040,308
FNMA 12,614 807,360
FHLMC 2,379 102,318
Other VA, FHA and
Conventional loans 18,593 999,967
-------- ----------
109,429 $6,949,953
======== ==========
10
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2000 and 1999)
--------------------------------------------------------------------------------
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 in 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 First Insurance and
inter-segment income eliminations and unallocated expenses. Selected
segment information in the following table includes only the three and
six-months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three-Months Ended June 30, 2000
--------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
------------ --------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 15,359 $ (4,532) $ 15,741 $ 4,150
Total interest expense 10,225 (4,484) 10,527 4,182
-------- --------- -------- --------
Net interest income 5,134 (48) 5,214 (32)
Provision for loan losses 581 - 75 506
-------- --------- -------- --------
Net interest income after
Provision 4,553 (48) 5,139 (538)
Non-interest income 13,118 629 1,066 11,423
Non-interest expense 13,814 720 4,332 8,762
-------- --------- -------- --------
Income before income taxes 3,857 (139) 1,873 2,123
Income taxes 1,399 (38) 614 823
-------- --------- -------- --------
Net income $ 2,458 $ (101) $ 1,259 $ 1,300
======== ========= ======== ========
Total assets $979,762 $(352,625) $966,219 $366,168
======== ========= ======== ========
</TABLE>
11
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2000 and 1999)
--------------------------------------------------------------------------------
6. Line of Business Reporting - Continued
<TABLE>
<CAPTION>
Six-Months Ended June 30, 2000
------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
------------ --------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 31,189 $ (8,830) $ 30,645 $ 9,374
Total interest expense 19,867 (8,854) 20,246 8,475
-------- --------- -------- --------
Net interest income 11,322 24 10,399 899
Provision for loan losses 1,989 - 311 1,678
-------- --------- -------- --------
Net interest income after
Provision 9,333 24 10,088 (779)
Non-interest income 24,961 1,266 1,983 21,712
Non-interest expense 27,063 1,407 8,661 16,995
-------- --------- -------- --------
Income before income taxes 7,231 (117) 3,410 3,938
Income taxes 2,573 (9) 1,092 1,490
-------- --------- -------- --------
Net income $ 4,658 $ (108) $ 2,318 $ 2,448
======== ========= ======== ========
Total assets $979,762 $(352,625) $966,219 $366,168
======== ========= ======== ========
<CAPTION>
Three-Months Ended June 30, 1999
--------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
------------ --------- ------- -------
Total interest income $ 12,646 $ (3,239) $ 13,116 $ 2,769
Total interest expense 7,122 (3,554) 8,421 2,255
-------- --------- -------- --------
Net interest income 5,524 315 4,695 514
Provision for loan losses 202 - (237) 439
-------- --------- -------- --------
Net interest income after
Provision 5,322 315 4,932 75
Non-interest income 9,846 156 941 8,749
Non-interest expense 11,556 362 3,926 7,268
-------- --------- -------- --------
Income before income taxes 3,612 109 1,947 1,556
Income taxes 1,241 62 618 561
-------- --------- -------- --------
Net income $ 2,371 $ 47 $ 1,329 $ 995
======== ========= ======== ========
Total assets $838,029 $(320,051) $844,033 $314,047
======== ========= ======== ========
</TABLE>
12
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2000 and 1999)
--------------------------------------------------------------------------------
6. Line of Business Reporting - Continued
<TABLE>
<CAPTION>
Six-Months Ended June 30, 1999
------------------------------
(In Thousands)
Parent Retail Mortgage
Consolidated and Other Banking Banking
------------ --------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 25,127 $ (5,837) $ 25,837 $ 5,127
Total interest expense 13,878 (6,638) 16,586 3,930
-------- --------- -------- --------
Net interest income 11,249 801 9,251 1,197
Provision for loan losses 712 - (116) 828
-------- --------- -------- --------
Net interest income after
Provision 10,537 801 9,367 369
Non-interest income 18,838 346 2,085 16,407
Non-interest expense 22,673 578 7,848 14,247
-------- --------- -------- --------
Income before income taxes 6,702 569 3,604 2,529
Income taxes 2,373 258 1,153 962
-------- --------- -------- --------
Net income $ 4,329 $ 311 $ 2,451 $ 1,567
======== ========= ======== ========
Total assets $838,029 $(320,051) $844,033 $314,047
======== ========= ======== ========
</TABLE>
7. Acquisitions
On December 24, 1998, First Defiance completed the acquisition of First
Insurance 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 earnings
criteria are met.
On September 1, 1999, First Insurance completed the asset acquisition of
the Defiance office of Insurance and Risk Management in a cash transaction
valued at $1.9 million. The acquisition has been accounted for as a
purchase.
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,
exceeded fair value of net assets acquired by approximately $11.3 million,
which was recorded as goodwill. The goodwill is amortized over 15 years.
On May 1, 1999, The Leader exchanged a debt position in a partnership that
owned a Cleveland area apartment complex for a 100% ownership position.
13
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2000 and 1999)
--------------------------------------------------------------------------------
8. New Accounting Pronouncement
The FASB has released Statement of Financial Accounting Standards ("FAS")
No. 133, Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities, as amended by FAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. These statement
establish accounting and reporting standards for derivative financial
instruments and require all derivatives to be measured at fair value and to
be recognized as either assets or liabilities in the statement of financial
position. These standards become effective for First Defiance for quarterly
and annual reporting beginning January 1, 2001 and are not expected to have
a material impact on the Company's financial statements.
14
<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 Bank of the Midwest, Defiance Ohio
("First Federal") and First Insurance & Investments ("First Insurance") and
First Federal's wholly owned subsidiary, The Leader Mortgage Company LLC ("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 seven 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 and trust 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. First Insurance is an
insurance agency that does business in the Defiance, Ohio area. First Insurance
offers property and casualty, group health, 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 $8.7 million
at June 30, 2000. Loans held-for-sale securitized in the normal course of The
Leader's operations have been classified as trading securities, reported at fair
market value. The Leader has committed to sell these securities at their
carrying value. Securities not classified as held-to-maturity or trading are
classified as available-for-sale, which are stated at fair value and had a
recorded value of $53.4 million at June 30, 2000. The available-for-sale
portfolio consists of U.S. Treasury securities and obligations of U.S.
Government corporations and agencies ($18.2 million), corporate bonds ($12.7
million), certain municipal obligations ($5.3 million), adjustable-rate mortgage
backed security mutual funds ($8.6 million), CMOs and REMICs ($6.6 million),
preferred stock ($1.7 million), and corporate equities ($295,000). 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 $1.7 million at
June 30, 2000, $1.2 million after considering the related deferred tax benefit.
15
<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
mortgage loan servicing income, other 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 June 30, 2000, First Defiance's total assets, deposits (including customer's
escrow deposits) and stockholders' equity amounted to $979.8 million, $633.8
million and $93.5 million, respectively, compared to $988.0 million, $564.5
million and $89.4 million, respectively, at December 31, 1999.
Net loans receivable have increased to $511.4 million at June 30, 2000 from
$465.3 million at December 31, 1999. During the same period, loans held-for-sale
decreased to $197.7 million at June 30, 2000 from $237.6 million at December 31,
1999. The reduction in the held-for-sale loans is a result of efforts by
management to reduce the time between loan purchases and settlements on
securitizations, thereby reducing overall funding costs.
Securities decreased to $62.3 million at June 30, 2000 from $93.6 million at
December 31, 1999 as a result of a $29.6 million decrease in trading securities.
Trading securities represent low coupon GNMA securities issued by the Company
but not yet delivered to the bond trustee who is obligated to purchase the
securities at par. This reduction in trading securities is related to
management's efforts to securitize loans and deliver the securities to the
trustees on a more timely basis, thereby reducing funding requirements. Proceeds
from the sale of trading securities were used to fund loan growth and pay down
advances from the Federal Home Loan Bank ("FHLB"). In addition, deposits
increased to $562.7 million as of June 30, 2000 from $503.0 million at December
31, 1999. This increase was primarily the result a $31.2 million increase in
brokered certificates of deposit, to $91.3 million as of June 30, 2000 from
$60.1 million as of December 31, 1999, with the remainder of the increase due to
acquiring additional retail deposits. As a result of the decline in the loans
held-for-sale and increase in deposits, FHLB advances and warehouse and term
notes payable decreased to $221.0 million and $16.2 million, respectively, as of
June 30, 2000 from $265.4 million and $53.5 million, respectively, at December
31, 1999.
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.
16
<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. See Results
of Operations section for a discussion of the impact on the six-month period
ended June 30, 2000 loan yields resulting from a change in the estimated income
on loans 90 days or more past due which have FHA insurance or VA guarantees.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------
(in thousands)
2000 1999
----------------------------- ---------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $727,245 $14,206 7.81% $633,800 $11,869 7.49%
Securities 64,562 1,153 7.14 55,431 777 5.61
FHLB stock 14,431 266 7.37 11,736 221 7.53
-------- -------- ------
Total interest-earning assets 806,238 15,625 7.75 700,967 12,867 7.34
Non-interest-earning assets 189,907 137,596
-------- --------
Total assets $996,145 $838,563
======== ========
Interest-bearing liabilities:
Deposits $530,179 $6,153 4.64% $475,717 $4,849 4.08%
FHLB advances and other 203,530 2,842 5.59 172,372 2,107 4.89
Notes payable 82,990 1,230 5.93 11,113 166 5.97
--------- ------- -------- --------
Total interest-bearing liabilities 816,699 10,225 5.01 659,202 7,122 4.32
------- ---- ------ ----
Non-interest-bearing liabilities 87,595 88,117
-------- --------
Total liabilities 904,294 747,319
Stockholders' equity 91,851 91,244
-------- ---------
Total liabilities and stock-
holders' equity $996,145 $838,563
======== ========
Net interest income; interest
rate spread $5,400 2.74% $5,745 3.02%
====== ===== ====== =====
Net interest margin (2) 2.68% 3.28%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 99% 106%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------
(in thousands)
2000 1999
----------------------------- ----------------------------
Average Yield Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $702,601 $28,514 8.12% $613,702 $23,491 7.66%
Securities 74,578 2,675 7.17 55,471 1,636 5.90
FHLB stock 14,307 514 7.19 11,573 418 7.22
-------- ------- -------- -------
Total interest-earning assets 791,486 31,011 8.01 680,746 25,545 7.51
Non-interest-earning assets 182,870 134,123
-------- --------
Total assets $974,356 $814,869
======== ========
Interest-bearing liabilities:
Deposits $517,843 $11,776 4.55% $466,414 $9,531 4.09%
FHLB advances and other 210,699 5,729 5.44 168,043 4,089 4.87
Notes payable 75,081 2,362 6.29 8,591 258 6.01
-------- ------- -------- -------
Total interest-bearing liabilities 803,623 19,867 4.94 643,048 13,878 4.32
------- ---- ------- ----
Non-interest-bearing liabilities 79,782 79,924
-------- ---------
Total liabilities 883,405 722,972
Stockholders' equity 90,951 91,897
-------- ---------
Total liabilities and stock-
holders' equity $974,356 $814,869
======== ========
Net interest income; interest
rate spread $11,836 3.07% $11,667 3.19%
======= ===== ======= =====
Net interest margin (2) 2.99% 3.43%
===== =====
Average interest-earning assets
to average interest-bearing
liabilities 98% 106%
==== ====
</TABLE>
(1) Annualized
(2) Net interest margin is net interest income divided by average
interest-earning assets.
Results of Operations
---------------------
Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999
-----------------------------------------------------------------------------
On a consolidated basis, First Defiance had net income of $2.5 million for the
three months ended June 30, 2000 compared to $2.4 million for the same period in
1999. On a per share basis, basic and diluted earnings per share were $.39 and
$.38, respectively, for the 2000 second quarter compared to $.37 and $.35 basic
and diluted per share earnings for the 1999 second quarter. The 1999 second
quarter results included a $316,000 after tax gain ($.05 per share) realized on
the sale of certain non-core mortgage servicing rights. Excluding the impact of
that one-time gain, 2000 second quarter earnings per diluted share increased by
27% over the same period in 1999.
Cash earnings for the second quarter of 2000 were $2.7 million or $.42 per
diluted share compared to $2.6 million or $.37 per diluted share for the same
period in 1999. Cash earnings are calculated by excluding the net income impact
of amortization of goodwill.
Net Interest Income. Net interest income before provision for loan losses
decreased to $5,134,000 for the three-month period ending June 30, 2000 from
$5,524,000 for the same period in 1999. The Company's net interest margin
decreased to 2.68% for the quarter ended June 30, 2000 as
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
-------------------------------------------------------------------------------
compared to 3.28% for the quarter ended June 30, 1999. 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 2000 second
quarter was 2.74%, which was 28 basis points lower than the 1999 second quarter
level of 3.02%.
The reductions in net interest income and net interest margin results from the
necessary funding to support the growth in average non-interest earning assets,
primarily mortgage servicing rights, which increased from an average of $79.8
million for the second quarter of 1999 to $109.1 million for the same period in
2000. The increase in average mortgage servicing rights reflects the growth in
loan production at The Leader and results in increases in both gain on sale of
loans and mortgage banking income.
Total interest income increased by $2.8 million, or 21.5%, from $12.6 million
for the three months ended June 30, 1999 to $15.4 million for the three months
ended June 30, 2000. The increase was primarily due to a $93.4 million increase
in the average balance of loans outstanding for the second quarter of 2000 when
compared to the same period in of 1999. The yield on those loans increased to
7.81% in 2000 versus 7.49% in 1999. The increase in loans receivable was
attributable to increases in the average balance of loans held-for-sale at The
Leader and commercial loans at First Federal. Loans held-for-sale increased from
an average balance of $163.3 million for the second quarter of 1999 to $213.9
million for the same period in 2000. The recent increasing rate environment
along with a planned expansion of The Leader's mortgage banking operations has
resulted in the increase in the average balance in loans held-for-sale. For the
2000 second quarter, The Leader originated 8,930 loans with balances of $619.5
million compared to production of 5,532 loans with balances of $370.3 million
during the same period of 1999. Commercial loans increased from an average
balance of $99.4 million for the three-month period ended June 30, 1999 to
$174.7 million for the same period in 2000.
Interest earnings from the investment portfolio increased to $1.0 million for
the three months ended June 30, 2000 compared to $760,000 for the same period in
1999. The increase in interest income was the result of a $9.2 million increase
in the average balance on investment securities from $55.4 million for the
second quarter of 1999 to $64.6 million for the same period in 2000.
Additionally, due to the increasing rate environment of the last several
quarters, the average yield on the investment portfolio increased from 5.61% for
the three-month period ended June 30, 1999 to 7.14% for the same period in 2000.
Interest expense increased by $3.1 million, or 43.6%, to $10.2 million for the
second quarter of 2000 compared to $7.1 million for the same period in 1999. The
increase is primarily due to funding the $102.3 million increase in average
interest-earning assets combined with a $52.3 million increase in average
non-interest earning assets, from $137.6 million for the first quarter of 1999
to $189.9 million for the same period in 2000. As previously noted, this
increase in average non-interest earning assets was primarily the result in
increases in mortgage servicing rights resulting from The Leader's increased
production.
Interest expense also increased because of an increase in the average balance of
deposits outstanding and the average cost of those deposits. Average deposits
increased to $530.2 million for the three months ended June 30, 2000 compared to
$475.7 million for the three months ended
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
June 30, 1999. The average cost of those deposits increased by 56 basis points
in the second quarter of 2000, to 4.64% from 4.08% for the same period in 1999.
The average balance of FHLB advances increased to $203.5 million for the three
months ended June 30, 2000 from $172.4 million for the comparable period in
1999. The average cost of those advances increased to 5.59% from 4.89% for the
three months ended June 30, 2000 and 1999, respectively. These increase in the
cost of FHLB advances was the result of several increases to the targeted Fed
Funds rate initiated by the Federal Reserve throughout 1999 and continuing in
2000.
Provision for Loan Losses. The provision for loan losses for the quarter ended
June 30, 2000 was $581,000 compared to $202,000 during the same period in 1999.
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. The increased provision reflects the shift in
First Federal's portfolio to a larger concentration of commercial loans. It also
includes increased provision for losses associated with both the cost of
servicing foreclosed loans in the servicing portfolio and the rapid growth in
that servicing portfolio.
Non-performing assets, which include loans 90 days or more past due, loans
deemed impaired, and repossessed assets totaled $1.3 million at June 30, 2000,
which is .14% of total assets. Non-performing loans and repossessed assets
reported do not include $7.6 million of 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
June 30, 2000 was $8.4 million compared to $8.5 million at June 30, 1999 and
$7.8 million at December 31, 1999. For the quarter ended June 30, 2000, First
Defiance charged off $588,000 of loans against its allowance and realized
recoveries of $211,000 from loans previously charged off. During the same
quarter in 1999, First Defiance charged off $1.1 million in loans and realized
recoveries of $96,000.
Non-Interest Income. Non-interest income increased substantially in the second
quarter of 2000, from $9.8 million for the quarter ended June 30, 1999 to $13.1
million for the same period in 2000. Individual components of non-interest
income are as follows:
Mortgage Banking Income. Mortgage banking income, which includes servicing fees
and late charge income, increased to $8.6 million for the three-month period
ended June 30, 2000 compared to $6.6 million for the same period in 1999. This
increase in mortgage banking income was primarily the result of the growth in
the mortgage-servicing portfolio from $5.1 billion as of June 30, 1999 to $6.9
billion at June 30, 2000.
Gain on Sale of Loans. Gain on sale of loans increased from $1.6 million for the
quarter ended June 30, 1999 to $2.6 million for the same period of 2000. The
increased gain on sale of loans is associated with increased secondary market
activi
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
ties at The Leader. For the 2000 second quarter, The Leader originated $619.5
million in loans compared to $370.3 million in production during the same period
in 1999.
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 $1.9 million for the
quarter ended June 30, 2000 from $1.6 million for the same period in 1999. Other
income for the three-month period ended June 30, 1999 included a $479,000 gain
realized on the sale of non-core servicing rights. There were no sales of loan
servicing in the current year. Commission revenue increases at First Insurance,
due to the September 1, 1999 acquisition of the Defiance, Ohio office of
Insurance and Risk Management, accounted for $466,000 of the increase from the
quarter ended June 30, 1999 to the quarter ended June 30, 2000.
Non-Interest Expense. Total non-interest expense increased $2.2 million from
$11.6 million for the quarter ended June 30, 1999 to $13.8 million for the same
period in 2000. Significant individual components of the increase are as
follows:
Compensation and Benefits. Compensation and benefits increased $1.2 million from
$4.7 million for the quarter ended June 30, 1999 to $5.9 million for the same
period in 2000. This increase was the result of planned expansions of The
Leader's operations, increases at First Federal to support the growth in
commercial lending and the expansion of the branch network, and the additional
staff at First Insurance acquired through the acquisition of the Insurance and
Risk Management office.
Occupancy. Occupancy expense increased to $1.2 million for the three-month
period ended June 30, 2000 from $1.0 million for the three months ended June 30,
1998. This increase was the result of the branch expansions at First Federal,
office renovation and expansion at The Leader, and the addition of the Insurance
and Risk Management office at First Insurance.
Amortization of Mortgage Servicing Rights. Amortization of mortgage servicing
rights (MSRs) increased to $3.7 million for the quarter ended June 30, 2000 from
$3.1 million for the same period in 1999. This increase was due to the growth in
the mortgage-servicing portfolio from $5.1 billion as of June 30, 1999 to $6.9
billion as of June 30, 2000. Due to increases in interest rates, management has
concluded that there are no impairment issues with the servicing portfolio. The
loan prepayments of The Leader's servicing portfolio have fallen to 4.71% for
the second quarter of 2000, annualized, compared to 9.53% for the same period in
1999, annualized.
Amortization of Goodwill and Other Acquisition Related Costs. Amortization of
goodwill and other acquisition costs amounted to $612,000 in the second quarter
of 2000 compared to $576,000 during the same period in 1999. This increase was
due to First Insurance's acquisition of the Defiance office of Insurance and
Risk Management in the third quarter of 1999.
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $2.4 million for the quarter ended June 30, 2000 from $2.2 million for the
same period in 1999.
First Defiance has computed federal income tax expense in accordance with FASB
Statement No. 109 which resulted in an effective tax rate of 36.3% for the
quarter ended June 30, 2000 compared to 34.3% for the same period in 1999. The
higher rate for the 2000 second quarter resulted from
21
<PAGE>
increasing the effective rate to 35% in the second quarter from the 34% rate
used during the 2000 first quarter
As a result of the above factors, net income for the quarter ended June 30, 2000
was $2,458,000 compared to $2,371,000 for the comparable period in 1999. On a
per share basis, basic and diluted earnings per share for the three months ended
June 30, 2000 were $.39 and $.38 respectively compared to $.37 and $.35,
respectively, for the same period in 1999. As stated above, the results for the
quarter ended June 30, 1999 were favorably impacted by the $479,000 gain
realized on the sale of certain non-core mortgage servicing rights. The after
tax gain resulting from the sale of the servicing was $316,000 or $.05 per basic
and diluted share. Average shares outstanding for the basic and diluted
calculations were 6,305,000 and 6,407,000, respectively, for the quarter ended
June 30, 2000 compared to 6,489,000 and 6,670,000, respectively, for the quarter
ended June 30, 1999.
First Defiance's board of directors declared a dividend of $.11 per common share
as of June 30, 2000. The dividend amounted to $711,327, including dividends on
unallocated ESOP shares. It was paid on July 28, 2000. 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.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
-------------------------------------------------------------------------
On a consolidated basis, First Defiance had net income of $4.7 million for the
six-months ended June 30, 2000 compared to $4.3 million for the same period in
1999. On a per share basis, basic and diluted earnings per share were $.74 and
$.73, respectively, compared to $.66 and $.63 basic and diluted per share
earnings for the same period in 1999. As discussed in the quarterly results
above, the 1999 second quarter included a one-time gain on sale of certain
non-core servicing rights of $479,000 (or $.05 per share).
Cash earnings for the six-months ended June 30, 2000 were $5.1 million or $.79
per diluted share compared to $4.7 million or $.69 per diluted share for the
same period in 1999. Cash earnings are calculated by excluding the net income
impact of amortization of goodwill.
Net Interest Income. Net interest income before provision for loan losses
increased to $11.3 million for the six-month period ending June 30, 2000
compared to $11.2 million for the same period in 1999. The Company's
year-to-date net interest margin through June 30, 2000 decreased to 2.99%
compared to 3.43% for the same period in 1999. Interest rate spread also
decreased to 3.07% for the six-month period ended June 30, 2000 from 3.19% for
the same period in 1999. The net interest margin was favorably impacted by a
first quarter change in the estimate of interest receivable on certain loans
that are more than 90 days delinquent which have been repurchased out of the
servicing portfolio by The Leader. This change in estimate of interest
receivable resulted in a 20 basis point increase in the yield on
interest-earning assets for the six-month period ended June 30, 2000. Without
that change, the year-to-date net interest margin would have been 2.82%. In
addition, management enhanced its method of estimating the required reserve for
potential losses on foreclosure loans to more accurately reflect the total risk
inherent in the servicing and loan portfolios at The Leader. This resulted in a
one-time adjustment to provision for loan losses of $693,000. The net impact of
these two items essentially offset each other and without these adjustments
earnings for the year would still be $.73 per diluted share.
Excluding the estimate change, total interest income increased by $5.4 million,
or 21.4%, from $25.1 million for the six-months ended June 30, 1999 to $30.5
million for the same period in 2000. The increase was due to a $100.7 million
increase in the average balance of interest-earning assets for the six-months
ended June 30, 2000 when compared to the same period in 1999. The yield on
interest earning assets increased from 7.51% for the year-to-date period ended
June 30, 1999 to 7.84% for the same period in 2000 excluding the impact of the
change in estimate noted above (8.01% including the change in estimate).
Excluding the estimate change, interest earnings on the loan portfolio increased
$4.3 million from $23.5 million for the six-months ended June 30, 1999 to $27.8
million for the same period in 2000. This increase was due to increases in the
average balance of loans receivable and the yield on these loans from $613.7
million and 7.66% for the six-month period ended June 30, 1999, respectively, to
$702.6 million and 7.92%, respectively, for the same period in 2000.
Interest earnings from the investment portfolio increased to $2.5 million for
the six months ended June 30, 2000 compared to $1.6 million for the same period
in 1999. The increase in interest income was primarily the result of a $19.1
million increase in the average balance of investment
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
securities, from $55.5 million for the first six months of 1999 to $74.6 million
for the same period in 2000. This increase resulted from including loans that
were securitized pending delivery to the bond trustees in trading securities
beginning in late December of 1999. These trading securities were delivered to
the trustee during the first quarter of 2000. Additionally, the yield on the
average portfolio balance for the six months ended June 30, 2000 was 7.17%
compared to 5.90% for the same period in 1999.
Interest expense increased by $6.0 million, or 43.2%, to $19.9 million for the
six months ended June 30, 2000 compared to $13.9 million for the same period in
1999. The increase is primarily due to the funding of the $100.7 million
increase in average interest earning assets noted above combined with a $48.8
million increase in average non-interest earning assets, from $134.1 million for
the first six months of 1999 to $182.9 million for the same period in 2000. This
increase in average non-interest earning assets was primarily a result of the
growth in The Leader's mortgage servicing assets from an average of $78.8
million for the year-to-date period ended June 30, 1999 to $105.3 million for
the same period in 2000. These increased funding requirements resulted in a
$160.6 million increase in the average balance of total interest-bearing
liabilities from $643.0 million for the six months ended June 30, 1999 to $803.6
million for the same period of 2000.
Interest expense also increased due to an increase in the average cost of funds
during the first six months of 2000 to 4.94% from 4.32% for the comparable
period in 1999. This increase resulted from increases in the average costs of
deposits, FHLB advances, and notes payable of 46 basis points, 57 basis points,
and 28 basis points, respectively, from 4.09%, 4.87%, and 6.01%, respectively
for the six-months ended June 30, 1999, to 4.55%, 5.44%, and 6.29%, respectively
for the same period in 2000. These increases were the result of several
increases to the targeted Fed Funds rate initiated by the Federal Reserve
throughout 1999 and continuing through the second quarter of 2000.
Provision for Loan Losses. The provision for loan losses increased to $2.0
million for the six-months ended June 30, 2000 compared to $712,000 for the same
period in 1999. As noted above, $693,000 of this increase was the result of the
change in accounting estimate on foreclosure loans at The Leader. First Defiance
charged off $1.6 million of loans against its allowance for loan losses for the
six-month period ended June 30, 2000 and realized recoveries of $249,000 from
loans previously charged off. During the same period in 1999, First Defiance
charged off $1.9 million in loans and realized recoveries of $146,000.
Non-Interest Income. Non-interest income increased $6.2 million for the
six-month period ended June 30, 2000 from $18.8 million to $25.0 million for the
1999 and 2000 periods, respectively. Individual components of non-interest
income are as follows:
Mortgage Banking Income. Mortgage banking income, which includes servicing fees
and late charge income, increased to $16.7 million for the six-month period
ended June 30, 2000 from $13.1 million for the same period in 1999. This
increase in mortgage banking income was primarily the result of the growth in
the mortgage servicing portfolio noted in the Results of Operations section for
the second quarter of 2000. The Leader now services a total of 110,000 loans
with a balance of nearly $7.0 billion.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
Gain on Sale of Loans. Gain of sale of loans increased from $3.2 million for the
six-months ended June 30, 1999 to $4.5 million for the same period in 2000. The
increase in gains on sale of loans is a result of continued strong production
levels at The Leader. Year-to-date the number of loans produced has increased by
66% over 1999 from 9,512 for the first six months of 1999 to 15,803 for the same
period in 2000. The dollar balance of loans produced has increased by 72% over
that same period, from $635.5 million during the first half of 1999 compared to
$1.094 billion during the same period in 2000.
Other Non-Interest Income. Other non-interest income, including insurance
commission income, dividends on Federal Home Loan Bank stock, gains on sale of
securities, and other miscellaneous charges, increased to $3.7 million for the
first half of 2000 from $2.5 million for the same period in 1999. Commission
revenue increases at First Insurance accounted for $909,000 of the year over
year increase due to the 1999 third quarter acquisition of the Insurance and
Risk Management office. Additionally, as previously noted, during the second
quarter of 1999 The Leader recognized a $479,000 gain on sale of non-core
servicing rights.
Non-Interest Expense. Total non-interest expense increased $4.4 million from
$22.7 million for the six-month period ended June 30, 1999 to $27.1 for the same
period in 2000. Significant individual components of the increase are as
follows:
Compensation and Benefits. Compensation and benefits increased $2.4 million from
$9.0 million for the year-to-date period ended June 30, 1999 to $11.4 million
for the same period in 2000. This increase was the result of planned expansions
of The Leader's operations, increases at First Federal to support the growth in
commercial lending and expansion of the branch network, and the additional staff
at First Insurance acquired through the acquisition of the Insurance and Risk
Management office.
Occupancy. Occupancy expense increased to $2.4 million for the six-month period
ended June 30, 2000 from $1.9 million for the same period in 1999. This increase
was a result of expansions throughout the Company.
Amortization of Mortgage Servicing Rights. Amortization of mortgage servicing
rights increased to $7.2 million for the six-month period ended June 30, 2000
from $6.4 million for the same period in 1999 due to the growth in the mortgage
servicing portfolio.
Amortization of Goodwill and Other Acquisition Costs. $1.22 million in
amortization of goodwill and other acquisition costs was recognized for the
six-month period ended June 30, 2000 compared to $1.15 million for the same
period in 1999, due to the purchase of The Leader and the First Insurance.
Other Non-Interest Expenses. Other non-interest expenses (including state
franchise tax, data processing, deposit premiums, and loan servicing) increased
to $4.7 million for the six-month period ended June 30, 2000 compared to $4.3
million for the same period in 1999.
The effective tax rate utilized for the six months ended June 30, 2000 was 35.6%
compared to 35.4% for the six months ended June 30, 1999.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
As a result of the above factors, net income for the six-month period ended June
30, 2000 increased to $4.7 million from $4.3 million for the six-months ended
June 30, 1999. On a per share basis, basic and diluted earnings per share for
the six months ended June 30, 2000 were $.74 and $.73 respectively compared to
$.66 and $.63, respectively, for the same period in 1999. As stated above the
results for the six months ended June 30, 1999 were favorably impacted by the
$479,000 gain realized on the sale of certain non-core mortgage servicing
rights. The after tax gain resulting from the sale of the servicing was $316,000
or $.05 per basic and diluted share. Average shares outstanding for the basic
and diluted calculations were 6,272,000 and 6,394,000 respectively for the
six-months ended June 30, 2000 compared to 6,614,000 and 6,835,000 respectively
for the same period in 1999.
Through June 30, 2000, First Defiance has declared dividends totaling $.22 per
share.
Liquidity and Capital Resources
First Federal is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
First Federal's liquidity exceeded applicable liquidity requirements throughout
the six-month period ended June 30, 2000.
First Defiance generated $21.5 million in cash for operating activities during
the first six months of 2000. The Company's cash flow from operating activities
include net income for the period, adjusted for various non-cash items,
including the provision for loan losses, depreciation and amortization,
including amortization of mortgage servicing rights, ESOP expense related to
release of shares, and changes in loans held 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 June 30, 2000, First Defiance had $20.6 million in outstanding mortgage loan
commitments and loans in process to be funded generally within the next six
months and an additional $45.3 million committed under existing consumer and
commercial lines of credit and standby letters of credit. Also at that date,
First Defiance had commitments to sell $198.9 million of loans held-for-sale and
it also had commitments to acquire $1.635 billion of mortgage loans under active
first-time homebuyer programs, all of which have offsetting commitments for sale
into the secondary market as GNMA or FNMA mortgage backed securities. Also as of
June 30, 2000, the total amount of certificates of deposit that are scheduled to
mature by June 30, 2001 is $350.7 million. First Defiance believes that it has
adequate resources to fund commitments as they arise and that it can adjust the
rate on savings certificates to retain deposits in changing interest rate
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -Continued
--------------------------------------------------------------------------------
environments. If First Defiance requires funds beyond its internal funding
capabilities, additional advances from the FHLB of Cincinnati are available.
Currently First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities include REMIC and CMO investments. Such investments are not
classified as high risk at June 30, 2000 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.
27
<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 June 30, 2000.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital (1)
------- ------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Regulatory capital $62,644 $62,644 $68,560
Minimum required regulatory
capital 14,107 37,621 50,083
------- ------- --------
Excess regulatory capital $48,537 $25,023 $18,477
======= ======= =======
Regulatory capital as a
percentage of assets (2) 6.7% 6.7% 11.0%
Minimum capital required as
a percentage of assets 1.5% 4.0% 8.0%
------- ------- ------
Excess regulatory capital as a
percentage in excess of
requirement 5.2% 2.7% 3.0%
====== ===== =====
</TABLE>
(1) Does not reflect the interest-rate risk component in the risk-based capital
requirement, discussed above.
(2) Tangible capital and core capital are computed as a percentage of adjusted
total assets of $940.5 million. Risk-based capital is computed as a
percentage of total risk-weighted assets of $626.0 million.
FDIC Insurance
The Deposits of First Federal are currently insured by the Savings Association
Insurance Fund("SAIF") which is administered by the FDIC. The FDIC also
administers the Bank Insurance Fund ("BIF") which generally provides insurance
to commercial bank 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 2000 are approximately $0.0052 per $100
of deposits.
28
<PAGE>
Item 3. Qualitative and Quantitative Disclosure About Market Risk
As discussed in detail in the 1999 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 monetary 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 does 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
June 30, 2000 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 June 30, 2000, a 100 basis
point decrease in interest rate would not materially impact the valuation
reserve for mortgage servicing rights.
29
<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
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
30
<PAGE>
FIRST DEFIANCE FINANCIAL CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
First Defiance Financial Corp.
(Registrant)
Date: August 11, 2000 By: /s/ William J. Small
--------------- --------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: August 11, 2000 By: /s/ John C. Wahl
--------------- ----------------
John C. Wahl
Executive Vice President, Chief
Financial Officer and
Treasurer
31
