-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q/67p76AwtDDpbIsi8zxuRdAoXqhJr4GxHKGyialFNYzq1kyglhEUi0kWwhTpay6 LcAOmOutj5fAEE6HptCiIQ== 0000914317-98-000190.txt : 19980331 0000914317-98-000190.hdr.sgml : 19980331 ACCESSION NUMBER: 0000914317-98-000190 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST DEFIANCE FINANCIAL CORP CENTRAL INDEX KEY: 0000946647 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341803915 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26850 FILM NUMBER: 98578859 BUSINESS ADDRESS: STREET 1: 601 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 BUSINESS PHONE: 4107825015 MAIL ADDRESS: STREET 1: 601 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number ________________ FIRST DEFIANCE FINANCIAL CORP. (Exact name of registrant as specified in its charter) OHIO 34-1803915 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 601 Clinton Street, Defiance, Ohio 43512 (Address of principal executive offices) (Zip code) Registrants telephone number, including area code: (419) 782-5015 Securities registered pursuant to Section 12(b) of the Act: (None) Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 Per Share (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 26, 1998, there were issued and outstanding 8,123,171 shares of the Registrants common stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the average bid and ask price of such stock as of March 26, 1998 was approximately $126.7 million. ----------------- Documents Incorporated by References List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. (1) Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997 are incorporated into Part II, Items 5-8 of this Form 10-K. (2) Portions of the Registrant's definitive proxy statement for its 1998 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K. PART I Item 1. Business First Defiance Financial Corp. ("First Defiance" or the "Company") was organized in June, 1995 and on September 29, 1995 became the parent company of First Federal Savings and Loan, Defiance, Ohio ("First Federal") when First Federal and First Federal Mutual Holding Company, which at the time owned 59% of the outstanding common stock of First Federal, completed a Conversion and Reorganization from the mutual holding company form of ownership to full stock ownership. In connection with the Conversion and Reorganization ("the Reorganization") First Defiance completed a Subscription and Community Stock Offering ("the Offering") in which it sold 6,476,914 shares of common stock (equivalent to the 59% ownership of First Federal Mutual Holding Company) for $10 per share. The outstanding public shares of common stock of First Federal were converted into common shares of First Defiance in a ratio of 2.1590231 shares for every one share of First Federal. First Federal had reorganized on June 19, 1993 from a mutual savings and loan association to a mutual holding company known as First Federal Mutual Holding Company ("the Mutual Holding Company Reorganization"). As part of the Mutual Holding Company Reorganization First Federal Mutual Holding Company organized a federally chartered stock savings and loan association (now First Federal) and transferred all of its assets and liabilities to First Federal in exchange for 3,000,000 shares of common stock which represented all of the outstanding shares of First Federal upon completion of the Mutual Holding Company Reorganization. Concurrent with the Mutual Holding Company Reorganization, First Federal sold 2,080,000 additional shares of common stock to members and employees of First Federal and to the public. On September 29, 1995, as part of the Reorganization, the 3,000,000 shares of First Federal held by the Mutual Holding Company were canceled and the shares held by the public were exchanged for shares of First Defiance in accordance with an exchange ratio which assured they would maintain their existing 41.0% ownership. The business of the Company and its subsidiaries will be discussed herein as activities of the Company (on a consolidated basis), and references to the Company's historical investment activities include the activities of First Federal prior to September 29, 1995 unless otherwise noted. The Company employs executive officers and a support staff if and as the need arises. Such personnel are provided by First Federal and are not paid separate remuneration for such services. The Company reimburses First Federal for the use of First Federal personnel, pursuant to an expense sharing agreement between the Company and First Federal. First Federal provides the Company with office space and is reimbursed for the use of the space through the expense sharing agreement. At December 31, 1997, the Company had consolidated assets of $579.7 million, consolidated deposits of $395.3 million, and consolidated stockholders' equity of $106.9 million. The Company's executive office is located at 601 Clinton St., Defiance, Ohio 43512 and its telephone number is (419) 782-5015. First Federal Savings and Loan First Federal is a federally chartered stock savings and loan headquartered in Defiance, Ohio. It conducts operations through its main office, nine full service branch offices in Defiance, Fulton, Henry, Paulding, Putnam and Williams Counties in northwest Ohio. First Federal's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). First Federal is a member of the Federal Home Loan Bank System. First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans secured by single-family residences (one-to-four-family units) primarily located in the six counties in which its offices are located. First Federal also originates other real estate loans secured by nonresidential and multi-family residential real estate and construction loans. First Federal also holds a significant number of non real estate loans including commercial, home improvement and equity, consumer finance loans, primarily automobile loans, and mobile home loans. First Federal also invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities which are issued by federal agencies and corporate bonds. Securities Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity and equity securities are classified as available-for-sale. Available for-sale securities are stated at fair value. First Defiance's securities portfolio is managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. All securities transactions must be approved by the Investment Committee and reported to the Board of Directors. First Defiance's investment portfolio includes five CMO and REMIC issues totaling $4.0 million, all of which are fully amortizing securities, and five separate agencies securities totaling $8.8 million which have a step-up feature. All such investments are considered derivative securities. None of First Defiance's investments are considered to be high risk and management does not believe the risks associated with these investments to be significantly different from risks associated with other pass-through mortgage backed or agency securities. First Defiance does not invest in off-balance sheet derivative securities. The amortized cost and fair value of securities at December 31, 1997 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Money market mutual funds and other mutual funds are not due at a single maturity date. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
Contractually Maturing Total ------------------------------------------------------------------------------------------------------------ Weighted Weighted Weighted Weighted Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average Year Rate Years Rate Years Rate Years Rate Amount Yield ---- ---- ----- ---- ----- ---- ----- ---- ------ ----- (Dollars in Thousands) U.S. Government and federal agency obligations $16,800 5.24% $25,136 6.28% $14,925 6.76% $ 1,990 6.00% $ 58,851 6.10% Corporate bonds 3,068 7.50 7,026 6.13 10,094 6.54 Obligations of states and political 229 6.34 420 6.56 835 5.48 300 7.38 1,784 6.16 subdivisions Mortgage-backed securities 979 5.51 2,831 8.02 866 8.11 15,039 7.26 19,715 7.32 REMICs and CMOs - - - - 2,010 7.00 2,029 6.14 4,039 6.57 ------- ------- ------- ------- -------- Total $21,076 $35,413 $18,636 $19,358 94,483 ======= ======= ======= ======= Mutual funds 8,981 Unrealized loss on securities available for sale (75) ======== Total $103,389 ========
The book value of investment securities is as follows:
December 31 1997 1996 1995 ------- ------- ------- Available-for-Sale Securities: U. S. Treasury and other U. S. Government agencies and corporations ................... $58,850 $44,234 $53,626 Obligations of state and political subdivisions 550 -- -- Other ......................................... 23,036 33,173 39,415 ------- ------- ------- Totals ........................................... $82,436 $77,407 $93,041 ======= ======= ======= Held-to-Maturity Securities: U. S. Treasury and other U. S. Government agencies and corporations ................... $19,715 $24,514 $24,465 Obligations of state and political subdivisions 1,238 1,423 1,608 ------- ------- ------- Totals ........................................... $20,953 $25,937 $26,073 ======= ======= =======
For additional information regarding First Defiance's investment portfolio refer to Note 4 to the financial statements. Interest-Bearing Deposits First Defiance has interest-bearing deposits in the FHLB of Cincinnati amounting to $1.6 million at December 31, l997 and l996. Lending Activities General. A savings association generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. See "Regulation - Federal Regulation of Savings Associations." At December 31, 1997, First Federal's limit on loans-to-one borrower was $12.0 million and its five largest loans or groups of loans to one borrower, including related entities, aggregated $4.4 million, $3.4 million, $2.5 million, $2.4 million and $2.3 million. All of these loans or groups of loans were performing in accordance with their terms at December 31, 1997. Loan Portfolio Composition. Loan volume continues to be strong. The net increase in net loans outstanding over the prior year was $26.5million, $33.9 million, and $26.5 million in 1997, 1996 and 1995, respectively. The loan portfolio contains no foreign loans nor any concentrations to identified borrowers engaged in the same or similar industries exceeding 10% of total loans. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated.
December 31 ------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------ Amount % Amount % Amount % Amount % Amount % ------------------------------------------------------------------------------------------------ (Dollars in thousands) Real estate: Single-family residential $255,340 57.0% $241,228 57.1% $220,880 56.9% $222,035 61.6% $219,435 64.7% Multi-family residential 9,363 2.1 9,175 2.2 16,929 4.4 7,577 2.1 5,745 1.7 Non-residential real estate 20,159 4.5 21,348 5.0 19,780 5.1 19,888 5.5 18,596 5.5 Construction 10,148 2.2 11,412 2.7 8,200 2.1 6,858 1.9 6,954 2.1 ------------------------------------------------------------------------------------------------ Total real estate loans 295,010 65.8 283,163 67.0 265,789 68.5 256,358 71.1 250,730 74.0 Non-real estate: Consumer finance 81,111 18.1 74,019 17.5 61,810 15.9 52,491 14.6 41,041 12.1 Commercial 29,758 6.6 26,674 6.3 23,647 6.1 17,436 4.8 15,560 4.6 Mobile home 25,424 5.7 25,199 6.0 24,671 6.4 24,191 6.7 22,274 6.5 Home equity and improvement 16,940 3.8 13,570 3.2 11,875 3.1 10,265 2.8 9,464 2.8 ------------------------------------------------------------------------------------------------ Total non-real estate loans 153,233 34.2 139,462 33.0 122,003 31.5 104,383 28.9 88,339 26.0 ------------------------------------------------------------------------------------------------ Total loans 448,243 100.0% 422,625 100.0% 387,792 100.0% 360,741 100.0% 339,069 100.0% ===== ===== ===== ===== ===== Less: Loans in process 3,087 4,474 3,971 3,440 2,860 Deferred loan origination fees 645 568 559 631 883 Allowance for loan losses 2,687 2,217 1,817 1,733 1,662 -------- -------- -------- -------- -------- Net loans $441,824 $415,366 $381,445 $354,937 $333,664 ======== ======== ======== ======== ========
First Defiance also had $87,500, $558,600 and $3.8 million in loans classified as held for sale at December 31, 1997, 1996 and 1995, respectively. The fair value of such loans, which are all single-family residential mortgage loans, exceeded their carrying value by $2,000, $5,000 and $64,000 as of December 31, 1997, 1996 and 1995, respectively. Contractual Principal Repayments and Interest Rates. The following table sets forth certain information at December 31, 1997 regarding the dollar amount of loans maturing in First Defiance's portfolio, based on the contractual terms to maturity, before giving effect to net items. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.
Due 3-5 Due 5-10 Due 10-15 Due 15+ Due Due Years Years Years Years Before Before After After After After 12/31/98 12/31/99 12/31/97 12/31/97 12/31/97 12/31/97 Total ------------------------------------------------------------------------------------ (In Thousands) Real estate $21,680 $14,935 $31,886 $ 82,875 $61,035 $82,599 $295,010 Non-real estate: Commercial 18,741 3,759 4,362 2,548 345 3 29,758 Home equity and improvement 5,326 781 1,302 1,566 241 7,724 16,940 Mobile home 1,936 2,010 4,262 9,917 4,898 2,401 25,424 Consumer finance 27,569 20,721 27,738 5,005 63 15 81,111 =================================================================================== Total $75,252 $42,206 $69,550 $101,911 $66,582 $92,742 $448,243 ===================================================================================
The schedule above does not reflect the actual life of the Company's loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which give First Defiance the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The following table sets forth the dollar amount of all loans, before net items, due after one year from December 31, l997 which have fixed interest rates or which have floating or adjustable interest rates.
Floating or Fixed Adjustable Rates Rates Total -------------------------------------------- (In Thousands) Real estate $192,036 $81,294 $273,330 Non-real estate: Commercial 3,954 7,063 11,017 Other 80,371 8,273 88,644 =========================================== $276,361 $96,630 $372,991 ===========================================
Originations, Purchases and Sales of Loans. The lending activities of First Defiance are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained from a variety of sources, including referrals from real estate brokers, developers, builders, and existing customers; newspapers and radio advertising; and walk-in customers. First Defiance's loan approval process is intended to assess the borrowers ability to repay the loan, the viability of the loan, and the adequacy of the value of the property that will secure the loan. A loan application is first reviewed by a loan officer of First Defiance and then is submitted for approval to the Senior Vice President of Lending. All loans greater than $200,000, all commercial loans and all employee loans are subject to the approval of the executive committee of the Board of Directors. Loans is excess of $500,000 require approval by the full Board of Directors. First Defiance offers adjustable rate loans in order to decrease the vulnerability of its operations to changes in interest rates. The demand for adjustable-rate loans in First Defiance's primary market area has been a function of several factors, including customer preference, the level of interest rates, the expectations of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that can be originated at any time is largely determined by the demand for each in a competitive environment. Adjustable rate loans represented 34.7% of First Federal's total originations of mortgage loans in 1997 compared to 26.0% and 33.4% during 1996 and 1995, respectively. First Defiance continues to hold adjustable-rate securities in order to further reduce its interest-rate gap. Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. First Defiance originated substantially all of the loans in its portfolio. To better manage interest rate risk, First Defiance is an approved seller/servicer for the Federal Home Loan Mortgage Corporation (Freddie Mac). The Company sold $8.2 million, $13.3 million and $86,000 in loans during the years ended December 31, 1997, 1996 and 1995, respectively. First Defiance had identified $87,500 and $559,000 in additional loans which were classified as held for sale as of December 31, 1997 and 1996, respectively. All loans with a 30-year maturity which meet the Freddie Mac underwriting guidelines are deemed available-for-sale. Management intends to retain servicing rights on any loans sold. The following table shows total loans originated, loan reductions, and the net increase in First Defiance's total loans during the periods indicated:
Year ended December 31 1997 1996 1995 ---------------------------------------------- (In thousands) Loan originations: One to four family residential $ 72,752 $ 70,494 $ 49,430 Five or more family residential 1,464 1,414 2,564 Non-residential real estate 5,153 5,006 4,065 Construction 11,044 15,936 13,133 Commercial 31,435 25,298 23,854 Mobile home 5,945 6,465 5,982 Home equity and improvement 10,103 6,448 5,323 Consumer 54,994 53,698 42,700 -------------------------------------------- Total loans originated 192,890 184,759 147,051 Loan reductions: Loan pay-offs 106,840 87,879 73,869 Mortgage loans sold 8,242 13,332 86 Periodic principal repayments 52,190 48,715 46,045 --------------------------------------------- 167,272 149,926 120,000 --------------------------------------------- Net increase in total loans $ 25,618 $ 34,833 $ 27,051 =============================================
Asset Quality First Defiance's credit policy establishes guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to ensure sound credit decisions. First Defiance's credit policies and review procedures are meant to minimize the risk and uncertainties inherent in lending. In following the policies and procedures, management must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur because of changing economic conditions. Delinquent Loans. The following table sets forth information concerning delinquent loans at December 31, 1997, in dollar amount and as a percentage of First Defiance's total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
Non-residential and Single-family multi-family Home equity residential residential Mobile home and improvement ------------------------------------------------------------------------------------------------------- Amount Percentage Amount Percentage Amount Percentage Amount Percentage ------------------------------------------------------------------------------------------------------- (Dollars in thousands) Loans delinquent for: 30-59 days $1,787 .40% $160 .04% $1,464 .33% $181 .04% 60-89 days 467 .10 600 .13 13 90 days and over 313 .07 315 .07 ======================================================================================================= Total delinquent loans $2,567 .57% $160 .04% $2,379 .53% $194 .04% ======================================================================================================= Consumer finance Commercial Total -------------------------------------------------------------------------- Amount Percentage Amount Percentage Amount Percentage -------------------------------------------------------------------------- (Dollars in thousands) Loans delinquent for: 30-59 days $1,763 .39% $ 962 .21% $6,317 1.41% 60-89 days 275 .06 404 .09 1,759 .39 90 days and over 167 .04 570 .13 1,365 .31 ==================================================================================================== Total delinquent loans $2,205 .49% $1,936 .43% $9,441 2.11% ====================================================================================================
Non-Performing Assets. All loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is deemed insufficient to warrant further accrual. Generally, First Defiance places all loans more than 90 days past due on non-accrual status. When a loan is placed on non-accrual status, total unpaid interest accrued to date is reserved. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. First Defiance considers that a loan is impaired when, based on current information and events, it is probable that they will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. When a loan is impaired, First Defiance measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral, if collateral dependent. If the measure of the impaired loan is less than the recorded investment, First Defiance will recognize an impairment by creating a valuation allowance. This policy excludes large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage, consumer installment, and credit card loans. Impairment of loans having recorded investments of $537,000 and $1.6 million has been recognized as of December 31, 1997 and 1996, respectively. Interest received and recorded in income during 1997 and 1996 on impaired loans including interest received and recorded in income prior to such impaired loan designation amounted to $53,000 and $156,000, respectively. Unrecorded interest income on these and all non-performing loans in 1997 and 1996 was $24,000 and $34,000, respectively. The average recorded investment in impaired loans during 1997 and 1996 was $1.30 million and $1.45 million, respectively. The total allowance for loan losses related to these loans was $327,000 and $804,000 at December 31, 1997 and 1996, respectively. Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. In addition, First Defiance also repossesses other assets securing loans, consisting primarily of automobiles and mobile homes. When such property is acquired it is recorded at the lower of the restated loan balance, less any allowance for loss, or fair value. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of property exceeds its estimated net realizable value. As of December 31, 1997, First Defiance's total non-performing loans amounted to $1,365,000, or .43% of total loans, compared to $1,972,000, or .47% of total loans, at December 31, 1996. The following table sets forth the amounts and categories of First Defiance's nonperforming assets and troubled debt restructurings at the dates indicated.
December 31 1997 1996 1995 1994 1993 ------------------------------------------------------ (Dollars in thousands) Non-performing loans: Single-family residential $ 313 $ 88 $ 263 $ 207 $ 150 Non-residential and multi-family residential real estate -- 19 -- 18 209 Commercial 570 1,561 268 294 380 Mobile home 315 193 130 163 135 Consumer finance 167 111 111 16 41 ------------------------------------------------------ Total non-performing loans 1,365 1,972 772 698 915 Real estate owned 18 -- 1 3 29 Other repossessed assets 523 267 172 164 71 ------------------------------------------------------ Total repossessed assets 541 267 173 167 100 ------------------------------------------------------ Total non-performing assets $1,906 $2,239 $ 945 $ 865 $1,015 ------------------------------------------------------ Troubled debt restructurings $ -- $ -- $ 437 $ 443 $ 136 ====================================================== Total non-performing assets as a percentage of total assets .33% .41% .18% .18% .22% ====================================================== Total non-performing loans and troubled debt restructurings as a percentage of total loans .43% .47% .31% .32% .31% ====================================================== Total non-performing assets and troubled debt restructurings as a percentage of total assets .33% .41% .26% .28% .25% ====================================================== Allowance for loan losses as a percent of total non-performing assets 140.9% 99.0% 192.3% 200.5% 164.0% ======================================================
Allowance for Loan Losses. It is management's policy to maintain an allowance for loan losses based upon an assessment of prior loss experience, the volume and type of lending conducted by First Defiance, industry standards, past due loans, general economic conditions and other factors related to the collectibility of the loan portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. At December 31, l997, First Defiance's allowance for loan losses amounted to $2.7 million compared to $2.2 million at December 31, 1996. As of December 31, 1997 and l996, $499,000 and $837,000, respectively, constituted an allowance with respect to specific loans or assets held for sale.Charge-offs in non-real estate consumer finance increased $648,000 for the year ended December 31, 1997 over 1996 due to increases in lending and delinquencies in this area. The following table sets forth the activity in First Defiance's allowance for loan losses during the periods indicated.
Year Ended December 31 1997 1996 1995 1994 1993 --------------------------------------------------------- (Dollars in thousands) Allowance at beginning of period $2,217 $1,817 $1,733 $1,662 $1,185 Provisions 1,613 1,020 374 426 829 Charge-offs: Single-family real estate - - - 19 63 Non-real estate: Consumer finance 1,078 430 230 222 132 Mobile home 259 334 91 159 121 Commercial 4 12 23 1 86 --------------------------------------------------------- Total non-real estate 1,341 776 344 382 339 --------------------------------------------------------- Total charge-offs 1,341 776 344 401 402 Recoveries: Consumer finance 195 152 51 46 50 Commercial - 4 - - - Mobile home 2 - - - - Assets held for sale - 3 - - --------------------------------------------------------- Total 197 156 54 46 50 --------------------------------------------------------- Allowance at end of period $2,686 $2,217 $1,817 $1,733 $1,662 ========================================================= Allowance for loan losses to total non-performing loans at end of period 196.8% 112.4% 235.4% 248.3% 181.6% Allowance for loan losses to total loans at end of period .60% .53% .47% .48% .49%
The following table sets forth information concerning the allocation of First Defiance's allowance for loan losses by loan categories at the dates indicated. For information about the percent of total loans in each category to total loans, see "- Lending Activities - Loan Portfolio Composition."
December 31 1997 1996 1995 ------------------------------------------------------------------------------ Percent of Percent of Percent of total loans total loans total loans Amount by category Amount by category Amount by category ------------------------------------------------------------------------------ Real estate mortgage loans $ 351,149 65.8% $ 307,041 67.0% $ 431,133 68.5% Other: Commercial business loans 827,816 6.6 866,185 6.3 687,122 6.1 Mobile home loans 361,468 5.7 208,095 6.0 191,646 6.4 Consumer and home equity and improvement loans 1,146,039 21.9 835,701 20.7 507,043 19.0 ============================================================================== $2,686,472 100.0% $2,217,022 100.0% $1,816,944 100.0% ==============================================================================
Sources of Funds General. Deposits are the primary source of First Defiance's funds for lending and other investment purposes. In addition to deposits, First Defiance derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the Federal Home Loan Bank may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. Deposits. First Defiance's deposits are attracted principally from within First Defiance's primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market accounts, regular savings accounts, and term certificate accounts. Included among these deposit products are individual retirement account certificates of approximately $55.5 million at December 31, l997. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. Average balances and average rates paid on deposits are as follows:
Year ended December 31 1997 1996 1995 --------------------- ----------------------- --------------------- Amount Rate Amount Rate Amount Rate --------- ---- ----------- ----- --------- ---- (Dollars in thousands) Noninterest bearing demand deposits $ 2,545 -- $ 1,902 -- $ 1,395 -- Interest bearing and money market demand deposits 48,766 2.88% 45,649 2.45% 45,109 2.72% Savings deposits 63,028 2.58 67,926 3.00 68,459 3.12 Time deposits 268,235 5.58 265,967 5.80 261,901 5.92 ========= ==== =========== ==== ========= ==== Totals $382,574 4.70% $ 381,444 4.87% $ 376,864 5.00% ======== ==== =========== ==== ========= ====
The following table sets forth the maturities of First Defiance's certificates of deposit having principal amounts of $100,000 or more at December 31, 1997.
Certificates of deposit maturing in quarter ending: - -------------------------------------------------------------------------------- (In thousands) March 31, 1998 $ 7,584 June 30, 1998 4,171 September 30, 1998 6,475 December 31, 1998 3,021 After December 31, 1998 8,626 -------- Total certificates of deposit with balances of $100,000 or more $ 29,877 ========
The following table details the deposit accrued interest payable as of December 31:
1997 1996 --------------------------- Checking and money market accounts $ 71,687 $ 49,502 Passbook Accounts 3,882 -- Certificates 1,325,698 166,811 ========== ========== $1,401,267 $ 216,313 ========== ==========
For additional information regarding First Defiance's deposits see Note 9 to the financial statements. Borrowings. First Defiance may obtain advances from the FHLB of Cincinnati upon the security of the common stock it owns in that bank and certain of its residential mortgage loans, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Such advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. See "Regulation - - Federal Regulation of Savings Associations - Federal Home Loan Bank System." The following table sets forth certain information as to First Defiance's FHLB advances at the dates indicated.
December 31 1997 1996 1995 ------------------------------------------ (Dollars in thousands) Long-term: FHLB advances $ 4,529 $ 5,601 $ 6,842 Weighted average interest rate 6.57% 6.58% 6.70% Short-term: FHLB advances 67,136 35,220 -- Weighted average interest rate 5.85% 6.28% --
The following table sets forth the maximum month-end balance and average balance of First Defiance's FHLB advances during the periods indicated.
Year ended December 31 1997 1996 1995 --------------------------------- (Dollars in thousands) Long-term: Maximum balance $ 5,601 $ 6,842 $12,641 Average balance 4,529 6,115 9,881 Weighted average interest rate of FHLB advances 6.19% 6.59% 7.28% Short-term: Maximum balance 70,135 35,220 18,000 Average balance 53,039 8,310 8,154 Weighted average interest rate of FHLB advances 5.77% 5.59% 6.19%
$3.2 million of First Defiance's outstanding long-term FHLB advances were obtained in the first calendar quarter of 1992 as part of the Company's asset and liability management strategy and $1.3 million were obtained in the fourth quarter in 1995 as part of the FHLB's Affordable Housing Program. First Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. There were $67.1 and $35.2 million in short-term advances outstanding at December 31, 1997 and 1996, respectively. First Defiance borrows funds under a variety of programs at the FHLB. At December 31, 1997, $30 million was outstanding under First Defiance's REPO Advance line of credit. The total available under the REPO line is $30 million. Amounts are generally borrowed under the REPO line on an overnight basis. An additional $13.8 million was borrowed under the FHLB's Cash Management Advance (CMA) program at a variable rate. Amounts borrowed under the CMA program mature within 90 days. The $23.4 million of other advances are borrowed under the FHLB's short-term fixed or LIBOR based programs. Average Balances, Interest Rates and Yields The following table presents for the periods indicated the total dollar amounts of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Dividends received on Federal Home Loan Bank stock are included as interest income. The table does not reflect the effect of income taxes.
Year Ended December 31, --------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------------- (Dollars in thousands) Interest-Earning Assets Loans receivable $428,550 $37,302 8.70% $399,949 $34,635 8.66% $367,773 $32,003 8.70% Securities 103,304 6,556 6.35 107,702 6,622 6.15 106,120 6,562 6.18 Dividends on FHLB stock 3,355 242 7.21 2,955 207 7.00 2,798 191 6.82 --------------------------------------------------------------------------------------- Total interest-earning assets 535,209 44,100 8.24 510,606 41,464 8.12 476,691 38,756 8.13 Non-interest-earning assets 25,500 18,257 12,927 -------- -------- -------- Total assets $560,709 $528,863 $489,628 ======== ======== ======== Interest-Bearing Liabilities Deposits $382,574 17,992 4.70 $381,444 $18,579 4.87 $376,864 $18,857 5.00 FHLB advances 58,100 3,394 5.84 15,828 880 5.56 19,036 1,432 7.52 --------------------------------------------------------------------------------------- Total interest-bearing liabilities 440,674 21,386 4.85 397,272 19,459 4.90 395,900 20,289 5.12 Non-interest-bearing liabilities 4,804 4,311 3,855 -------- -------- -------- Total liabilities 445,478 401,583 399,755 Stockholders' equity 115,231 127,280 89,873 -------- -------- -------- Total liabilities and stockholders' equity $560,709 $528,863 $489,628 ======== ======== ======== Net interest income; interest rate spread $22,714 3.39% $22,005 3.22% $18,467 3.01% =============== =============== ============== Net interest margin (2) 4.24% 4.31% 3.87% ===== ===== ===== Average interest-earning assets to average interest-bearing liabilities 121% 129% 120% ===== ===== =====
(1) At December 31, 1997, the yields earned and rates paid were as follows: loans receivable, 8.64%; securities, 6.37%; other interest-earning assets, 7.25%; total interest-earning assets, 8.21%; deposits, 4.72%; FHLB advances, 5.86%; total interest-bearing liabilities, 4.89%; and interest rate spread 3.31%. (2) Net interest margin is net interest income divided by average interest-earning assets. Rate/Volume Analysis The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected First Defiance's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Year Ended December 31, ----------------------------------------------------------------------------------- 1997 vs. 1996 1996 vs. 1995 ----------------------------------------- ----------------------------------------- Increase Increase Increase Increase (decrease) (decrease) Total (decrease) (decrease) Total due to due to increase due to due to increase rate volume (decrease) rate volume (decrease) ------------- ------------- ------------- ------------- ------------- ------------- (In thousands) Interest-Earning Assets Loans $ 190 $ 2,477 $ 2,667 $ (146) $ 2,778 $ 2,632 Securities 204 (270) (66) (29) 89 60 FHLB stock 7 28 35 5 11 16 ======= ======= ======= ======= ======= ======= Total interest-earning assets $ 402 $ 2,234 $ 2,636 $ (170) $ 2,878 $ 2,708 ======= ======= ======= ======= ======= ======= Interest-Bearing Liabilities Deposits $ (642) $ 55 $ (587) $ (522) $ 244 $ (278) FHLB advances 164 2,350 2,514 (335) (217) (552) ======= ======= ======= ======= ======= ======= Total interest-bearing liabilities $ (478) $ 2,405 $ 1,927 $ (857) $ 27 $ (830) ======= ======= ======= ======= ======= ======= Increase (decrease) in net interest income $ 709 $ 3,538 ======= =======
--------------------------------------- 1995 vs. 1994 --------------------------------------- Increase Increase (decrease) (decrease) Total due to due to increase rate volume (decrease) ------------- ------------- ----------- Interest-Earning Assets Loans $ 732 $ 2,091 $ 2,823 Securities 632 (150) 482 FHLB stock 30 (1) 29 ======= ======= ======= Total interest-earning assets $ 1,394 $ 1,940 $ 3,334 ======= ======= ======= Interest-Bearing Liabilities Deposits $ 3,283 $ 94 $ 3,377 FHLB advances 137 (153) (16) ======= ======= ======= Total interest-bearing liabilities $ 3,420 $ (59) $ 3,361 ======= ======= ======= Increase (decrease) in net interest income $ (27) =======
Subsidiaries The Company has two wholly-owned subsidiaries, First Federal and First Defiance Service Company ("First Defiance Service"). First Defiance Service was established to provide customers with certain uninsured financial service products through an affiliation with a third party vendor. Total fees collected in 1997 by First Defiance Service were less than $4,000. Employees First Defiance had 139 full-time employees and 36 part-time employees at December 31, 1997. None of these employees are represented by a collective bargaining agent, and First Defiance believes that it enjoys good relations with its personnel. Competition First Defiance faces strong competition both in attracting deposits and making real estate loans. Its most direct competition for deposits has historically come from commercial banks and credit unions located in northwestern Ohio, including many large financial institutions which have greater financial and marketing resources available to them. In addition, First Defiance has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The ability of First Defiance to attract and retain savings deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. First Defiance experiences strong competition for real estate loans principally from other savings associations, commercial banks, and mortgage banking companies. First Defiance competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions. REGULATION General. First Defiance, as the holding company of First Federal, is subject to regulation, examination and oversight by the OTS and is required to submit periodic reports to the OTS. As a savings association organized under the laws of the United States, First Federal is also subject to regulatory oversight by the OTS, and, because First Federal's deposits are insured by the FDIC, First Federal is also subject to examination and regulation by the FDIC. First Federal must file periodic reports with the OTS concerning its activities and financial condition. Examinations are conducted periodically by the OTS and the FDIC to determine whether First Federal is in compliance with various regulatory requirements and is operating in a safe and sound manner. First Federal is a member of the FHLB of Cincinnati. Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations. Pursuant to such legislation, Congress may eliminate the OTS and First Federal may be regulated under federal law as a bank or may be required to change its charter. Such change in regulation or charter would likely change the range of activities in which First Federal may engage and would probably subject First Federal to more regulation by the FDIC. In addition, First Defiance might become subject to a different form of holding company regulation which may limit the activities in which First Defiance may engage and subject First Defiance to additional regulatory requirements, including separate capital requirements. First Defiance cannot predict when or whether Congress may actually pass legislation regarding First Defiance's and First Federal's regulatory requirements or charter. Although such legislation may change the activities in which First Defiance and First Federal may engage, it is not anticipated that the current activities of either First Defiance or First Federal will be materially affected by those activity limits. Office of Thrift Supervision. The OTS is an office in the Department of the Treasury and is responsible for the regulation and supervision of all federally chartered savings associations and all other savings associations, the deposits of which are insured by the FDIC in the SAIF. The OTS issues regulations governing the operation of savings associations, regularly examines such associations and imposes assessments on savings associations based on their asset size to cover the costs of general supervision and examination. It also promulgates regulations that prescribe the permissible investments and activities of federally chartered savings associations, including the type of lending that such associations may engage in and the investments in real estate, subsidiaries and securities they may make. The OTS also may initiate enforcement actions against savings associations and certain persons affiliated with them for violations of laws or regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the OTS may appoint a conservator or receiver for a savings association. Federally chartered savings associations are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of an association to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent an institution lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas. First Federal has received a "satisfactory" examination rating under those regulations. OTS Regulatory Capital Requirements. First Federal is required by OTS regulations to meet certain minimum capital requirements. The following table sets forth the amount and percentage level of regulatory capital of First Federal at December 31, 1997, and the amount by which it exceeds the minimum capital requirements. Tangible and core capital are reflected as a percentage of adjusted total assets. Total (or risk-based) capital, which consists of core and supplementary capital, is reflected as a percentage of risk-weighted assets. Assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk.
At December 31, 1997 Amount Percent ------ ------- (In thousands) Tangible capital $80,284 13.65% Requirement 8,821 1.50 ------- ----- Excess $71,463 12.15% ======= ===== Core capital $80,284 13.65% Requirement 17,642 3.00 ------- ----- Excess $62,642 10.65% ======= ===== Total capital $82,473 21.55% Risk-based requirement 30,613 8.00 ------- ----- Excess $51,860 13.55% ======= =====
Current capital requirements call for tangible capital (which for First Federal is equity capital under generally accepted accounting principles plus the unrealized losses on available-for-sale securities less servicing assets and deferred tax assets) of 1.5% of adjusted total assets, core capital (which for First Federal consists of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for First Federal consists of core capital plus general valuation reserves of $2.189 million) of 8% of risk-weighted assets. The OTS has proposed to amend the core capital requirement so that those associations that do not have the highest examination rating and exceed an acceptable level of risk will be required to maintain core capital of from 4% to 5%, depending on the association's examination rating and overall risk. First Federal does not anticipate that it will be adversely affected if the core capital requirement regulation is amended as proposed. First Federal's current core capital level is 13.65% of adjusted total assets. The OTS has adopted an interest rate risk component to the risk-based capital requirement, though the implementation of that component has been delayed. Pursuant to that requirement, a savings association would have to measure the effect of an immediate 200 basis point change in interest rates on the value of its portfolio, as determined under the methodology established by the OTS. If the measured interest rate risk is above the level deemed normal under the regulation, the association will be required to deduct one-half of that excess exposure from its total capital when determining its level of risk-based capital. In general, an association with less than $300 million in assets and a risk-based capital ratio of greater than 12% will not be subject to the interest rate risk component. First Federal does not currently qualify for such exemption. Pending implementation of the interest rate risk component, the OTS has the authority to impose a higher individualized capital requirement on any savings association it deems to have excess interest rate risk. The OTS also may adjust the risk-based capital requirement on an individual basis for any association to take into account risks due to concentrations of credit and non-traditional activities. The OTS has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled savings associations. At each successively lower defined capital category, an association is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the OTS has less flexibility in determining how to resolve the problems of the institution. The OTS has defined these capital levels as follows: (1) well-capitalized associations must have total risk-based capital of at least 10%, core risk-based capital (consisting only of items that qualify for inclusion in core capital) of at least 6% and core capital of at least 5%; (2) adequately capitalized associations are those that meet the regulatory minimum of total risk-based capital of at least 8%, core risk-based capital (consisting only of items that qualify for inclusion in core capital) of at least 4% and core capital of at least 4% (except for associations receiving the highest examination rating and with an acceptable level of risk, in which case the level is at least 3%); (3) undercapitalized associations are those that do not meet regulatory limits, but that are not significantly undercapitalized; (4) significantly undercapitalized associations have total risk-based capital of less than 6%, core risk-based capital (consisting only of items that qualify for inclusion in core capital) of less than 3% or core capital of less than 3%; and (5) critically undercapitalized associations are those with tangible equity of less than 2% of total assets. In addition, the OTS generally can downgrade an association's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the association is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. An undercapitalized association must submit a capital restoration plan to the OTS within 45 days after it becomes undercapitalized. Such an association will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Furthermore, critically undercapitalized institutions must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances. First Federal's capital at December 31, 1997, meets the standards for a well-capitalized institution. Federal law prohibits an insured institution from making a capital distribution to anyone or paying management fees to any person having control of the association if, after such distribution or payment, the association would be undercapitalized. In addition, each company controlling an undercapitalized association must guarantee that the association will comply with its capital plan until the association has been adequately capitalized on an average during each of four preceding calendar quarters and must provide adequate assurances of performance. The aggregate liability pursuant to such guarantee is limited to the lesser of (a) an amount equal to 5% of the association's total assets at the time the institution became undercapitalized or (b) the amount that is necessary to bring the association into compliance with all capital standards applicable to such association at the time the association fails to comply with its capital restoration plan. Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions, including dividend payments. An association which has converted to stock form is prohibited from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the net worth of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. OTS regulations also establish a three-tier system limiting capital distributions according to ratings of associations based on their capital level and supervisory condition. Tier 1 consists of associations that, before and after the proposed distribution, meet their fully phased-in capital requirements. Associations in this category may make capital distributions during any calendar year equal to the greater of 100% of net income, current year-to-date, plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or the amount authorized for a Tier 2 association. A Tier 1 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association. Tier 2 consists of associations that before and after the proposed distribution meet their current minimum, but not fully phased-in, capital requirements, as such requirements are defined by OTS regulations. Associations in this category may make capital distributions of up to 75% of net income over the four most recent quarters. Tier 3 associations do not meet current minimum capital requirements and must obtain OTS approval of any capital distribution. First Federal meets the requirements for a Tier 1 Association and has not been notified of any need for more than normal supervision. As a subsidiary of First Defiance, First Federal is required to give the OTS 30 days notice prior to declaring any dividend on its common shares. The OTS may object to the dividend during that 30-day period based on safety and soundness concerns. Moreover, the OTS may prohibit any capital distribution otherwise permitted by regulation if the OTS determines that such distribution would constitute an unsafe or unsound practice. First Federal paid no dividends to First Defiance during 1997. In January 1998, the OTS issued a proposal to amend the capital distribution limits. Under that proposal, an association owned by a holding company would still be required to provide either a notice or an application to the OTS, although under certain circumstances a savings association without a holding company having an examination rating of 1 or 2 could make a capital distribution without notice to the OTS, if it would remain adequately capitalized after the distribution is made. Liquidity. OTS regulations require that each savings association maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances and specified United States government, state or federal agency obligations) equal to a monthly average of not less than 4% of its net withdrawable savings deposits plus borrowings payable in one year or less. Monetary penalties may be imposed upon associations failing to meet liquidity requirements. The eligible liquidity of First Federal, as computed under current regulations, at December 31, 1997, was $72.7 million, or 15.3% and exceeded the 4.0% liquidity requirement by approximately $54.5 million. Qualified Thrift Lender Test. Savings associations are required to meet the Qualified Thrift Lender ("QTL") Test. Prior to September 30, 1996, the QTL Test required savings associations to maintain a specified level of investments in assets that are designated as qualifying thrift investments ("QTI"), which are generally related to domestic residential real estate and manufactured housing and include stock issued by any FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and 20% of liquid assets) must consist of QTI on a monthly average basis in 9 out of every 12 months. Congress created a second QTL Test, effective September 30, 1996, pursuant to which a savings association may also qualify as a QTL thrift if at least 60% of the institution's assets (on a tax basis) consist of specified assets (generally loans secured by residential real estate or deposits, educational loans, cash and certain governmental obligations). The OTS may grant exceptions to the QTL Test under certain circumstances. If a savings association fails to meet the QTL Test, the association and its holding company become subject to certain operating and regulatory restrictions. A savings association that fails to meet the QTL Test will not be eligible for new FHLB advances. At December 31, 1997, First Federal met the QTL Test. Lending Limit. OTS regulations generally limit the aggregate amount that a savings association may lend to one borrower (the "Lending Limit") to an amount equal to 15% of the savings association's total capital under the regulatory capital requirements plus any additional loan reserve not included in total capital (the "Lending Limit Capital"). A savings association may loan to one borrower an additional amount not to exceed 10% of total capital plus additional reserves if the additional loan amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." Certain types of loans are not subject to these limits. In applying these limits, loans to certain borrowers may be aggregated. Notwithstanding the specified limits, an association may lend to one borrower up to $500,000 "for any purpose." At December 31, 1997, First Federal was in compliance with this lending limit. Transactions with Insiders and Affiliates. Loans to executive officers, directors and principal shareholders and their related interests must conform to the Lending Limit, and the total of such loans cannot exceed the association's Lending Limit Capital. Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the "disinterested" members of board of directors of the association with any "interested" director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program. Loans to executive officers are subject to additional restrictions. First Federal was in compliance with such restrictions at December 31, 1997. All transactions between savings associations and their affiliates must comport with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An affiliate of a savings association is any company or entity that controls, is controlled by or is under common control with the savings association. First Defiance is an affiliate of First Federal. Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a savings association or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, (ii) limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (iii) require that all such transactions be on terms substantially the same, or at least as favorable to the association, as those provided in transactions with a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. In addition to the limits in Sections 23A and 23B, a savings association may not make any loan or other extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for a bank holding company and may not purchase or invest in securities of any affiliate except shares of a subsidiary. First Federal was in compliance with these requirements and restrictions at December 31, 1997. Federal Deposit Insurance Corporation Regulations. The FDIC is an independent federal agency that insures the deposits of federally insured banks and thrifts, up to prescribed statutory limits, and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF for savings associations. First Federal is a member of the SAIF and its deposit accounts are insured by the FDIC, up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including First Federal, and has authority to initiate enforcement actions against federally insured savings associations, if the FDIC does not believe the OTS has taken appropriate action to safeguard safety and soundness and the deposit insurance fund. The FDIC is required to maintain designated levels of reserves in each fund. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because of the differing reserve levels of the funds, deposit insurance assessments paid by healthy banks were reduced significantly below the level paid by healthy savings associations effective in mid-1995. Federal legislation, which was effective September 30, 1996, provided for the recapitalization of the SAIF by means of a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. First Federal paid a special assessment of $2.5 million, which was accounted for and recorded as of September 30, 1996. BIF assessments for healthy banks in 1997 were $.013 per $100 in deposits and SAIF assessments for healthy institutions in 1997 were $.064 per $100 in deposits. First Federal paid $194,000 in SAIF assessments in 1997 compared to $872,000 in 1996, exclusive of the special assessment. FRB Reserve Requirements. FRB regulations currently require that reserves of 3% of net transaction accounts (primarily NOW accounts) up to $47.8 million (subject to an exemption of up to $4.7 million), and of 10% of net transaction accounts in excess of $47.8 million. At December 31, 1997, First Federal was in compliance with its reserve requirements. Federal Home Loan Banks. The FHLBs provide credit to their members in the form of advances. First Federal is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of First Federal's residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. First Federal is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $3.8 million at December 31, 1997. Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the United States government or an agency thereof; deposits in any FHLB; or other real estate related collateral (up to 30% of the member association's capital) acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. Holding Company Regulation. First Defiance is a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act (the "HOLA"). As such, First Defiance is registered with the OTS and is subject to OTS regulations, examination, supervision and reporting requirements. There are generally no restrictions on the activities of unitary savings and loan holding companies and such companies are the only financial institution holding companies that may engage in commercial, securities and insurance activities without limitation. The broad latitude to engage in activities under current law can be restricted if the OTS determines that there is reasonable cause to believe that the continuation of an activity by a savings and loan holding company constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings association. The OTS may impose such restrictions as deemed necessary to address such risk, including limiting (i) payment of dividends by the savings association, (ii) transactions between the savings association and its affiliates, and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. Notwithstanding the foregoing rules as to permissible business activities of a unitary savings and loan holding company, if the savings association subsidiary of a holding company fails to meet the QTL Test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. At December 31, 1997, First Federal met the QTL Test. The HOLA generally prohibits a savings and loan holding company from controlling any other savings association or savings and loan holding company, without prior approval of the OTS, or from acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof, which is not a subsidiary. Under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the OTS, up to 15% of the previously unissued voting shares of an undercapitalized savings association for cash without such savings association being deemed to be controlled by the holding company. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. If First Defiance were to acquire control of another savings institution, other than through a merger or other business combination with First Federal, First Defiance would become a multiple savings and loan holding company. Unless the acquisition is an emergency thrift acquisition and each subsidiary savings association meets the QTL Test, the activities of First Defiance and any of its subsidiaries (other than First Federal or other subsidiary savings associations) would thereafter be subject to activity restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof that is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by federal regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the OTS prior to being engaged in by a multiple holding company. The OTS may approve acquisitions resulting in the formation of a multiple savings and loan holding company that controls savings associations in more than one state only if the multiple savings and loan holding company involved controls a savings association that operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). The OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code regulates certain takeover bids affecting certain public corporations with significant ties to Ohio. The statute prohibits, with some exceptions, any merger, combination or consolidation and any of certain other sales, leases, distributions, dividends, exchanges, mortgages or transfers between such an Ohio corporation and any person who has the right to exercise, alone or with others, 10% or more of the voting power of such corporation (an "Interested Shareholder"), for three years following the date on which such person first becomes an Interested Shareholder. Such a business combination is permitted only if, prior to the time such person first becomes an Interested Shareholder, the Board of Directors of the issuing corporation has approved the purchase of shares that resulted in such person first becoming an Interested Shareholder. After the initial three-year moratorium, such a business combination may not occur unless (1) an exception specifically enumerated in the statute is applicable to the combination, (2) the combination is approved, at a meeting held for such purpose, by the affirmative vote of the holders of the issuing public corporation entitling them to exercise at least two-thirds of the voting power of the issuing public corporation in the election of directors or of such different proportion as the articles may provide, provided the combination is also approved by the affirmative vote of the holders of at least a majority of the disinterested shares, or (3) the business combination meets certain statutory criteria designed to ensure that the issuing public corporation's remaining shareholders receive fair consideration for their shares. An Ohio corporation may, under certain circumstances, "opt out" of the statute by specifically providing in its articles of incorporation that the statute does not apply to any business combination of such corporation. However, the statute still prohibits for twelve months any business combination that would have been prohibited but for the adoption of such an opt-out amendment. The statute also provides that it will continue to apply to any business combination between a person who became an Interested Shareholder prior to the adoption of such an amendment as if the amendment had not been adopted. The Articles of Incorporation of First Defiance do not opt out of the protection afforded by Chapter 1704. Control Share Acquisition. Section 1701.831 of the Ohio Revised Code (the "Control Share Acquisition Statute") requires that, with certain exceptions, acquisitions of voting securities which would result in the acquiring shareholder owning 20%, 33 1/3%, or 50% of the outstanding voting securities of an Ohio corporation (a "Control Share Acquisition") must be approved in advance by (a) the holders of at least a majority of the outstanding voting shares of such corporation represented at a meeting at which a quorum is present, and (b) a majority of the portion of the outstanding voting shares represented at such a meeting excluding the voting shares owned by the acquiring shareholder, by certain other persons who acquire or transfer voting shares after public announcement of the acquisition or by certain officers of the corporation or directors of the corporation who are employees of the corporation. The Control Share Acquisition Statute was intended, in part, to protect shareholders of Ohio corporations from coercive tender offers. Takeover Bid Statute. Ohio law provides that an offeror may not make a tender offer or request or invitation for tenders that would result in the offeror beneficially owning more than ten percent of any class of the target company's equity securities unless such offeror files certain information with the Ohio Division of Securities (the "Securities Division") and provides such information to the target company and the offerees within Ohio. The Securities Division may suspend the continuation of the control bid if the Securities Division determines that the offeror's filed information does not provide full disclosure to the offerees of all material information concerning the control bid. The statute also provides that an offeror may not acquire any equity security of a target company within two years of the offeror's previous acquisition of any equity security of the same target company pursuant to a control bid unless the Ohio offerees may sell such security to the offeror on substantially the same terms as provided by the previous control bid. The statute does not apply to a transaction if either the offeror or the target company is a savings and loan holding company and the proposed transaction requires federal regulatory approval. TAXATION Federal Taxation The Company and First Federal are each subject to the federal tax laws and regulations which apply to corporations generally. Certain thrift institutions, including First Federal, were, however, prior to the enactment of the Small Business Jobs Protection Act, which was signed into law on August 21, 1996, allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualified thrift institutions could compute deductions for bad debts using either the specific charge off method of Section 166 of the Code, or the reserve method of Section 593 of the Code under which a thrift institution annually could elect to deduct bad debts under either (i) the "percentage of taxable income" method applicable only to thrift institutions, or (ii) the "experience" method that also was available to small banks. Under the "percentage of taxable income" method, a thrift institution generally was allowed a deduction for an addition to its bad debt reserve equal to 8% of its taxable income (determined without regard to this deduction and with additional adjustments). Under the experience method, a thrift institution was generally allowed a deduction for an addition to its bad debt reserve equal to the greater of (i) an amount based on its actual average experience for losses in the current and five preceding taxable years, or (ii) an amount necessary to restore the reserve to its balance as of the close of the base year. A thrift institution could elect annually to compute its allowable addition to bad debt reserves for qualifying loans either under the experience method or the percentage of taxable income method. For tax year 1995, First Federal used the percentage of taxable income method. Section 1616(a) of the Small Business Job Protection Act repealed the Section 593 reserve method of accounting for bad debts by thrift institutions, effective for taxable years beginning after 1995. Thrift institutions that would be treated as small banks are allowed to utilize the experience method applicable to such institutions, while thrift institutions that are treated as large banks are required to use only the specific charge off method. The percentage of taxable income method of accounting for bad debts is no longer available for any financial institution. A thrift institution required to change its method of computing reserves for bad debt will treat such change as a change in the method of accounting, initiated by the taxpayer, and having been made with the consent of the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code required to be recaptured with respect to such change generally will be determined solely with respect to the "applicable excess reserves" of the taxpayer. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to the residential loan requirement described below. In the case of a thrift institution that becomes a large bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans (generally loans secured by improved real estate) and its reserve for losses on nonqualifying loans (all other types of loans) as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (ie., the "pre-1988 reserves"). In the case of a thrift institution that becomes a small bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would have been at the close of its last year beginning before January 1, 1996, had the thrift always used the experience method. For taxable years that begin after December 31, 1995, and before January 1, 1998, if a thrift meets the residential loan requirement for a tax year, the recapture of the applicable excess reserves otherwise required to be taken into account as a Code Section 481(a) adjustment for the year will be suspended. A thrift meets the residential loan requirement if, for the tax year, the principal amount of residential loans made by the thrift during the year is not less than its base amount. The "base amount" generally is the average of the principal amounts of the residential loans made by the thrift during the six most recent tax years beginning before January 1, 1996. A residential loan is a loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by residential real and church property and certain mobile homes), but only to the extent that the loan is made to the owner of the property to acquire, construct, or improve the property. In addition to the regular income tax, the Company and First Federal are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum taxable income" (which is the sum of a corporation's regular taxable income, with certain adjustments, and tax preference items), less any available exemption. Such tax preference items include interest on certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the amount by which a corporation's "adjusted current earnings" exceeds its alternative minimum taxable income computed without regard to this preference item and prior to reduction by net operating losses, is included in alternative minimum taxable income. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax. Payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. In addition, for taxable years after 1986 and before 1996, the Company and First Federal are also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2.0 million. The balance of the pre-1988 reserves is subject to the provisions of Section 593(e) as modified by the Small Business Job Protection Act which requires recapture in the case of certain excessive distributions to shareholders. The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). Distribution of a cash dividend by a thrift institution to a shareholder is treated as made: first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper. To the extent a distribution by First Federal to the Company is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and First Federal's gross income for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves. As of December 31, 1997, First Federal's pre-1988 reserves for tax purposes totaled approximately $9.52 million. The tax returns of First Federal have been audited or closed without audit through the tax year ended December 31, 1993. In the opinion of management, any examination of open returns would not result in a deficiency which would have a material adverse effect on the financial condition of First Federal. Ohio Taxation The Company is subject to the Ohio corporation franchise tax, which, as applied to the Company, is a tax measured by both net earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times taxable net worth. In computing its tax under the net worth method, the Company may exclude 100% of its investment in the capital stock of First Federal after the Conversion, as reflected on the balance sheet of the Company, in computing its taxable net worth as long as it owns at least 25% of the issued and outstanding capital stock of First Federal. The calculation of the exclusion from net worth is based on the ratio of the excludable investment (net of any appreciation or goodwill included in such investment) to total assets multiplied by the net value of the stock. As a holding company, the Company may be entitled to various other deductions in computing taxable net worth that are not generally available to operating companies. A special litter tax is also applicable to all corporations, including the Company, subject to the Ohio corporation franchise tax other than "financial institutions." If the franchise tax is paid on the net income basis, the litter tax is equal to .11% of the first $50,00 of computed Ohio taxable income and .22% of computed Ohio taxable income in excess of $50,000. If the franchise tax is paid on the net worth basis, the litter tax is equal to .014% times taxable net worth. First Federal is a "financial institution" for State of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.5% of First Federal's book net worth determined in accordance with GAAP. As a "financial institution," First Federal is not subject to any tax based upon net income or net profits imposed by the State of Ohio. Item 2. Properties At December 31, 1997, First Federal conducted its business from its main office at 601 Clinton Street, Defiance, Ohio, and nine other full service branches in northwestern Ohio. First Defiance maintains its headquarters in the main office of First Federal at 601 Clinton Street, Defiance, Ohio. The following table sets forth certain information with respect to the office and other properties of the Company at December 31, l997. See Note 8 to the Consolidated Financial Statements.
Net book value Description/address Leased/owned of property Deposits - -------------------------------------------------------------------------------- (Dollars in thousands) Main Office Owned $ 6,204 $166,114 601 Clinton Street Defiance, OH Branch Offices 204 E. High Street Owned 1,240 77,566 Bryan, OH 211 S. Fulton Street Owned 877 36,085 Wauseon, OH 625 Scott Street Owned 1,778 62,760 Napoleon, OH 1050 East Main Street Owned 650 18,036 Montpelier, OH 926 East High Street Owned 126 7,265 Bryan, OH 1333 Woodlawn Owned 82 14,220 Napoleon, OH 825 N. Clinton Street Owned 412 8,870 Defiance, OH Inside Super K-Mart Leased 177 2,740 190 Stadium Dr. Defiance, OH 905 N. Williams St. Leased - 1,666 Paulding, OH ============================== $11,546 $395,322 ==============================
Item 3. Legal Proceedings First Defiance is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of First Defiance. Item 4. Submission of Matters to a Vote of Securities Holders No matters were submitted to a vote of securities holders during the fourth quarter of l997. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required herein is incorporated by reference from page 36 of First Defiance's Annual Report to Stockholders for fiscal 1997 ("Annual Report"), which is included herein as Exhibit 13. Item 6. Selected Financial Data The information required herein is incorporated by reference from pages 6 through 7 of the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required herein is incorporated by reference from pages 8 through 13 of the Annual Report. Item 8. Financial Statements and Supplementary Data The financial statements required herein are incorporated by reference from pages 15 through 36 of the Annual Report. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information required herein is incorporated by reference from page 7 through 11 of the definitive proxy statement dated March 23, 1998. Otherwise, the requirements of this Item 10 are not applicable. Item 11. Executive Compensation The information required herein is incorporated by reference from page 14 of the definitive proxy statement dated March 23, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required herein is incorporated by reference from page 3 of the definitive proxy statement dated March 23, 1998. Item 13. Certain Relationships and Related Transactions The information required herein is incorporated by reference from page 22 of the definitive proxy statement dated March 23, 1998. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements The following financial statements are incorporated herein by reference from pages 14 through 36 of the Annual Report: Report of Independent Auditors Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are included in the Notes to Financial Statements incorporated herein by reference and therefore have been omitted. (3) Exhibits The following exhibits are either filed as a part of this report or are incorporated herein by reference to documents previously filed as indicated below:
Exhibit Number Description Page - ------------------------------------------------------------------------------------------ 3.1 Articles of Incorporation * 3.2 Form of Code of Regulations * 3.2 Bylaws * 4.1 Specimen Stock Certificate * 10.1 1996 Stock Option Plan ** 10.2 1996 Management Recognition Plan and Trust *** 10.3 1993 Management Recognition Plan and Trust * 10.4 1993 Stock Incentive Plan * 10.5 1993 Directors' Stock Option Plan * 10.6 Employment Agreement with Don C. Van Brackel * 13 Annual Report to Shareholders and Notice of Annual Meeting of Shareholders and Proxy Statement E-1 21.1 List of Subsidiaries of the Company E-64 23.1 Consent of Independent Auditors E-66
* Incorporated herein by reference to the like numbered exhibit in the Registrant's Form S-1 (File No. 33-93354). ** Incorporated herein by reference to Appendix A to the 1996 Proxy Statement. *** Incorporated herein by reference to Appendix B to the 1996 Proxy Statement. (b) Reports on Form 8-K None (c) See (a)(3) above for all exhibits filed herewith or incorporated herein by reference to documents previously filed and the Exhibit Index. (d) There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders which are required to be included herein. SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST DEFIANCE FINANCIAL CORP. March 27, 1998 By: /s/ Don C. Van Brackel ---------------------- Don C. Van Brackel Chairman, President, CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1998. Signature Title --------- ----- /s/ Don C. Van Brackel Chairman of the Board, President - ---------------------- and CEO Don C. Van Brackel /s/ John C. Wahl Senior Vice President and CFO - ---------------- John C. Wahl /s/ Edwin S. Charles Director, Vice Chairman - -------------------- Edwin S. Charles /s/ Stephen L. Boomer Director - --------------------- Stephen L. Boomer /s/ Dr. Douglas A. Burgei Director - ------------------------- Dr. Douglas A. Burgei /s/ Dr. John U. Fauster, III Director - ---------------------------- Dr. John U. Fauster, III /s/ Dr. Marvin J. Ludwig Director - ------------------------ Dr. Marvin J. Ludwig /s/ Gerald W. Monnin Director - -------------------- Gerald W. Monnin /s/ Thomas A. Voigt Director - ------------------- Thomas A. Voigt /s/ James M. Zachrich Director - --------------------- James M. Zachrich EX-13 2 Exhibit 13 Annual Report to Shareholders and Notice of Annual Meeting of Shareholders and Proxy Statement A Foundation for Growth 1997 Annual Report First Defiance Financial Corp. Table of Contents Financial Highlights.......................1 Letter from the President................2-4 Financial Highlights....................2 Foundation for Growth...................3 Where do we go from here?...............4 Locations..................................5 Selected Consolidated Financial Information....................6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations...............8-13 Report of Independent Auditors............14 Audited Consolidated Financial Statements...................15-36 Consolidated Statements of Financial Condition.................15 Consolidated Statements of Income..............................16 Consolidated Statements of Changes in Stockholder's Equity........17 Consolidated Statements of Cash Flows.......................18-19 Notes to Consolidated Financial Statements................20-36 Stock Information.........................36 Executive Officers (pictured from left to right) Patricia A. Cooper [GRAPHIC-PHOTO OF EXECUTIVE Senior Vice President OFFICERS LISTED] William J. Small Senior Vice President and President, First Federal Savings and Loan Don C. Van Brackel Chairman, President and Chief Executive Officer John C. Wahl Senior Vice President, Chief Financial Officer and Corporate Treasurer John W. Boesling Senior Vice President and Corporate Secretary Jeffrey D. Vereecke Senior Vice President
First Defiance Financial Corp. Financial Highlights Years ended December 31 ($ in thousands, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------- At Period End: Assets $579,698 $543,411 $525,550 Loans, net 441,911 415,925 385,203 Deposits 395,322 382,525 381,779 Stockholders' equity 106,885 116,565 133,506 Book value per share 12.53 12.31 12.16 Stockholders' equity to total assets 18.44% 21.45% 25.40% Average Balances: Assets $560,709 $528,863 $489,628 Loans 428,550 399,949 367,773 Deposits 382,574 381,444 376,864 Stockholders' equity 115,231 127,280 89,873 Summary of Operating Results: Net interest income $22,471 $21,798 $18,276 Provision for loan losses 1,613 1,020 374 Non-interest income 1,627 1,327 1,035 Non-interest expense* 14,093 13,497 10,560 Net income* 5,407 5,775 5,521 Basic earnings per share* 0.65 0.60 0.54 Diluted earnings per share* 0.62 0.59 0.53 Return on average equity* 4.69% 4.54% 6.14% Return on average assets* 0.96% 1.09% 1.13%
* 1996 operating results exclude the effect of a one-time $2.461 million charge to recapitalize the Savings Association Insurance Fund Net of tax the charge was $1.624 million, or $.17 per share (both basic and diluted). Net income for 1996 including the charge was $4.151 million, basic and diluted EPS were $.43 and $.42, respectively, return on average equity was 3.26% and return on average assets was .78%. [GRAPHIC-PICUTRE OF COLUMNS] Dear Shareholder: Much was accomplished at First Defiance Financial Corp. during 1997: We achieved our highest level of earnings per share since becoming a public company in 1993. We completed major renovations at our four main office facilities. We enhanced our distribution channel by opening a new branch facility in Paulding, Ohio in September and followed that with the opening of a branch in Hicksville, Ohio in early 1998. We upgraded our computer systems to improve our efficiency and customer service efforts. We made some key additions to our management team to allow us to more effectively implement our strategic plan. We grew our commercial and consumer loan portfolios substantially without adversely affecting asset quality. From an earnings per share standpoint, 1997 was a record year. Our basic earnings per share for 1997 was $.65 per share, an increase from the 1996 level of $.60 per share, after adding back the one-time SAIF charge. The increase in earnings per share was achieved despite a decrease in net income in 1997 compared to 1996 (after adding back the SAIF assessment) because of a 1.2 million reduction in the average shares outstanding. The reduction in outstanding shares is the result of five successful stock repurchase programs completed between May 1996 and November 1997. We have recently completed our sixth stock repurchase during the first quarter of 1998. Our net income for 1997 was $5.4 million, compared to $5.8 million in 1996 (after adding back the SAIF assessment). Net interest income for the year increased by over $600,000, but our provision for loan losses increased by essentially the same amount. Our non-interest income increased by $300,000 but our non-interest expense increased by $600,000, primarily to pay for improvements to our facilities and computer systems as well as personnel costs of new branches and central operations additions. In highlighting these accomplishments, I need to stress that we are in no way satisfied with our financial performance in 1997. For the year ended December 31, 1997, our return on average equity was 4.69%, compared to 4.54% in 1996 when you exclude the effect of the SAIF assessment. Return on average assets was .96% for 1997 compared to 1.09% in 1996. We realize that it is management's job to improve shareholder value and that shareholder value is best improved by higher levels of profitability and return on equity. [GRAPHIC-COLUMNS DEPICTING EARNING PER SHARE] However, in order to achieve our long-range strategic goals, certain improvements needed to be made to our infrastructure. Those changes included improvements to our physical plants, upgrades to our computer systems, expansion of our product offerings and distribution channels, and upgrading the capability of our central office staff to support growth. Many of these very positive changes had a negative impact on earnings in 1997. 2 A Foundation for Growth We believe the improvements we made to our facilities and to our systems during 1997 will allow us to better compete in the rapidly consolidating financial services industry. The renovations of our offices in Defiance, Napoleon, Bryan and Wauseon actually began in late 1995 and were completed during the first quarter of 1997. These facilities were originally designed for traditional savings and loan associations. We had space for loan officers who processed only mortgage loans and for tellers who opened only passbook savings accounts and certificates of deposits. Over the years, space became a premium as we added many services, including a variety of non-mortgage loan products, as well as individual retirement accounts and checking accounts. Our renovated facilities allow us to serve our customers in a setting that strengthens quality customer service. [GRAPHIC-PHOTO OF BANK CUSTOMERS AT COUNTER] As outdated as our offices were, on a relative basis, our data processing platform was even more outdated. We spent considerable time and money during 1997 upgrading our PC networks, our communications links, our reporting systems, and our tellering platform. These efforts should allow for both more efficient processing of transactions, and for the production of better management reports. We are continuing to improve our systems and in the spring of 1998 we will implement check imaging for our 12,000 checking accounts. We also are working closely with our third party data processors to assure that all systems are Year 2000 compliant. We understand that to achieve our strategic growth initiatives, we will need to grow both by increasing our market share in those areas we now serve and by expanding into new areas. We are very excited about the prospects in the two new markets we have recently entered with de novo branches, Paulding and Hicksville, Ohio. Both of these communities are adjacent to markets we already serve but provide us with an opportunity to cost effectively expand our customer base to the south and to the west. The Paulding office opened in September and has significantly exceeded our expectations for both deposit and loan growth through its first three months of operations. The Hicksville office opened on February 6, 1998 and has experienced a brisk traffic flow during its short life thus far. In both of these locations, we hired managers and staff who are from those communities and who have been able to make a maximum impact in a short period of time. [GRAPHIC-PHOTO OF BANK CUSTOMER AND SERVICE PERSON] 3 Also in 1997 we increased our support staff in our central operations departments. We hired a full-time marketing manager and restructured our loan departments to support growth in commercial and consumer lending. While these efforts cost us earnings in 1997, we are confident they will pay off in the future. [GRAPHIC-PHOTO] Where do we go from here? While we are proud of our heritage as a savings and loan, in reality, our operations do not resemble those of a traditional thrift institution. I believe that during 1998, we'll continue to shed our thrift identity and implement the initiatives that will make us a more competitive provider of a wide array of financial services. From a strategic standpoint, we need growth, especially in the commercial and consumer lending areas. And, we have all the products in place to compete in those areas - our suite of commercial business products is as good as any in the market. In the consumer arena, we have been very successful in making car loans through a network of auto dealers in northwest Ohio. We hope to expand to other areas of consumer credit in 1998. Finally, we will continue to be a dominant mortgage lender in the markets we serve, not only with our traditional first mortgage products, but with some very successful home equity loan programs as well. [GRAPHIC-PHOTO] We also will continue to focus our attention on sound capital management. If it remains prudent, and if our regulators allow, we will continue to repurchase our own stock. We also will continue to actively pursue opportunities to better leverage our balance sheet. We believe we have put the foundation for growth in place to successfully meet the challenges in 1998 and beyond. I would like to thank our employees for their hard work and dedication to First Defiance, our thousands of customers for their continued loyalty, and you our shareholders for your patience and your continued interest in First Defiance Financial Corp. Yours truly, /S/Don C. Van Brackel - --------------------- Don C. Van Brackel Chairman, President and CEO 4 Office Locations - -------------------------------------------------------------------------------- First Defiance Financial Corp. Headquarters 601 Clinton St. Defiance, OH 43512 www.fdef.com 419-782-5015 [GRAPHIC-MAPS OF OHIO SHOWING LOCATIONS] Bryan Downtown 204 East High Street Bryan, Ohio 43506 419-636-3118 Bryan East 926 East High Street Bryan, Ohio 43506 419-636-5653 Defiance Downtown 601 Clinton Street Defiance, OH 43512 419-782-5015 Defiance North 825 North Clinton Street Defiance, OH 43512 419-782-6626 Defiance Super K-Mart 190 Stadium Drive Defiance, OH 43512 419-782-5252 Hicksville 201 East High Street Hicksville, OH 43526 419-542-5626 Montpelier 1050 East Main Street Montpelier, OH 43543 419-485-5591 Napoleon Downtown 625 Scott Street Napoleon, OH 43545 419-592-3060 Napoleon Woodlawn 1333 Woodlawn Avenue Napoleon, OH 43545 419-599-2727 Paulding 905 North Williams Street Paulding, OH 45879 419-399-9748 Wauseon 211 South Fulton Street Wauseon, OH 43567 419-335-7911 www.first-fed.com 5
First Defiance Financial Corp. and Subsidiary Selected Consolidated Financial Information ($ in thousands, except per share data) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Selected Consolidated Financial Condition Data: At December 31 - --------------------------------------------------------------------------------------------------------------------------- Total assets $579,698 $543,411 $525,550 $471,461 $467,400 Loans receivable held-to-maturity 441,824 415,366 381,444 354,937 333,664 Loans receivable held-for-sale 88 559 3,759 - - Allowance for loan losses 2,686 2,217 1,817 1,733 1,662 Non-performing assets 1,906 2,239 945 865 1,015 Securities available-for-sale 82,436 77,407 93,041 65,604 77,069 Securities held-to-maturity 20,953 25,937 26,073 30,632 39,351 Deposits 395,322 382,525 381,779 375,690 376,281 FHLB advances 71,665 40,821 6,842 23,741 21,509 Stockholders' equity 106,885 116,565 133,506 68,396 65,681 - --------------------------------------------------------------------------------------------------------------------------- Selected Consolidated Operating Results: Years ended December 31 - --------------------------------------------------------------------------------------------------------------------------- Total interest income $ 43,858 $ 41,257 $ 38,565 $ 35,260 $ 36,461 Total interest expense 21,387 19,459 20,289 16,928 18,413 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 22,471 21,798 18,276 18,332 18,048 Provision for loan losses 1,613 1,020 374 465 975 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 20,858 20,778 17,902 17,867 17,073 Non-interest income 1,627 1,327 1,035 1,001 1,043 Non-interest expense 1 14,093 15,957 10,560 9,930 8,631 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 8,392 6,148 8,377 8,938 9,485 Income taxes 2,985 1,997 2,856 2,985 3,052 - --------------------------------------------------------------------------------------------------------------------------- Net income 1 $ 5,407 $ 4,151 $ 5,521 $ 5,953 $ 6,433 - --------------------------------------------------------------------------------------------------------------------------- Basic earnings per share 1,2 $ 0.65 $ 0.43 $ 0.54 $ 0.58 $ 0.31 - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share 1,2 $ 0.62 $ 0.43 $ 0.53 $ 0.58 $ 0.31 - --------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share 2 $ 0.33 $ 0.29 $ 0.28 $ 0.28 $ 0.13 - ---------------------------------------------------------------------------------------------------------------------------
[GRAPHIC-COLUMNS SHOWING NET INTEREST INCOME] [GRAPHIC-PIE CHARTS DEPICTING ASSETS BY CATEGORIES] 6
1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios and Other Data: - --------------------------------------------------------------------------------------------------------------------------- Performance Ratios: Return on average assets 1 0.96% 0.78% 1.13% 1.28% 1.40% Return on average equity 1 4.69% 3.26% 6.14% 8.87% 12.30% Interest rate spread 3 3.39% 3.22% 3.01% 3.50% 3.59% Net interest margin 3 4.24% 4.31% 3.87% 4.06% 4.06% Ratio of operating expense to average total assets 1 2.51% 3.02% 2.16% 2.13% 1.88% Dividend payout ratio 4 50.77% 67.44% 51.85% 48.28% 41.94% Quality Ratios: Non-performing assets to total assets at end of period 5 0.33% 0.41% 0.24% 0.28% 0.25% Allowance for loan losses to non-performing assets 5 140.92% 99.02% 192.28% 200.35% 163.74% Provision for loan losses to total loans receivable 0.60% 0.52% 0.47% 0.48% 0.49% Capital Ratios: Equity to total assets at end of period 18.44% 21.45% 25.40% 14.51% 14.05% Average equity to average assets 20.55% 24.07% 18.36% 14.40% 11.41% Book value per share $ 12.53 $12.31 $12.16 $6.23 $5.99 Ratio of average interest-earning assets to average interest-bearing liabilities 121% 129% 120% 115% 111%
1 Non-interest expense for 1996 includes a one-time charge of $2.461 million to recapitalize the Savings Association Insurance Fund (SAIF). Without the SAIF charge, net income for 1996 would have been $5.775 million, or $.60 basic earnings share ($.59 on a diluted basis), return on average assets would have been 1.09%, return on equity would have been 4.54% and the ratio of operating expense to average total assets would have been 2.55%. 2 Per share amounts for 1993-1994 have been restated to reflect the reorganization described in Note 1 to the Consolidated Financial Statements. Earnings per share for 1993 are based on the weighted average number of shares outstanding (as adjusted) and net income from July 19, 1993, the date of the Mutual Holding Company Reorganization, through December 31, 1993. See Note 1 to the Consolidated Financial Statements. Earnings per share for 1993-1996 have been restated for FASB Statement 128 as described in Note 3 to the Consolidated Financial Statements. 3 Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets. 4 Dividend payout ratio was calculated using basic earnings per share. 5 Non-performing assets consist of non-accrual loans that are contractually past due 90 days or more, loans that are deemed impaired under the criteria of FASB Statement No. 114, and real estate, mobile homes and other assets acquired by foreclosure or deed-in-lieu thereof. [GRAPHIC-COLUMNS SHOWING EQUITY TO TOTAL ASSETS] {GRAPHIC-COLUMNS SHOWING NON-PERFORMING ASSETS TO TOTAL ASSETS] 7 Management's Discussion and Analysis Management's Discussion and Analysis of Financial Condition and Results of Operations First Defiance Financial Corp. ("First Defiance" or "the Company"), through its wholly owned subsidiary First Federal Savings and Loan ("First Federal") provides financial services to communities based in the northwest corner of Ohio. First Federal operates 11 full-service branches, including branches in Paulding, Ohio and Hicksville, Ohio which opened in September, 1997 and February, 1998 respectively. Forward Looking Statements The statements in this Annual Report which are not historical fact are forward looking statements. Forward-looking information should not be construed as guarantees of future performance. Actual results may differ from expectations contained in such forward looking information as a result of factors including but not limited to the interest rate environment, economic policy or conditions, federal and state banking and tax regulations and competitive factors in the marketplace. Each of these factors could affect estimates, assumptions, uncertainties and risks considered in the development of forward looking information and could cause actual results to differ materially from management's expectations regarding future performance. Financial Condition First Defiance increased average interest earning assets by $24.6 million in 1997 from 1996. This growth was achieved through a $28.6 million, or 7.1%, increase in the average loan portfolio for the year ended December 31, 1997 compared to 1996. The growth in the loan portfolio was funded primarily through increases in Federal Home Loan Bank (FHLB) advances, whose average balance increased by $42.3 million, and through maturities of investments held in the investment securities portfolio. The average outstanding balance in the investment portfolio decreased by $4.4 million for the year ended December 31, 1997 compared to the year ended December 31, 1996. However, without the implementation of several leveraged growth strategies implemented during 1997, the average balance in the investment portfolio would have been an additional $28.9 million lower. FHLB advances were utilized to fund the leverage growth strategies and also to fund $14.5 million in purchases of treasury stock during 1997. The average balance of deposits outstanding for 1997 was $382.6 million, only a slight increase from the $381.4 million average balance outstanding for 1996. First Defiance also had a substantial increase in its properties and equipment during 1997 as the balance in those accounts increased from $12.3 million at December 31, 1996 to $16.8 million at December 31, 1997. The increase is due to the completion of renovations to the Company's facilities in Wauseon, Napoleon, Bryan and at the headquarters in Defiance during the first half of 1997. The total cost of those renovations capitalized during 1997 was $10.6 million, including $7.6 million that was in construction in process at December 31, 1996. Premises and equipment also includes $1.2 million in construction in process at the end of 1997, of which approximately $1 million is for the permanent branch facility in Paulding, Ohio, which is scheduled to be completed in April, 1998 and the new branch in Hicksville, Ohio which opened in February, 1998. The branch renovations increased occupancy costs by approximately $366,000 in 1997 compared to 1996. It is estimated that occupancy costs will increase by approximately $450,000 in 1998. Asset/Liability Management First Defiance's ability to maximize net income is largely dependent upon management's ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Due to the fact that the majority of assets and liabilities of a financial institution are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and have potentially the greatest impact on the net income of the Company. First Defiance does not use off balance sheet derivatives to enhance its risk management, nor does it engage in any trading activities. First Defiance monitors interest rate risk on a monthly basis through simulation analysis which measures the impact changes in interest rates can have on net interest income. The simulation technique analyzes 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 100 basis points over a 12 month period, using 1998 projected amounts as a base case, First Defiance's net interest income would decline by 3.0%. Were interest rates to fall by 100 basis points during that same 12 month period, the simulation indicates that net interest income would increase by 3.4% over the projected 1998 base case. 8 The following table shows First Defiance's cumulative gap over the next two years. The interest rate gaps reported in the table result when assets are funded with liabilities having different repricing intervals. The traditional gap approach shows the Company to be liability sensitive to rate changes at December 31, 1997. During 1997, net interest income increased by $880,000 as a result of changing interest rates. The interest rate gaps are managed and frequently change as adjustments are made to interest rate forecasts, market outlooks, and balance sheet cash flows. First Defiance's gap position at the end of any period may not be reflective of interest rate views in subsequent periods, and the Company's active management dictates that longer-term economic views are balanced against short-term interest rate changes.
Interest Rate Sensitivity Analysis December 31,1997 Over Over Over (Dollars in thousands) Less than 3 through 6 6 Months 1 through 2 Over 3 Months Months through 1 Year Years 2 Years Total - -------------------------------------------------------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------------------------------------------------------- Loans, gross $ 60,938 $ 32,448 $ 77,542 $ 38,119 $ 235,463 $ 444,510 Securities 2,800 2,784 5,282 43,476 49,047 103,389 FHLB Stock 3,764 3,764 - -------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive assets 63,738 35,232 82,824 81,595 288,274 551,663 Other assets 28,035 28,035 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $ 63,738 $ 35,232 $ 82,824 $ 81,595 $ 316,309 $ 579,698 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities - -------------------------------------------------------------------------------------------------------------------------------- Savings, NOW accounts, checking and money market deposit accounts 70,046 46,698 116,744 Certificates of deposit 59,778 47,236 76,733 78,495 16,336 278,578 FHLB advances 67,305 172 353 746 3,089 71,665 - -------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive liabilities 197,129 47,408 77,086 79,241 66,123 466,987 Other liabilities 5,826 5,826 Stockholders' equity 106,885 106,885 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilites and stockholders' equity $ 197,129 $ 47,408 $ 77,086 $ 79,241 $ 178,834 $ 579,698 - -------------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $(133,391) $ (12,176) $ 5,738 $ 2,354 $ 222,151 $ 84,676 - -------------------------------------------------------------------------------------------------------------------------------- Cumulative interest rate sensitivity gap $(133,391) $(145,567) $(139,829) $ (137,475) $ 84,676 - -------------------------------------------------------------------------------------------------------------------------------- Percentage of cumulative gap to total rate sensitive assets (24.18)% (26.39)% (25.35)% (24.92)% 15.35% - --------------------------------------------------------------------------------------------------------------------------------
In addition to the simulation analysis and the interest rate gap table, First Defiance also utilizes the "market value of portfolio equity" ("NPV") methodology adopted by the OTS. Under the NPV methodology, interest rate risk exposure ("IRR") is assessed by reviewing the estimated changes in First Federal's Net Interest Income ("NII") and NPV which would hypothetically occur if interest rates simultaneously rise or fall along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. For 1997, the results of such projections were within limits set by the Company's board of directors. First Defiance's lending strategy is designed to increase the rate sensitivity of its loan portfolio. The focus of growth in First Defiance's loan portfolio is in the consumer and commercial areas, which by their nature have less exposure to interest rate fluctuations. The balances of First Defiance's auto loans increased from $62.1 million at December 31, 1996 to $69.1 million at December 31, 1997 and commercial loans increased from $26.7 million to $30.0 million during that same time period. First Defiance also has increased the outstanding balance on its home equity lines of credit, which are granted at up to 100% of collateral value at competitive rates. The total outstanding home equity loans at December 31, 1997 were $16.9 million compared to $13.6 million at December 31, 1996. 9 First Defiance originates a substantial amount of fixed and adjustable rate mortgage loans. Loans originated with a maturity of 20 years or more are generally sold in the secondary market while loans originated with a maturity less than 20 years are generally retained in the portfolio. A total of $8.2 million in loans were sold during 1997 and at December 31, 1997, First Defiance serviced a total of $17.8 million in loans for others, compared to $11.3 million at December 31, 1996. Management utilizes the investment portfolio to help enhance overall net interest margin and to maintain liquidity. At December 31, 1997, First Defiance's available for sale investment portfolio was comprised of U.S. Treasury and Agency securities ($58.9 million fair value), corporate bonds ($10.1 million fair value), mutual funds which invest primarily in adjustable rate mortgage backed securities ($8.8 million fair value), REMICs and CMOs ($4.1 million fair value) and municipal obligations ($550,000 fair value). The Company also has certain securities, primarily mortgage-backed securities and municipal obligations, which havebeen classified as held-to-maturity. The total carrying amount of those securities is $21.0 million at December 31, 1997. First Defiance's sources of funding include deposits received through its branch network, loan repayments, investment security maturities and repayments, national/brokered certificates of deposit obtained through brokers or directly from other institutions, and advances from the FHLB. Deposits are priced according to management's asset/liability objectives, alternate funding sources and competition. Based on an assessment of the current interest rate environment, management has focused its efforts on competitively pricing primarily shorter-term deposits. As a result, 67.5% of First Defiance's $278.6 million in certificates of deposit at December 31, 1997 will mature during 1998. The asset/liability committee regularly assesses which source of funding is the most appropriate given pending needs. During 1997, First Defiance expanded both the uses of national/brokered certificates of deposit and FHLB advances. The Company had no national or brokered certificates of deposit at December 31, 1996 and had a total of $7.1 million at December 31, 1997. The company issues brokered or national certificates if the rates are appropriate in relation to other sources of funding. FHLB advances increased to $71.7 million at December 31, 1997 from $40.8 million at December 31, 1996. In addition to being a source of funding for the lending operations of First Defiance, FHLB advances are used specifically for leveraged growth strategies and to fund the repurchase of shares of Company stock as part of First Defiance's capital management. Concentration of Credit Risk Financial institutions such as First Defiance generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility of loss is known as credit risk. Credit risk is increased by lending or investing in activities that concentrate a financial institution's assets in a way that exposes the institution to a material loss from any single occurrence or group of related occurrences. Diversifying loans and investments to prevent concentrations of risks is one manner a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include geographic concentrations, loans or investments of a single type, loans or investments in a single industry, multiple loans made to a single borrower, and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its credit risk at acceptable levels. 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 Treasury, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings institution 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. First Federal's liquidity substantially exceeded applicable requirements throughout 1997 and at December 31, 1997. Cash was generated by First Defiance's operating activities during the years ended December 31, 1997, 1996 and 1995, primarily as a result of net income. The adjustments to reconcile net income to cash provided by operations during the periods presented consisted primarily of proceeds from the sale of loans (less the origination of loans held for sale), the provision for loan losses, depreciation and amortization expense, ESOP expense related to the release of ESOP shares in accordance with AICPA SOP 93-6 and increases and decreases in other assets and liabilities. The primary investing activity of First Defiance is lending, which is funded with cash provided from operations and financing activities, as well as proceeds from payments on existing loans and proceeds from maturities of securities and, in 1995, from proceeds from a public stock offering. For additional information about cash flows from First Defiance's operating, investing and financing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements. 10 At December 31, 1997, First Defiance had an aggregate of $37.2 million in unfunded commitments to originate loans (including unused portions of lines of credit and letters of credit) and no commitments to purchase securities. At the same date, the total amount of certificates of deposit that are scheduled to mature by December 31, 1998 was $188.2 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, national/brokered certificates of deposit and advances from FHLB are available. Stockholders' equity decreased by $9.7 million, or 8.3%, at December 31, 1997 compared to December 31, 1996 due to the repurchase of 966,519 shares of First Defiance stock (10.2% of shares outstanding at the beginning of the year). Those shares were repurchased for an average cost of $15.05 per share and as a result, stockholders' equity was reduced by $14.5 million. First Defiance made similar purchases of 1,518,688 shares of common stock during 1996. The equity reduction caused by the repurchase of First Defiance shares was offset to a lesser degree by earnings retention, the vesting or issuance of shares under the Company's Management Recognition ("MRP") and Employee Stock Ownership ("ESOP") plans, unrealized securities gains, and the issuance of stock under stock option programs. Net income for 1997 was $5.4 million, of which $2.8 million was returned to shareholders in the form of declared dividends (51.7% of net income, $.33 per share). The vesting of MRP shares and release of ESOP shares increased equity by $898,000 and $847,000 respectively. Unrealized gains on available for sale securities, net of tax, increased equity by $347,000. Stock option exercises increased equity by approximately $161,000. The book value of First Defiance's common stock increased to $12.53 at December 31, 1997 from $12.31 at December 31, 1996. First Federal is subject to the various capital requirements of the Office of Thrift Supervision. At December 31, 1997, First Federal's capital ratios well exceeded the minimum regulatory requirements. For additional information about First Federal's capital requirements, see Note 13 to the Consolidated Financial Statements. Results of Operations General - First Defiance reported net income of $5.4 million for the year ended December 31, 1997 compared to $4.2 million and $5.5 million respectively for the years ended December 31, 1996 and December 31, 1995 respectively. The 1996 net income was adversely impacted by a one-time assessment of $2.5 million to recapitalize the Savings Association Insurance Fund ("SAIF"). The after-tax impact of the SAIF charge was a reduction in net income in 1996 by $1.6 million. Without the SAIF charge, First Defiance's net income for 1996 would have been $5.8 million. On a diluted per share basis, First Defiance's net income was $.62, $.42 and $.53 respectively for the years ended December 31, 1997, 1996 and 1995 ($.59 for 1996 after adding back the SAIF assessment). Earnings per share increased in 1997 despite the reduction in net income because of a 1.1 million reduction in the number of average shares outstanding. The reduction in average shares outstanding is the result of the repurchase of almost 2.5 million shares in six separate stock buy-backs conducted between May, 1996 and December, 1997. Net interest income after the provision for loan losses was $20.9 million for the year ended December 31, 1997, compared to $20.8 million and $17.9 million for the years ended December 31, 1996 and 1995 respectively. Net interest margin was 4.24%, 4.31% and 3.87% for the years ending December 31, 1997, 1996 and 1995 respectively. The yield on interest earning assets was 8.24% for 1997, a slight increase from 8.12% for the year ended December 31, 1996 and 8.13% for 1995. The Company's cost of funds for the year ended December 31, 1997 was 4.85% compared to 4.90% for the year ended December 31, 1996 and 5.12% for the year ended December 31, 1995. As a result, the interest rate spread increased to 3.39% for the year ended December 31, 1997 compared to 3.22% for 1996 and 3.01% for 1995. Non-interest income for the year ended December 31, 1997 was $1.6 million, a 22.6% increase from the $1.3 million level for the year ended December 31, 1996. The 1996 amount was a 28.2% increase from the 1995 level of $1.0 million. Non-interest expense for the year ended December 31, 1997 was $14.1 million compared to $16.0 million for the year ended December 31, 1996. However, the 1996 amount includes the $2.5 million SAIF assessment. Without the SAIF assessment, non-interest expense for 1996 would have been $13.5 million. Non-interest expense for the year ended December 31, 1995 was $10.6 million. Net Interest Income - First Defiance's net interest income is determined by its interest rate spread (i.e., the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Total interest income increased by $2.6 million, or 6.3%, from $41.3 million for the year ended December 31, 1996 to $43.9 million for the year ended December 31, 1997. The increase was due to a $28.6 million increase in the average balance of loans outstanding for 1997 when compared to 1996. The yield on those loans increased 11 slightly, to 8.70% in 1997 from 8.66% in 1996. The 1996 interest income was an increase of $2.7 million, or 7.0%, from 1995. Total interest income for the year ended December 31, 1995 was $38.6 million. That increase was due to a $32.2 million increase in the average balance of loans outstanding in 1996 compared to 1995. The yield on loans for 1995 was 8.70%. Earnings from the investment portfolio have been constant at $6.6 million for each of the years ending December 31, 1997, 1996 and 1995. For 1997, the yield on the investment portfolio increased approximately 20 basis points, to 6.35% from 6.15% for 1996 and 6.18% for 1995. However, the average balance of the portfolio declined to $103.3 million for the year ended December 31, 1997 from $107.7 million for 1996 and $106.1 million for 1995. Interest expense in 1997 increased to $21.4 million from $19.5 million for the year ended December 31, 1996. The increase was due to an increase in interest expense on FHLB advances, which was $3.4 million for the year ended December 31, 1997 compared to $880,000 for the same period in 1996. This increase was due to a significant increase in the average balance of FHLB advances outstanding during the year ended December 31, 1997 compared to 1996. Average FHLB advances during 1997 were $58.1 million, compared to $15.9 million in 1996. The average cost of those advances also increased to 5.84% for the year ended December 31, 1997 compared to 5.56% for the year ended December 31, 1996. The cost of deposit liabilities actually decreased to $18.0 million for the year ended December 31, 1997 compared to $18.6 million for the same period in 1996. The decline in deposit cost was due to a 17 basis point decrease in the average cost of those funds as the average balance of deposits outstanding was essentially flat when comparing 1997 to 1996. Interest expense for the year ended December 31, 1996 compared to the year ended December 31, 1995 declined by $830,000. The decrease was due primarily to a decline in the average outstanding balance of FHLB advances, which were $19.0 million for 1995, as well a 13 basis point decline in the average rate paid on deposits in 1996 compared to 1995. Also, interest expense in 1995 included an interest penalty of approximately $125,000 incurred to pay off a high rate fixed-rate advance in December 1995. As a result of the foregoing, First Defiance's net interest income was $22.5 million for the year ended December 31, 1997 compared to $21.8 million for the year ended December 31, 1996 and $18.3 million for the year ended December 31, 1995. Provision for Loan Losses - First Defiance's provision for loan losses was $1.6 million for the year ended December 31, 1997 compared to $1.0 million and $374,000 for 1996 and 1995, respectively. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level that is deemed appropriate by management. Factors considered by management include historical experience, the volume and type of lending conducted by First Defiance, industry standards, the amount of non-performing assets, including loans which meet the "FASB" Statement No. 114's definition of impaired, general economic conditions, particularly as they relate to First Defiance's market area, and other factors related to the collectability of First Defiance's loan portfolio. The increase in the provision for loan losses, both from 1995 to 1996 and from 1996 to 1997, can be attributed to the overall growth of the loan portfolio and the continued emphasis on higher-yielding consumer and commercial lending, which have inherently greater credit risk than mortgage lending. Also, the level of charge-offs has increased substantially, especially during 1997. Total charge-offs, net of recoveries were $1.1 million for the year ending December 31, 1997 compared to $620,000 in 1996 and $293,000 in 1995. At December 31, 1997, non-performing assets, which include loans 90 days past due and repossessed assets, were $1.9 million. That amount includes one loan ($537,000) considered impaired as defined by FASB Statement No. 114. The total allowance for loan losses at December 31, 1997 was $2.7 million. At December 31, 1996, $1.6 million in loans were considered impaired and other non-performing assets totaled an additional $678,000. The loan loss reserve at December 31, 1996 was $2.2 million. Non-interest Income - First Defiance's non-interest income was $1.6 million for the year ended December 31, 1997, compared to $1.3 million for 1996 and $1.0 million for 1995. Service fees and other charges increased by $211,000 or 25.6% in 1997 compared to 1996. NSF income, late fees on loans, income from the sale of credit life insurance products and ATM surcharge fees all contributed to those increases. The Company had similar increases from 1995 to 1996, when service fee income increased by $153,000 primarily due to increases in NSF charges. Non-interest income also includes gains on sales of mortgage loans and service fees related to the servicing of those loans. For 1997, those amounts totaled $183,000 compared to $221,000 for 1996 and $2,000 for 1995. First Defiance did not become a Freddie Mac seller/servicer until December 1995. Non-interest income also includes $103,000 of gains from the disposal of available-for-sale securities for 1997 compared to $26,000 of similar gains in 1996 and $75,000 in losses in 1995. Also, non-interest income for 1995 included a gain on disposal of investment properties of $110,000. Non-interest Expense - Total non-interest expense for 1997 was $14.1 million compared to $16.0 million for the year ended December 31, 1996 ($13.5 million excluding the SAIF assessment) and $10.6 million for the year ended December 31, 1995. The increase from 1996 to 1997 was due primarily to a $1.0 million increase in compensation and benefits expense and a $596,000 increase in occupancy costs. Compensation expense increased by $288,000 because of an increase in the value of shares released by the Company's ESOP plan for allocation to participants. Compensation costs also increased by approximately $518,000 due to increased compensation costs related to increases in staffing, both at the Company headquarters and at the branches. During 1997, First Defiance hired a full-time marketing director and realigned duties in the lending area in order to improve customer service. Also, staffing for the Paulding branch, which opened in September 1997 12 was hired beginning in June 1997 in order to prepare for the opening of that facility and the staffing for the Hicksville Branch, which opened in February 1998 was hired and trained beginning in October 1997. Total full-time equivalent employees at December 31, 1997 was 155 compared to 138 at December 31, 1996. Occupancy costs increased in 1997 compared to 1996 because of the completion of major renovations at the Defiance headquarters and at large branches in Bryan, Napoleon and Wauseon. The total increase in depreciation expense as a result of those renovations was $366,000. Also, in addition to the building renovations, First Defiance made substantial improvements to its computer hardware, network equipment and communications links during 1997. The total of those technology expenditures was $699,000 and the increased depreciation expense resulting from those improvements was $95,000. The increases in compensation and occupancy costs in 1997 were offset by substantial decreases in SAIF deposit insurance premiums and Ohio franchise taxes. SAIF premiums, excluding the special 1996 SAIF assessment, decreased to $194,000 for 1997 compared to $872,000 in 1996. The decrease in premiums resulted from the reduction in the annual assessment from approximately 23 basis points per $100 of insured deposits to 6.4 basis points per $100 of insured deposits. Ohio franchise tax for 1997 was $1.1 million compared to $1.7 million for the year ended December 31, 1996. The reduction in state franchise taxes were the result of a tax planning strategy which decreased franchise taxes for both First Federal and the holding company but increased Ohio income taxes at the holding company level. The increase in non-interest expense from 1995 to 1996 was primarily due to a $1.6 million increase in compensation and benefits, a $695,000 increase in Ohio franchise taxes, a $123,000 increase in data processing costs, and a $462,000 increase in non-interest expense - other. The increase in compensation costs was due to an increase in salaries and wages of $665,000, a 21% increase from 1995. This increase was due to the expansion of staffing, both at headquarters and in the branches, inflationary wage increases and merit increases. Compensation costs also increased by $577,000 in 1996 over 1995 due to the amortization of the additional shares acquired by the Management Recognition Plan in 1996 and by $161,000 due to increases in ESOP expense because of increases in the price of First Defiance's common stock. Also, expense for the pension plan increased by $126,000 from 1995 to 1996. Ohio franchise taxes are calculated based on beginning of year equity and increased in 1996 because of the proceeds from the September 1995 stock offering. Data processing costs increased due to the upgrade of systems and the addition of several new applications in 1996. Non-interest expense - other increased in 1996 over 1995 because of an increase in charitable contributions and the outsourcing of appraisal fees. The increase in appraisal fees in 1996 was offset by an increase in fees charged to loan customers. Income Taxes - Income tax amounted to $3.0 million in 1997 compared to $2.0 million in 1996 and $2.9 million in 1995. The effective tax rates for the three years were 35.6%, 32.5% and 34.1% respectively. The increase in the tax rate for 1997 compared to the other years is due primarily to the inclusion in 1997 of a provision for Ohio income taxes, which are assessed at the holding company level and were not material in 1996. See Note 14 to the Consolidated Financial Statements. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services as measured by the consumer price index. Technology Risk In order to limit its technology risk, First Defiance has outsourced the majority of its computer processing tasks to a variety of third-party vendors. An ongoing assessment of technology risk includes an assessment of third party vendors readiness for processing in the year 2000. Management has identified all third party vendors and has requested certification as to the vendors' compliance with processing in the year 2000. Management is coordinating with the Company's primary data processing provider, BISYS, Inc. to perform testing of all significant applications during the third and fourth quarters of 1998. BISYS has represented to the Company that all appropriate programming changes will be completed and that all testing will be performed and certified before the end of 1998. Management has reviewed all existing hardware and software that is maintained by the Company. Certain older personal computers which are not Year 2000 compliant will be replaced during 1998. Management also is developing a contingency plan which will be implemented should its primary third party vendors fail to be Year 2000 compliant. However, based on representations from third party vendors, management believes those vendors will be compliant by the end of 1998. Because all major data processing is outsourced, management does not believe the cost of being Year 2000 compliant will be material to the financial statements of the Company. 13 Report of Independent Auditors To the Stockholders and the Board of Directors First Defiance Financial Corp. We have audited the consolidated statements of financial condition of First Defiance Financial Corp. as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Defiance Financial Corp. at December 31, 1997 and 1996, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/Ernst & Young LLP -------------------- Ernst & Young LLP Toledo, Ohio January 16, 1998
First Defiance Financial Corp. Consolidated Statements of Financial Condition December 31 1997 1996 - -------------------------------------------------------------------------------------------- Assets - -------------------------------------------------------------------------------------------- Cash and cash equivalents: Cash and amounts due from depository institutions $ 8,149,392 $ 3,102,385 Interest-bearing deposits 848,078 1,649,801 - -------------------------------------------------------------------------------------------- 8,997,470 4,752,186 Investment securities: Available-for-sale, carried at fair value 82,435,528 77,407,019 Held-to-maturity, carried at amortized cost (approximate fair value $21,370,123 and $26,324,936 at December 31, 1997 and 1996, respectively) 20,953,120 25,936,547 - -------------------------------------------------------------------------------------------- 103,388,648 103,343,566 Loans held for sale (approximate fair value $89,062 and $563,642 at December 31, 1997 and 1996, respectively) 87,500 558,550 Loans receivable, net of allowance of $2,686,472 and $2,217,022 at December 31, 1997 and 1996, respectively 441,823,805 415,366,199 Accrued interest receivable 3,479,496 3,061,133 Federal Home Loan Bank stock 3,764,300 3,033,300 Premises and equipment 16,798,904 12,254,660 Deferred federal income taxes 415,000 550,000 Real estate, mobile homes and other assets held for sale 540,760 266,521 Other assets 402,560 224,606 - -------------------------------------------------------------------------------------------- Total assets $579,698,443 $543,410,721 - -------------------------------------------------------------------------------------------- Liabilities and stockholders' equity - -------------------------------------------------------------------------------------------- Deposits $395,322,084 $382,525,366 Advances from the Federal Home Loan Bank 71,664,669 40,820,664 Accrued expenses and other liabilities 5,165,604 2,886,535 Advance payments by borrowers for taxes and insurance 661,255 613,494 - -------------------------------------------------------------------------------------------- Total liabilities 472,813,612 426,846,059
Stockholders' equity: Preferred stock, no par value per share: 5,000,000 shares authorized; no shares issued Common stock, $.01 par value per share: 20,000,000 shares authorized; 8,527,686 and 9,470,880 shares outstanding, respectively 85,277 94,709 Additional paid-in capital 65,726,285 73,670,607 Stock acquired by ESOP (4,533,819) (5,092,569) Stock acquired by Management Recognition Plan (1,387,934) (2,172,987) Net unrealized losses on available-for-sale securities, net of tax of $25,000 and $203,000, respectively (49,961) (397,056) Retained earnings--substantially restricted 47,044,983 50,461,958 - -------------------------------------------------------------------------------------------- Total stockholders' equity 106,884,831 116,564,662 - -------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $579,698,443 $543,410,721 - --------------------------------------------------------------------------------------------
See accompanying notes. 15
First Defiance Financial Corp. Consolidated Statements of Income Years ended December 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Interest income: Mortgage and other loans $37,302,078 $34,635,111 $32,002,983 Investment securities 6,458,038 6,429,590 5,915,313 Deposits with banks 98,013 192,200 646,405 - ----------------------------------------------------------------------------------------------- Total interest income 43,858,129 41,256,901 38,564,701 Interest expense: Deposits 17,992,359 18,579,237 18,857,219 Federal Home Loan Bank advances and other 3,394,457 879,565 1,431,751 - ----------------------------------------------------------------------------------------------- Total interest expense 21,386,816 19,458,802 20,288,970 - ----------------------------------------------------------------------------------------------- Net interest income 22,471,313 21,798,099 18,275,731 Provision for loan losses 1,613,310 1,019,813 373,741 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 20,858,003 20,778,286 17,901,990 Non-interest income: Service fees and other charges 1,035,630 824,239 671,602 Dividends on Federal Home Loan Bank stock 242,401 206,941 190,861 Net gain (loss) on sale of available-for-sale securities 103,130 25,527 (75,158) Other 246,279 270,684 248,018 - ----------------------------------------------------------------------------------------------- 1,627,440 1,327,391 1,035,323 Non-interest expense: Compensation and benefits 7,904,833 6,899,701 5,329,669 Occupancy 1,241,104 645,166 600,413 SAIF deposit insurance premiums 193,745 871,611 858,765 SAIF special assessment - 2,460,977 - State franchise tax 1,101,230 1,721,329 1,025,947 Data processing 780,300 721,132 598,556 Mobile home loan servicing 456,904 433,331 404,313 Other 2,415,136 2,204,388 1,742,315 - ----------------------------------------------------------------------------------------------- 14,093,252 15,957,635 10,559,978 - ----------------------------------------------------------------------------------------------- Income before income taxes 8,392,191 6,148,042 8,377,335 Income taxes 2,985,000 1,997,000 2,856,000 - ----------------------------------------------------------------------------------------------- Net income $ 5,407,191 $ 4,151,042 $ 5,521,335 - -----------------------------------------------------------------------------------------------
Earnings per share: Basic $ .65 $ .43 $ .54 - ----------------------------------------------------------------------------------------------- Diluted $ .62 $ .42 $ .53 - ----------------------------------------------------------------------------------------------- Dividends declared per share $ .33 $ .29 $ .28 - ----------------------------------------------------------------------------------------------- Average number of shares outstanding: Basic 8,360,149 9,610,153 10,286,992 - ----------------------------------------------------------------------------------------------- Diluted 8,706,131 9,771,544 10,375,258 - -----------------------------------------------------------------------------------------------
See accompanying notes. 16
First Defiance Financial Corp. Consolidated Statements of Changes in Stockholders' Equity For the years ended December 31, 1997, 1996 and 1995 Stock Acquired By - ------------------------------------------------------------------------------------------------------------------------------------ Additional Management Common Stock Paid-In Recognition - ------------------------------------------------------------------------------------------------------------------------------------ Shares Amount Capital ESOP Plan - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1995 10,976,211 $109,762 $20,068,511 $(1,000,000) $(262,095) Amortization of deferred compensation of Management Recognition Plan 164,838 ESOP shares released 102,601 479,166 Shares issued under stock option plan 539 5 2,495 Organization of First Defiance Financial Corp.: Cancellation of shares held by First Federal Mutual Holding Company (6,476,914) (64,769) 64,769 Proceeds from issuance of 6,476,914 shares of First Defiance Financial Corp. common stock on September 29, 1995, net of 135 fractional shares acquired, and net of stock offering costs of $1,684,468 6,476,779 64,768 63,019,904 (5,181,530) First Federal Mutual Holding Company Equity 200,000 Change in net unrealized gains (losses), net of income taxes of $1,206,000 Dividends declared Net income - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 10,976,615 109,766 83,458,280 (5,702,364) (97,257) Amortization of deferred compensation of Management Recognition Plan 741,722 ESOP shares released 133,381 609,795 Shares issued under stock option plan 12,953 130 59,843 Acquisition of common stock for Management Recognition Plan (2,817,452) Acquisition of common stock for treasury (1,518,688) (15,187) (9,980,897) Change in net unrealized gains (losses), net of income taxes of $125,000 Dividends declared Net income - ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,470,880 94,709 73,670,607 (5,092,569) (2,172,987) Amortization of deferred compensation of Management Recognition Plan 113,000 785,053 ESOP shares released 287,972 558,750 Shares issued under stock option plan 23,325 233 160,570 Acquisition of common stock for treasury (966,519) (9,665) (8,505,864) Change in net unrealized gains (losses), net of income taxes of $178,000 Dividends declared Net income - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 8,527,686 $85,277 $65,726,285 $(4,533,819) $(1,387,934) - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
Net Unrealized Gain (Losses) on Total Available-For- Retained Stockholders' Sale Securities Earnings Equity Balance at January 1, 1995 $(2,493,010) $51,973,285 $68,396,453 Amortization of deferred compensation of Management Recognition Plan 164,838 ESOP shares released 581,767 Shares issued under stock option plan 2,500 Organization of First Defiance Financial Corp.: Cancellation of shares held by First Federal Mutual Holding Company Proceeds from issuance of 6,476,914 shares of First Defiance Financial Corp. common stock on September 29, 1995, net of 135 fractional shares acquired, and net of stock offering costs of $1,684,468 57,903,142 First Federal Mutual Holding Company Equity 200,000 Change in net unrealized gains (losses), net of income taxes of $1,206,000 2,341,373 2,341,373 Dividends declared (1,604,919) (1,604,919) Net income 5,521,335 5,521,335 - ------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 (151,637) 55,889,701 133,506,489 Amortization of deferred compensation of Management Recognition Plan 741,722 ESOP shares released 743,176 Shares issued under stock option plan 59,973 Acquisition of common stock for Management Recognition Plan (2,817,452) Acquisition of common stock for treasury (6,819,103) (16,815,187) Change in net unrealized gains (losses), net of income taxes of $125,000 (245,419) (245,419) Dividends declared (2,759,682) (2,759,682) Net income 4,151,042 4,151,042 - -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (397,056) 50,461,958 116,564,662 Amortization of deferred compensation of Management Recognition Plan 898,053 ESOP shares released 846,722 Shares issued under stock option plan 160,803 Acquisition of common stock for treasury (6,031,107) (14,546,636) Change in net unrealized gains (losses), net of income taxes of $178,000 347,095 347,095 Dividends declared (2,793,059) (2,793,059) Net income 5,407,191 5,407,191 - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $(49,961) $47,044,983 $106,884,831 - -------------------------------------------------------------------------------------------------------------------
17
First Defiance Financial Corp. Consolidated Statements of Cash Flows Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Operating activities - ---------------------------------------------------------------------------------------------- Net income $ 5,407,191 $ 4,151,042 $ 5,521,335 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,613,310 1,019,813 373,741 Provision for depreciation 736,183 256,713 239,164 Amortization of deferred compensation of Management Recognition Plan 785,053 741,722 164,838 Release of ESOP shares 846,722 743,176 381,767 (Gain) loss on sale of office properties and equipment (3,149) 44,575 7,275 Gain on sale of investment properties - - (110,881) (Gain) loss on sale of securities (103,130) (25,527) 75,158 Gain on sale of loans (116,223) (209,458) (1,658) Amortization of premiums and accretion of discounts on available-for-sale and held-to-maturity securities 40,558 9,704 33,309 Tax benefit of stock plans in equity 161,000 - - Deferred federal income taxes (credit) (43,000) (203,000) 176,000 Increase in interest receivable and other assets (596,317) (246,593) (369,012) Proceeds from sale of loans 8,358,029 13,541,259 87,599 Originations of loans held for sale (7,770,756) (10,131,779) (3,847,829) Increase in accrued interest and other expenses 2,316,415 89,540 126,261 - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 11,631,886 9,781,187 2,857,067 Investing activities - ---------------------------------------------------------------------------------------------- Proceeds from maturities of available-for-sale securities 13,231,326 19,613,796 5,604,170 Proceeds from sale of available-for-sale securities 22,220,275 27,247,132 2,921,719 Purchases of available-for-sale securities (39,838,154) (36,747,804) (32,500,000) Proceeds from maturities of held-to-maturity securities 4,929,138 5,302,174 4,535,734 Proceeds from sale of real estate, mobile homes and other assets held for sale 1,519,073 1,336,585 1,043,797 Proceeds from sale of Federal Home Loan Bank stock - - 209,700 Proceeds from sale of office properties and equipment and investment properties 3,149 1,600 315,675 Purchases of Federal Home Loan Bank stock (731,000) (203,300) (186,500) Purchases of premises and equipment (5,280,427) (6,273,024) (3,616,879) Net increase in mortgage and other loans (29,864,228) (36,371,949) (27,928,124) - ---------------------------------------------------------------------------------------------- Net cash used in investing activities (33,810,848) (26,094,790) (49,600,708)
18
First Defiance Financial Corp. Consolidated Statements of Cash Flows (continued) Years ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Financing activities - ---------------------------------------------------------------------------------------------------------- Net increase in deposits and advance payments by borrowers for taxes and insurance 12,796,718 746,227 6,288,692 Net increase (decrease) in Federal Home Loan Bank short-term advances 31,804,058 35,220,000 (11,000,000) Proceeds from Federal Home Loan Bank long-term advances - - 1,364,000 Repayment of Federal Home Loan Bank long-term advances (960,053) (1,241,774) (7,262,204) Loan to ESOP - - (5,981,530) Purchase of common stock for treasury (14,546,636) (16,815,187) - Contribution to Management Recognition Plan for purchase of common stock - (2,817,451) - Cash dividends paid (2,782,644) (2,771,179) (1,178,625) Proceeds from exercise of stock options 112,803 59,972 2,500 Net proceeds from issuance of common stock - - 63,084,672 - ---------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 26,424,246 12,380,608 45,317,505 - ---------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 4,245,284 (3,932,995) (1,426,136) Cash and cash equivalents at beginning of period 4,752,186 8,685,181 10,111,317 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 8,997,470 $ 4,752,186 $ 8,685,181 - ---------------------------------------------------------------------------------------------------------- Supplemental cash flow information - ---------------------------------------------------------------------------------------------------------- Interest paid $20,194,478 $19,652,287 $ 20,473,789 - ---------------------------------------------------------------------------------------------------------- Income taxes paid $ 2,738,977 $ 2,364,000 $ 2,612,434 - ---------------------------------------------------------------------------------------------------------- Transfers from loans to real estate, mobile homes and other assets held for sale $ 1,793,312 $ 1,430,202 $ 1,047,107 - ---------------------------------------------------------------------------------------------------------- Noncash operating activities - ---------------------------------------------------------------------------------------------------------- Change in deferred taxes on net unrealized gains or losses on available-for-sale securities $ 178,000 $ (125,000) $ (1,206,000) - ----------------------------------------------------------------------------------------------------------
Noncash investing activities - ---------------------------------------------------------------------------------------------------------- Change in net unrealized gain (loss) on available-for-sale securities $ 525,095 $ (370,419) $ 3,547,373 - ---------------------------------------------------------------------------------------------------------- Land acquired with notes payable - - $ 236,400 - ---------------------------------------------------------------------------------------------------------- Land formerly included in investment properties - - $ 186,842 - ---------------------------------------------------------------------------------------------------------- Noncash financing activities - ---------------------------------------------------------------------------------------------------------- Cash dividends declared but not paid $ 720,248 $ 757,675 $ 720,928 - ---------------------------------------------------------------------------------------------------------- Repayment of ESOP obligation guaranteed by First Federal - - $ 1,000,000 - ---------------------------------------------------------------------------------------------------------- Transfer of equity of Mutual Holding Company - - $ 200,000 - ----------------------------------------------------------------------------------------------------------
See accompanying notes. 19 First Defiance Financial Corp. Notes to Consolidated Financial Statements December 31, 1997 1. Basis of Presentation and Reorganization The consolidated financial statements include the accounts of First Defiance Financial Corp. ("First Defiance" or "the Company") and First Federal Savings and Loan ("First Federal"), its wholly-owned subsidiary. First Federal operates eleven branches in northwestern Ohio as a federally chartered savings and loan. First Federal focuses primarily on single family residential mortgage lending, consumer and business loans to customers. First Federal is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. All significant intercompany transactions and balances are eliminated in consolidation. On September 29, 1995, First Federal and First Federal Mutual Holding Company ("the Mutual Holding Company") completed a second step conversion ("the Reorganization"). As part of the Reorganization, First Defiance was formed as a first-tier wholly-owned subsidiary of First Federal. The Mutual Holding Company was converted to an interim federal stock savings association and simultaneously merged with and into First Federal, at which point the Mutual Holding Company ceased to exist and 3,000,000 shares or 59% of the outstanding First Federal common stock held by the Mutual Holding Company was cancelled. A second interim savings and loan association ("Interim") formed by First Defiance solely for the Reorganization was then merged with and into First Federal. As a result of the merger of Interim with and into First Federal, First Federal became a wholly-owned subsidiary of First Defiance. Pursuant to an exchange ratio of 2.1590231 shares for each share of First Federal stock, which assured that the public shareholders of First Federal maintained their 41.0% ownership of First Defiance, the 2,184,500 outstanding shares of First Federal were exchanged for approximately 4,500,000 shares of First Defiance. Concurrent with the Reorganization, First Defiance sold 6,476,914 additional shares to members of the Mutual Holding Company, employees of First Federal and the public at a price of $10.00 per share. Reorganization and stock offering costs of approximately $1,685,000 resulted in net proceeds from the offering of approximately $63,085,000. Each depositor of First Federal as of the effective date of the Conversion will have upon liquidation of First Federal a right to his pro rata interest in a liquidation account established for the benefit of such depositors. Records are maintained to ensure such rights receive statutory priority as required by OTS regulations. The reorganization was accounted for as a change in corporate form with the historic basis of accounting for First Federal unchanged. 2. Statement of Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Most significantly, First Defiance uses estimates in determining the value of the allowance for loan losses. Earnings Per Share Earnings per share are based on the weighted average number of shares of common stock. In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings per Share". Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and unvested stock grants. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Cash and Cash Equivalents Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home Loan Bank ("FHLB"). 20 Investment Securities Management determines the appropriate classification of debt securities at the time of purchase and evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the securities to maturity and are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Debt securities not classified as held-to-maturity and equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity until realized. Realized gains and losses, and declines in value judged to be other-than-temporary are included in gains (losses) on sale of securities. The cost of mutual funds sold is based on the average cost method. The cost of all other securities sold is based on the specific identification method. Currently, First Defiance invests in on-balance sheet derivative securities as part of the overall asset and liability management process. Such derivative securities are disclosed in Note 3 and include agency step-up, REMIC and CMO investments. Such investments are not classified as high risk at December 31, 1997 and do not present risk significantly different than other mortgage-backed or agency securities. First Defiance does not invest in off-balance sheet derivative securities. Investments Required by Regulations As a member of the FHLB System, First Federal is required to own stock of the FHLB of Cincinnati in an amount principally equal to at least 1% of its net home mortgage loans, subject to periodic redemption at par if the stock owned is over the minimum requirement. FHLB stock is a restricted equity security that does not have a readily determinable fair value and is carried at cost. Loans Receivable Investment in real estate mortgage loans consists principally of long-term conventional loans collateralized by first mortgages on single-family residences, other residential property, and commercial and industrial property. Such loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Mortgage loans originated and intended for the secondary market are carried at the lower of cost or estimated market value in the aggregate. Nonrefundable fees and related costs associated with originating or acquiring real estate mortgage and other loans are capitalized and recognized as an adjustment of the yield of the related loan. Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is fully reserved. Interest income is subsequently recognized only to the extent cash payments are received. Management's determination of the adequacy of the allowance for loan losses is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors. The allowance is increased by provisions for loan losses charged against earnings and decreased by charge-offs (net of recoveries). Loan Servicing Rights In June 1996, the FASB issued Statement 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement supersedes certain provisions of Statement 65, "Accounting for Certain Mortgage Banking Activities," and Statement 122, "Accounting for Mortgage Servicing Rights." Statement 125 requires that servicing assets and other retained interests in transferred assets be measured by allocating the previous carrying amount between the assets sold and retained interests based on their relative fair values at the date of the transfer. It also requires that servicing assets be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income and (b) assessment for asset impairment based on the fair value. The adoption of Statement 125 has had no significant impact on the results of operations. 21 Notes to Consolidated Financial Statements 2. Statement of Accounting Policies (continued) Real Estate, Mobile Homes and Other Assets Held for Sale Assets held for sale are comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair value at time of foreclosure or insubstance foreclosure. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives: Buildings and improvements 20 to 50 years Furniture, fixtures and equipment 5 to 15 years Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Accounting Pronouncements The FASB issued Statement 130, "Reporting Comprehensive Income," in 1997. First Defiance will adopt the provisions of Statement 130 in 1998. Statement 130 requires that comprehensive income, which includes net income and other comprehensive income consisting of minimum pension liability adjustments and unrealized gains and losses on certain security investments, be reported as a total in the financial statements. Adoption of Statement 130 will have no effect on First Defiance's consolidated results of operations, financial position or cash flows. 3. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 - --------------------------------------------------------------------------------------------- Numerator for basic and diluted earnings per share - net income $5,407,191 $4,151,042 $ 5,521,335 - --------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted-average shares 8,360,149 9,610,153 10,286,992 Effect of dilutive securities: Employee stock options 251,992 136,810 88,266 Unvested Management Recognition Plan stock 93,990 24,580 - - --------------------------------------------------------------------------------------------- Dilutive potential common shares 345,982 161,390 88,266 - --------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 8,706,131 9,771,544 10,375,258 - --------------------------------------------------------------------------------------------- Basic earnings per share $.65 $.43 $.54 - --------------------------------------------------------------------------------------------- Diluted earnings per share $.62 $.42 $.53 - ---------------------------------------------------------------------------------------------
In accordance with Statement 128, unreleased shares held by the Employee Stock Ownership Plan (ESOP) (504,451, 583,665 and 658,942 shares at December 31, 1997, 1996 and 1995, respectively) and unvested shares held for the 1996 Management Recognition Plan (MRP) (214,145 and 259,076 shares at December 31, 1997 and 1996, respectively) have been excluded from basic average shares outstanding. Such shares are included in basic average shares outstanding as they are released for allocation (ESOP) or become vested (MRP). Unvested MRP shares and stock options are included in diluted average shares outstanding based upon the treasury stock method. For additional disclosures regarding the employee stock options and the management recognition plan stock, see notes 16 and 15, respectively. 22 While the number of outstanding shares has been restated for all periods to reflect the 1995 Reorganization, earnings on the proceeds from the Reorganization are reflected only in the fourth quarter of 1995 and thereafter. Had the Reorganization occurred at January 1, 1995 and assuming the net proceeds were used to repay advances and invested in medium-term investment securities, pro-forma net income (unaudited) would have been $6,327,000 for the year ended December 31, 1995. Pro-forma basic and diluted earnings per share (unaudited) would have been $.62 and $.61, respectively. 4. Investment Securities The following is a summary of available-for-sale and held-to-maturity securities:
December 31,1997 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------- Available-for-Sale Securities - ----------------------------------------------------------------------------------------------------------- U. S. Treasury securities and obligations of U. S. Government corporations and agencies $ 58,850,967 $151,534 $152,253 $ 58,850,248 Corporate bonds 10,094,368 19,387 292 10,113,463 Adjustable rate mortgage-backed security mutual funds 8,981,303 144,763 8,836,540 REMIC 2,963,184 24,196 16,838 2,970,542 Collateralized mortgage obligations 1,075,667 38,787 1,114,454 Obligations of state and political subdivisions 545,000 5,281 550,281 - ----------------------------------------------------------------------------------------------------------- Totals $ 82,510,489 $239,185 $314,146 $ 82,435,528 - ----------------------------------------------------------------------------------------------------------- Held-to-Maturity Securities - ----------------------------------------------------------------------------------------------------------- FHLMC certificates $ 8,797,603 $197,421 $ 26,345 $ 8,968,679 FNMA certificates 8,310,283 95,405 119,096 8,286,592 GNMA certificates 2,607,298 96,665 865 2,703,098 Obligations of states and political subdivisions 1,237,936 173,868 50 1,411,754 - ----------------------------------------------------------------------------------------------------------- Totals $ 20,953,120 $563,359 $ 146,356 $ 21,370,123 - -----------------------------------------------------------------------------------------------------------
December 31, 1996 Available-for-Sale Securities - ----------------------------------------------------------------------------------------------------------- U. S. Treasury securities and obligations of U. S. Government corporations and agencies $ 44,762,114 $ 13,681 $ 541,513 $ 44,234,282 Fixed income mutual funds 18,856,749 56,918 18,913,667 Adjustable rate mortgage-backed security mutual funds 11,255,372 7,083 159,752 11,102,703 Money market mutual funds 750,000 750,000 REMIC 1,160,983 19,812 1,141,171 Collateralized mortgage obligations 1,097,593 34,507 1,132,100 Other 124,264 8,832 133,096 - ----------------------------------------------------------------------------------------------------------- Totals $ 78,007,075 $121,021 $ 721,077 $ 77,407,019 - ----------------------------------------------------------------------------------------------------------- Held-to-Maturity Securities - ----------------------------------------------------------------------------------------------------------- FHLMC certificates $ 11,795,121 $261,891 $ 48,933 $12,008,079 FNMA certificates 9,628,002 104,518 177,919 9,554,601 GNMA certificates 3,089,882 90,538 2,922 3,177,498 Obligations of states and political subdivisions 1,423,542 161,316 100 1,584,758 - ----------------------------------------------------------------------------------------------------------- Totals $ 25,936,547 $618,263 $ 229,874 $26,324,936 - -----------------------------------------------------------------------------------------------------------
23 Notes to Consolidated Financial Statements 4. Investment Securities (continued) During the years ended December 31, 1997, 1996 and 1995, available-for-sale securities with fair values of $22.2, $27.2 and $2.9 million, respectively, were sold with realized gains (losses) of $103,130 $25,527 and ($75,158), respectively. The amortized cost and fair value of securities at December 31, 1997 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mutual funds are not due at a single maturity date. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
Available-for-Sale Held-to-Maturity - ------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------------------------- Due in one year or less $ 19,868,008 $ 19,801,028 $ 1,207,225 $ 1,208,476 Due after one year through five years 32,162,793 32,169,083 3,251,023 3,356,327 Due after five years through ten years 17,479,176 17,590,131 1,155,537 1,240,711 Due after ten years 4,019,209 4,038,746 15,339,335 15,564,609 - ------------------------------------------------------------------------------------------------- 73,529,186 73,598,988 20,953,120 21,370,123 Adjustable rate mortgage-backed security mutual funds 8,981,303 8,836,540 - - - ------------------------------------------------------------------------------------------------- Totals $82,510,489 $82,435,528 $20,953,120 $21,370,123 - -------------------------------------------------------------------------------------------------
5. Loan Commitments and Delinquencies Loan commitments are made to accommodate the financial needs of First Defiance's customers. The associated credit risk is essentially the same as that involved in extending loans to customers and are subject to First Defiance's normal credit policies. Collateral such as mortgages on property and equipment, receivables and inventory is obtained based on management's credit assessment of the customer. At December 31, 1997, First Defiance's outstanding commitments to fund long-term mortgage loans amounted to approximately $8,643,000 which were comprised of approximately 74% fixed rate and 26% adjustable rate loans with rates ranging from 6.375% to 11.5%. First Defiance's maximum exposure to credit loss for loan commitments (unfunded loans, unused lines of credit and letters of credit) was $37,204,200 at December 31, 1997. Unpaid balances of mortgage and installment loans with contractual payments delinquent 90 days or more totaled $1,365,000 at December 31, 1997 and $411,000 at December 31, 1996. First Federal does not anticipate any significant losses in the collection of these delinquent loans in excess of the allowance for loan losses. Impairment of loans having recorded investments of $537,000 at December 31, 1997 and $1.6 million at December 31, 1996 has been recognized in conformity with FAS Statement No. 114, as amended by FAS Statement No. 118. The average recorded investment in impaired loans during 1997 and 1996 was $1.3 and $1.45 million, respectively. The total allowance for loan losses related to these loans was $327,000 and $804,000 at December 31, 1997 and 1996, respectively. Loans having carrying values of $1.8 million and $1.4 million were transferred to real estate, mobile homes and other assets held for sale in 1997 and 1996, respectively. First Defiance is not committed to lend additional funds to debtors whose loans have been modified. 24 6. Loans Receivable
December 31 1997 1996 - -------------------------------------------------------------------------------------------- Loans receivable consist of the following at December 31: Mortgage loans: Secured by one-to-four-family residences $255,339,585 $241,227,635 Secured by other properties 26,526,267 28,438,585 Construction loans 10,148,331 11,412,465 Other mortgage loans 2,995,888 2,084,060 - -------------------------------------------------------------------------------------------- 295,010,071 283,162,745 Other loans: Automobile 69,130,753 62,089,625 Mobile home 25,423,509 25,198,701 Commercial 29,758,228 26,674,342 Home equity and improvement 16,940,115 13,570,255 Other 11,980,094 11,929,499 - -------------------------------------------------------------------------------------------- 153,232,699 139,462,422 - -------------------------------------------------------------------------------------------- Total mortgage and other loans 448,242,770 422,625,167 Deduct: Undisbursed loan funds 3,087,228 4,473,780 Net deferred loan origination fees and costs 645,265 568,166 Allowance for loan losses 2,686,472 2,217,022 - -------------------------------------------------------------------------------------------- Totals $441,823,805 $415,366,199 - --------------------------------------------------------------------------------------------
Changes in the allowance for mortgage and other loan losses were as follows:
Years ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Balance at beginning of year $ 2,217,022 $1,816,944 $1,733,411 Charge-offs (1,341,359) (775,399) (344,563) Recoveries 197,499 155,664 51,355 - ------------------------------------------------------------------------------------------------ Net charge-offs (1,143,860) (619,735) (293,208) Provision charged to income 1,613,310 1,019,813 376,741 - ------------------------------------------------------------------------------------------------ Balance at end of year $ 2,686,472 $2,217,022 $1,816,944 - ------------------------------------------------------------------------------------------------
Interest income on mortgage and other loans for the years ended December 31, is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------ Mortgage loans $23,259,455 $22,272,502 $21,039,898 Other loans 14,042,623 12,362,609 10,963,085 - ------------------------------------------------------------------------------------------------ Totals $37,302,078 $34,635,111 $32,002,983 - ------------------------------------------------------------------------------------------------
7. Mortgage Banking Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others was approximately $17.8 million and $11.3 million at December 31, 1997 and 1996, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $76,000 and $46,000 at December 31, 1997 and 1996, respectively. In accordance with Statement No. 125, mortgage servicing rights of $98,651 and $123,201 were capitalized during the years ended December 31, 1997 and 1996. The book value of mortgage servicing rights was approximately $188,000 and $121,000 at December 31, 1997 and 1996. Amortization of mortgage servicing rights was $17,347 and $1,456 in the years ended December 31, 1997 and 1996, respectively. As of December 31, 1997, a valuation allowance of approximately $14,700 was recorded to reflect changes in the market value of mortgage servicing rights recorded. 25 Notes to Consolidated Financial Statements 7. Mortgage Banking (continued) The components of mortgage banking income (included in other non-interest income) are as follows:
Years ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------------------- Gain on sale of loans $116,223 $209,458 $1,658 Loan servicing fee income, net of amortization 67,254 11,406 - - --------------------------------------------------------------------------------------------- $183,477 $220,864 $1,658 - ---------------------------------------------------------------------------------------------
8. Premises and Equipment Premises and equipment are summarized as follows:
December 31 1997 1996 - ------------------------------------------------------------------------------- Cost: Land $ 1,890,427 $ 1,850,427 Buildings 11,436,832 3,604,775 Leasehold improvements 235,714 235,714 Furniture, fixtures and equipment 5,579,868 1,833,311 Construction in process 1,174,195 7,616,060 - ------------------------------------------------------------------------------- 20,317,036 15,140,287 Less allowances for depreciation and amortization 3,518,132 2,885,627 - ------------------------------------------------------------------------------- $16,798,904 $12,254,660 - -------------------------------------------------------------------------------
Interest capitalized on construction projects amounted to approximately $83,515 and $214,587 for the years ended December 31, 1997 and 1996, respectively. 9. Deposits The following schedule sets forth interest expense for the years ended December 31 by type of savings deposit:
1997 1996 1995 - ------------------------------------------------------------------------------------------------ Demand, N.O.W. and money market accounts $ 1,400,170 $ 1,119,239 $ 1,226,354 Savings accounts 1,624,915 2,036,287 2,138,660 Certificates 15,050,789 15,638,298 15,512,741 - ------------------------------------------------------------------------------------------------ 18,075,874 18,793,824 18,877,755 Less interest capitalized (83,515) (214,587) (20,536) - ------------------------------------------------------------------------------------------------ Totals $17,992,359 $18,579,237 $18,857,219 - ------------------------------------------------------------------------------------------------
A summary of deposit balances is as follows:
December 31 1997 1996 - -------------------------------------------------------------------------------- Savings accounts $ 59,403,817 $ 68,865,453 Demand and N.O.W. accounts 32,414,463 32,184,313 Money Market demand accounts 24,926,328 15,875,015 Certificates of deposit 278,577,476 265,600,585 - -------------------------------------------------------------------------------- Totals $395,322,084 $382,525,366 - --------------------------------------------------------------------------------
At December 31, 1997, scheduled maturities of certificates of deposit are as follows (in thousands):
1998 $188,168 1999 79,645 2000 7,686 2001 1,309 2002 456 2003 and thereafter 1,314 - -------------------------------------------------------------------------------- Total $278,578 - --------------------------------------------------------------------------------
26 At December 31, 1997 and 1996 deposits of $33.0 and $24.6 million, respectively, were in excess of the $100,000 Federal Deposit Insurance Corporation limit. At December 31, 1997, $1 million in U. S. Government Agency securities were pledged as collateral against public deposits for certificates in excess of $100,000. On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Act) was enacted. The Act provided for a special assessment to be calculated for depository institutions on deposit, accrued interest and escrow data from the base date of March 31, 1995. The assessment of $2,460,977 was assessed at September 30, 1996 and was subsequently paid when due to the Federal Deposit Insurance Corporation in November 1996. 10. Advances from Federal Home Loan Bank First Federal has the ability to borrow funds from the FHLB. First Federal pledges its single-family residential mortgage loan portfolio as security for these advances. At December 31, 1997, the total available for collateral amounted to approximately $254.0 million. Collateral must exceed borrowings by 150%. The total level of borrowing is also limited to 25% of total assets. This would give First Federal a maximum potential to acquire advances of approximately $144.9 million from the FHLB. The FHLB made a series of fixed rate long-term advances to First Defiance during 1992 and a long-term fixed rate advance under the FHLB Affordable Housing Program in 1995. The total FHLB long-term advances bear a weighted average interest rate of 6.57% at December 31, 1997. Future minimum payments by fiscal year are as follows:
1998 $ 961,838 1999 961,838 2000 961,838 2001 961,838 2002 299,777 Thereafter 1,676,098 - -------------------------------------------------------------------------------- Total minimum payments 5,823,227 Less amounts representing interest 1,293,558 - -------------------------------------------------------------------------------- Totals $4,529,669 - --------------------------------------------------------------------------------
First Defiance also utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. There were $67.2 million in short-term advances outstanding at December 31, 1997 ($35.2 at December 31, 1996). First Defiance borrows funds under a variety of programs at FHLB. At December 31, 1997, $30 million was outstanding under First Defiance's REPO Advance line of credit. The total available under the REPO line is $30 million. Amounts are generally borrowed under the REPO line on an overnight basis. An additional $13.8 million was borrowed under the FHLB's Cash Management Advance ("CMA") program at a variable rate. Amounts borrowed under the CMA program mature within 90 days. The $23.4 million of other advances are borrowed under the FHLB's short-term fixed or LIBOR based programs. Information concerning short-term advances is summarized as follows:
1997 1996 - -------------------------------------------------------------------------------- Average balance during the year $53,039,497 $ 8,309,801 Maximum month-end balance during the year 70,135,000 35,220,000 Average interest rate during the year 5.77% 5.59%
11. Postretirement Benefits The Company sponsors a defined benefit postretirement plan that is intended to supplement Medicare coverage for certain retirees who meet minimum years of service requirements. Persons who retired prior to April 1, 1997 who completed 20 years of service after age 40 receive full medical coverage at no cost. Such coverage continues for surviving spouses of those participants for one year, after which coverage may be continued provided the spouse pays 50% of the average cost. Persons retiring after April 1, 1997 will be provided medical benefits at a cost based on their combined age and years of service at retirement. An employee whose combined age and years of service at retirement is at least 90 years is eligible to receive coverage that is 80% paid by the Company. The percentage paid by the Company decreases as the combined sum of age and years of service declines, to a 27 Notes to Consolidated Financial Statements 11. Postretirement Benefits (continued) maximum of 35% for age and years of service totalling 75 years. No coverage is provided to retirees whose age and service combined totals less than 75 years. Surviving spouses are also eligible for continued coverage after the retiree is deceased at a subsidy level that is 10% less than what the retiree is eligible for. Persons retiring before July 1, 1997 received dental and vision care in addition to medical coverage. Persons who retire after July 1, 1997 are not eligible for dental or vision care, but those retirees and their spouses each receive up to $200 in a medical spending account. Funds in that account may be used for payment of uninsured medical expenses. All retiree medical plans are intended to be secondary to Medicare to the extent permitted by law. Premiums charged to retirees who are not Medicare eligible are based on the Company's COBRA rate. The plan is not currently funded. The following table sets forth the amount recorded in the Company's consolidated statements of financial condition at December 31:
1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $329,517 $270,191 Active employees fully eligible for benefits 30,198 274,329 Other active plan participants 427,108 190,264 - -------------------------------------------------------------------------------- 786,823 734,784 Unrecognized prior service cost (58,657) - Unrecognized net gain (loss) 20,003 (44,155) - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation included in accrued interest and other expenses in consolidated statement of financial condition $748,169 $690,629 - --------------------------------------------------------------------------------
Net periodic postretirement benefit cost includes the following components:
Years ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------------------- Service cost-benefits attributable to service during the period $39,905 $43,902 $21,980 Interest cost on accumulated postretirement benefit obligation 51,443 47,200 35,283 Net amortization and deferral 3,910 - (8,807) - --------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $95,258 $91,102 $48,456 - ---------------------------------------------------------------------------------------------
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997 and 1996; the rate was assumed to decrease gradually to 5.5% for the year 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by 1 percentage point for each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $144,900 and the aggregate of the service and interest cost for the year then ended by $20,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% for 1997, 1996 and 1995. 12. Pension Plan The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation during the last five years of employment. The Company's policy is to fund pension costs as accrued and to amortize past service costs over approximately twenty years. 28 During 1997, the Company amended the plan to eliminate all benefits for future service in connection with a termination of the plan and distribution of plan assets which will occur in 1998. Such actions have decreased the actuarially determined present value of projected plan benefits in 1997 by approximately $2.5 million and all accumulated plan benefits have become fully vested. The effect in 1998 of the final settlement of plan obligations is not anticipated to be material. Net periodic pension cost includes the following components:
Years ended December 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $354,032 $311,459 $225,175 Interest cost on projected benefit obligation 290,956 244,186 234,485 Actual (return) loss on plan assets (6,460) 66,041 (142,619) Net amortization and deferral 10,205 (53,727) 124,958 - ----------------------------------------------------------------------------------------------- Net periodic pension cost $648,733 $567,959 $441,999 - ----------------------------------------------------------------------------------------------- Weighted average discount rate 6% 5.75% 7% Rate of increase in future compensation levels - 4% 4% Expected long-term rate of return on plan assets 5% 5.5% 5.5%
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated statements of financial condition.
December 31 1997 1996 - -------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,835,624 and $2,733,744 $1,835,624 $3,026,043 - -------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date $1,835,624 $4,849,273 Plan assets (insurance contracts and money market certificates) at fair value (1,450,904) (2,284,964) - -------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 384,720 2,564,309 Unrecognized net loss from experience different than that assumed and effects of changes in assumptions (775,933) (2,350,987) Unrecognized net obligation at transition (108,020) (125,662) Adjustment required to recognize minimum liability 883,953 653,419 - -------------------------------------------------------------------------------- Accrued pension liability recorded in accrued interest and other expenses in statement of financial condition $ 384,720 $ 741,079 - --------------------------------------------------------------------------------
13. Regulatory Matters First Defiance is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Defiance's financial statements. Under capital guidelines and the regulatory framework for prompt corrective action, First Federal must meet specific capital guidelines that involve quantitative measures of First Federal's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. First Federal's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require First Federal to maintain minimum amounts and ratios of Tier I and total capital to risk-weighted assets and of Tier I capital to average assets. As of December 31, 1997 and 1996, First Federal meets all capital adequacy requirements to which it is subject. The most recent notification from the Office of Thrift Supervision categorized First Federal as well capitalized under the regulatory framework. To be categorized as well capitalized, First Federal must maintain minimum Tangible, Core and Risk-Based Capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed First Federal's ranking. 29 Notes to Consolidated Financial Statements 13. Regulatory Matters (continued) The following schedule presents First Federal's regulatory capital ratios as of December 31, 1997 and 1996 (dollars in thousands):
Regulatory Capital Standards - ------------------------------------------------------------------------------------------- Actual Required Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------- As of December 31, 1997: Tangible Capital $80,284 13.65% $ 8,821 1.5% Core Capital 80,284 13.65 17,642 3.0 Risk-Based Capital 82,473 21.55 30,613 8.0 As of December 31, 1996: Tangible Capital $74,942 13.97% $ 8,049 1.5% Core Capital 74,942 13.97 16,098 3.0 Risk-Based Capital 76,617 22.43 27,332 8.0
14. Income Taxes The components of income tax expense are as follows:
Years ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Current: Federal $2,812,000 $2,200,000 $2,680,000 State 216,000 - - Deferred (credit) (43,000) (203,000) 176,000 - ------------------------------------------------------------------------------------------------- $2,985,000 $1,997,000 $2,856,000 - -------------------------------------------------------------------------------------------------
The provision for income taxes differs from that computed at the statutory corporate tax rate as follows:
Years ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Tax expense at statutory rate $2,853,000 $2,090,000 $2,848,000 Increases (decreases) in taxes from: State income tax - net of federal tax benefit 143,000 - - Tax exempt interest income (36,000) (39,000) (41,000) Other 25,000 (54,000) 49,000 - ------------------------------------------------------------------------------------------------- Totals $2,985,000 $1,997,000 $2,856,000 - -------------------------------------------------------------------------------------------------
Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of First Defiance's deferred federal income tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
December 31 1997 1996 - -------------------------------------------------------------------------------- Deferred federal income tax assets: Net unrealized losses on available-for-sale securities $ 25,000 $ 203,000 Allowance for loan losses 321,000 218,000 Pension costs 131,000 16,000 Postretirement benefit costs 261,000 233,000 Deferred compensation and management recognition plans 493,000 403,000 State income tax 73,000 - Other 80,000 89,000 - -------------------------------------------------------------------------------- Total deferred federal income tax assets 1,384,000 1,162,000 Deferred federal income tax liabilities: FHLB stock dividends 614,000 532,000 Deferred loan origination fees and costs (net) 222,000 80,000 Other 133,000 - - -------------------------------------------------------------------------------- Total deferred federal income tax liabilities 969,000 612,000 - -------------------------------------------------------------------------------- Net deferred federal income tax assets $ 415,000 $ 550,000 - --------------------------------------------------------------------------------
30 No valuation allowance was required at December 31, 1997 or 1996. Retained earnings at December 31, 1996 include financial statement tax bad debt reserves of $10.6 million. The Small Business Job Protection Act of 1996 passed on August 20, 1996 eliminated the special bad debt deduction previously granted solely to thrifts. This results in the recapture of past taxes for permanent deductions arising from the "applicable excess reserve," which is the total amount of First Federal's reserve over its base year reserve as of December 31, 1987. The recapture tax was to be paid in six equal annual installments beginning after December 31, 1996. However, deferral of those payments was permitted for up to two years, contingent upon satisfying a specified mortgage origination test for 1996 and 1997 (which was met). At December 31, 1997, First Federal had $1.037 million in excess of the base year reserves. Deferred taxes have been provided related to this item. No provision is required to be made for the $9.52 million of base year reserves. 15. Employee Stock Ownership and Management Recognition Plans The Company has established an Employee Stock Ownership Plan ("ESOP") covering all employees age 21 or older who have at least one year of credited service. The ESOP will be funded by First Defiance's contributions made in cash or common stock. Benefits may be paid either in shares of common stock or in cash. The Company accounts for its ESOP in accordance with Statement of Position 93-6 "Employers' Accounting for Employee Stock Ownership Plans" of the Accounting Standards Division of the American Institute of Certified Public Accountants. In conjunction with First Federal's initial offering of common stock in 1993, the ESOP borrowed $1,600,000 from an unaffiliated lender to purchase 160,000 shares of First Federal common stock (exchanged for 345,443 shares of First Defiance stock in 1995). The remaining loan was paid in connection with the Reorganization. Also in conjunction with the Reorganization, the ESOP acquired an additional 518,153 shares of common stock of the Company. First Defiance makes contributions to the ESOP in amounts sufficient to pay obligations maturing under the loan made to the ESOP. As principal and interest on the loan is paid, shares are released from collateral and committed for allocation to active employees, based on the proportion of debt service paid in the year. Shares held by the ESOP which have not been released for allocation are reported as stock acquired by the ESOP plan in the statement of financial condition. As shares are released, First Defiance reports compensation expense equal to the average fair value of the shares over the period in which the shares were earned. Also, the shares released for allocation are included in average shares outstanding for earnings per share computations. Dividends on allocated shares are recorded as a reduction of retained earnings and dividends on unallocated shares are recorded as additional ESOP expense. ESOP compensation expense was $1,025,000, $735,000 and $582,000 for 1997, 1996 and 1995, respectively. As of December 31, 1997, 353,062 ESOP shares have been released for allocation of which 338,668 were allocated to participants. The 510,534 unreleased shares have a fair value of $8.2 million at December 31, 1997. The Shareholders of First Defiance approved and established Management Recognition Plans ("MRP") in 1993 and 1996 to provide directors, officers and employees with a proprietary interest in First Defiance as incentive to contribute to its success. Cash was contributed to the MRP in the form of prepaid compensation amounting to $800,000 in 1993 and $2,817,452 in 1996. The $800,000 contributed in 1993 was used to purchase 80,000 shares of First Federal common stock (exchanged for 172,722 shares of First Defiance common stock in 1995). The $2,817,452 contributed in 1996 was used to purchase 259,076 shares of First Defiance common stock. At the discretion of a committee appointed by the Board of Directors, all 172,722 shares acquired in 1993 were granted on July 19, 1993. Also at the committee's discretion, 228,551 of the shares acquired in 1996 have been granted as of December 31, 1997, not including 27,773 shares forfeited by participants who terminated before their shares vested. The shares vest at a rate of 20% per year over 5 years. First Defiance is amortizing the prepaid compensation and recording additions to stockholder's equity as the shares vest. Compensation expense attributable to the MRP amounted to $785,053, $741,722 and $164,838 in 1997, 1996 and 1995, respectively. 16. Stock Option Plans First Defiance has established incentive stock option plans for its directors and its employees and has reserved 1,033,485 shares of common stock for issuance under the plans. A total of 731,235 shares are reserved for employees and 302,250 shares are reserved for directors. As of December 31, 1997, 870,140 options (621,128 for employees and 249,012 for directors) have been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the 31 Notes to Consolidated Financial Statements 16. Stock Option Plans (continued) options were granted. The 385,994 options granted under the 1993 plan are currently exercisable while the 484,146 options granted under the 1996 plan vest at 20% per year beginning in 1997. All options expire ten years from date of grant. Statement 123, "Accounting for Stock-Based Compensation" defines a fair value-based method of accounting for stock-based employee compensation plans. Under the fair value-based method, compensation costs is measured at the grant date based upon the value of the award and is recognized over the service period. While the standard encourages entities to adopt this method of accounting for employee stock compensation plans, it also allows an entity to continue to measure compensation costs for its plans as prescribed in APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." First Defiance has elected to continue to apply APB 25. The following pro forma information regarding net income and earnings per share assumes the adoption of Statement No. 123 for stock options. The estimated fair value of the option is amortized to expense over the option and vesting period. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996:
1997 1996 - -------------------------------------------------------------------------------- Risk free interest rate 6.23% 6.62% Dividend yield 2.68% 2.66% Volatility factors of expected market price of stock 0.319% 0.341% Weighted average expected life 7.5 years 7.35 years
Based upon the above assumptions, pro forma net income and earnings per share for the years ended December 31, 1997 and 1996 are as follows:
1997 1996 - -------------------------------------------------------------------------------- Pro forma net income $5,015,000 $3,783,000 - -------------------------------------------------------------------------------- Pro forma earnings per share: Basic $.60 $.39 - -------------------------------------------------------------------------------- Diluted $.58 $.39 - --------------------------------------------------------------------------------
No options were granted in 1995, thus pro forma disclosures are not required. The pro forma effects for 1997 and 1996 are not likely to be representative of the pro forma effects for future years. Because Statement No. 123 is applicable only to options granted subsequent to December 31, 1994, options granted prior to December 31, 1994 do not have fair value pro forma information provided. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because First Defiance's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 32 The following table summarizes stock option activity for 1997 and 1996:
1997 1996 - ------------------------------------------------------------------------------------------------- Range of Range of Option Option Option Option Shares Prices Shares Prices - ------------------------------------------------------------------------------------------------- Outstanding at January 1 894,339 $4.63 to $10.6875 325,456 $4.63 to $6.95 Granted 75,961 $12.625 to $13.00 582,836 $10.375 to $10.6875 Exercised (23,325) $4.63 to $10.6875 (12,953) 4.63 Expired or cancelled (76,835) 10.50 (1,000) 10.50 - ------------------------------------------------------------------------------------------------- Outstanding at December 31 870,140 $4.63 to $13.00 894,339 $4.63 to $10.6875 - ------------------------------------------------------------------------------------------------- Exercisable to: 2004 289,978 $4.63 to $6.95 312,503 $4.63 to $6.95 2006 504,201 $10.375 to $10.6875 581,836 $10.375 to $10.6875 2007 75,961 $12.625 to $13.00 - - - ------------------------------------------------------------------------------------------------- 870,140 $4.63 to $13.00 894,339 $4.63 to $10.6875 - ------------------------------------------------------------------------------------------------- Available for future grant at December 3l 163,345 162,471 - -------------------------------------------------------------------------------------------------
17. Condensed Financial Statements of First Defiance Financial Corp. (Parent Only) First Defiance Financial Corp. was organized in June 1995 and began operations on September 29, 1995. The Company's balance sheet as of December 31, 1997 and 1996 and related statements of income and cash flows for the years ended December 31, 1997 and 1996 and from inception to December 31, 1995 are as follows:
December 31 Balance Sheets 1997 1996 - -------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 670,950 $ 344,476 Investment securities available-for-sale - 6,927,616 Investment in First Federal Savings and Loan 80,321,687 74,558,462 Subordinated debt receivable from First Federal Savings and Loan 30,000,000 30,000,000 Loan receivable from First Federal Employee Stock Ownership Plan 4,972,143 5,438,254 Other assets 205,591 36,442 - -------------------------------------------------------------------------------- Total assets $ 116,170,371 $ 117,305,250 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Accrued liabilities $ 9,285,540 $ 740,588 Stockholders' equity 106,884,831 116,564,662 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 116,170,371 $ 117,305,250 - --------------------------------------------------------------------------------
Sept. 29, 1995 Year ended December 31 to December 31, Statements of Income 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Interest income $ 191,036 $ 955,190 $ 96,675 Interest on subordinated debt 2,475,000 - - Interest on loan to ESOP 454,450 499,044 131,654 Gain on sale of investments 58,600 25,527 - Non-interest expense (289,451) (582,384) (72,814) - ----------------------------------------------------------------------------------------------- Income before income taxes and equity in earnings of subsidiary 2,889,635 897,377 155,515 Income tax expense 1,124,000 363,000 20,000 - ----------------------------------------------------------------------------------------------- Income before equity in earnings of subsidiary 1,765,635 534,377 135,515 Equity in earnings of First Federal Savings and Loan 3,641,556 3,616,665 1,732,273 - ----------------------------------------------------------------------------------------------- Net income $ 5,407,191 $ 4,151,042 $ 1,867,788 - -----------------------------------------------------------------------------------------------
33 Notes to Consolidated Financial Statements 17. Condensed Financial Statement of First Defiance Financial Corp. (Parent Only) (continued)
Sept. 29, 1995 Year ended December 31 to December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Statements of Cash Flows Operating Activities Net income $ 5,407,191 $ 4,151,042 $ 1,867,788 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities (58,600) (25,527) - Tax benefit of stock option plan included in equity 48,000 - - Deferred federal income taxes (credit) 10,000 (37,000) - Equity in earnings of First Federal Savings and Loan (3,641,556) (3,616,665) (1,732,273) Dividends received from subsidiary - 30,000,000 25,560,806 Change in other assets and liabilities 8,324,388 74,028 (59,315) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 10,089,423 30,545,878 25,637,006 Investing activities Loan to subsidiary - (30,000,000) - Proceeds from sale of available-for-sale securities 7,051,480 27,247,132 - Investment in subsidiary - - (57,103,142) Loan to ESOP - - (5,981,530) Principal payments received on ESOP loan 466,111 458,954 84,322 Purchase of available-for-sale securities (112,063) (8,602,422) (25,500,000) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 7,405,528 (10,896,336) (88,500,350) Financing activities Proceeds from sale of common stock - - 63,084,672 Stock options exercised 160,803 59,972 - Purchase of common stock for treasury (14,546,636) (16,815,187) - Cash dividends paid (2,782,644) (2,771,179) - - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (17,168,477) (19,526,394) 63,084,672 - --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 326,474 123,148 221,328 Cash equivalents at beginning of year 344,476 221,328 - - --------------------------------------------------------------------------------------------------------------------------- Cash equivalents at end of year $ 670,950 $ 344,476 $ 221,328 - --------------------------------------------------------------------------------------------------------------------------- Noncash financing activities Cash dividends declared but not paid $ 720,248 $ 757,675 $ 720,928 - ---------------------------------------------------------------------------------------------------------------------------
18. Fair Value Statement of Consolidated Financial Condition The following is a comparative condensed consolidated statement of financial condition based on carrying and estimated fair values of financial instruments as of December 31, 1997 and 1996 (dollars in thousands). In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance Financial Corp.
December 31, 1997 December 31, 1996 - --------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Values Value Fair Values - --------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 8,997 $ 8,997 $ 4,752 $ 4,752 Investment securities 103,389 103,806 103,344 103,732 Loans, net 441,911 443,232 415,925 417,977 - --------------------------------------------------------------------------------------------- 554,297 $ 556,035 524,021 $526,461 Other assets 25,401 19,390 Total assets $579,698 $ 543,411 Liabilities and stockholders' equity Deposits $395,322 $ 395,451 $ 382,525 $383,273 Advances from Federal Home Loan Bank 71,665 71,665 40,821 41,000 - --------------------------------------------------------------------------------------------- 466,987 $467,116 423,346 424,273 Other liabilities 5,826 3,500 472,813 426,846 Stockholders' equity 106,885 116,565 Total liabilities and stockholders' equity $579,698 $543,411
19. Quarterly Consolidated Results of Operations (Unaudited) The following is a summary of the quarterly consolidated results of operations for 1997 and 1996 (amounts in thousands, except per share data):
Three months ended 1997 March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------- Interest income $10,601 $10,754 $11,296 $11,207 Interest expense 4,966 5,184 5,589 5,648 - ----------------------------------------------------------------------------------------------- Net interest income 5,635 5,570 5,707 5,559 Provision for loan losses 365 282 514 452 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,270 5,288 5,193 5,107 Gain on sale of securities 7 6 63 27 Non-interest income 329 351 383 461 Non-interest expense 3,254 3,378 3,487 3,974 - ----------------------------------------------------------------------------------------------- Income before income taxes 2,352 2,267 2,152 1,621 Income taxes 795 746 769 675 - ----------------------------------------------------------------------------------------------- Net income $ 1,557 $ 1,521 $ 1,383 $ 946 - ----------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.18 $ 0.18 $ 0.17 $ 0.12 - ----------------------------------------------------------------------------------------------- Diluted $ 0.17 $ 0.17 $ 0.16 $ 0.11 - ----------------------------------------------------------------------------------------------- Average shares outstanding: Basic 8,597 8,622 8,357 7,946 - ----------------------------------------------------------------------------------------------- Diluted 8,911 8,937 8,724 8,334 - -----------------------------------------------------------------------------------------------
35 Notes to Consolidated Financial Statements 19. Quarterly Consolidated Results of Operations (Unaudited) (continued)
Three months ended 1996 March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------- Interest income $10,237 $10,254 $10,263 $10,503 Interest expense 4,895 4,778 4,782 5,004 - ----------------------------------------------------------------------------------------------- Net interest income 5,342 5,476 5,481 5,499 Provision for loan losses 163 181 264 412 - ----------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 5,179 5,295 5,217 5,087 Gain on sale of securities - - - 26 Non-interest income 308 284 366 343 Non-interest expense 3,201 3,113 5,963 3,680 - ----------------------------------------------------------------------------------------------- Income (loss) before income taxes 2,286 2,466 (380) 1,776 Income taxes 751 791 (145) 600 - ----------------------------------------------------------------------------------------------- Net income $ 1,535 $ 1,675 $ (235) $ 1,176 - ----------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.15 $ 0.17 $ (0.03) $ 0.13 - ----------------------------------------------------------------------------------------------- Diluted $ 0.15 $ 0.17 $ (0.02) $ 0.13 - ----------------------------------------------------------------------------------------------- Average shares outstanding: Basic 10,323 9,875 9,392 8,875 - ----------------------------------------------------------------------------------------------- Diluted 10,447 10,003 9,544 9,117 - -----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Stock Information - -------------------------------------------------------------------------------- First Defiance's Common Stock is traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol "FDEF". The range of high and low sales prices and closing stock date for First Defiance's Common Stock, along with information on declared cash dividends is as follows:
1997 1996 - ---------------------------------------------------------------------------------------------- High Low High Low - ---------------------------------------------------------------------------------------------- Quarter Ended March 31 $14.625 $11.75 $10.8125 $10.125 June 30 14.75 12.375 11.00 10.375 September 30 16.00 14.25 11.00 9.875 December 31 16.25 14.75 12.50 10.625
Dividend Declared per Share of Common Stock 1997 1996 - ---------------------------------------------------------------------------------------------- March $0.08 $0.07 June 0.08 0.07 September 0.08 0.07 December 0.09 0.08 - ----------------------------------------------------------------------------------------------
As of March 6, 1998 there were approximately 1,915 registered holders of Common Stock. Dividends are subject to determination and declaration by the Board of Directors, which will take into account First Defiance's financial condition, results of operations, tax considerations, industry standards, economic conditions, and regulatory restrictions which affect the payment of dividends and other factors. The Board of Directors of First Defiance has adopted, subject to the considerations described above, a cash dividend policy at a rate of 36 cents per share, per annum, payable quarterly. In addition to certain federal income tax considerations, regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. Under such regulations, a savings association that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirement is generally permitted without OTS approval (but subsequent to 30 day notice to the OTS of the planned dividend) to make capital distributions during a calendar year in the amount of up to 100% of its net earnings to date during the year plus an amount equal to one-half of the amount by which its total capital to assets ratio exceeded its fully phased-in capital to assets ratio at the beginning of the year. 36 Board of Directors of First Defiance Financial Corp. and First Federal Savings and Loan Don C. Van Brackel Chairman, President and Chief Executive Officer First Defiance Financial Corp. 1,2 Edwin S. Charles Vice Chairman, Retired CEO of First Federal Savings and Loan 2,3,4 James M. Zachrich Retired Manufacturer 5,6,7 Dr. John U. Fauster, III Dentist 5,6,7 Dr. Marvin J. Ludwig President Emeritus of The Defiance College 3,6,7 Stephen L. Boomer President, Co-owner of Arps Dairy, Defiance OH 3,4,6 Dr. Douglas A. Burgei Veterinarian 2,4,5 Thomas A. Voigt Vice President, General Manager, Bryan Publishing Company, Bryan, OH 3,5,7 Gerald W. Monnin President, CEO Northwest Controls, Defiance, OH 3,4,5 1 Permanent member of Executive committee. Other board members serve on Executive committee on a rotating basis 2 Investment Committee 3 MRP-Stock Option Committee 4 Governance Committee 5 Long Range Planning Committee 6 Audit Committee 7 Compensation Committee Officers of First Defiance Financial Corp. Don C. Van Brackel Chairman, President and Chief Executive Officer William J. Small Senior Vice President and President First Federal Savings and Loan John C. Wahl Senior Vice President, Chief Financial Officer and Corporate Treasurer John W. Boesling Senior Vice President and Corporate Secretary Patricia A. Cooper Senior Vice President Jeffrey D. Vereecke Senior Vice President Dennis E. Rose, Jr. Controller Officers of First Federal Savings and Loan Executive Officers Don C. Van Brackel Chairman and Chief Executive Officer William J. Small President and Chief Operating Officer John C. Wahl Senior Vice President, Chief Financial Officer and Corporate Treasurer John W. Boesling Senior Vice President and Corporate Secretary Patricia A. Cooper Senior Vice President Jeffrey D. Vereecke Senior Vice President Vice Presidents Jack E. Brace Patrick S. Rothgery David R. Schultz Gary W. Spencer John D. Starner Frederick Warncke Thomas F. Weber J. Kevin Yarnell Controller Dennis E. Rose, Jr. Assistant Vice Presidents Cynthia S. Castor Brian A. Eitniear Gregory L. Troyer Robin L. Trudel Assistant Secretaries James M. Crow Jeffrey A. Hench Assistant Treasurer Kathryn L. Hoover Internal Auditor Bruce C. Fackler Compliance Officer Gary L. Verhoff Human Resource Manager Rachel L. Ulrich Marketing Director Robert G. McCullough General Counsel Vorys, Sater, Seymour and Pease Suite 2100 Atrium Two 221 E. Fourth St. Cincinnati, OH 45201 Transfer Agent and Registrar Registrar & Transfer Company 10 Commerce Dr. Cranford, NJ 07016 Independent Auditor Ernst & Young LLP One Seagate Toledo, OH 43604 Major Market Makers Keefe, Bruyette & Woods, Inc. Friedman, Billings, and Ramsey Co. Sandler O'Neill & Partners L.P. Tucker Anthony Incorporated Herzog, Heine, Geduld, Inc. Everen Securities Howe Barnes Investments Inc. ABN AMRO Chicago Corp. Ryan Beck & Co., Inc. Annual meeting April 21, 1998, 1:00 p.m. at the office of First Federal Savings and Loan 601 Clinton Street Defiance, Ohio 43512 Form 10-K A copy of First Defiance's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, is available without charge to all stockholders of record by writing to: John C. Wahl Senior Vice President and Chief Financial Officer First Defiance Financial Corp. 601 Clinton Street Defiance, Ohio 43512 Long-time directors Edwin S. Charles and James M. Zachrich will retire from the boards of First Defiance Financial Corp. and First Federal Savings and Loan effective with the 1998 annual meeting. Ed Charles joined the First Federal board in 1959 and served as its president and managing officer from 1972 until 1978, as president until 1988 and as chairman of the board and CEO from 1988 until 1994. He has been vice chairman since 1994. Jim Zachrich served as an outside director beginning in 1975. EX-21.1 3 Exhibit 21.1 List of Subsidiaries of First Defiance Financial Corp. First Federal Savings and Loan First Defiance Service Company EX-23.1 4 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of First Defiance Financial Corp. of our report dated January 16, 1998, included in the 1997 Annual Report to Shareholders of First Defiance Financial Corp. We also consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the 1993 Stock Incentive Plan and the 1993 Directors' Stock Option Plan of First Defiance Financial Corp. of our report dated January 16, 1998, with respect to the consolidated financial statements of First Defiance Financial Corp. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/Ernst & Young LLP -------------------- Ernst & Young LLP Toledo, Ohio March 27, 1998 EX-27.1 5
9 1,000 YEAR DEC-31-1997 DEC-31-1997 8,149 848 0 0 82,436 20,953 21,370 444,597 2,686 579,698 395,322 67,135 5,827 4,530 0 0 85 106,800 579,698 37,302 6,458 98 43,858 17,992 21,387 22,471 1,613 103 14,093 8,392 5,407 0 0 5,407 0.65 0.62 4.24 1,365 0 0 0 2,217 1,341 197 2,686 2,686 0 0
EX-27.2 6 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 1,000 YEAR YEAR 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 4,394 3,102 3,707 3,539 2,702 4,291 1,650 4,565 2,812 2,299 0 0 0 0 0 0 0 0 0 0 93,041 77,407 88,809 77,176 70,885 26,073 25,937 24,578 23,210 22,235 26,692 26,325 25,000 23,462 22,505 387,020 415,925 393,786 399,176 410,052 1,817 2,217 1,896 1,942 2,019 525,550 543,411 528,222 520,666 524,247 381,779 382,525 383,710 384,604 380,760 0 35,220 0 0 12,000 3,422 3,500 3,663 3,512 5,102 6,842 5,601 6,662 5,945 5,719 0 0 0 0 0 0 0 0 0 0 110 95 110 104 99 133,396 116,470 134,077 126,501 120,509 525,550 543,411 528,222 520,666 524,247 32,003 34,635 8,431 16,999 25,743 5,915 6,430 1,731 3,366 4,849 647 192 75 125 161 38,565 41,257 10,237 20,490 30,753 18,857 18,579 4,779 9,438 14,043 20,289 19,459 4,895 9,673 14,455 18,276 21,798 5,342 10,817 16,298 377 1,020 163 344 608 (75) 25 0 0 0 10,560 15,958 3,201 6,314 12,231 8,377 6,148 2,286 4,752 4,373 5,521 4,151 1,535 3,210 2,976 0 0 0 0 0 0 0 0 0 0 5,521 4,151 1,535 3,210 2,976 .54 .43 .15 .32 .30 .53 .42 .15 .31 .30 3.87 4.31 4.23 4.35 4.32 772 411 1,142 795 981 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,733 1,817 1,817 1,817 1,817 344 775 111 282 502 51 156 27 64 96 1,817 2,217 1,896 1,942 2,019 1,817 2,217 1,896 1,942 2,019 0 0 0 0 0 0 0 0 0 0
EX-27.3 7 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 2,473 4,362 4,251 2,736 847 328 0 0 0 0 0 0 72,838 71,138 88,920 24,712 23,577 22,521 25,371 23,994 22,998 423,535 432,082 436,153 2,327 2,425 2,565 546,060 552,225 574,364 378,261 383,393 383,997 41,220 42,535 67,835 4,193 3,690 4,930 5,432 4,865 4,696 0 0 0 0 0 0 94 94 90 116,860 117,648 112,816 546,060 552,225 574,364 9,031 18,251 27,716 1,558 3,059 4,855 11 44 80 10,601 21,354 32,651 4,347 8,833 13,392 4,966 10,149 15,739 5,635 11,205 16,912 365 646 1,161 6 12 76 3,254 6,632 10,119 2,352 4,620 6,772 1,557 3,079 4,462 0 0 0 0 0 0 1,557 3,079 4,462 .18 .36 .52 .17 .34 .50 4.36 4.29 4.29 1,935 2,236 2,229 0 0 0 0 0 0 0 0 0 2,217 2,217 2,217 285 512 965 31 74 152 2,327 2,425 2,565 2,327 2,425 2,565 0 0 0 0 0 0
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