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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2004
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or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-26850
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FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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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)
Registrant's telephone number, including area code: (419) 782-5015
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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)
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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 Registrant's 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|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes |X| No |_|
As of March 4, 2005, there were issued and outstanding 7,015,329 shares of the
Registrant's 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 June 30, 2004 was approximately $155.1 million
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Documents Incorporated by Reference
Part II and Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 19, 2005 are incorporated by reference into
Part II and III thereof.
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PART I
Item 1. Business
First Defiance Financial Corp. (First Defiance or the Company) is a
unitary thrift holding company that, through its subsidiaries (the
Subsidiaries), focuses on traditional banking and property and casualty, life
and group health insurance products. The Company's traditional banking
activities include originating and servicing residential, commercial, and
consumer loans and providing a broad range of depository services. The Company's
insurance activities consist primarily of commissions relating to the sale of
property and casualty, life and group health insurance and investment products.
At December 31, 2004, the Company had consolidated assets of $1.127
billion, consolidated deposits of $797.7 million, and consolidated stockholder's
equity of $126.9 million. The Company was incorporated in Ohio in June of 1995.
Its principal executive offices are located at 601 N. Clinton Street, Defiance,
Ohio 43512, and its telephone number is (419) 782-5015.
First Defiance previously owned The Leader Mortgage Company (The Leader),
a mortgage banking company located in Cleveland, Ohio. Effective April 1, 2002,
First Defiance sold The Leader to U.S. Bank Home Mortgage, a unit of U.S. Bank.
The gain from the sale of that business, as well as all operating results
associated with The Leader, are reported as results of discontinued operations
for all periods. The results of operations of the subsidiaries and the holding
company are reflected in continuing operations.
First Defiance's Internet site, www.fdef.com contains a hyperlink under
the Investor Relations section to EDGAR where the annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge as soon as
reasonably practicable after First Defiance has filed the report with the SEC
-2-
The Subsidiaries
The Company's core business operations are conducted through the following
Subsidiaries:
First Federal Bank of the Midwest: First Federal Bank of the Midwest
(First Federal) is a federally chartered stock savings bank headquartered in
Defiance, Ohio. As of December 31, 2004, it conducts operations through its main
office and nineteen full service branch offices in Defiance, Fulton, Hancock,
Henry, Lucas, Paulding, Seneca, Williams and Wood Counties in northwest Ohio. On
January 21, 2005, First Defiance completed the acquisition of ComBanc, Inc. and
its subsidiary, the Commercial Bank, Delphos, Ohio. That acquisition added four
branch offices located in Allen County, Ohio which is adjacent to First
Defiance's existing footprint. First Defiance has also entered into an agreement
to acquire the Genoa Savings and Loan Company, which operates offices in the
metropolitan Toledo, Ohio area. That transaction is expected to close during the
2005 second quarter. 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 (FHLB) System.
First Federal is primarily engaged in community banking. It attracts
deposits from the general public through its offices and uses those and other
available sources of funds to originate residential real estate loans,
non-residential real estate loans, commercial loans, home improvement and home
equity loans and consumer loans. In addition, First Federal 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, including REMICs and CMOs and corporate bonds.
First Insurance & Investments: First Insurance & Investments (First
Insurance) is a wholly owned subsidiary of First Defiance. First Insurance is an
insurance agency that does business in the Defiance, Ohio area. First Insurance
offers property and casualty insurance, life insurance, group health insurance,
and investment products.
Securities
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. The Chief Financial Officer, the Chief Operating Officer,
and the Chief Executive Officer of First Federal can each approve transactions
up to $1 million. Two of the three officers are required to approve transactions
between $1 million and $5 million. All transactions in excess of $5 million must
be approved by the Board of Directors.
First Defiance's investment portfolio includes 22 CMO and REMIC issues
totaling $24.9 million, all of which are fully amortizing securities. All such
investments are considered derivative securities. None of the securities are
considered to be "high risk" based on the stress test developed by the banking
regulators. Management does not believe the risks associated with any of these
investments are significantly different from risks associated with other
pass-through mortgage-backed securities. First Defiance does not invest in
off-balance sheet derivative securities.
-3-
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.
The amortized cost and fair value of securities at December 31, 2004 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)
Mortgage-backed
securities $ 4,444 4.53% $ 9,640 4.43% $ 3,381 4.45% $ 673 4.65% $ 18,138 4.47%
Corporate bonds -- -- 6,000 5.80 -- -- -- -- 6,000 5.80
REMICs and CMOs 7,854 3.04 13,838 4.18 3,234 4.49 2 1.22 24,928 3.86
U.S. government and
federal agency
obligations 12,477 2.65 31,500 4.94 4,570 4.90 -- -- 48,547 4.35
Obligations of states
and political
subdivisions (1) 1,050 6.81 4,325 6.32 11,012 6.38 14,335 6.46 30,722 6.42
Trust preferred stock -- -- 6,250 4.28 6,250 4.28
-------- -------- -------- -------- -------
Total $ 25,825 $ 65,303 $ 22,197 $ 21,260 134,585
======== ======== ======== ========
Equity securities 69
Unamortized
premiums/
(discounts) 1,325
Unrealized gain on
securities
available
for sale 3,279
--------
Total $139,258
========
(1) Tax exempt yield based on effective tax rate of 35%. Actual coupon rate is
approximately equal to the weighted average rate disclosed in the table
times 65%.
-4-
The carrying value of investment securities is as follows:
December 31
2004 2003 2002
----------------------------------
(In Thousands)
Available-for-sale securities:
Corporate bonds $ 6,468 $ 7,716 $ 27,453
U. S. treasury and federal agency obligations 50,313 76,875 101,833
Obligations of state and political subdivisions 32,092 32,835 31,115
CMOs, REMICS and mortgage-backed securities 41,765 43,433 39,845
Other 6,365 7,400 9,358
----------------------------------
Total $137,003 $168,259 $209,604
==================================
Held-to-maturity securities:
Mortgage-backed securities $ 1,725 $ 2,186 $ 3,331
Obligations of state and political
subdivisions 530 590 590
----------------------------------
Total $ 2,255 $ 2,776 $ 3,921
==================================
For additional information regarding First Defiance's investment portfolio
refer to Note 6 to the consolidated financial statements.
Interest-Bearing Deposits
First Defiance had interest-earning deposits in the FHLB of Cincinnati
amounting to $456,000 and $1.3 million at December 31, 2004 and 2003,
respectively.
Residential Loan Servicing Activities
Servicing mortgage loans for investors involves a contractual right to
receive a fee for processing and administering loan payments on mortgage loans
that are not owned by the Company and are not included on the Company's balance
sheet. This processing involves collecting monthly mortgage payments on behalf
of investors, reporting information to those investors on a monthly basis and
maintaining custodial escrow accounts for the payment of principal and interest
to investors and property taxes and insurance premiums on behalf of borrowers.
At December 31, 2004, First Federal serviced 5,710 loans totaling $463.8
million. The vast majority of the loans serviced for others are fixed rate
conventional mortgage loans.
-5-
As compensation for its mortgage servicing activities, the Company
receives servicing fees, usually 0.25% per annum of the loan balances serviced,
plus any late charges collected from delinquent borrowers and other fees
incidental to the services provided. In the event of a default by the borrower,
the Company receives no servicing fees until the default is cured.
The following table shows the delinquency statistics for the mortgage
loans serviced by the Company as of the dates presented.
December 31
2004 2003 2002
Percentage Percentage Percentage
Number of Servicing Number of Servicing Number of Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio
----------------------------------------------------------------------------
Loans delinquent for:
30-59 days 9 0.16% 2 0.04% 4 0.09%
60-89 days 3 0.05 1 0.02 1 0.02
90 days and over 6 0.11 5 0.09 1 0.02
----------------------------------------------------------------------------
Total delinquencies 18 0.32% 8 0.15% 6 0.13%
============================================================================
Foreclosures 5 0.09% 2 0.04% -- --
============================================================================
The following table sets forth certain information regarding the number
and aggregate principal balance of the mortgage loans serviced by the Company,
including both fixed and adjustable rate loans, at various interest rates:
December 31
-----------------------------------------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Less than 5.00% 770 $ 72,321 15.59% 694 $ 66,512 15.36% 6 $ 967 0.30%
5.00% - 5.99% 2,881 244,842 52.79 2,476 213,267 49.24 1,010 91,620 28.20
6.00% - 6.99% 1,609 126,132 27.20 1,591 122,338 28.24 2,005 156,888 48.28
7.00% - 7.99% 383 17,810 3.84 522 26,634 6.15 1,092 66,835 20.57
8.00% - 8.99% 63 2,503 0.54 99 4,179 0.96 178 8,408 2.59
9.00% and over 4 182 0.04 5 203 0.05 5 206 0.06
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Total 5,710 $463,790 100.00% 5,387 $433,133 100.00% 4,296 $324,924 100.00%
===========================================================================================================
-6-
Loan servicing fees decrease as the principal balance on the outstanding
loan decreases and as the remaining time to maturity of the loan shortens. The
following table sets forth certain information regarding the remaining maturity
of the mortgage loans serviced by the Company as of the dates shown.
2004 2003
------------------------------------------------------------------------------------------------
% of %
% of Unpaid Unpaid % of Unpaid of Unpaid
Number Number of Principal Principal Number Number Principal Principal
Maturity of Loans Loans Amount Amount of Loans of Loans Amount Amount
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
1-5 years 392 6.88% $ 30,317 6.54 302 5.61% $ 22,838 5.27%
6-10 years 614 10.75 41,076 8.86 673 12.49 47,819 11.04
11-15 years 2,122 37.16 153,680 33.14 2,130 39.54 156,847 36.21
16-20 years 787 13.78 67,964 14.65 762 14.15 66,135 15.27
21-25 years 107 1.87 8,551 1.84 74 1.37 5,147 1.19
More than 25
years 1,688 29.56 162,202 34.97 1,446 26.84 134,347 31.02
------------------------------------------------------------------------------------------------
Total 5,710 100.00% $463,790 100.00% 5,387 100.00% $433,133 100.00%
================================================================================================
2002
----------------------------------------------
% of
% of Unpaid Unpaid
Number Number Principal Principal
Maturity of Loans of Loans Amount Amount
- ---------------------------------------------------------------
(Dollars in Thousands)
1-5 years 154 3.58% $ 8,956 2.76%
6-10 years 560 13.04 38,098 11.73
11-15 years 1,652 38.45 115,385 35.51
16-20 years 605 14.08 49,694 15.29
21-25 years 92 2.14 5,503 1.69
More than 25
years 1,233 28.71 107,288 33.02
----------------------------------------------
Total 4,296 100.00% $324,924 100.00%
==============================================
Lending Activities
General - A savings bank 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. 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, a savings bank may lend to one borrower up to $500,000 "for
any purpose". At December 31, 2004, First Federal's limit on loans-to-one
borrower was $16.8 million and its five largest loans (including available lines
of credit) or groups of loans to one borrower, including related entities, were
$14.1 million, $10.3 million, $9.7 million, $8.9 million and $7.8 million. All
of these loans or groups of loans were performing in accordance with their terms
at December 31, 2004.
Loan Portfolio Composition - The net increase in net loans outstanding
over the prior year was $140.1 million, $164.8 million, and $76.6 million in
2004, 2003, and 2001, 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.
-7-
The following table sets forth the composition of the Company's loan
portfolio by type of loan at the dates indicated.
December 31
------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Real estate:
One to four family
residential $190,070 21.1% $167,983 22.2% $157,691 26.6% $167,764 32.9% $229,791 42.5%
Five or more family
residential 39,049 4.4 30,322 4.0 32,324 5.5 21,757 4.3 15,686 2.9
Nonresidential real estate 376,115 41.9 311,101 41.1 195,430 33.0 152,274 29.8 120,529 22.3
Construction 15,507 1.7 16,830 2.2 15,357 2.6 7,875 1.5 9,627 1.8
------------------------------------------------------------------------------------------------
Total real estate loans 620,741 69.1 526,236 69.5 400,802 67.7 349,670 68.5 375,633 695
Other:
Consumer finance 45,213 5.0 39,808 5.3 37,562 6.3 40,721 8.0 52,113 9.6
Commercial 141,644 15.8 120,677 15.9 104,070 17.6 83,690 16.4 81,138 15.0
Home equity and improvement 90,839 10.1 70,038 9.2 49,889 8.4 36,179 7.1 31,836 5.9
Mobile home 299 -- 449 0.1 17 -- 12 -- 29 --
------------------------------------------------------------------------------------------------
Total non-real estate loans 277,995 30.9 230,972 30.5 191,538 32.3 160,602 31.5 165,116 30.5
------------------------------------------------------------------------------------------------
Total loans 898,736 100.0% 757,208 100.0% 592,340 100.0% 510,272 100.0% 540,749 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 6,341 6,079 7,255 2,887 3,415
Deferred loan origination
fees 1,232 1,158 1,212 1,024 1,041
Allowance for loan losses 9,956 8,844 7,496 6,548 6,330
-------- -------- -------- -------- --------
Net loans $881,207 $741,127 $576,377 $499,813 $529,963
======== ======== ======== ======== ========
Included above, First Defiance had $6.2 million, $5.9 million, $15.3
million and $672,000 in loans classified as held for sale at December 31, 2004,
2003, 2002 and 2001, respectively. The fair value of such loans, which are all
single-family residential mortgage loans, approximated their carrying value for
both years presented. This information for 2000 is not available.
Contractual Principal, Repayments and Interest Rates - The following table
sets forth certain information at December 31, 2004 regarding the dollar amount
of gross loans maturing in First Defiance's portfolio, based on the contractual
terms to maturity. 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+
Years After December 31
Due Before December 31 --------------------------------------------
2005 2006 2004 2004 2004 2004 Total
---------------------------------------------------------------------------------
(In Thousands)
Real estate $ 98,073 $ 40,798 $104,144 $307,025 $ 35,252 $ 35,450 $620,742
Nonreal estate:
Commercial 74,914 21,352 36,540 8,492 226 120 141,644
Home equity and
improvement 2,391 515 8,987 1,687 862 76,397 90,839
Mobile home 46 67 103 83 -- -- 299
Consumer finance 17,933 10,899 15,637 581 119 43 45,212
---------------------------------------------------------------------------------
Total $193,357 $ 73,631 $165,411 $317,868 $ 36,459 $112,010 $898,736
=================================================================================
-8-
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 gross loans due after
one year from December 31, 2004 which have fixed interest rates or which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
--------------------------------------------
(In Thousands)
Real estate $ 98,262 $424,407 $522,669
Commercial 32,297 34,433 66,730
Other 36,302 79,678 115,980
--------------------------------------------
$166,861 $538,518 $705,379
============================================
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 existing customers, real estate brokers, developers,
builders, and existing customers; newspapers and radio advertising; and walk-in
customers.
First Defiance's loan approval process for all types of loans is intended
to assess the borrowers ability to repay the loan, the viability of the loan,
and the adequacy of the value of the collateral that will secure the loan.
A commercial loan application is first reviewed and underwritten by one of
the commercial loan officers, who may approve credits within their lending
limit. Another loan officer with limits sufficient to cover the exposure must
approve credits exceeding an individual's lending limit. All credits which
exceed $100,000 in aggregate exposure must be presented for review or approval
to the Senior Loan Committee comprised of senior lending personnel. Credits
which exceed $1,000,000 in aggregate exposure must be presented for approval to
the Executive Loan Committee, a committee of First Federal's Board of Directors.
A mortgage loan originator initially reviews a mortgage loan. Approval for
conforming mortgage loans which are sold to the secondary market occurs
centrally by the Senior Vice President of Mortgage Lending or approved
underwriters. Either the Senior Vice President of Mortgage Lending or the Chief
Lending Officer must approve non-conforming mortgage loans.
-9-
Consumer loan officers underwrite and may approve direct consumer credits
within their lending limits. Another loan officer with limits sufficient to
cover the exposure must approve credits exceeding an officer's lending limits.
All indirect consumer credits are underwritten and approved by a centralized
underwriting department.
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 22.1% of First Defiance's total
originations of mortgage loans in 2004 compared to 14.71% and 14.80% during 2003
and 2002, respectively.
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.
The following table shows total loans originated, loan reductions, and the
net increase in First Defiance's total loans during the periods indicated:
Years Ended December 31
2004 2003 2002
----------------------------------
(In Thousands)
Loan originations:
Single family residential $132,463 $291,481 $241,138
Multi-family residential 76,483 58,370 58,111
Non-residential real estate 137,524 165,164 98,116
Construction 20,983 20,553 17,751
Commercial 110,915 104,007 86,329
Home equity and improvement 38,552 38,150 32,310
Consumer finance 27,250 19,366 23,112
----------------------------------
Total loans originated 544,170 697,091 556,867
Loans acquired in branch acquisition -- 79,094 --
Loan reductions:
Loan pay-offs 223,976 222,163 190,485
Mortgage loans sold 104,968 293,673 207,348
Periodic principal repayments 70,566 83,879 95,016
----------------------------------
399,510 599,715 492,849
----------------------------------
Net increase in total loans $144,660 $176,470 $ 64,018
==================================
-10-
The loans acquired in the 2003 branch acquisition by category were as
follows: Single family residential - $21.4 million, non-residential real estate
- - $35.4 million, Commercial - $16.8 million, Home equity and improvement - $1.8
million and Consumer finance - $3.6 million.
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, 2004, 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 that are past due.
30 to 59 Days 60 to 89 Days 90 Days and Over Total
-------------------- -------------------- -------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
-------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
Single - family residential $ 463 0.05% $ 831 0.09% $ 419 0.05% $1,713 0.19%
Nonresidential and Multi-
family residential 4,453 0.51 5,223 0.59 1,014 0.11 10,689 1.21
Home equity and
improvement 341 0.04 32 0.01 6 -- 379 0.05
Consumer finance 306 0.03 36 0.01 4 -- 346 0.04
Commercial 351 0.04 7 -- 450 0.05 808 0.09
-----------------------------------------------------------------------------------------
Total $5,914 0.67% $6,129 0.70% $1,893 0.21% $13,935 1.58%
=========================================================================================
Nonperforming Assets - All loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collectibility 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 nonaccrual status, total unpaid
interest accrued to date is reversed. 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 it will be unable to collect all amounts due (both principal
and interest) according to the contractual terms of the loan agreement. 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 estimated recoverability of the impaired loan is less than the recorded
investment, First Defiance will recognize impairment by creating a valuation
allowance.
-11-
Loans having recorded investments of $505,000, $563,000 and $593,000 were
considered impaired as of December 31, 2004, 2003 and 2002, respectively. These
amounts exclude large groups of small-balance homogeneous loans that are
collectively evaluated for impairment such as residential mortgage, consumer
installment, and credit card loans. There was $36,000 of interest received and
recorded in income during 2004 related to impaired loans including interest
received and recorded in income prior to such impaired loan designation. There
was $29,000 and $46,000 recorded in 2003 and 2002 respectively. Unrecorded
interest income based on the loan's contractual terms on these impaired loans
and all non-performing loans in 2004, 2003 and 2002 was $102,000, $73,000, and
$93,000, respectively. The average recorded investment in impaired loans during
2004, 2003 and 2002 was $732,000, $892,000 and $697,000, respectively. The total
allowance for loan losses related to these loans was $255,000, $297,000, and
$359,000 at December 31, 2004, 2003 and 2002, respectively.
Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. First Defiance also repossesses other assets
securing loans, consisting primarily of automobiles. 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, 2004, First Defiance's total non-performing loans
amounted to $1.9 million or 0.21% of total loans, compared to $2.5 million or
0.34% of total loans, at December 31, 2003. Non-performing loans are loans which
are more than 90 days past due. The nonperforming loan balance includes $204,000
of loans also considered impaired.
-12-
The following table sets forth the amounts and categories of First
Defiance's non-performing assets (excluding impaired loans not considered
non-performing) and troubled debt restructurings at the dates indicated.
December 31
2004 2003 2002 2001 2000
------------------------------------------------------
(Dollars in Thousands)
Nonperforming loans:
Single-family residential $ 419 $ 471 $ 404 $1,151 $ 671
Nonresidential and multi-family
residential real estate 1,014 1,092 1,217 972 572
Commercial (1) 450 949 879 110 140
Mobile home -- -- -- -- --
Consumer finance 10 33 25 157 66
------------------------------------------------------
Total nonperforming loans 1,893 2,545 2,525 2,390 1,449
Real estate owned 49 397 175 81 --
Other repossessed assets 49 7 31 55 41
------------------------------------------------------
Total repossessed assets 98 404 206 136 41
------------------------------------------------------
Total nonperforming assets $1,991 $2,949 $2,731 $2,526 $1,490
======================================================
Troubled debt restructurings $ -- $ -- $ -- $ -- $ --
======================================================
Total nonperforming assets as a
percentage of total assets of
continuing operations 0.18% 0.28% 0.31% 0.39% 0.22%
======================================================
Total nonperforming loans and troubled
debt restructurings as a percentage of
total loans 0.21% 0.34% 0.43% 0.47% 0.27%
======================================================
Total nonperforming assets and troubled
debt restructurings as a percentage of
total assets 0.18% 0.28% 0.31% 0.39% 0.22%
======================================================
Allowance for loan losses as a percent of
total nonperforming assets 500.30% 299.90% 274.48% 259.22% 424.83%
======================================================
(1) - In 2000 nonresidential and multi-family real estate loans were included
in commercial loans
In addition to the $1.9 million of loans reported above and the $281,000
of loans considered impaired, which are not included in the loans reported
above, there are approximately $19.3 million of performing loans where known
information about possible credit problems of the borrowers causes management to
have doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in the inclusion of such loans in
non-performing loans at some future date.
-13-
Allowance for Loan Losses - First Defiance maintains an allowance for loan
losses to absorb probable losses in the loan portfolio. The balance of the
allowance is based upon an assessment of prior loss experience, the volume and
type of lending conducted by First Defiance, industry standards, past due loan
amounts and trends, general economic conditions and other factors related to the
collectibility of the loan portfolio. The Company principally uses its own loss
experience in calculating its loan loss provision. However, in those instances
where the Company's experience with certain types of lending is new or recent
and therefore historical losses are less meaningful, management will consider
such other factors as industry loss statistics, regulatory guidance, experience
of other financial institutions operating in the same geographic area, and
inherent risks associated with the borrower in determining the required
allowance. In evaluating the adequacy of its allowance each quarter, management
grades all loans in the commercial portfolio using a scale of one to ten. Loans
graded in the three worst categories (substandard, doubtful and loss) generally
are specifically reserved for. Loans graded as substandard would generally have
reserves that range between zero and 20% based on management's knowledge of the
credit and other local factors. Substandard loans that have no reserves
allocated to them generally exhibit negative financial characteristics, such as
poor cash flow or declining sales, but have offsetting credit strengths, such as
an abundance of collateral or the existence of a strong guarantor. Loans
classified as doubtful are generally reserved at 50% and loans classified as
loss are reserved at 100%, unless other facts and circumstances warrant a
different percentage. Management also engages a third-party to perform an
independent loan review on a semi-annual basis. That third party reviews all
loan relationships in excess of $250,000 and, among other things, challenges
management's loan grades.
Loans charged-off are charged against the allowance when such loans meet
the Company's established policy on loan charge-offs and the allowance itself is
adjusted quarterly by recording a provision for loan losses. As such, actual
losses and losses provided for should be approximately the same if the overall
quality, composition and size of the portfolio remains static. To the extent
that the portfolio grows at a rapid rate, such as the Company has experienced,
or overall quality deteriorates, the provision generally will exceed
charge-offs. Although management believes that it uses the best information
available to make such determinations, future adjustments to the allowances may
be necessary, and net earnings could be significantly affected, if circumstances
differ substantially from the assumptions used in making the initial
determinations.
-14-
At December 31, 2004, First Defiance's allowance for loan losses amounted
to $10.0 million compared to $8.8 million at December 31, 2003. As of December
31, 2004 and 2003, $21,000 and $87,000, respectively, constituted an allowance
with respect to specific loans or assets held for sale. The following table sets
forth the activity in First Defiance's allowance for loan losses during the
periods indicated.
Years Ended December 31
2004 2003 2002 2001 2000
-----------------------------------------------------------------
(Dollars in Thousands)
Allowance at beginning of year $ 8,844 $ 7,496 $ 6,548 $ 6,330 $ 6,504
Provision for credit losses 1,549 1,719 1,451 993 635
Charge-offs:
One to four family residential real estate 52 18 110 152 --
Commercial real estate 58 162 184 130 182
Commercial 390 375 36 151 155
Consumer finance 186 170 390 599 692
Mobile home -- -- -- -- 2
-----------------------------------------------------------------
Total charge-offs 686 725 720 1,032 1,031
Recoveries 249 354 217 257 222
-----------------------------------------------------------------
Net charge-offs 437 371 503 775 809
-----------------------------------------------------------------
Ending allowance $ 9,956 $ 8,844 $ 7,496 $ 6,548 $ 6,330
=================================================================
Allowance for loan losses to total non-
performing loans at end of year 526.2% 347.5% 296.9% 274.0% 436.9%
Allowance for loan losses to total loans at end
of year 1.12% 1.18% 1.32% 1.29% 1.17%
Allowance for loan losses to net charge-offs
for the year 2,278.26% 2,383.82% 1,490.26% 844.90% 782.45%
Net charge-offs for the year to average loans 0.05% 0.06% 0.10% 0.15% 0.16%
The provision for credit losses has increased significantly over the
five-year period shown in the above table in conjunction with significant growth
in the commercial loan and non-residential real estate loan portfolios over
those same periods.
The percentage of the allowance for loan losses to total loans declined at
December 31, 2004 compared with the prior year primarily because classified
assets have grown at a slower rate than the loan balances as a whole, indicating
an overall improvement in the credit quality of the portfolio. In addition, in
conjunction with the RFC acquisition, management recorded a fair value discount
of $1.7 million to offset expected credit losses in the acquired portfolio which
resulted in loans being recorded at their estimated fair value. Given that
discount, no allowance for loan losses was required for the $40.9 million of
loans remaining in that portfolio at December 31, 2004. Non-performing assets
decreased to $2.0 million at December 31, 2004 from $2.9 million at December 31,
2003, a decrease of 32.5%. During that same period, total loan balances
increased by 19%. Based on continued low levels of charge-offs in the commercial
and non-residential real estate loan portfolios and improved charge-off
experience in the consumer portfolio, management has reduced the amount provided
for portfolio-level reserves. As a result of those reductions, the allowance as
a percentage of total loans outstanding continued to decline in 2004. Those
historical trends are monitored by management on a quarterly basis.
-15-
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
2004 2003 2002 2001 2000
-----------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
total loans total loans total loans total loans total loans
Amount by category Amount by category Amount by category Amount by category Amount by category
-----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Single family
residential $ 239 22.8% $ 386 24.4% $ 587 29.2% $ 613 34.4% $ 396 44.3%
Nonresidential and
Multi-family
residential real
estate 6,538 46.3 6,265 45.1 4,293 38.5 2,847 34.1 2,310 25.2
Other:
Commercial loans 2,454 15.8 1,424 15.9 1,729 17.6 1,734 16.4 1,355 15.0
Consumer and
home equity and
improvement
loans 725 15.1 769 14.6 887 14.7 1,354 15.1 2,269 15.5
-----------------------------------------------------------------------------------------------------------
$9,956 100.0% $8,844 100.0% $7,496 100.0% $6,548 100.0% $6,330 100.0%
===========================================================================================================
(1) In 2000, the breakdown between commercial real estate and non-real estate
commercial loans was not available. As a result, all commercial real
estate loans were reported in the commercial classification.
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 FHLB 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 checking accounts, money market accounts,
regular savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$77.0 million at December 31, 2004. 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.
-16-
To supplement its funding needs, First Defiance also utilizes brokered
Certificates of Deposit. Such deposits, which were primarily acquired in prior
years to fund operations now discontinued, have maturities ranging from three
months to one year. The total balance of brokered certificates of deposit was
$61.2 million at December 31, 2004. Brokered CDs at December 31, 2003 totaled
$27.5 million. Brokered certificates of deposit are not included in the
following tables for a portion of 2002 as the interest associated with those
deposits were allocated to discontinued operations.
Average balances and average rates paid on deposits are as follows:
Years Ended December 31
2004 2003 2002
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------
(Dollars in Thousands)
Non-interest-bearing
demand deposits $ 56,241 -- $ 47,505 -- $ 33,089 --
Interest bearing
demand deposits 232,044 0.74% 198,039 0.74% 162,664 1.66%
Savings deposits 53,247 0.25 47,047 0.36 39,129 0.94
Time deposits 413,796 2.68 387,948 3.04 345,740 3.89
---------------------------------------------------------------
Totals $755,328 1.71% $680,539 1.97% $580,622 2.84%
===============================================================
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, 2004.
(In Thousands)
--------------
Certificates of deposit maturing in quarter ending:
March 31, 2005 $ 18,052
June 30, 2005 11,102
September 30, 2005 15,786
December 31, 2005 8,743
After December 31, 2005 53,014
--------
Total certificates of deposit with
balances of $100,000 or more $106,697
========
The following table details the deposit accrued interest payable as of
December 31:
2004 2003
-----------------
(In Thousands)
Interest bearing demand deposits and
money market accounts $ 58 $ 16
Savings Accounts -- --
Certificates 432 520
-----------------
$490 $536
=================
For additional information regarding First Defiance's deposits see Note 11
to the financial statements.
-17-
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, non-residential loans and investment
securities 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.
The following table sets forth certain information as to First Defiance's
FHLB advances and other borrowings at the dates indicated.
December 31
2004 2003 2002
------------------------------------
(Dollars in Thousands)
Long-term:
FHLB advances $151,713 $153,522 $146,096
Weighted average interest rate 4.62% 4.60% 4.95%
Notes -- -- 10.00
Weighted average interest rate -- -- 7.50
Short-term:
FHLB advances $ 26,500 $ 11,000 $ 3,000
Weighted average interest rate 2.20% 1.12% 1.50%
Revolving borrowings 3,000 -- --
Weighted average interest rate 2.25% -- --
Securities sold under agreement to repurchase $ 11,804 $ 12,267 $ 4,289
Weighted average interest rate 1.57% 0.85% 1.20%
The following table sets forth the maximum month-end balance and average
balance of First Defiance's Long-term FHLB advances and other borrowings during
the periods indicated.
Years Ended December 31
2004 2003 2002
------------------------------------
(Dollars in Thousands)
Long-term:
FHLB advances:
Maximum balance $153,373 $154,930 $156,269
Average balance 152,547 152,939 140,399
Weighted average interest rate 4.61% 4.78% 5.08%
Term Borrowings:
Maximum balance -- $ 7 $ 46
Average balance -- 1 30
Weighted average interest rate -- 7.50% 7.50%
The following table sets forth the maximum month-end balance and average
balance of First Defiance's short-term FHLB advances and other borrowings during
the periods indicated.
-18-
Years Ended December 31
2004 2003 2002
---------------------------------
(Dollars in Thousands)
Short-term:
FHLB advances:
Maximum balance $28,500 $14,250 $90,500
Average balance 15,577 2,296 17,118
Weighted average interest rate 1.55% 1.31% 2.08%
Revolving credit agreements:
Maximum balance $ 3,000 $ -- $21,900
Average balance 1,349 -- 6,787
Weighted average interest rate 2.20% -- 3.68%
Securities sold under agreement to
repurchase:
Maximum balance $12,606 $12,860 $ 4,298
Average balance 10,612 7,569 777
Weighted average interest rate 1.08% 1.02% 1.29%
First Defiance borrows funds under a variety of programs at the FHLB. As
of December 31, 2004, there was $151.7 million outstanding under various
long-term FHLB advance programs. First Defiance utilizes short-term advances
from the FHLB to meet cash flow needs and for short-term investment purposes.
There were $26.5 million and $11.0 million in short-term advances outstanding at
December 31, 2004 and 2003, respectively. At December 31, 2004, $26.5 million
was outstanding under First Defiance's REPO advance line of credit. The total
available under the line is $75.0 million. Additionally, First Defiance has
$15.0 million available under a Cash Management advance line of credit. Amounts
are generally borrowed under these lines on an overnight basis.
As a member of the FHLB of Cincinnati, First Federal must maintain an
investment in the capital stock of that FHLB in an amount principally equal to
..15% of total assets plus an amount of at least 2% but no more than 4% of its
non-grandfathered mission asset activity (as defined in the FHLB's regulations).
First Federal is permitted to own stock in excess of the minimum requirement and
is in compliance with the minimum requirement with an investment in stock of the
FHLB of Cincinnati of $13.4 million at December 31, 2004.
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 FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
homebuyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.
For additional information regarding First Defiance's FHLB advances and
other debt see Notes 12 and 13 to the financial statements.
-19-
Employees
First Defiance had 284 employees at December 31, 2004. None of these
employees are represented by a collective bargaining agent, and First Defiance
believes that it enjoys good relations with its personnel.
Competition
Competition in originating loans arises mainly from other savings
associations, commercial banks, and mortgage companies. The distinction among
market participants is based primarily on price and, to a lesser extent, the
quality of customer service and name recognition. The Company competes for loans
by offering competitive interest rates and product types and by seeking to
provide a higher level of personal service to mortgage brokers and borrowers
than is furnished by competitors. However, First Federal does have a significant
market share of the lending markets in which it conducts operations.
Management believes that First Federal's most direct competition for
deposits comes from local financial institutions. The distinction among market
participants is based on price and the quality of customer service and name
recognition. First Federal's cost of funds fluctuates with general market
interest rates. During certain interest rate environments, additional
significant competition for deposits may be expected from corporate and
governmental debt securities, as well as from money market mutual funds. First
Federal competes for conventional deposits by emphasizing quality of service,
extensive product lines and competitive pricing.
-20-
Regulation
General - First Defiance and First Federal are subject to regulation,
examination and oversight by the OTS. Because the FDIC insures First Federal's
deposits, First Federal is also subject to examination and regulation by the
FDIC. First Defiance and First Federal must file periodic reports with the OTS
and 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 subject to various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosure, equal credit opportunity, and, in the case
of First Federal, fair credit reporting and community reinvestment. Failure to
abide by federal laws and regulations governing community reinvestment could
limit the ability of First Federal to open a new branch or engage in a merger
transaction. Community reinvestment regulations evaluate how well and to what
extent First Federal lends and invests in its designated service area, with
particular emphasis on low-to-moderate income communities and borrowers in such
areas.
First Defiance is also subject to various Ohio laws which restrict
takeover bids, tender offers and control-share acquisitions involving public
companies which have significant ties to Ohio.
Regulatory Capital Requirements - First Federal is required by OTS
regulations to meet certain minimum capital requirements. Current capital
requirements call for tangible capital of 1.5% of adjusted total assets, core
capital of 4.0% of adjusted total assets, except for associations with the
highest examination rating and acceptable levels of risk, and risk-based capital
of 8% of risk-weighted assets.
The following table sets forth the amount and percentage level of
regulatory capital of First Federal at December 31, 2004, 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.
December 31, 2004
------------------
(In Thousands)
Tangible Capital $102,342 9.29%
Requirement 16,533 1.50
------------------
Excess $ 85,809 7.79%
==================
Core Capital $102,342 9.29%
Requirement 44,089 4.00
------------------
Excess $ 58,253 5.29%
==================
Total risked-based capital $112,269 12.71%
Risk-based requirement 70,653 8.00
------------------
Excess $ 41,616 4.71%
==================
-21-
First Federal's capital at December 31, 2004, meets the standards for a
well-capitalized institution.
Transactions with Insiders and Affiliates - Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limits. 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. In addition, all related party transactions must be
approved by the Company's audit committee pursuant to Nasdaq Rule 4350(h),
including loans made by financial institutions in the ordinary course of
business. All transactions between savings associations and their affiliates
must comport with Sections 23A and 23B of the Federal Reserve Act (FRA) and the
Federal Reserve Board's Regulation W. 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.
Holding Company Regulation - First Defiance is a unitary thrift holding
company and is subject to OTS regulations, examination, supervision and
reporting requirements. Federal law generally prohibits a thrift holding company
from controlling any other savings association or thrift 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. 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 thrift holding
company and its activities would thereafter be limited generally to those
activities authorized by the FRB as permissible for bank holding companies.
-22-
Item 2. Properties
At December 31, 2004, First Federal conducted its business from its main
office at 601 Clinton Street, Defiance, Ohio, and eighteen other full service
banking centers in northwestern Ohio. First Insurance conducted its business
from leased office space at 419 5th Street, Suite 1200, Defiance, 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, 2004. See Note 10 to
the Consolidated Financial Statements.
Leased/ Net Book Value
Description/address Owned of Property Deposits
-----------------------------------------------------------------------------
(Dollars in Thousands)
Main Office, First Federal
601 Clinton Street, Defiance, OH Owned $ 5,568 $254,762
Branch Offices, First Federal
204 E. High Street, Bryan, OH Owned 984 93,197
211 S. Fulton Street, Wauseon, OH Owned 694 46,256
625 Scott Street, Napoleon, OH Owned 1,436 67,274
1050 East Main Street, Montpelier, OH Owned 517 26,359
926 East High Street, Bryan, OH Owned 96 7,062
1333 Woodlawn, Napoleon, OH Owned 46 17,131
825 N. Clinton Street, Defiance, OH Owned 358 13,977
190 Stadium Dr., Defiance, OH Leased 8 6,888
905 N. Williams St., Paulding, OH Owned 1,002 28,159
201 E. High St., Hicksville, OH Owned 519 14,709
3900 N. Main St., Findlay, OH Owned 1,309 37,121
11694 N. Countyline St., Fostoria, OH Owned 838 18,998
1226 W. Wooster, Bowling Green, OH Owned 1,269 41,889
301 S. Main St., Findlay, OH Owned 1,017 28,731
405 E. Main St., Ottawa, OH Owned 485 61,759
124 E. Main St., McComb, OH Owned 266 20,588
7591 Patriot Dr., Findlay, OH Owned 1,399 3,995
417 W. Dussell Dr., Maumee, OH Leased 1,211 8,846
First Insurance & Investments
419 5th Street, Site 1200, Defiance, OH Leased N/A N/A
------------------------
$ 19,022 $797,701
========================
-23-
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 2004.
-24-
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters and
Issuers Purchases of Common Stock
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "FDEF." As of March 4, 2005, the Company had approximately 2,300
shareholders of record. The table below shows the reported high and low sales
prices of the common stock and cash dividends declared per share of common stock
during the periods indicated in 2004 and 2003.
Years Ending
December 31, 2004 December 31, 2003
--------------------------------------------------------------------------
High Low Dividend High Low Dividend
------------------------- -------------------------
Quarter ended:
March 31 $29.00 $26.60 $ .20 $20.67 $18.21 $ .15
June 30 28.88 22.07 .20 20.70 18.50 .15
September 30 26.76 22.01 .20 26.80 19.28 .15
December 31 28.90 25.20 .22 30.65 24.00 .20
The OTS imposes various restrictions or requirements on the ability of
associations to make capital distributions. Capital distributions include,
without limitation, payments of cash dividends, repurchases and certain other
acquisitions by an association of its shares and payments to stockholders of
another association in an acquisition of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (ii) if the savings association will not
be at least adequately capitalized following the capital distribution; or (iii)
if the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice. If a savings association subsidiary of a
holding company is not required to file an application, it must file a notice of
the proposed capital distribution with the OTS. First Federal paid $5.0 million
in dividends to First Defiance during 2004 and $5.0 million during 2003.
-25-
First Defiance completed the following common stock repurchases during the
fourth quarter and the year ended December 31,
Maximum
Total Number of Number of Shares
Shares Purchased that May Yet Be
as Part of Publicly Purchased Under
Total Number of Average Price Announced Plans the Plans or
Period Shares Purchased Paid Per Share or Programs Programs (a)
- --------------------------------------------------------------------------------------------------
October 1, 2004 -
October 31, 2004 654 $ 26.63 654 481,425
November 1, 2004 -
November 30, 2004 14,469 $ 26.92 14,469 466,956
December 1, 2004 -
December 31, 2004 9,553 $ 27.68 9,553 457,403
Total for 2004
Fourth Quarter 24,676 $ 27.21 24,676 457,403
Total for 2004 (b) 183,581 $ 25.55 183,581 457,403
(a) On July 18, 2003, First Defiance announced that its Board of
Directors had authorized management to repurchase up to 10% of the
Registrant's common stock through open market or in any private
transaction. The authorization, which is for 639,828 shares, does
not have an expiration date.
(b) Totals for 2004 include 1,156 shares purchased to complete a
previously announced share repurchase authorization and 182,425
shares purchased under the authorization announced on July 18, 2003.
-26-
Item 6. Selected Financial Data
The following table sets forth certain summary consolidated financial data
at or for the periods indicated. Results of operations associated with The
Leader, including certain inter-company financing transactions, are reflected as
discontinued operations for all periods presented. Continuing operations reflect
the results of First Federal, First Insurance and First Defiance holding company
expenses for all periods presented. This information should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included herein. See "Item 8. Financial Statements and Supplementary Data."
At or For Years Ended December 31
-------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data
Selected Consolidated Financial Data:
Total assets $1,126,667 $1,040,599 $ 884,245 $1,132,648 $1,072,194
Assets of continuing operations 1,126,667 1,040,599 884,245 644,194 664,468
Loans held-to maturity, net 878,912 735,255 561,041 499,141 529,963
Loans held-for-sale 2,295 5,872 15,336 672 --
Allowance for loan losses 9,956 8,844 7,496 6,548 6,330
Nonperforming assets 1,990 2,949 2,731 2,526 1,490
Securities available-for-sale 137,003 168,259 209,604 48,453 52,850
Securities held-to maturity 2,255 2,776 3,921 5,818 7,697
Mortgage servicing rights 3,598 3,431 2,090 1,821 1,131
Deposits and borrowers' escrow balances 797,979 729,227 599,889 615,238 529,067
FHLB advances 178,213 164,522 149,096 196,302 223,258
Stockholders' equity 126,874 124,269 120,110 111,021 99,473
Selected Consolidated Operating Results:
Interest income from continuing operations $ 54,119 $ 49,936 $ 46,141 $ 46,545 $ 46,941
Interest expense from continuing operations 20,381 20,855 22,044 25,602 27,202
Net interest income from continuing
operations 33,738 29,081 24,097 20,943 19,739
Provision for loan losses 1,548 1,719 1,451 994 635
Noninterest income 15,313 18,788 12,921 10,220 6,676
Noninterest expense 31,905 28,378 26,161 22,948 20,178
Income before income taxes 15,598 17,772 9,406 7,221 5,602
Income taxes 4,802 5,690 2,986 2,423 1,734
Income from continuing operations 10,796 12,082 6,420 4,798 3,868
Discontinued operations, net of tax -- -- 8,853 8,818 7,094
Cumulative effect of change in method of
accounting for goodwill -- -- (194) -- --
Net income 10,796 12,082 15,079 13,616 10,962
Basic earnings per share from continuing
operations 1.77 2.00 1.01 0.74 0.61
Basic earnings per share 1.77 2.00 2.37 2.11 1.74
Diluted earnings per share from continuing
operations 1.69 1.91 0.97 0.72 0.60
Diluted earnings per share 1.69 1.91 2.28 2.05 1.71
-27-
Item 6. Selected Financial Data (continued)
At or For Years Ended December 31
------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data
Performance Ratios:
Return on average assets 1.01% 1.24% 0.77% 0.69% 0.60%
Return on average equity 8.57% 9.97% 5.39% 4.61% 4.13%
Interest rate spread (1) 3.37% 3.13% 2.92% 3.25% 3.11%
Net interest margin (1) 3.60% 3.42% 3.38% 3.68% 3.57%
Ratio of operating expense to
Average total assets 2.98% 2.91% 3.16% 3.31% 3.11%
Quality Ratios:
Nonperforming assets to total assets
at end of period (2) 0.18% 0.28% 0.31% 0.39% 0.22%
Allowance for loan losses to
nonperforming assets (2) 500.30% 299.90% 274.48% 259.22% 424.83%
Allowance for loan losses to total
loans receivable 1.13% 1.19% 1.32% 1.31% 1.19%
Capital Ratios (3):
Equity to total assets at end of period 11.26% 11.94% 13.58% 17.23% 14.97%
Tangible equity to tangible assets
at end of period 9.74% 10.17% 13.23% 16.75% 14.46%
Average equity to average assets 11.76% 12.43% 14.36% 15.03% 14.45%
Book value per share $ 20.20 $ 19.64 $ 18.73 $ 16.20 $ 14.49
Tangible book value per share $ 17.19 $ 16.39 $ 18.17 $ 15.65 $ 13.92
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.25% 112.25% 115.57% 110.21% 110.02%
Stock Price and Dividend Information:
High $ 29.00 $ 30.65 $ 21.44 $ 18.00 $ 12.50
Low 22.01 18.21 15.12 10.69 7.63
Close 28.85 25.90 18.90 15.20 10.88
Cash dividends declared per share 0.82 0.65 0.54 .49 .45
Dividend payout ratio (4) 46.33% 32.50% 22.78% 23.22% 25.86%
(1) Interest rate spread represents the difference between the weighted
average yield on interest-earnings assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earnings assets. Interest
income on tax-exempt securities and loans has been adjusted to a
tax-equivalent basis using the statutory federal income tax rate of 35%.
(2) Nonperforming assets consist of nonaccrual 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.
(3) Capital ratios are based on assets of continuing operations.
(4) Dividends payout ratio was calculated using basic earnings per share.
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
First Defiance is a unitary thrift holding company which conducts business
through its subsidiaries, First Federal and First Insurance.
First Federal is a federally chartered savings bank that provides
financial services to communities based in northwest Ohio where as of December
31, 2004 it operated 19 full service banking centers. On January 21, 2005, First
Defiance acquired ComBanc, Inc., headquartered in Delphos, Ohio. ComBanc's
subsidiary, the Commercial Bank, operated four banking offices in Delphos, Lima
and Elida, Ohio. First Defiance also has reached an agreement to acquire the
Genoa Savings and Loan Company, which operates four branches in the Toledo, Ohio
metropolitan area. Following the completion of that transaction, the related
combination of Genoa's Maumee, Ohio branch into First Federal's existing Maumee
branch, and the planned combination of two branches in Defiance, First Federal
will operate a total of 25 branch offices in 19 communities in Northwest Ohio.
First Federal provides a broad range of financial services including checking
accounts, savings accounts, certificates of deposit, real estate mortgage loans,
commercial loans, consumer loans, home equity loans and trust services.
First Insurance sells a variety of property and casualty, group health and
life, and individual health and life insurance products and investment and
annuity products. Insurance products are sold through First Insurance's office
in Defiance, Ohio while investment and annuity products are sold through
registered investment representatives located at four of First Federal's banking
center locations.
During 2003, First Defiance acquired $166.7 million of deposits, $79.0
million of loans, and three banking center offices located in Findlay, Ottawa
and McComb Ohio (the "RFC acquisition"). First Defiance successfully completed
the RFC acquisition on June 6, 2003 and their results reflect the acquisition
from that date forward. For more details on the RFC acquisition, see Note 3 -
Acquisition of Banking Center Offices in the Notes to Consolidated Financial
Statements.
Effective April 1, 2002, First Defiance sold its Leader Mortgage
subsidiary to U.S. Bank Home Mortgage, a unit of U.S. Bank, and recognized an
after-tax gain of $7.7 million, or $1.16 per share from the sale. That gain, as
well as all operating results associated with the Leader, has been reported as
discontinued operations for all periods presented. During the third quarter of
2004, First Defiance settled all remaining contingent liabilities related to its
sale of Leader Mortgage and recorded a $1.9 million pre-tax charge in continuing
operations.
-29-
Financial Condition
Total assets at December 31, 2004 were $1.13 billion compared to $1.04
billion at December 31, 2003. Net loans receivable increased by $139.7 million
or 19.0% to $875.0 million at December 31, 2004 from $735.3 million at December
31, 2003. A portion of that loan growth was funded with assets from the
Company's investment securities portfolio, which dropped from $171.0 million at
December 31, 2003 to $139.3 million at December 31, 2004. A portion of loan
growth was also funded by a decline in cash balances and interest bearing
deposits at other financial institutions, which declined to $20.5 million at
December 31, 2004 from $37.8 million at the same date in 2003. The Company also
redeemed $5 million of stock at the Federal Home Loan Bank during the year and
that balance declined to $13.4 million at December 31, 2004 from $17.8 million
at December 31, 2003 after also accounting for quarterly FHLB stock dividends.
Goodwill and intangibles, which increased substantially during 2003 because of
the RFC acquisition, declined to $18.9 million at December 31, 2004 from $20.5
million at December 31, 2003 because of a revision in the purchase price
allocation recorded by management.
The increase in loans receivable occurred in virtually all major loan
categories. Non-residential real estate loans increased by $73.7 million, or
21.6%, to $415.2 million at December 31, 2004 from $341.4 million at December
31, 2003. Home equity and improvement loans increased by $20.8 million, or
29.7%, to $90.8 million at December 31, 2004 from $70.0 million at December 31,
2003. Owner occupied residential loans increased by $20.5 million, or 11.5% to
$199.2 million at December 31, 2004 from $178.7 million at December 31, 2003.
Commercial loan balances increased by $20.9 million, or 17.4% to $141.6 million
at December 31, 2004 from $120.7 million at December 31, 2003. Consumer finance
loans increased by $5.3 million, or 13.1% to $45.5 million at December 31, 2004
from $40.3 million at December 31, 2003.
The decline in the Company's investment portfolio is due to management
taking advantage of the rate environment by selling investments and realizing
gains during 2004 of $1.4 million. Further, with the strong loan growth the
Company experienced, many securities that matured were used to fund that growth
rather than reinvested in the securities portfolio. The remaining $139.3 million
portfolio has an average duration of 3.21 years.
The Company's total deposits increased to $797.7 million at December 31,
2004 from $729.0 million at December 31, 2003, an increase of 9.4%. Key to the
deposit growth is growth in checking accounts, which increased to $137.4 million
at December 31, 2004 from $119.7 million at the end of 2003, an increase of
14.8% and an increase in money market demand account balances, which increased
to $183.8 million at December 31, 2004 from $148.7 million at December 31, 2003,
an increase of 23.6%. Because the balance in that type of transaction accounts
can fluctuate significantly, management typically assesses growth by reviewing
average balances rather than period end balances.
-30-
The average balance in checking accounts increased to $126.3 million for
the full year in 2004 compared to $103.7 million for 2003, an improvement of
21.8%. The checking average balance includes $56.2 million of non-interest
bearing deposits for 2004, up from $47.5 million in 2003. Certificate of deposit
balances increased to $424.3 million at December 31, 2004 from $408.9 million at
December 31, 2003, an increase of $15.4 million or just 3.8%. Of that growth,
$10.5 million was due to an increase in the average balance of brokered
certificates of deposit used by the Company to supplement its funding needs.
In addition to deposit growth, First Defiance had an increase in its FHLB
advance balances, which increased from $14.5 million at December 31, 2003 to
$181.2 million at December 31, 2004. The increase in advances, which were all
short-term overnight advances, was used to fund the loan growth.
-31-
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. The table does
not reflect the effect of income taxes:
Year Ended December 31,
-----------------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (1) Rate (2) Balance (1) Rate (2)
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable $ 806,877 47,360 5.87% $ 667,165 $ 41,233 6.18%
Securities 152,316 7,499 4.92% 186,631 9,186 4.92%
Interest-earning deposits 2,447 43 1.76% 22,082 280 1.27%
Dividends on FHLB stock 14,839 612 4.12% 17,552 695 3.96%
---------------------------------------------------------------------------------
Total interest-earning assets 976,482 55,514 5.69% 893,430 51,394 5.75%
Non-interest-earning assets 94,321 81,617
---------- ----------
Total Assets $1,070,803 $ 975,047
========== ==========
Interest-Bearing Liabilities:
Interest-bearing deposits $ 699,087 $ 12,950 1.85% $ 633,034 $ 13,435 2.12%
FHLB advances 169,463 7,317 4.32% 155,301 7,343 4.73%
Other borrowings 10,608 114 1.07% 7,570 77 1.02%
---------------------------------------------------------------------------------
Total interest-bearing
liabilities 879,158 20,381 2.32% 795,905 20,855 2.62%
Non-interest bearing
demand deposits 56,241 -- 47,505 --
------------------------ -------------------------
Total including non-
interest- bearing
demand deposits 935,399 20,381 2.18% 843,410 20,855 2.47%
Other non-interest
liabilities 9,484 10,403
---------- ----------
Total Liabilities 935,399 853,813
Stockholders' equity 125,920 121,234
---------- ----------
Total liabilities and
stockholders' equity $1,070,803 $ 975,047
========== ==========
Net interest income;
interest rate spread (3) $ 35,133 3.37% $ 30,539 3.13%
======================== ========================
Net interest margin (4) 3.60% 3.42%
===== =====
Average interest-earning
assets to average interest-
bearing liabilities 104.4% 112.3%
===== =====
Year Ended December 31,
----------------------------------------
2002
----------------------------------------
Average Interest Yield/
Balance (1) Rate (2)
----------------------------------------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable $ 525,855 $ 37,095 7.05%
Securities 168,329 9,027 5.36%
Interest-earning deposits 44,285 720 1.63%
Dividends on FHLB stock 22,889 904 3.95%
--------------------------------------
Total interest-earning assets 761,357 47,746 6.27%
Non-interest-earning assets 185,140
----------
Total Assets $ 946,497
==========
Interest-Bearing Liabilities:
Interest-bearing deposits $ 547,533 $ 16,508 3.01%
FHLB advances 103,552 5,276 5.10%
Other borrowings 7,685 260 3.38%
--------------------------------------
Total interest-bearing
liabilities 658,769 22,044 3.35%
Non-interest bearing
demand deposits 33,089 --
------------------------
Total including non-
interest- bearing
demand deposits 691,858 22,044 3.19%
Other non-interest
liabilities 135,567
----------
Total Liabilities 827,425
Stockholders' equity 119,072
----------
Total liabilities and
stockholders' equity $ 946,497
==========
Net interest income;
interest rate spread (3) $ 25,702 2.92%
========================
Net interest margin (4) 3.38%
=====
Average interest-earning
assets to average interest-
bearing liabilities 115.6%
=====
(1) Interest on certain tax exempt loans (amounting to $29,000, $61,000 and
$445,000 in 2004, 2003 and 2002 respectively) and tax-exempt securities
($1.5 million, $1.4 million and $947,000 in 2004, 2003 and 2002) is not
taxable for Federal income tax purposes. The average balance of such loans
was $722,000, $870,000 and $6.7 million in 2004, 2003 and 2002 while the
average balance of such securities was $32.8 million, $30.5 million and
$21.1 million in 2004, 2003 and 2002 respectively. In order to compare the
tax-exempt yields on these assets to taxable yields, the interest earned
on these assets is adjusted to a pre-tax equivalent amount based on the
marginal corporate federal income tax rate of 35%.
(2) At December 31, 2004, the yields earned and rates paid were as follows:
loans receivable, 5.96%; securities, 4.81%; FHLB stock, 4.25%; total
interest-earning assets, 5.79%; deposits, 1.85%; FHLB advances, 4.26%;
other borrowings, 1.71%; total interest-bearing liabilities, 2.29%; and
interest rate spread, 3.50%.
(3) Interest rate spread is the difference in the yield on interest-earning
assets and the cost of interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
-32-
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,
---------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
---------------------------------------------------------------------------
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 $(2,507) $ 8,634 $ 6,127 $(5,830) $ 9,968 $ 4,138
Securities 2 (1,689) (1,687) (823) 982 159
Interest-earning
deposits 12 (249) (237) (78) (361) (439)
FHLB stock 24 (107) (83) 2 (211) (209)
---------------------------------------------------------------------------
Total interest- earning assets $(2,469) $ 6,589 $ 4,120 $(6,729) $10,378 $ 3,649
===========================================================================
Interest-Bearing Liabilities
Deposits $(1,886) $ 1,401 $ (485) $(5,651) $ 2,578 $(3,073)
FHLB advances (696) 670 (26) (570) 2,637 2,067
Term notes 6 31 37 (179) (4) (183)
---------------------------------------------------------------------------
Total interest- bearing
liabilities $(2,576) $ 2,102 $ (474) $(6,400) $ 5,211 $(1,189)
===========================================================================
Increase in net interest income $ 4,594 $ 4,838
======= =======
Year Ended December 31,
------------------------------------
2002 vs. 2001
------------------------------------
Increase Increase
(decrease) (decrease) Total
due to due to increase
rate volume (decrease)
------------------------------------
(in thousands)
Interest-Earning Assets
Loans $(6,177) $ 406 $(5,771)
Securities (1,672) 7,027 5,355
Interest-earning
deposits (403) 852 449
FHLB stock (637) 486 (151)
------------------------------------
Total interest- earning assets $(8,889) $ 8,771 $ (118)
====================================
Interest-Bearing Liabilities
Deposits $(8,446) $ 4,023 $(4,423)
FHLB advances 3 1,664 1,667
Term notes (172) (630) (802)
------------------------------------
Total interest- bearing
liabilities $(8,615) $ 5,057 $(3,558)
====================================
Increase in net interest income $ 3,440
=======
Results of Operations
General -- First Defiance reported net income of $10.8 million for the
year ended December 31, 2004 compared to $12.1 million and $15.1 million for the
years ended December 31, 2003 and 2002 respectively. Results for 2002 included
$8.9 million of discontinued operations related to the operating results of and
gain on sale from the Company's former Leader Mortgage Company subsidiary, which
was sold to US Bancorp on April 1, 2002. See Note 4 to the consolidated
financial statements. Income from continuing operations was $6.2 million for the
year ended December 31, 2002. Excluding the cumulative effect adjustment for a
change in accounting for goodwill, First Defiance had income from continuing
operations of $6.4 million for the year ended December 31, 2002.
-33-
On a diluted per share basis, First Defiance earned $1.69 in 2004, $1.91
in 2003 and $2.28 in 2002. Diluted per share income from continuing operations
was $0.94 in 2002 ($.97 before cumulative effect adjustment for change in
accounting for goodwill).
The 2004 operating results included a $1.9 million pretax charge to
reflect final settlement of certain contingent liabilities related to the sale
of Leader Mortgage to US Bancorp. After tax, that amount was $1.25 million or
$0.20 per diluted share.
Net interest income was $33.7 million for the year ended December 31, 2004
compared to $29.1 million and $24.1 million for the years ended December 31,
2003 and 2002 respectively. The tax-equivalent net interest margin was 3.60%,
3.42% and 3.38% for the years ended December 31, 2004, 2003 and 2002
respectively. The increase in margin between 2003 and 2004 is due to an improved
interest rate spread, which increased from 3.13% in 2003 to 3.37% in 2004, a
result primarily due to a 30 basis point reduction in the Company's overall cost
of interest-bearing liabilities (from 2.62% to 2.32%) compared to a drop of just
six basis points on the yield of interest earning assets (from 5.75% in 2003 to
5.69% in 2004). Margin also improved due to an $8.7 million increase in the
average balance in non-interest bearing deposits and a $4.7 million increase in
capital. The increase in the margin between 2002 and 2003 is due to an improved
interest rate spread, which increased from 2.92% in 2002 to 3.13% in 2003, a
result the cost of interest-bearing liabilities dropping 0.73% (73 basis points)
compared to the yield on interest-earning assets, which fell by just 0.52% (52
basis points). The margin between 2002 and 2003 also improved because of growth
in non-interest bearing deposits between the two periods.
The decline in asset yields in 2004 compared to 2003 is the result of a 31
basis point decline in the yield on loans, which dropped to 5.87% in 2004 from
6.18% in 2003. That decline was partially offset by an improved asset mix as
average loan balances increased from $667.2 million in 2003 to $806.9 million in
2004 while the average balance in securities declined from $186.6 million in
2003 to $152.3 million in 2004 and the average balance of interest bearing
deposits declined from $22.1 million in 2003 to just $2.4 million in 2004.
The 52 basis point decline in the yield on interest-earning assets between
2002 and 2003 was due to an 87 basis point decline in the yield on the Company's
loan portfolio from 7.05% in 2002 to 6.18% in 2003. The drop in loan yields was
slightly offset by an improved mix of loans, securities and interest-earning
deposits in 2003 compared to 2002. The overall decline in rates for both assets
and liabilities in 2003 compared to 2002 was due to the low rate environment
that existed throughout the entire twelve-month period in 2003, the result of
cuts by the Federal Reserve to its Federal Funds rate during that year.
The provision for loan losses for the year ended December 31, 2004 was
$1.5 million compared to $1.7 million in 2003 and $1.5 million in 2002.
-34-
For the year ended December 31, 2004, non-interest income was $15.3
million compared to $18.8 million for 2003 and $12.9 million for 2002.
Non-interest expense for the year ended December 31, 2004 was $31.9 million
compared to $28.4 million for 2003 and $26.2 million for 2002. If you exclude
the contingency settlement from 2004 non-interest expense, it totaled $30.0
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 $4.2 million, or 8.4% to $54.1 million
for the year ended December 31, 2004 from $49.9 million for the year ended
December 31, 2003. The increase in income was due to an increase in the average
balance of loans receivable, to $806.9 million for the twelve months of 2004
compared to $667.2 million for 2003. During the same period, the average balance
of lower yielding investment securities declined to $152.3 million in 2004 from
$186.6 million in 2003 and funds held on deposit at other financial institutions
dropped to an average of just $2.4 million in 2004 from $22.1 million in 2003.
While loan yields between 2003 and 2004 dropped to 5.87% from 6.18%, that 31
basis point decline was more than offset by the change in the mix between loans
and lower yielding assets.
The increase in the average balance of loans receivable was due primarily
to the growth in the Company's commercial real estate loans, which increased by
$73.7 million or 21.6% between December 31, 2003 and December 31, 2004. In
addition, balances in one-to-four family residential real estate loans,
commercial loans and home equity loans increased by $22.1 million, $21.0 million
and $20.8 million respectively from the beginning to the end of 2004.
Interest income from the investment portfolio decreased to $6.7 million
for 2004 from $8.5 million in 2003. The decrease is due to a decline in the
average balance from $186.6 million for 2003 to $152.3 million for 2004. As
securities were sold or matured, the proceeds were generally utilized to fund
loan growth. The yield on the investment portfolio, on a tax equivalent basis to
reflect the favorable tax treatment of tax-exempt municipal securities, was
4.92% for both 2004 and 2003. First Defiance also substantially improved its
asset mix as interest-bearing deposits, which averaged $22.1 million for 2003
and were $9.8 million at December 31, 2003, declined to minimal amounts in 2004.
The average balance of those deposits were just $2.4 million in 2004. Yields on
those interest bearing deposits were just 1.27% in 2003 and 1.76% in 2004.
-35-
Total interest income increased by $3.8 million, or 8.2% to $49.9 million
for the year ended December 31, 2003 from $46.1 million for the year ended
December 31, 2002. This increase was a result of growth in non-owner occupied
residential mortgage loans and commercial loans which increased by $143.2
million, or 42.7% in 2003, to $478.8 million for the year ended December 31,
2003 from $335.6 million for 2002. The increase in these portfolios is the
result of First Defiance's June 2003 acquisition of branches in Findlay, Ottawa
and McComb, Ohio from RFC Banking Company. The growth was also a result of
continued strong growth in this type of lending throughout First Defiance's
market area. The Company also had an increase in the average balance of home
equity and improvement loans between 2003 and 2004 as those balances averaged
$59.3 million in 2003, up 36.8% from 2002's average balance of $43.4 million.
Income from loans increased to $41.2 million in 2003 compared to $36.9 million
in 2002. The growth in balances offset declining yields in 2003. First
Defiance's loan yield declined to 6.18% in 2003 from 7.05% in 2002. Income from
First Defiance's investment portfolio was essentially flat between 2002 and 2003
as it declined slightly to $8.5 million for 2003 from $8.6 million for 2002. The
tax equivalent yield on the portfolio dropped from 5.36% to 4.92% between 2002
and 2003 while the average balance increased from $168.3 million to $186.6
million. First Defiance also had a significant decline in the balance of
interest-earning deposits maintained at other banks, which averaged $22.1
million during 2003, a 50% drop from the $44.3 million average balance carried
during 2002. Those deposits were used to fund loan growth and national CD
run-off. The yield on those interest-bearing deposits, which is closely tied to
the Federal Funds rate, declined to 1.27% for 2003 compared to 1.63% in 2002
Interest expense declined by $474,000 in 2004 from 2003, to $20.4 million
from $20.9 million. This decline was the result of a decline in interest rates
paid on deposits and the utilization of overnight Federal Home Loan Bank
advances to help short-term funding needs. Interest expense on interest bearing
deposits was $12.95 million for 2004 compared to $13.4 million for 2003 despite
the fact that the average balance of interest-bearing deposits increased to
$699.1 million for 2004 from $633.0 million for 2003. The growth in the average
balance of deposits occurred in both transaction accounts (savings accounts,
money market accounts, and interest-bearing checking accounts which increased in
total to $285.3 million at December 31, 2004 from $245.1 million at December 31,
2003) and in certificates of deposits (which increased to $413.8 million at
December 31, 2004 from $387.9 million at December 31, 2003). The growth in
certificate of deposit balances included $10.5 million of net growth in CDs
acquired through brokers or on the national market during 2004. From a cost
perspective, the average cost of interest bearing deposits was 1.85% in 2004,
down from 2.12% in 2003. Interest-bearing checking accounts cost on average
0.16% in 2004 compared to 0.23% in 2003; money-market accounts had an average
rate of 1.00% in 2004 and 0.94% in 2003, respectively; and CDs had an average
rate of 2.68% and 3.04% in 2004 and 2003 respectively.
The average cost of FHLB advances declined to 4.32% in 2004 from 4.73% in
2003 because of an increase in the average balance of over-night or short-term
advances during the year. At December 31, 2004, FHLB advances included $26.5
million of overnight advances, compared to just $11.0 million at December 31,
2003. The average balance of short-term advances was $15.6 million for 2004
compared to $2.3 million for 2003. There was no change in the balance or rates
paid on long-term advances during 2004.
-36-
In 2003, interest expense decreased by $1.2 million, or 5.4%, to $20.9
million compared to $22.0 million in 2002. Interest expense on interest-bearing
deposits was $3.1 million lower in 2003 compared to 2002 despite an $85.5
million increase in the average balance of such deposits. The average cost of
interest-bearing deposits dropped to 2.12% in 2003 from 3.01% in 2002. The drop
in the interest rates paid on deposits occurred in both core deposit accounts,
which include money market accounts and interest-bearing checking accounts, and
in certificates of deposit. The average cost of savings and interest-bearing
checking accounts dropped from 1.51% in 2002 to 0.67% in 2002 while the average
cost of CDs declined from 3.89% to 3.06% between the same time periods. The
decline in interest expense on deposits was partially offset by an increase in
expense on FHLB advances, which increased to $7.3 million in 2003 from $5.3
million in 2002. Part of the increase is due to the fact that the interest
expense on approximately $148.5 million of FHLB advances was allocated to
discontinued operations during the first quarter of 2002 as those advances were
used to fund operations of the Leader. At the completion of the sale of Leader,
$25 million of those advances were prepaid and the remaining advances were
maintained to fund operations of First Federal.
As a result of the foregoing, First Defiance's net interest income was
$33.7 million for the year ended December 31, 2004 compared to $29.1 million for
the year ended December 31, 2003 and $24.1 million for the year ended December
31, 2002. Net interest margin from continuing operations calculated on a
tax-equivalent basis was 3.60% for 2004 compared to 3.42% in 2003 and 3.38% in
2002. In addition to the factors cited above, net interest margin is also
favorably impacted by an increase in non-interest bearing deposits, which
increased to an average balance of $56.2 million in 2004 from an average of
$47.5 million in 2003 and $33.1 million in 2002.
Provision for Loan Losses - First Defiance's provision for loan losses was
$1.5 million for the year ended December 31, 2004 compared to $1.7 million and
$1.5 million for the years ended December 31, 2003 and 2002 respectively.
Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management to absorb
probable losses in the loan portfolio. Factors considered by management include
identifiable risk in the portfolios; historical experience; the volume and type
of lending conducted by First Defiance; the amount of non-performing assets,
including loans which meet the FASB Statement No. 114 definition of impaired;
the amount of assets graded by management as substandard, doubtful, or loss;
general economic conditions, particularly as they relate to First Defiance's
market areas; and other factors related to the collectability of First
Defiance's loan portfolio.
In determining the appropriate level for the allowance for loan losses,
First Defiance evaluates all loans in its portfolio. While allowances are
generally required for loans classified as substandard or lower, it is possible
for a credit relationship to be graded as substandard based on the financial
performance of the credit for which no allowance is required because of other
factors such as value of collateral or creditworthiness of guarantors. At
December 31, 2004, a total of $8.1 million of loans are classified as
substandard for which some level of reserve
-37-
ranging up to 20% of the outstanding balance is required. A total of $13.0
million in additional credits were classified as substandard at December 31,
2004 for which no reserve is required. First Defiance also has classified
$483,000 as doubtful and $21,000 as loss at December 31, 2004. First Defiance
also utilizes a general reserve percentage for loans not otherwise classified
which ranges from 0.025% for mortgage loans to 1.50% for consumer loans. General
reserves for commercial and commercial real estate loans, the largest category
in First Defiance's portfolio, are established at 1.20% of the outstanding
balance. The reserve percentage utilized for these loans is based on both
historical losses in the Company's portfolio, national statistics on loss
percentages, regulatory guidance and empirical evidence regarding the strength
of the economy in First Defiance's general market area.
Favorable trends in charge-offs related to the First Defiance portfolio,
as well as a strengthening local economy, resulted in a lower level of the
allowance for loan losses as a percentage of the total portfolio, as well as a
decrease in provision expense in 2004 compared to 2003 despite strong loan
growth during 2004. The allowance for loan losses totaled $10.0 million (1.12%
of loans) at December 31, 2004 compared to $8.8 million (1.18% of loans) at
December 31, 2002 and $7.5 million at December 31, 2001. The allowance for loan
losses grew by 12.6% from December 31, 2003 to December 31, 2004. During that
same period, loan balances before the allowance increased by 18.8%. Total loan
charge-offs were $685,000 in 2004 compared to $725,000 and $720,000 in 2003 and
2002 respectively while recoveries in those same years were $249,000, $354,000
and $217,000 respectively. As a percentage of average loans, net charge-offs
were 0.05% for the year ended December 31, 2004 compared to 0.06% and 0.10% for
2003 and 2002 respectively. Management does not believe there has been any
deterioration in the overall quality of its loan portfolio during 2004.
The percentage of the allowance for loan losses to total loans declined in
2004as a result of the continued significant growth in First Defiance's loan
portfolio during 2004 and the limited amount of provision expense that was
required, given the anticipated losses in that portfolio. The lower level of
provision expense results from a number of factors including a strengthening of
the local economy in which First Defiance conducts its lending business and
continued favorable charge-off experience, especially in the commercial loan and
non-residential real estate loan portfolios.
-38-
First Defiance's non-performing assets at December 31, 2004 were just $2.0
million compared to $2.9 million at December 31, 2003 and $2.7 million at
December 31, 2002. Non-performing assets include loans that are 90 days past due
and all real estate owned and other foreclosed assets. Non-performing assets at
December 31, 2004 and 2003 by category were as follows:
December 31
2004 2003
---------------
(In thousands)
Non-performing loans:
Single-family residential $ 419 $ 471
Non-residential and multi-family residential real estate 1,013 1,092
Commercial 450 949
Consumer finance 10 33
---------------
Total non-performing loans 1,892 2,545
Real estate owned and repossessed assets 98 404
---------------
Total non-performing assets $1,990 $2,949
===============
Non-performing loans in the single-family residential, non-residential and
multi-family residential real estate and commercial loan categories represent
0.22%, 0.24% and 0.32% of the total loans in those categories respectively at
December 31, 2004 compared to 0.28%, 0.32% and 0.79% respectively for the same
categories at December 31, 2003. Management believes that the allowance for loan
losses is adequate to cover any potential losses from non-performing assets.
Non-interest Income - Non-interest income decreased by $3.5 million to
$15.3 million for the year ended December 31, 2004 from $18.8 million in 2003.
Non-interest income was $12.9 million in 2002. The reduction between 2003 and
2004 was due to a gains from the sale of loans declining by $4.65 million, to
$2.5 million for the year ended December 31, 2004 from $7.2 million for 2003.
Mortgage gains were $4.6 million in 2002. The fluctuation in mortgage loan gains
can be attributed to the significant increase in mortgage origination volume
from mid-2002 through the third quarter of 2003. Mortgage origination volume
dropped to $105.3 million of mortgage loans originated in 2004 from a peak of
$291.5 million in 2003 and $241.1 million in 2002.
First Defiance also realized $1.4 million of securities gains in 2004,
$1.6 million in similar gains during 2003 and just $21,000 of such gains in
2002. The increased level of gains realized resulted from management taking
advantage of favorable prices on the bond portfolio as long-term interest rates
stayed low. Generally as investments were sold out of the investment portfolio,
the related proceeds were used to fund loan growth or they were reinvested in
shorter-term securities in order to position the Company for an eventual overall
rate increase.
-39-
Loan and deposit fees at First Defiance increased to $5.3 million in 2004
from $4.5 million in 2003 and $3.8 million in 2002, an increase of 19.2% and
18.9% respectively year-over-year. Also, insurance and investment sales
commissions recognized in 2004 were $4.1 million compared to $3.7 million in
2003 and $3.3 million in 2002, an increase of 9.2% and 12.1% period-to-period
respectively. First Defiance also had an increase in income associated with its
investment in bank owned life insurance (BOLI), which was $947,000 in 2004,
$809,000 in 2003 and $144,000 in 2002. Income from BOLI increased because of
additional investments made in the product in mid-2003. The initial BOLI
purchase was made in the fourth quarter of 2002.
Non-interest Expense -- Total non-interest expense for 2004 was $31.9
million compared to $28.4 million for the year ended December 31, 2003 and $26.2
million for the year ended December 31, 2002. The 2004 results include a charge
of $1.9 million related to the final settlement of a contingent liability
related to First Defiance's 2002 sale of Leader. Non-interest expense, excluding
the settlement of that contingency, was $30.0 million for 2004. Compensation and
benefits increased by $1.3 million or 8.1% between 2003 and 2004. That increase
was due to the recognition of a full year of expense at branches acquired during
June 2003, compared with just six months of expense in 2003. Compensation and
benefits also increased as a result of the opening of de novo branches in
Findlay and Maumee, Ohio in late 2003 and early 2004 respectively, as well as
routine compensation adjustments, which were in the 3% range for 2004 over 2003,
and health insurance increases, which on a per-person basis increased by 10.2%
in 2004 compared with 2003. For 2004, the average number of employees covered
under the First Defiance group health plan was 246 compared with 213 employees
participating in the plan on average for 2003. Those increases were slightly
offset by lower incentive compensation payouts in 2004 compared to 2003 due to
the Company's lower level of profitability. Amortization of mortgage servicing
rights decreased significantly in 2004 compared with 2003, to $704,000 from $2.0
million. This decrease was due to the lower level of mortgage refinance activity
in 2004 compared with 2003. The 2003 results also included $717,000 in
recoveries of previously recognized mortgage servicing rights impairment
reserves. In 2004, mortgage servicing rights impairment and recovery amounts
essentially offset each other over the course of the year.
First Defiance services a growing portfolio of mortgage loans for others,
comprised of loans originated in its banking offices which are subsequently sold
in the secondary market. At December 31, 2004, First Defiance serviced a total
of 5,710 loans for others with a principal balance of $463.8 million. The total
servicing portfolio at December 31, 2003 was 5,387 loans with balances of $433.1
million. The mortgage servicing rights associated with those loans had a net
value of $3.6 million as of December 31, 2004 after subtracting a $607,000
reserve for impairment, compared to $3.4 million as of December 31, 2003 after
subtracting $606,000 of impairment.
The increase in non-interest expense from 2002 to 2003 was primarily in
compensation and benefits which increased by $2.0 million. Amortization of
mortgage servicing rights and data processing costs also increased by $559,000
and $384,000 respectively from 2002 to 2003. Those increases were partially
offset by changes in the valuation of mortgage servicing rights,
-40-
which resulted in a $746,000 recovery of MSR impairment in 2003 compared with
impairment expense of $517,000 in 2002.
Income Taxes - Income taxes amounted to $4.8 million in 2004 compared to
$5.7 million in 2003 and $3.0 million of income taxes from continuing operations
in 2002. The effective tax rates for those years were 30.8%, 32.0% and 31.7%
respectively. The tax rate is lower than the statutory 35% tax rate for the
Company because of investments in tax-exempt securities and in BOLI. The
earnings on such investments are not subject to federal income tax.
Discontinued Operations - First Defiance's 2002 results included income
from discontinued operations of $8.9 million, or $1.34 per diluted share. The
amount included $7.7 million related to the after-tax gain on the sale of the
Leader, $2.0 million of income earned by Leader during the three months the
subsidiary was operated by First Defiance, and $844,000 of other expenses
associated with discontinued operations. Interest expense recorded at First
Federal which was associated solely with financing activities of the Leader,
primarily interest on brokered CDs and a portion of the Company's FHLB advances,
was reported as part of discontinued operations.
Change in Accounting for Goodwill - Effective January 1, 2002, First
Defiance adopted FASB Statement No. 142, Goodwill and Other Intangible Assets.
As required under the standard, management evaluated goodwill recorded at its
First Insurance & Investments subsidiary for the purpose of measuring impairment
and determined that such goodwill was impaired by $238,000 ($194,000 or $0.03
per share after tax) as of January 1, 2002. As required, that amount was
reflected in the income statement as the cumulative effect of a change in
accounting principle. As a result of Statement No. 142, First Defiance is no
longer required to recognize goodwill amortization as an expense. Management is
required to evaluate goodwill on an annual basis to determine if the recorded
value is impaired. During 2002, First Defiance paid additional consideration of
$200,000 to settle a contingent payout clause under an agreement entered into in
1998 when First Insurance was acquired. Because the settlement was reached after
January 1, 2002, the goodwill created by the settlement was deemed to be
impaired in 2002 and was recorded as part of non-interest expense in 2002.
Goodwill was evaluated at the end of 2004, 2003 and 2002 and no additional
impairment charges were required for any of those periods. See Footnote 21 to
the Consolidated Financial Statements.
-41-
Concentrations 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 is known as credit risk.
Lending or investing activities that concentrate assets in a way that
exposes the Company to a material loss from any single occurrence or group of
occurrences increases credit risk. 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 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 exposure
to concentrations of credit risk at acceptable levels. First Defiance's loan
portfolio is concentrated geographically in its northwest Ohio market area.
There are no industry concentrations that exceed 10% of the Company's loan
portfolio.
Liquidity and Capital Resources
The Company's primary source of liquidity is its core deposit base, raised
through First Federal's branch network, along with unused wholesale sources of
funding and its capital base. These funds, along with investment securities,
provide the ability to meet the needs of depositors while funding new loan
demand and existing commitments.
Cash generated from operating activities was $16.6 million and $21.5
million in 2004 and 2003 respectively and cash used in operating activities was
$75.3 million in 2002. Excluding the gain from the sale of discontinued
operations and net changes in assets and liabilities of discontinued operations,
First Defiance used $17.9 million of cash in operations in 2002. The adjustments
to reconcile net income to cash provided by or used in operations during the
periods presented consist primarily of proceeds from the sale of loans (less the
origination of loans held for sale), the provision for loan losses, depreciation
expense, the origination, amortization and impairment of mortgage servicing
rights, 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.
-42-
In a typical year, the primary investing activity of First Defiance is
lending, which is funded with cash provided from operating and financing
activities, as well as proceeds from payment on existing loans and proceeds from
maturities of investment securities. In addition to the ordinary investing
activities, in 2003, First Defiance completed the RFC acquisition, which
increased cash from investing activities by $70.1 million as deposits acquired
exceeded the purchase price plus loans acquired. In 2002, First Defiance
realized proceeds from the sale of The Leader of $371.8 million.
In considering the more typical investing activities, during 2004, $42.8
million and $20.7 million was generated from the maturity or sale of
available-for-sale investment securities, respectively, while $144.7 million was
used fund loan growth while $34.3 million was used to purchase
available-for-sale investment securities. During 2003, $64.9 million and $22.2
million was realized from the maturity of investment securities and sale of
investment securities respectively while $97.4 million was used to fund loan
growth and $48.9 million was used to purchase available for sale securities.
During 2002, a total of $194.8 million was used to purchase available for sale
securities, $39.5 million in proceeds were received from the maturing of
available for sale securities and $64.0 million was used to fund loan growth.
Principal financing activities include the gathering of deposits, the
utilization of FHLB advances, the sale of securities under agreements to
repurchase such securities and borrowings from other banks. In addition, First
Defiance also purchased common stock for its treasury. For the year ended
December 31, 2004, deposits increased by $69.1 million, including $58.6 million
of growth in retail deposits generated by the First Federal Bank branch network,
and $10.5 million in net growth in deposits acquired from CD brokers or other
out of market sources. For the year ended December 31, 2003, deposits declined
by $37.3 million, primarily do to the Company not replacing $32.0 million of
maturing brokered certificates of deposit which were no longer needed. First
Defiance also had a $15.3 million decline in deposits in 2002 due to the
maturing of $64.3 million of brokered CDs. Also in 2004, First Defiance borrowed
$15.5 million in short-term advances from the FHLB and $3.0 million on from
other financial institutions under short-term lines of credit. In 2003, First
Defiance borrowed $9 million from the FHLB under long-term advance agreements
and an additional $8 million was borrowed on short-term advances. In 2002, the
Company repaid $62.2 million of existing advances from the FHLB, borrowed $15
million of new advances from the FHLB and repaid $18.2 million of borrowings
from other banks. Also, the Company repurchased $4.7 million, $4.4 million and
$10.3 million of common stock for treasury in 2004, 2003 and 2002 respectively.
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.
-43-
At December 31, 2003, First Defiance had the following commitments to fund
deposit, advance and borrowing obligations:
Maturity Dates by Period at December 31, 2004
------------------------------------------------------------------
Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
- -----------------------------------------------------------------------------------------------------------------
(In Thousands)
Savings, checking and demand accounts $ 373,379 $ 373,379 $ -- $ -- $ --
Certificates of deposit 424,323 198,709 218,477 5,764 1,373
FHLB overnight advances 26,500 26,500 -- -- --
FHLB fixed advances including interest (1) 199,948 8,677 15,618 23,613 152,040
Securities sold under repurchase agreements 11,804 11,804 -- -- --
Lease obligations 3,524 264 486 488 2,286
------------------------------------------------------------------
Total contractual cash obligations $1,039,478 $ 619,333 $ 234,581 $ 29,865 $ 155,699
==================================================================
(1) Includes principal payments of $151,713 and interest payments of $48,235
At December 31, 2004, First Defiance had the following commitments to fund
loan or line of credit obligations:
Amount of Commitment Expiration by Period
Total ----------------------------------------------------
Amounts Less than 1 After 5
Commitments Committed year 1-3 years 4-5 years years
- ---------------------------------------------------------------------------------------------------
(In Thousands)
Mortgage loans in process $ 6,341 $ 6,341 $ -- $ -- $ --
Commercial loans in process 35,431 11,194 3,705 7,168 13,364
Single-family mortgage loan
originations 1,382 1,382 -- -- --
Nonmortgage loan originations 5,255 5,255 -- -- --
Consumer lines of credit 76,120 13,461 2,850 7,347 52,462
Commercial lines of credit 71,796 70,137 1,653 6 --
----------------------------------------------------------------
Total commitments $196,325 $107,770 $ 8,208 $ 14,521 $ 65,826
================================================================
In addition to the above commitments, at December31, 2004 First Defiance
had commitments to sell $6.9 million of loans held for sale to Freddie Mac.
To meet its obligations, management can adjust the rate of savings
certificates to retain deposits in changing interest rate environments; it can
sell or securitize mortgage and non-mortgage loans; and it can turn to other
sources of financing including FHLB advances, the Federal Reserve Bank, bank
lines and brokered certificates of deposit. At December 31, 2004 First Defiance
had $54.1 million capacity under its agreements with the FHLB and other banks.
Stockholders equity increased by $2.6 million, or 2.1% at December 31,
2004 compared to December 31, 2003. Net income for 2004 was $10.8 million, of
which $5.0 million was returned to shareholders in the form of declared
dividends ($.82 per share). The decrease in unrealized gains in the investment
portfolio decreased equity by $1.9 million. The release of ESOP shares increased
equity by $1.3 million. Stock option exercises increased equity by approximately
$2.1 million. The purchase of 183,581 shares of First Defiance common stock from
treasury at an average price of $25.55 reduced equity by $4.7 million. The book
value of
-44-
First Defiance's common stock was $20.11 per share at December 31, 2004 compared
to $19.64 per share at December 31, 2003. The tangible book value (excluding
goodwill and core deposit intangibles) per share was $17.10 and $16.39 per share
at December 31, 2004 and 2003.
First Defiance is subject to various capital requirements of the Office of
Thrift Supervision. At December 31, 2004, First Federal had capital ratios that
exceeded the standard to be considered "well capitalized". For additional
information about First Federal's capital requirements, see Note 15 to the
Consolidated Financial Statements.
Pro Forma Income Statement
Management does not believe that the reported income from continuing
operations for the year ended December 31, 2002 accurately represented the true
financial picture of First Defiance because continuing operations for the first
three months of 2002 did not reflect the reinvestment of any of the net proceeds
realized from the sale of The Leader.
The following 2002 pro-forma income statement attempts to present what
First Defiance's results from continuing operations would have been for 2002 had
the sale of The Leader occurred as of January 1, 2002 and the proceeds invested
for the period from January 1, 2002 to April 1, 2002. Management has estimated
that additional assets added to the balance sheet as a result of the sale would
have been reinvested to yield a weighted average rate of 4.44% for the first
quarter of 2002. Also, to the extent possible, management has assumed that
proceeds from the sale were used to prepay advances. Dollars are in thousands
(except per share amounts).
Continuing Pro Forma
Operations Pro Forma Continuing
As Reported Adjustments Operations
---------------------------------------
Interest income $46,141 3,043 (1) $49,184
Interest expense 22,044 2,516 (2) 24,560
------- -------
Net interest income 24,097 24,624
Provision for loan losses 1,451 1,451
------- -------
Net interest income after provision 22,646 23,173
Non-interest income 12,921 12,921
Non-interest expense 26,161 26,161
------- -------
Income before income taxes 9,406 9,933
Income taxes 2,986 185 (3) 3,171
------- -------
Net income from continuing operations $ 6,420 $ 6,762
======= =======
Net income per diluted share from continuing
operations $ 0.97 $ 1.02
======= =======
(1) Assumed $120 million invested at 5.65%, $154 million invested at 3.5% for
three months.
(2) Add back $799,000 of interest on brokered CDs classified as discontinued,
add back $2.2 million of interest on FHLB advances classified as
discontinued, subtract $326,000 interest on advances to be paid off,
subtract $157,000 interest on bank debt to be paid off.
(3) Income tax on $527,000 increase in net interest income at 35%
-45-
Critical Accounting Policies
First Defiance has established various accounting policies which govern
the application of accounting principles generally accepted in the United States
in the preparation of its financial statements. The significant accounting
policies of First Defiance are described in the footnotes to the consolidated
financial statements. Certain accounting policies involve significant judgments
and assumptions by management, which have a material impact on the carrying
value of certain assets and liabilities; management considers such accounting
policies to be critical accounting policies. The judgments and assumptions used
by management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates, which could have a material impact on the
carrying value of assets and liabilities and the results of operations of First
Defiance.
Allowance for Loan Losses: First Defiance believes the allowance for loan
losses is a critical accounting policy that requires the most significant
judgments and estimates used in preparation of its consolidated financial
statements. In determining the appropriate estimate for the allowance for loan
losses, management considers a number of factors relative to both specific
credits in the loan portfolio and macro-economic factors relative to the economy
of the United States as a whole and the economy of the northwest Ohio region in
which the Company does business.
Factors relative to specific credits that are considered include a
customer's payment history, a customer's recent financial performance, an
assessment of the value of collateral held, knowledge of the customer's
character, the financial strength and commitment of any guarantors, the
existence of any customer or industry concentrations, changes in a customer's
competitive environment, and any other issues that may impact a customer's
ability to meet his obligations.
Economic factors that are considered include levels of unemployment and
inflation, specific plant or business closings in the Company's market area, the
impact of strikes or other work stoppages, the impact of weather or
environmental conditions, especially relative to agricultural borrowers and
other matters than may have an impact on the economy as a whole.
In addition to the identification of specific customer's who may be
potential credit problems, management considers its historical losses, the
results of independent loan reviews, an assessment of the adherence to
underwriting standards, the loss experience being reported by other financial
institutions operating in the Company's market area, and other factors in
providing for loan losses that have not been specifically classified. While
management believes its allowance for loan losses is conservatively determined
based on the above factors, it does not believe the allowances to be excessive
or unnecessary. Refer to the section entitled Allowance for Loan Losses and Note
2, Statement of Accounting Policies for a further description of the Company's
estimation process and methodology related to the allowance for loan losses.
-46-
Valuation of Mortgage Servicing Rights: First Defiance believes the
valuations of mortgage servicing rights is a critical accounting policy that
requires significant estimates in preparation of its consolidated financial
statements. First Defiance recognizes as separate assets the value of mortgage
servicing rights, which are acquired through loan origination activities. First
Defiance does not purchase any mortgage servicing rights.
Key assumptions made by management relative to the valuation of mortgage
servicing rights include the stratification policy used in valuing servicing,
assumptions relative to future prepayments of mortgages, the potential value of
any escrow deposits maintained or ancillary income received as a result of the
servicing activity and discount rates used to value the present value of a
future cash flow stream. In assessing the value of the mortgage servicing rights
portfolio, management utilizes a third party that specializes in valuing
servicing portfolios. That third party reviews key assumptions with management
prior to completing the valuation. Prepayment speeds are determined based on
projected median prepayment speeds for 15 and 30 year mortgage backed
securities. Those speeds are then adjusted up or down based on the size of the
loan. The discount rate used in this analysis is the pretax yield generally
required by purchasers of bulk servicing rights as of the valuation date. The
value of mortgage servicing rights is especially vulnerable in a falling
interest rate environment. Refer also to the section entitled Mortgage Servicing
Rights and Note 2, Statement of Accounting Policies, and Note 9, Mortgage
Banking, for a further description of First Defiance's valuation process,
methodology and assumptions along with sensitivity analyses.
SFAS 91 - Deferral of Fees: First Defiance believes that SFAS No. 91 -
Deferral of Fees is a critical accounting policy that utilizes estimates in its
preparation of its consolidated financial statements. First Defiance accounts
for loan origination and commitment fees and certain direct loan origination
costs by deferring the net fees, or net costs, and amortizing them as an
adjustment of the related loan's yield. While the amount of fees to be deferred
is generally apparent in the origination of a loan, the amount of costs,
especially indirect or allocated costs to defer is a judgment that management
makes based various time studies and cost accounting assumptions. The time
studies are updated annually to assure that loan origination procedures have not
changed materially. In addition, standard costs utilized in this analysis are
also updated annually. Refer to Note 2, Statement of Accounting Policies, for a
description of First Defiance's methodology.
Pending Acquisitions
On January 21, 2005, First Defiance completed the acquisition of ComBanc,
Inc. and its wholly-owned subsidiary, The Commercial Bank, a $200 million
commercial bank. Under the terms of the agreement, shareholders of ComBanc will
receive cash, shares of First Defiance, or a combination thereof, based on an
election process to completed after the closing of the transaction. Cash
consideration was $17.20 per ComBanc share and stock consideration was fixed at
0.65266 shares of First Defiance for each share of ComBanc. The agreement
further provides that in the aggregate, 50% of ComBanc shares will be exchanged
for First Defiance common stock with the remainder of ComBanc shares exchanged
for cash. The transaction is valued at $39.2 million based on the closing price
of First Defiance stock on January 21, 2005.
-47-
Following the merger, the Commercial Bank was merged into First Federal Bank
Not considering the merger related charges discussed below, the merger is
expected to be accretive to diluted earnings per share for 2005, due primarily
to cost savings, by $.03 to $.05 per share in 2005. Cost savings are expected to
equal approximately 22% of ComBanc, Inc.'s annualized expense, or approximately
$1.4 million. After-tax merger related charges of approximately $1.1 million, or
approximately $0.16 per share are expected to be recognized in the 2005 first
quarter.
On October 13, 2004, First Defiance announced an agreement to acquire the
Genoa Savings and Loan Company, a $94 million asset savings and loan, for $30.22
per Genoa Savings and Loan share in cash. The transaction is valued at $11.0
million. Following the merger, the Genoa Savings and Loan will be merged into
First Federal Bank.
Not considering the merger-related charges discussed below, the merger is
expected to be accretive to diluted earnings per share for the year 2005 due to
expected cost savings, by $0.01 to $0.03 per share. Cost savings are expected to
equal approximately 35% of Genoa Savings annualized expense, or approximately
$1.7 million. After-tax merger related charges of approximately $1.5 million, or
approximately $0.22 per share are expected to be recognized in the 2005 second
quarter.
-48-
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Asset/Liability Management
A significant portion of the Company's revenues and net income is derived
from net interest income and, accordingly, the Company strives to manage its
interest-earning assets and interest-bearing liabilities to generate an
appropriate contribution from net interest income. Asset and liability
management seeks to control the volatility of the Company's performance due to
changes in interest rates. The Company attempts to achieve an appropriate
relationship between rate sensitive assets and rate sensitive liabilities. First
Defiance does not presently use off balance sheet derivatives to enhance its
risk management.
First Defiance monitors interest rate risk on a monthly basis through
simulation analysis that 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, non-maturity 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, First
Defiance's net interest income would increase by just 0.74% over the base case
scenario. Were interest rates to fall by 100 basis points during the same
12-month period, the simulation indicates that net interest income would
decrease by only 2.06%. It should be noted that other areas of First Defiance's
income statement, such as gains from sales of mortgage loans and amortization of
mortgage servicing rights are also impacted by fluctuations in interest rates
but are not considered in the simulation of net interest income.
First Defiance has increased its lending activities in the non-residential
real estate and commercial loan areas. While such loans carry higher credit risk
than residential mortgage lending, they tend to be more rate sensitive than
residential mortgage loans. The balance of First Defiance's non-residential and
multi-family real estate loan portfolio was $415.2 million, which is split
between $76.9 million of fixed-rate loans and $338.3 million of adjustable-rate
loans at December 31, 2004. The commercial loan portfolio increased to $141.6
million, which is split between $58.5 million of fixed-rate loans and $83.1
million of adjustable-rate loans at December 31, 2004. Certain of the loans
classified as adjustable have fixed rates for an initial term that may be as
long as five years. The maturities on fixed-rate loans are generally less than 7
years. First Defiance also has significant balances of consumer loans ($45.5
million at December 31, 2004) which tend to have a shorter duration than
residential mortgage loans, and home equity and improvement loans ($90.8 million
at December 31, 2004) which fluctuate with changes in the prime lending rate.
Also, to limit its interest rate risk, First Federal sold approximately 71% of
its fixed-rate mortgage originations into the secondary market in 2004.
-49-
In addition to the simulation analysis, First Federal also prepares an
"economic value of equity" ("EVE") analysis. This analysis calculates the net
present value of First Federal's assets and liabilities in rate shock
environments that range from -100 basis points to +200 basis points. The results
of this analysis are reflected in the following table.
December 31, 2004
- --------------------------------------------------------------------------------
Economic Value of
Equity as % of
Economic Value of Equity Present Value of Assets
-------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
- --------------------------------------------------------------------------------
+ 200 bp 123,278 723 0.59% 11.45% 47 bp
+ 100 bp 123,092 537 0.44% 11.23% 25 bp
0 bp 122,555 -- -- 10.98% --
-100 bp 121,103 (1,452) (1.18%) 10.66% (32) bp
-200 bp 118,726 (3,829) (3.12%) 10.27% (71) bp
Based on the above analysis, in the event of a 200 basis point increase in
interest rates as of December 31, 2004, First Federal would experience a 0.59%
increase in its economic value of equity. If rates would fall by 200 basis
points its economic value of equity would decline by 3.12%. During periods of
rising rates, the value of monetary assets declines. Conversely, during periods
of falling rates, the value of monetary assets increases. It should be noted
that the amount of change in value of specific assets and liabilities due to
changes in rates is not the same in a rising rate environment as in a falling
rate environment. Based on the EVE analysis, the change in the economic value of
equity in both rising and falling rate environments is generally negligible
because both its assets and liabilities have relatively short durations and the
durations are fairly closely matched. The average duration of its assets at
December 31, 2004 was 1.81 years while the average duration of its liabilities
was 2.12 years.
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the each of the methods of analysis presented must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market rates
while interest rates on other types of financial instruments may lag behind
current changes in market rates. Furthermore, in the event of changes in rates,
prepayments and early withdrawal levels could differ significantly from the
assumptions in calculating the table and the results therefore may differ from
those presented.
-50-
Forward Looking Information
Forward looking statements in this report are made in reliance upon the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The statements in this report which are not historical fact are forward looking
statements and they include, among other statements, projections about growth in
the Financial Condition section, comments about the adequacy of the allowance
for loan losses and projections about interest rate simulations included in the
Asset/Liability Management section. 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 expectation regarding future performance.
-51-
Item 8. Financial Statements and Supplementary Data
INDEX TO REPORTS ON INTERNAL CONTROL
Management's Report on Internal Control Over Financial Reporting..............53
Report of Independent Registered Accounting Firm
On Effectiveness of Internal Control Over Financial Reporting...............53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition................................55
Consolidated Statements of Income.............................................57
Consolidated Statements of Stockholders' Equity...............................58
Consolidated Statements of Cash Flows.........................................59
Notes to Consolidated Financial Statements....................................61
Report of Independent Registered Public Accounting Firm......................109
-52-
Management's Report on Internal Control Over Financial Reporting
The management of First Defiance Financial Corp. is responsible for
establishing and maintaining adequate internal control over financial reporting.
First Defiance's internal control over financial reporting is a process designed
under the supervision of First Defiance's chief executive officer and chief
financial officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of First Defiance's financial statements
for external reporting purposes in accordance with U.S. generally accepted
accounting principles.
First Defiance's management assessed the effectiveness of its internal
control over financial reporting as of December 31, 2004 based on the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in "Internal Control-Integrated Framework." Based on the assessment,
management determined that, as of December 31, 2004, First Defiance's internal
control over financial reporting is effective based on those criteria.
Management's assessment of the effectiveness of First Defiance's internal
control over financial reporting as of December 31, 2004 has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated
in their report appearing on this page.
/s/ William J. Small /s/ John C. Wahl
William J. Small John C. Wahl
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Report of Independent Registered Public Accounting Firm
On Effectiveness of Internal Control Over Financial Reporting
The Board of Directors
First Defiance Financial Corp.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that First
Defiance Financial Corp. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). First Defiance
Financial Corp.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment about the effectiveness
of internal control over financial reporting. Our responsibility is to express
an opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
-53-
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that First Defiance Financial
Corp. maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, First Defiance Financial Corp. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of financial condition as of December 31, 2004 and 2003, 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, 2004 of First
Defiance Financial Corp. and our report dated March 8, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 8, 2005
-54-
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
December 31
2004 2003
--------------------------
(In Thousands)
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 19,891 $ 28,020
Interest-bearing deposits 630 9,763
--------------------------
20,521 37,783
Securities:
Available-for-sale, carried at fair value 137,003 168,259
Held-to-maturity, carried at amortized cost
(fair value $2,376 and $2,938 at December 31,
2004 and 2003, respectively) 2,255 2,776
--------------------------
139,258 171,035
Loans receivable, net of allowance of $9,956 and
$8,844 at December 31, 2004 and 2003, respectively 878,912 735,255
Loans held for sale 2,295 5,872
Mortgage servicing rights 3,598 3,431
Accrued interest receivable 4,653 4,742
Federal Home Loan Bank stock and other
interest-earning assets 13,376 17,766
Bank Owned Life Insurance 18,581 17,952
Premises and equipment 24,248 23,846
Real estate and other assets held for sale 98 404
Goodwill 18,933 20,544
Other assets 2,194 1,969
--------------------------
Total assets $1,126,667 $1,040,599
==========================
-55-
December 31
2004 2003
-----------------------------
(In Thousands)
Liabilities and stockholders' equity
Liabilities:
Deposits $ 797,701 $ 728,996
Advances from the Federal Home Loan Bank 178,213 164,522
Short term borrowings and other interest-bearing liabilities 14,804 12,267
Advance payments by borrowers 278 231
Deferred taxes 934 1,859
Other liabilities 7,863 8,455
-----------------------------
Total liabilities 999,793 916,330
Stockholders' equity:
Preferred stock, no par value per share:
5,000 shares authorized; no shares issued
Common stock, $.01 par value per share:
20,000 shares authorized; 6,280 and 6,328
shares outstanding, respectively 63 63
Additional paid-in capital 52,131 51,144
Stock acquired by ESOP (1,479) (1,904)
Deferred compensation (4) (11)
Accumulated other comprehensive income,
net of tax of $1,148 and $2,163, respectively 2,131 4,017
Retained earnings 74,032 70,960
-----------------------------
Total stockholders' equity 126,874 124,269
-----------------------------
Total liabilities and stockholders' equity $ 1,126,667 $ 1,040,599
=============================
See accompanying notes.
-56-
First Defiance Financial Corp.
Consolidated Statements of Income
Years Ended December 31
2004 2003 2002
---------------------------------------
(In Thousands, Except Per Share Amount)
Interest income
Loans $ 47,345 $ 41,165 $ 36,871
Investment securities 6,731 8,491 8,550
Interest-bearing deposits 43 280 720
---------------------------------------
Total interest income 54,119 49,936 46,141
Interest expense
Deposits 12,950 13,435 16,508
Federal Home Loan Bank advances and other 7,317 7,343 5,276
Notes payable 114 77 260
---------------------------------------
Total interest expense 20,381 20,855 22,044
---------------------------------------
Net interest income 33,738 29,081 24,097
Provision for loan losses 1,548 1,719 1,451
---------------------------------------
Net interest income after provision for loan losses 32,190 27,362 22,646
Noninterest income
Service fees and other charges 5,341 4,480 3,767
Insurance commissions 4,052 3,712 3,266
Dividends on FHLB stock 612 695 904
Gain on sale of loans 2,523 7,173 4,565
Gain on sale of securities 1,426 1,575 21
Trust income 225 161 117
Income from Bank Owned Life Insurance 947 809 144
Other noninterest income 187 183 137
---------------------------------------
Total noninterest income 15,313 18,788 12,921
Noninterest expense
Compensation and benefits 17,422 16,120 14,104
Occupancy 3,294 3,040 2,802
SAIF Deposit insurance premiums 40 183 123
State Franchise tax 868 1,118 1,351
Data processing 2,363 1,841 1,457
Amortization of mortgage servicing rights 704 1,998 1,439
Impairment (recovery) of mortgage servicing rights 1 (746) 517
Amortization and impairment of goodwill and other intangibles 110 70 200
Settlement of contingent liability 1,927 -- --
Other noninterest expense 5,176 4,754 4,168
---------------------------------------
Total noninterest expense 31,905 28,378 26,161
---------------------------------------
Income before income taxes 15,598 17,772 9,406
Federal income taxes 4,802 5,690 2,986
---------------------------------------
Income from continuing operations 10,796 12,082 6,420
Discontinued operations, net of tax -- -- 8,853
---------------------------------------
Income before cumulative effect of a change in accounting principle 10,796 12,082 15,273
Cumulative effect of change in method of accounting for goodwill -- -- (194)
---------------------------------------
Net income $ 10,796 $ 12,082 $ 15,079
=======================================
Earnings per share:
Basic:
From continuing operations $ 1.77 $ 2.00 $ 1.01
Discontinued operations, net of tax $ -- $ -- $ 1.39
Cumulative effect of change in method of accounting for goodwill $ -- $ -- $ (0.03)
Net income $ 1.77 $ 2.00 $ 2.37
Diluted:
From continuing operations $ 1.69 $ 1.91 $ 0.97
Discontinued operations, net of tax $ -- $ -- $ 1.34
Cumulative effect of change in method of accounting for goodwill $ -- $ -- $ (0.03)
Net income $ 1.69 $ 1.91 $ 2.28
Dividends declared per share $ 0.82 $ 0.65 $ 0.54
See accompanying notes.
-57-
First Defiance Financial Corp.
Consolidated Statements of Stockholders' Equity
(In Thousands)
Stock Acquired By
-------------------------
Common Stock Additional Management
------------------------ Paid-In Recognition
Shares Amount Capital ESOP Plan
-------------------------------------------------------------------------
Balance at January 1, 2002 6,854 $ 69 $ 53,725 $ (2,813) $ (82)
Comprehensive income:
Net income -- -- -- -- --
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of $3,075 -- -- -- -- --
Total comprehensive income
ESOP shares released -- -- 357 426 --
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefit of $36 -- -- 36 -- 52
Shares issued under stock option plan,
net of income tax benefit of $290 108 1 1,170 -- --
Acquisition of common stock for treasury (550) (6) (4,586) -- --
Dividends declared -- -- -- -- --
-------------------------------------------------------------------------
Balance at December 31, 2002 6,412 64 50,702 (2,387) (30)
Comprehensive income:
Net income -- -- -- -- --
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of $(1,314) (a) -- -- -- -- --
Total comprehensive income
ESOP shares released 596 483 --
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefit of $31 -- -- 31 -- 19
Shares issued under stock option plan,
net of income tax benefit of $236 137 1 1,730 -- --
Acquisition of common stock for treasury (221) (2) (1,915) -- --
Dividends declared -- -- -- -- --
-------------------------------------------------------------------------
Balance at December 31, 2003 6,328 63 51,144 (1,904) (11)
Comprehensive income:
Net income
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of ($1,015) (a)
Total comprehensive income
ESOP shares released 845 425
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefit of $12 12 7
Shares issued under stock option plan,
net of income tax benefit of $552 135 1 2,107
Acquisition of common stock for treasury (183) (1) (1,977)
Dividends declared
-------------------------------------------------------------------------
Balance at December 31, 2004 6,280 $ 63 $ 52,131 $ (1,479) $ (4)
=========================================================================
Accumulated
Other Total
Comprehensive Retained Stockholders'
Income Earnings Equity
---------------------------------------------
Balance at January 1, 2002 $ 763 $ 59,359 $ 111,021
Comprehensive income:
Net income -- 15,079 15,079
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of $3,075 5,692 -- 5,692
---------
Total comprehensive income 20,771
ESOP shares released -- -- 783
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefit of $36 -- -- 88
Shares issued under stock option plan,
net of income tax benefit of $290 -- -- 1,171
Acquisition of common stock for treasury -- (5,683) (10,275)
Dividends declared -- (3,449) (3,449)
--------------------------------------------
Balance at December 31, 2002 6,455 65,306 120,110
Comprehensive income:
Net income -- 12,082 12,082
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of $(1,314) (a) (2,438) -- (2,438)
---------
Total comprehensive income 9,644
ESOP shares released -- -- 1,079
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefit of $31 -- -- 50
Shares issued under stock option plan,
net of income tax benefit of $236 -- -- 1,731
Acquisition of common stock for treasury -- (2,489) (4,406)
Dividends declared -- (3,939) (3,939)
--------------------------------------------
Balance at December 31, 2003 4,017 70,960 124,269
Comprehensive income:
Net income 10,796 10,796
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of ($1,015) (a) (1,886) (1,886)
---------
Total comprehensive income 8,910
ESOP shares released 1,270
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefit of $12 19
Shares issued under stock option plan,
net of income tax benefit of $552 2,108
Acquisition of common stock for treasury (2,713) (4,691)
Dividends declared (5,011) (5,011)
--------------------------------------------
Balance at December 31, 2004 $ 2,131 $ 74,032 $ 126,874
============================================
(a) Net of reclassification adjustments. Reclassification adjustments
represent net unrealized gains (losses) as of December 31 of the prior
year on securities available-for-sale that were sold during the current
year. The reclassification adjustment was $1.82 million ($1.18 after tax)
in 2004 and $1.39 million ($905,000 after tax) in 2003
See accompanying notes.
-58-
First Defiance Financial Corp.
Consolidated Statements of Cash Flows
Years Ended December 31
2004 2003 2002
-----------------------------------------
(In Thousands)
Operating activities
Net income $ 10,796 $ 12,082 $ 15,079
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,548 1,719 1,451
Provision for depreciation 1,798 1,645 1,605
Net securities amortization 564 988 695
Amortization of mortgage servicing rights 704 1,998 1,439
Net impairment (recovery) of mortgage servicing rights 1 (746) 517
Amortization of core deposit intangible 110 70 --
Net impairment of goodwill -- -- 438
Gain on sale of loans (2,523) (7,173) (4,565)
Gain on sale of discontinued operations -- -- (16,912)
Amortization of Management Recognition Plan
deferred compensation 19 50 88
Release of ESOP shares 1,270 1,079 783
Gains on sales of securities (1,426) (1,575) (21)
Deferred federal income tax (credit) 90 874 (437)
Proceeds from sale of loans 107,491 310,310 197,249
Origination of mortgage servicing rights (871) (2,593) (2,225)
Origination of loans held for sale (101,391) (293,673) (207,348)
Decrease in interest receivable and other assets (765) (2,727) (17,998)
Decrease in assets held for sale -- -- 12
Increase in assets of discontinued operations -- -- (40,479)
Decrease in accrued interest and other liabilities (787) (782) (4,638)
-----------------------------------------
Net cash provided by operating activities 16,628 21,546 (75,267)
Investing activities
Proceeds from maturities of held-to-maturity securities 403 1,125 1,623
Proceeds from maturities of available-for-sale securities 42,850 64,852 39,523
Proceeds from sale of available-for-sale securities 20,747 22,233 2,459
Proceeds from sale of real estate and other assets held for sale 996 338 597
Proceeds from sale of office properties and equipment 2 -- --
Proceeds from sale of discontinued operations -- 1,228 371,772
Purchases of available-for-sale securities (34,262) (48,885) (194,766)
Purchases of Federal Home Loan Bank stock (610) (692) (767)
Proceeds from sale of Federal Home Loan Bank stock 5,000 -- --
Purchases of office properties and equipment (2,202) (3,506) (1,500)
Acquisition of banking center offices -- 70,132 --
Net increase in loans receivable (144,660) (97,376) (64,018)
-----------------------------------------
Net cash provided by investing activities (111,736) 9,449 154,923
-59-
First Defiance Financial Corp.
Consolidated Statements of Cash Flows (continued)
Years Ended December 31
2004 2003 2002
--------------------------------------------
Financing activities
Net increase (decrease) in deposits 69,090 (37,343) (15,349)
Repayment of Federal Home Loan Bank long-term advances (1,809) (1,574) (25,206)
Repayment of term notes payable -- (10) (39)
Net increase (decrease) in Federal Home Loan Bank
short-term advances 15,500 8,000 (37,000)
Net increase (decrease) in short-term line of credit 3,000 -- (18,250)
Proceeds from Federal Home Loan Bank long-term advances -- 9,000 15,000
(Decrease) increase in securities sold under repurchase agreements (463) 6,671 4,299
Purchase of common stock for treasury (4,691) (4,406) (10,275)
Cash dividends paid (4,889) (3,939) (3,449)
Proceeds from exercise of stock options 2,108 1,731 1,171
--------------------------------------------
Net cash provided by (used in) financing activities 77,846 (21,870) (89,098)
--------------------------------------------
(Decrease) increase in cash and cash equivalents (17,262) 9,125 (9,442)
Cash and cash equivalents at beginning of period 37,783 28,658 38,100
--------------------------------------------
Cash and cash equivalents at end of period $ 20,521 $ 37,783 $ 28,658
============================================
Supplemental cash flow information
Interest paid $ 20,432 $ 21,047 $ 21,337
============================================
Income taxes paid $ 4,149 $ 5,063 $ 14,260
============================================
Transfers from loans to real estate
and other assets held for sale $ 690 $ 536 $ 667
============================================
Noncash operating activities
Change in deferred taxes on net unrealized gains or
losses on available-for-sale securities $ (1,015) $ (1,314) $ 3,075
============================================
Noncash investing activities
(Increase) decrease in net unrealized gain or (loss) on
available-for-sale securities $ (2,901) $ (3,752) $ 8,784
============================================
Noncash financing activities
Cash dividends declared but not paid $ 1,342 $ 1,220 $ 920
============================================
See accompanying notes.
-60-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements
December 31, 2004
1. Basis of Presentation
First Defiance Financial Corp. (First Defiance) is a holding company that
conducts business through its two wholly owned subsidiaries, First Federal Bank
of the Midwest, Defiance Ohio (First Federal) and First Insurance & Investments
(First Insurance). All significant intercompany transactions and balances are
eliminated in consolidation.
First Federal is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans primarily in the counties in which its offices are located.
First Federal's traditional banking activities include originating and servicing
residential, commercial and consumer loans and providing a broad range of
depository and trust services. First Federal is subject to the regulations of
certain federal agencies and undergoes periodic examinations by those regulatory
authorities. First Federal's wholly owned mortgage banking company, The Leader
Mortgage Company, LLC, was sold to US Bancorp in a transaction that was
completed on April 1, 2002.
First Insurance & Investments is an insurance agency that does business in the
Defiance, Ohio area offering property and casualty, group health, and life
insurance and investment and annuity products.
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S.
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. Significant areas where First Defiance uses estimates are the
determination of the allowance for loan losses, the valuation of mortgage
servicing rights and goodwill, and the determination of post-retirement
benefits..
Earnings Per Share
Earnings per share are based on the weighted average number of shares of common
stock outstanding during the period. Basic earnings per share exclude any
dilutive effects of options and unvested stock grants. Unreleased shares held by
the Company's Employee Stock Ownership Plan are not included in average shares
for purposes of calculating earnings per share. As shares are released for
allocation, they are included in the average shares outstanding. Also see note
17.
-61-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from banks and overnight
investments with the Federal Home Loan Bank (FHLB). Cash and amounts due from
depository institutions includes required balances at the FHLB and Federal
Reserve of approximately $346,000 and $100,000, respectively, at December 31,
2004.
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 unrealized losses 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 derivative securities as part of the
overall asset and liability management process. Such derivative securities are
disclosed in Note 6 and include agency step-up, REMIC and CMO investments. Such
investments are not classified by management as high risk at December 31, 2004
and do not present risk significantly different than other mortgage-backed or
agency 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 0.15% of total assets plus
an amount of at least 2% but no more than 4% of its non-grandfathered mission
asset activity (as defined in the FHLB's regulations). First Federal is
permitted to own stock in excess of the minimum requirement.
-62-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
FHLB stock is a restricted equity security that does not have a readily
determinable fair value and is carried at cost.
Loans Receivable
Loans are reported at the principal amount outstanding, net of unearned income.
Unearned income, which includes deferred fees net of deferred incremental loan
origination costs, is amortized to interest income generally over the
contractual life of the loan using the interest method.
Mortgage loans originated and intended for sale in the secondary market are
classified as loans held for sale and are carried at the lower of cost or
estimated fair value in the aggregate.
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 reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. The accrual of interest on these loans is generally resumed after a
pattern of repayment has been established.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio and is based
on the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans, actual loss experience, current economic
events in specific industries and geographical areas, and other pertinent
factors including regulatory guidance and general economic conditions.
Determination of the allowance is inherently subjective as it requires
significant estimates, including the amounts and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience and consideration of economic trends, all of which
may be susceptible to significant change. Loan losses are charged off against
the allowance when in management's estimation it is unlikely that the loan will
be collected, while recoveries of amounts previously charged off are credited to
the allowance. A provision for loan losses is charged to operations based on
management's periodic evaluation of the factors previously mentioned, as well as
other pertinent factors in order to maintain the allowance for loan losses at
the level deemed adequate by management.
The determination of whether a loan is considered past due or delinquent is
based on the contractual payment terms.
-63-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Marketing Costs
Marketing costs totaled $592,000, $524,000, and $504,000, in 2004, 2003, and
2002, respectively, and are expensed as incurred.
Mortgage Servicing Rights
The total cost of loans originated or purchased is allocated between loans and
servicing rights based on the relative fair values of each at the time of sale.
The servicing rights capitalized are amortized in proportion to and over the
period of estimated servicing income.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type (fixed or adjustable rate) and interest rate.
Impairment represents the excess of amortized cost of an individual mortgage
servicing rights stratum over its fair value, and is recognized through a
valuation allowance.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time. Changes
in these underlying assumptions could cause the fair value of mortgage servicing
rights, and the related valuation allowance, to change significantly in the
future.
Real Estate 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, less estimated costs to dispose, at
the time of foreclosure or insubstance foreclosure. Loan losses arising from the
acquisition of such property are charged against the allowance for loan losses.
-64-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
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 3 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles
are evaluated for impairment using the guidance provided by Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for Long-Lived Assets
to be Disposed of, relative to accounting for long-lived assets and accounting
for long-lived assets to be disposed of either through sale, abandonment,
exchange or a distribution to owners.
Income Taxes
Deferred income taxes reflect the temporary tax consequences on future years of
differences between the tax basis and financial statement amounts of assets and
liabilities at each year-end.
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.
An effective tax rate of 35% is used to determine after-tax components of other
comprehensive income included in the statements of stockholders' equity.
Business Combinations
Business combinations, which have been accounted for under the purchase method
of accounting, include the results of operations of the acquired business from
the date of acquisition. Net assets of companies acquired are recorded at their
estimated fair value as of the date of acquisition.
-65-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Goodwill and Other Intangibles
Core deposit intangibles are a measure of the value of checking and savings
deposits acquired in business combinations accounted for under the purchase
method. Core deposit intangibles are amortized on an accelerated basis over the
estimated lives of the existing deposit relationships acquired, but not
exceeding 10 years. Goodwill is the excess of the purchase price over the fair
value of the assets and liabilities of companies acquired through business
combinations accounted for under the purchase method. Goodwill is evaluated at
the business unit level, which for First Defiance is First Federal Bank and
First Insurance. At December 31, 2004 and December 31, 2003, goodwill totaled
$14.5 million and $16.1 million respectively and core deposit intangibles were
$593,000 and $703,000 at First Federal. At December 31, 2004 and 2003 goodwill
totaled $3.8 million and $3.7 million respectively at First Insurance. Core
deposit intangibles are amortized over the life of the related deposits, not to
exceed ten years. Amortization expense in 2004 was $110,000. Goodwill is not
subject to amortization but its value is assessed annually to determine if there
is any impairment of value.
Effective January 1, 2002, First Defiance adopted SFAS No 142, Goodwill and
Other Intangible Assets, under which goodwill is no longer amortized, but is
subject to an annual impairment test. Separable intangible assets that are not
deemed to have an indefinite life continue to be amortized over their useful
lives. The Company completes annual testing for impairment of goodwill. If an
impairment loss is determined in the future, the loss will be reflected as an
expense in the statement of operations in the period in which the impairment was
determined. The impact on the statement of income from the adoption of SFAS No.
142 in included in Note 21.
Stock Compensation Plans
At December 31, 2004, the Company had three stock-based compensations plans,
which are more fully described in Note 18. The Company accounts for those plans
under recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations. Under APB No. 25, because the exercise price of the
Corporation's employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized.
-66-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, Accounting for Stock-Based Compensation and has been determined as
if First Defiance had accounted for its employee stock-based compensation plans
under the fair value method of that Statement. Under the fair-value based
method, compensation cost is measured at the grant date based upon the value of
the award and recognized over the service period. For purposes of the pro forma
disclosures, the estimated fair value of the option is amortized to expense over
the options' vesting period.
The following pro forma results of operations use a fair value method of
accounting for stock options in accordance with SFAS No. 123. The estimated fair
value of the options are 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 which was originally developed for use in estimating the
fair value of traded options, which have different characteristics from the
Company's employee stock options. The model is also sensitive to changes in
assumptions, which can materially affect the fair value estimate. The following
weighted-average assumptions were used to determine the fair value of options
granted on First Defiance common stock:
December 31
2004 2003 2002
-----------------------------------------------
Risk free interest rate 5.55% 5.65% 5.74%
Dividend yield 2.99% 2.97% 2.93%
Volatility factors of expected
market price of stock 0.262% 0.266% 0.269%
Weighted average expected life 8.88 years 8.71 years 8.62 years
Weighted average grant date fair
value of options granted $ 3.75 $ 3.53 $ 3.44
-67-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Based upon the above assumptions, pro forma net income and earnings per share
are as follows:
Years Ended December 31
2004 2003 2002
--------------------------------------------
Net income from continuing operations,
as reported $ 10,796 $ 12,082 $ 6,420
Stock-based compensation using the
fair value method, net of tax (222) (186) (197)
--------------------------------------------
Pro forma net income from
continuing operations $ 10,574 $ 11,896 $ 6,223
============================================
Earnings per share as reported:
Basic $ 1.77 $ 2.00 $ 1.01
============================================
Diluted $ 1.69 $ 1.91 $ 0.97
============================================
Pro forma earnings per share:
Basic $ 1.74 $ 1.97 $ 0.97
============================================
Diluted $ 1.66 $ 1.88 $ 0.94
============================================
Accounting for Derivative Instruments and Hedging Activities
First Defiance's accounting policies for derivative instruments and hedging
activities reflect the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. All derivative instruments,
which are comprised of interest rate locks issued to customers and commitment to
sell mortgage loans in the secondary market, are carried at fair value on the
balance sheet. When the special hedge accounting criteria are met, offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability are deferred and recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are recognized in earnings and cannot be deferred. For
derivative instruments not accounted for as hedges, changes in fair value are
recognized in earnings as they occur.
-68-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Recent Accounting Pronouncements
Accounting for Stock Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values beginning with the first interim period after June
15, 2005, with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS No. 123 no longer will be an alternative to financial
statement recognition. The Company is required to adopt SFAS No. 123R in the
third quarter of 2005. Under SFAS No. 123R, the Company must determine the
appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at date of adoption.
The permitted transition methods include either retrospective or prospective
adoption. Under the retrospective option, prior periods may be restated either
as of the beginning of the year of adoption or for all periods presented. The
prospective method requires that compensation expense be recorded for all
unvested stock options at the beginning of the first quarter of adoption of SFAS
No. 123R, while the retrospective methods would record compensation expense for
all unvested stock options beginning with the first period presented. The
Company is currently evaluating the requirements of SFAS No. 123R and has not
yet determined the method of adoption or the effect of adopting SFAS No. 123R.
Accordingly, it has not yet determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under SFAS No. 123
set forth above.. See Note 18 for additional information regarding stock options
outstanding at year-end..
-69-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Meaning of Other Than Temporary Impairment
In March 2004, the Financial Accounting Standards Board (FASB) Emerging Issues
Task Force (EITF) released issue 03-01, Meaning of Other Than Temporary
Impairment, which addressed other-than-temporary impairment for certain debt and
equity investments. The recognition and measurement requirements of Issue 03-01,
and other disclosure requirements not already implemented, were effective for
periods beginning after June 15, 2004. In September 2004, the FASB staff issued
FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date for
certain measurement and recognition guidance contained in Issue 03-1. The FSP
requires the application of pre-existing other-than-temporary guidance during
the period of delay until a final consensus is reached. Management does not
anticipate the issuance of the final consensus will have a material impact on
financial condition, results of operations, or liquidity.
Accounting For Certain Loans or Debt Securities Acquired in a Transfer
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. SOP 03-3 requires acquired loans, including
debt securities, to be recorded at the amount of the purchaser's initial
investment and prohibits carrying over valuation allowances from the seller for
those individually-evaluated loans that have evidence of deterioration in credit
quality since origination, and it is probably all contractual cash flows on the
loan will be unable to be collected. SOP 03-3 also requires the excess of all
undiscounted cash flows expected to be collected at acquisition over the
purchaser's initial investment to be recognized as interest income on a
level-yield basis over the life of the loan. Subsequent increases in cash flows
expected to be collected are recognized prospectively through an adjustment of
the loan's yield over its remaining life, while subsequent decreases are
recognized as impairment. Loans carried at fair value, mortgage loans held for
sale, and loans to borrowers in good standing under revolving credit agreements
are excluded from the scope of SOP 03-3. The guidance is effective for loans
acquired in fiscal years beginning after December 15, 2004 and is not expected
to have a material impact on financial condition, results of operations, or
liquidity.
Medicare Prescription Law
In December 2003, the Financial Accounting Standards Board (FASB) issued
guidance that requires disclosure that acknowledges the issuance of this new law
and the fact that it may affect a company's accumulated postretirement benefit
obligation and net postretirement benefit cost. The required disclosure for
First Defiance is presented in Note 14.
-70-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
establishes standards for issuers to classify and measure certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that certain financial instruments that would previously have been
classified as equity to be classified as liabilities. The guidance was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise became effective for First Defiance on July 1, 2003. The application
of SFAS No. 150 did not have a material effect on the Company's financial
condition or results of operations.
In December 2003, the FASB deferred for an indefinite period the application of
the guidance in SFAS 150 to noncontrolling interests that are classified as
equity in the financial statements of a subsidiary but would be classified as a
liability in the parent's financial statements under SFAS 150. The deferral is
limited to mandatorily redeemable noncontrolling interests associated with
finite-lived subsidiaries. Management does not believe any such applicable
entities exist as of December 31, 2004, but will continue to evaluate the
applicability of this deferral to entities which may be consolidated as a result
of FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities.
Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires an entity to record a liability for an
obligation associated with the retirement of an asset at the time the liability
is incurred by capitalizing the cost as part of the carrying value of the
related asset and depreciating it over the remaining useful life of that asset.
The standard is effective for the Company beginning January 1, 2003, and its
adoption did not have a material effect on the Company's results of operations,
financial position or liquidity.
-71-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
2. Statement of Accounting Policies (continued)
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, non-controlling
interests and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected loss
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN No. 46 also requires additional disclosures by primary beneficiaries
and other significant variable interest holders. In December 2003, the FASB
issued modifications to FIN No. 46 to provide additional scope exceptions,
address certain implementation issues and promote a more consistent application
of the provisions. Revised FIN No. 46 superceded FIN No. 46 and was adopted by
the Company in the first quarter of 2004. As of December 31, 2004, the Company
was not party to any VIEs. The provisions of FIN No. 46, as revised, are not
expected to have a material impact on results of operation or financial
position.
3. Acquisitions
On January 21, 2005, First Defiance completed its acquisition of ComBanc, Inc.
(ComBanc), a bank holding company operating four branches in Delphos, Lima and
Elida, Ohio. The acquisition of ComBanc is expected to expand product offerings
and delivery channels into the Allen County, Ohio market area, which is adjacent
to First Defiance's existing market. Under the terms of the agreement, shares of
ComBanc stock were exchanged for either $17.20 of cash or .65266 shares of First
Defiance common stock. On an aggregate basis, 50% of the ComBanc shares were
exchanged for cash and the remaining ComBanc shares were exchanged for 721,520
shares of First Defiance common stock. The total value of this transaction,
based on First Defiance's closing price on January 21, 2005 of $28.00 per share,
is $39.2 million. The allocation of the purchase price to the assets and
liabilities acquired will be determined after completion of valuations to
determine the estimated fair value of ComBanc's assets and liabilities. The
results of ComBanc's operations will be included in First Defiance's statement
of income from the date of acquisition. As this transaction was completed
subsequent to December 31, 2004, the accompanying financial statements as of and
for the year ended December 31, 2004 do not include the effects of this
transaction.
-72-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
3. Acquisitions (continued)
In October 2004, the Company signed a definitive agreement to acquire the Genoa
Savings and Loan Company (Genoa), an $84 million savings and loan with four
branches in the metropolitan Toledo, Ohio area for a cash price of $11.0
million. The Genoa shareholders approved this transaction on January 20, 2005
but it is still subject to regulatory approval. This acquisition is expected to
close in the 2005 second quarter.
On February 22, 2003, First Defiance entered into a purchase and assumption
agreement with RFC Banking Company and its parent Rurban Financial Corp. to
acquire banking center offices located in Findlay, Ottawa and McComb, Ohio and
related deposit liabilities, certain loans and other assets associated with the
business of those branches. On June 6, 2003, First Defiance completed the
purchase of the banking center offices and the reported results include the
operations of these acquired banking centers assets and liabilities from that
acquisition date and thereafter. Total deposits acquired through the acquisition
were $166.7 million. Additionally, loan balances acquired by First Defiance in
the transaction were approximately $79 million, which included $35.4 million of
non-residential real estate loans, $16.8 million of commercial loans, $3.6
million of consumer loans, $1.8 million of home equity loans and $21.4 million
of residential mortgages. Other assets acquired included $2.0 million of
premises and equipment and $443,000 of interest receivable and other assets.
Cash received, net of the premium paid, was $70.1 million. Total consideration
for the acquisition was 10.5% of acquired non-brokered deposits plus an agreed
upon amount for all furnishings and equipment.
As of the final closing, First Defiance paid a net premium of $12.5 million and
recorded fair value increases (reductions) on acquired loans of ($1.2) million
and acquired deposits of $2.3 million to record them at fair value and recorded
transaction costs and other adjustments of approximately $900,000. These items
resulted in total intangibles of $16.9 million including goodwill of $16.1
million and a core deposit intangible of $772,000. During 2004, First Defiance
recorded adjustments to the original purchase price, reducing goodwill balances
by $1.6 million. The core deposit is being amortized over 10 years and goodwill
was recorded in accordance with SFAS No. 142 and accordingly is not subject to
amortization. All intangible assets acquired as part of this acquisition are
deductible for Federal income tax purposes over 15 years.
-73-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
4. Discontinued Operations
On April 1, 2002, First Defiance completed the sale of The Leader Mortgage
Company, LLC to US Bancorp. Discontinued operations as reported include the
operating results of The Leader for the periods owned, the gain realized by the
Company from the sale of The Leader, net of all expenses of the sale, and the
cost to the Company for early payment of certain FHLB advances and other
expenses. The components of discontinued operations for 2002 were as follows (in
thousands):
Operations of The Leader $ 4,316
Net interest income (expense) allocated
to discontinued operations (1,250)
Gain from sale of The Leader 16,959
Cost to terminate financing and other expenses
associated with discontinued operations (1,225)
---------
Income from discontinued operations
before income tax 18,800
Income tax on discontinued operations 9,947
---------
Income from discontinued operations $ 8,853
=========
Net interest income or expense was allocated to discontinued operations, in
accordance with EITF 87-24, based on interest earned by First Federal on
intercompany loans to The Leader less interest expense, primarily brokered CDs
and a portion of FHLB advances utilized to fund those intercompany loans. In
2002, First Federal had a negative spread in its borrowing relationship with The
Leader.
The gain from the sale of The Leader was based on the net proceeds from the
sale, after expenses, less the book value of First Defiance's investment in The
Leader. The Leader's net book value included goodwill of $9.6 million.
During 2004, US Bank asserted certain claims against First Defiance under the
Purchase and Sale Agreement. First Defiance settled all matters related to the
sale of The Leader in the 2004 third quarter and it recognized a pre-tax charge
of $1.9 million, which is included in continuing operations in 2004.
-74-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2004 2003 2002
------------------------------------------
(In Thousands, Except Per Share Amounts)
Numerator for basic and diluted earnings
per share-income from continuing operations $ 10,796 $ 12,082 $ 6,420
==========================================
Denominator:
Denominator for basic earnings per
share-weighted-average shares 6,094 6,036 6,359
Effect of dilutive securities:
Employee stock options 275 277 236
Unvested Management Recognition Plan stock 2 6 14
------------------------------------------
Dilutive potential common shares 277 283 250
------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted-average shares 6,371 6,319 6,609
==========================================
Basic earnings per share from continuing
operations $ 1.77 $ 2.00 $ 1.01
==========================================
Diluted earnings per share from continuing
operations $ 1.69 $ 1.91 $ 0.97
==========================================
-75-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Investment Securities
The following is a summary of available-for-sale and held-to-maturity
securities:
December 31, 2004
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(In Thousands)
Available-for-sale securities:
U.S. treasury securities and obligations
of U.S. government corporations and
agencies $ 48,913 $ 1,461 $ 61 $ 50,313
Corporate bonds 6,158 310 -- 6,468
Mortgage-backed securities 16,645 151 16 16,780
REMICs 4,902 -- 26 4,876
Collateralized mortgage obligations 20,027 136 54 20,109
Trust preferred stock 6,228 64 -- 6,292
Equity securities 69 4 -- 73
Obligations of state and political
subdivisions 30,781 1,313 2 32,092
--------------------------------------------------
Totals $133,723 $ 3,439 $ 159 $137,003
==================================================
Held-to-maturity securities:
FHLMC certificates $ 459 $ 21 $ 1 $ 479
FNMA certificates 960 12 4 968
GNMA certificates 306 4 1 309
Obligations of states and political
subdivisions 530 90 -- 620
--------------------------------------------------
Totals $ 2,255 $ 127 $ 6 $ 2,376
==================================================
-76-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Investment Securities (continued)
December 31, 2003
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
(In Thousands)
Available-for-sale securities:
U.S. treasury securities and obligations
of U.S. government corporations and
agencies $ 72,907 $ 3,980 $ 12 $ 76,875
Corporate bonds 7,210 506 -- 7,716
Mortgage-backed securities 19,621 169 38 19,752
REMICs 8,994 22 54 8,962
Collateralized mortgage obligations 14,687 53 21 14,719
Trust preferred stock 7,238 84 -- 7,322
Equity securities 69 9 -- 78
Obligations of state and political
subdivisions 31,352 1,504 21 32,835
--------------------------------------------------
Totals $162,078 $ 6,327 $ 146 $168,259
==================================================
Held-to-maturity securities:
FHLMC certificates $ 603 $ 25 $ 1 $ 627
FNMA certificates 1,174 16 6 1,184
GNMA certificates 409 11 -- 420
Obligations of states and political
subdivisions 590 117 -- 707
--------------------------------------------------
Totals $ 2,776 $ 169 $ 7 $ 2,938
==================================================
The amortized cost and fair value of securities at December 31, 2004 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. 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 the underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
-77-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Investment Securities (continued)
Available-for-Sale Held-to-Maturity
---------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------
(In Thousands)
Due in one year or less $ 12,501 $ 12,495 $ 85 $ 89
Due after one year through
five years 43,131 45,056 270 311
Due after five years through
ten years 21,524 22,186 218 270
Due after ten years 56,498 57,193 1,682 1,706
--------------------------------------------------
133,654 136,930 2,255 2,376
Equity securities 69 73 -- --
--------------------------------------------------
Totals $133,723 $137,003 $ 2,255 $ 2,376
==================================================
Investment securities with carrying amounts of $91.9 million and $105.2 million
at December 31, 2004 and 2003, respectively, were pledged as collateral on
public deposits, securities sold under repurchase agreements and FHLB advances
and for other purposes required or permitted by law.
-78-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Investment Securities (continued)
The following table summarizes First Defiance's securities that were in an
unrealized loss position at December 31, 2004 and December 31, 2003:
Duration of Unrealized Loss Position
-------------------------------------------------
Less than 12 Months 12 Month or Longer Total
---------------------- ---------------------- ---------------------
Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loses
---------------------------------------------------------------------------
(In Thousands)
At December 31, 2004
Available-for-sale
securities:
U.S. treasury securities
and obligations of U.S.
government
corporations
and agencies $16,817 $ (61) $ $ $16,817 $ (61)
Mortgage-backed
securities 3,312 (6) 759 (10) 4,071 (16)
Collateralized mortgage
obligations 11,601 (80) 11,601 (80)
Obligations of state and
political subdivisions 510 (1) 158 (1) 668 (2)
Held to maturity securities:
Mortgage-backed
securities 124 (2) 253 (4) 377 (6)
--------------------------------------------------------------------------
Total temporarily impaired
securities $32,364 $ (150) $ 1,170 $ (15) $33,534 $ (165)
==========================================================================
At December 31, 2003
Available-for-sale
securities:
U.S. Treasury securities
and obligations of U.S.
Government
corporations
and agencies $ $ $ 1,349 $ (12) $ 1,349 $ (12)
Mortgage-backed
securities 11,171 (38) 11,171 (38)
Collateralized mortgage
obligations 13,164 (75) 13,164 (75)
Obligations of state and
political subdivisions 4,144 (21) 4,144 (21)
Held to maturity securities:
Mortgage-backed
securities 374 (7) 374 (7)
--------------------------------------------------------------------------
Total temporarily impaired
securities $ -- $ -- $30,202 $ (153) $30,202 $ (153)
==========================================================================
-79-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
6. Investment Securities (continued)
The above securities all have fixed interest rates and defined maturities. Their
fair value is sensitive to movements in market interest rates. First Defiance
has the ability and intent to hold these investments for a time necessary to
recover the amortized cost without impacting its liquidity position.
7. Commitments and Contingent Liabilities
Loan Commitments
Loan commitments are made to accommodate the financial needs of the First
Federal's customers; however, there are no long-term, fixed-rate loan
commitments that result in market risk. Standby letters of credit commit the
Company to make payments on behalf of customers when certain specified future
events occur. They primarily are issued to facilitate customers' trade
transactions.
Both arrangements have credit risk, essentially the same as that involved in
extending loans to customers, and are subject to the Company's normal credit
policies. Collateral (e.g., securities, receivables, inventory and equipment) is
obtained based on Management's credit assessment of the customer.
The Company's maximum obligation to extend credit for loan commitments (unfunded
loans and unused lines of credit) and standby letters of credit outstanding on
December 31 was as follows (in thousands):
2004 2003
---------------------------
Commercial $ 112,482 $ 113,247
Real estate 7,723 6,799
Consumer 66,199 56,823
Standby letters of credit 9,921 3,550
---------------------------
Total $ 196,325 $ 180,419
===========================
Lease Agreements
The Company has entered into lease agreements covering First Insurance's main
office, one banking center location and the land on which one banking center was
constructed and numerous stand-alone Automated Teller Machine sites with varying
terms and options to renew.
-80-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingent Liabilities (continued)
Lease Agreements (continued)
Future minimum commitments under non-cancelable operating leases are as follows
(in thousands):
2004 $ 264
2005 247
2006 238
2007 240
2008 248
Thereafter 2,286
Rentals under operating leases and data processing costs amounted to $237,000,
$195,000, and $169,000, in 2004, 2003, and 2002, respectively.
8. Loans Receivable
December 31
2004 2003
------------------------
(In Thousands)
Loans receivable consist of the following at December 31:
Real estate loans:
Secured by single family residential $ 187,775 $ 162,111
Secured by multi-family residential 39,049 30,322
Secured by non-residential real estate 376,115 311,101
Construction 15,507 16,830
------------------------
618,446 520,364
Other loans:
Automobile 34,391 31,043
Commercial 141,644 120,677
Home equity and improvement 90,839 70,038
Other 11,121 9,214
------------------------
277,995 230,972
------------------------
Total loans 896,441 751,336
Deduct:
Undisbursed loan funds 6,341 6,079
Net deferred loan origination fees and costs 1,232 1,158
Allowance for loan losses 9,956 8,844
------------------------
Totals $ 878,912 $ 735,255
========================
-81-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
8. Loans Receivable (continued)
Changes in the allowance for loan losses were as follows:
Years Ended December 31
2004 2003 2002
------------------------------------
(In Thousands)
Allowance at beginning of year $ 8,844 $ 7,496 $ 6,548
Provision for credit losses 1,548 1,719 1,451
Charge-offs 685 725 720
Recoveries 249 354 217
------------------------------------
Net charge-offs 436 371 503
------------------------------------
Ending allowance $ 9,956 $ 8,844 $ 7,496
====================================
Unpaid balances of loans with contractual payments delinquent 90 days or more
totaled $1.9 million at December 31, 2004 and $2.5 million at December 31, 2003.
First Federal does not anticipate any significant losses in the collection of
these delinquent loans in excess of the allowance for loan losses.
Impaired loans having recorded investments of $505,000 at December 31, 2004 and
$563,000 at December 31, 2003, have been recognized in conformity with FASB
Statement No. 114, as amended by FASB Statement No. 118. The average recorded
investment in impaired loans during 2004 and 2003 was $732,000 and $892,000,
respectively. The total allowance for loan losses related to these loans was
$253,000 and $297,000 at December 31, 2004 and 2003. There was $36,000 of
interest received and recorded in income during 2004 on impaired loans including
interest received and recorded in income prior to such impaired loan
designation. There was $29,000 recorded in 2003 and $46,000 recorded in 2002.
Loans having carrying values of $690,000 and $536,000 were transferred to real
estate and other assets held for sale in 2004 and 2003, respectively. At
December 31, 2004 and December 31, 2003, non-performing loans were $1.9 million
and $2.5 million respectively.
-82-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
8. Loans Receivable (continued)
First Defiance is not committed to lend additional funds to debtors whose loans
have been modified.
Interest income on loans is as follows:
Years Ended December 31
2004 2003 2002
----------------------------------------------
(In Thousands)
Commercial and non-residential
real-estate loans $ 34,506 $ 28,145 $ 22,099
Mortgage loans 6,272 7,144 9,088
Other loans 6,567 5,876 5,684
----------------------------------------------
Totals $ 47,345 $ 41,165 $ 36,871
==============================================
There are no industry concentrations (exceeding 10% of gross loans) in First
Federal's non-residential real estate and commercial loan portfolios. The
Company's loans receivable are primarily to borrowers in the Northwest Ohio,
Northeast Indiana or Southeast Michigan areas.
9. Mortgage Banking
The unpaid principal balance of residential mortgage loans serviced for third
parties was $463.8 million at December 31, 2004 compared to $433.1 million at
December 31, 2003.
Years Ended December 31
2004 2003 2003
----------------------------------------------
(In Thousands)
Mortgage servicing assets:
Balance at beginning of period $ 4,037 $ 3,442 $ 2,656
Loans sold, servicing retained 872 2,593 2,225
Amortization (704) (1,998) (1,439)
----------------------------------------------
Carrying value before valuation allowance
at end of period 4,205 4,037 3,442
Valuation allowance:
Balance at beginning of period (606) (1,352) (835)
Impairment recovery (charges) (1) 746 (517)
----------------------------------------------
Balance at end of period (607) (606) (1,352)
==============================================
Net carrying value of MSRs at end of period $ 3,598 $ 3,431 $ 2,090
==============================================
Fair value of MSRs at end of period $ 3,743 $ 3,573 $ 2,116
==============================================
-83-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
9. Mortgage Banking (continued)
The Company's servicing portfolio is comprised of the following:
December 31
2004 2003
----------------------- -------------------------
Number of Principal Number of Principal
Investor Loans Outstanding Loans Outstanding
----------------------------------------------------------------------------------------
(Dollars in Thousands)
Fannie Mae 562 $ 34,351 682 $ 43,247
Freddie Mac 5,148 429,439 4,705 389,886
------------------------------------------------------
Totals 5,710 $ 463,790 5,387 $ 433,133
======================================================
Significant assumptions at December 31, 2004 used in determining the value of
MSRs include a weighted average prepayment rate of 302 PSA and a weighted
average discount rate of 9.75%.
A sensitivity analysis of the current fair value to immediate 10% and 20%
adverse changes in those assumptions as of December 31, 2004 is presented below.
These sensitivities are hypothetical. Changes in fair value based on a 10%
variation in assumptions generally cannot be extrapolated because the
relationship of the change in the assumption to the change in fair value may not
be linear. Also, the effect of a variation in a particular assumption on the
fair value of the MSR is calculated independently without changing any other
assumption. In reality, changes in one factor may result in changes in another
(for example, changes in mortgage interest rates, which drive changes in
prepayment rate estimates, could result in changes in the discount rates), which
might magnify or counteract the sensitivities.
10% Adverse 20% Adverse
Change Change
-------------------------------
(Dollars in Thousands)
Assumption:
Decline in fair value from increase in prepayment rate $ 173 $ 331
Declines in fair value from increase in discount rate 100 195
-84-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
10. Premises and Equipment
Premises and equipment are summarized as follows:
December 31
2004 2003
----------------------
(In Thousands)
Cost:
Land $ 3,913 $ 3,348
Buildings 20,401 18,221
Leasehold improvements 539 467
Furniture, fixtures and equipment 12,205 11,091
Construction in process 850 2,625
----------------------
37,908 35,752
Less allowances for depreciation and amortization 13,660 11,906
----------------------
$ 24,248 $ 23,846
======================
Depreciation expense was $1.8 million, $1.6 million and $1.6 million for the
years ended December 31, 2004, 2003 and 2002 respectively.
There was $6,400 of interest capitalized in 2004 and $10,000 in 2003.
11. Deposits
The following schedule sets forth interest expense by type of savings deposit:
Years Ended December 31
2004 2003 2002
---------------------------------------
(In Thousands)
Checking and money market accounts $ 1,722 $ 1,466 $ 2,702
Savings accounts 134 169 366
Certificates of deposit 11,100 11,810 13,454
---------------------------------------
12,956 13,445 16,522
Less interest capitalized 6 10 14
---------------------------------------
Totals $ 12,950 $ 13,435 $ 16,508
=======================================
Interest paid on brokered or national certificates of deposit in the amount of
$799,000 in 2002 was reclassified to discontinued operations as they were used
to fund operations of The Leader.
-85-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
11. Deposits (continued)
At December 31, 2004, accrued interest payable amounted to $490,000, which was
comprised of $432,000 and $58,000 for certificates of deposit and checking and
money market accounts respectively.
A summary of deposit balances is as follows:
December 31
2004 2003
--------------------------
(In Thousands)
Savings accounts $ 52,132 $ 51,767
Checking accounts 137,415 119,674
Money market demand accounts 183,832 148,691
Certificates of deposit 424,322 408,864
--------------------------
$ 797,701 $ 728,996
==========================
Scheduled maturities of certificates of deposit at December 31, 2004 are as
follows (in thousands):
2005 $ 199,012
2006 168,705
2007 49,470
2008 4,671
2009 1,091
2010 and thereafter 1,373
-------------
Total $ 424,322
=============
At December 31, 2004 and 2003, deposits of $214.6 million and $178.8 million,
respectively, were in excess of the $100,000 Federal Deposit Insurance
Corporation insurance limit. At December 31, 2004 and 2003, $57.0 million and
$44.6 million, respectively, in investment securities were pledged as collateral
against public deposits for certificates in excess of $100,000 and an additional
$1.3 million of securities were pledged at December 31, 2004 as collateral
against deposits from private entities in excess of $100,000. Also, First
Federal has $16,000,000 in depository bonds with the governmental entities,
which can be pledged as collateral against public deposits for certificates in
excess of $100,000.
-86-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. 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, certain
investment securities and certain multi-family or non-residential real estate
loans as security for these advances. Advances secured by investment securities
must have collateral to exceed borrowing by 105%. Advances secured by
residential mortgages must have collateral to exceed borrowings by 125%.
Advances secured by multi-family or non-residential real estate loans securities
must have 300% collateral coverage. The total level of borrowing is also limited
to 50% of total assets and at least 50% of the borrowings must be secured by
either one-to-four family residential mortgages or investment securities. Total
loans pledged to the FHLB at December 31, 2004 were $436.5 million. First
Federal has a maximum potential to acquire advances of approximately $187.3
million from the FHLB.
As of December 31, 2004, the FHLB has made a series of advances totaling $120.0
million to First Defiance that have fixed maturity dates but are callable at the
option of the FHLB on a specified date and quarterly thereafter. The terms of
these advances are as follows (in thousands):
Balance Interest Rate Call Date Maturity Date
---------------------------------------------------------------------------
$ 15,000 5.44% 01/26/05 10/23/13
10,000 5.84% 03/01/05 09/01/10
20,000 4.61% 01/20/05 10/21/13
10,000 4.71% 02/07/05 11/07/13
15,000 4.52% 01/10/05 01/10/11
10,000 4.76% 01/10/05 01/10/11
10,000 4.93% 02/02/05 02/02/11
20,000 4.07% 03/08/05 03/08/11
10,000 5.14% 03/08/05 03/08/11
-87-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. Advances from Federal Home Loan Bank (continued)
The FHLB has made advances totaling $17.0 million to First Defiance that have
fixed maturity dates but which are callable after the call date only when
three-month LIBOR rates exceed the agreed upon strike rate in the advance
contract. The terms of these advances are as follows (in thousands):
Balance Interest Rate Call Date Maturity Date LIBOR "Strike" Rate
- --------------------------------------------------------------------------------
$ 7,000 3.54% 01/15/05 10/15/12 8.0%
5,000 3.85% 02/02/05 11/06/12 8.0%
5,000 3.48% 02/25/05 02/25/13 7.5%
When called, First Defiance has the option of paying off these advances, or
converting them to variable rate advances priced at the three month LIBOR rate.
First Defiance has an additional $14.7 million outstanding on a series of fixed
rate long-term advances. Of this amount, $1.1 million is a fixed rate advance
under the FHLB Affordable Housing Program in 1995. The total FHLB long-term
advances including all convertible advances bear a weighted average interest
rate of 4.62 % at December 31, 2004.
Future minimum payments by fiscal year are as follows (in thousands):
2005 $ 8,677
2006 7,809
2007 7,809
2008 17,151
2009 6,461
Thereafter 152,040
------------
Total minimum payments 199,948
Less amounts representing interest 48,235
------------
Totals $ 151,713
============
-88-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
12. Advances from Federal Home Loan Bank (continued)
First Defiance also utilizes short-term advances from the FHLB to meet cash flow
needs and for short-term investment purposes. There were $26.5 million in
short-term advances outstanding at December 31, 2004 and $11.0 million at
December 31, 2003. First Defiance borrows short-term advances under a variety of
programs at FHLB. At December 31, 2004, $26.5 million was outstanding under
First Defiance's REPO Advance line of credit. The total available under the REPO
Advance line is $75.0 million. In addition, First Defiance has $15.0 million
available under a Cash Management Advance line of credit. Amounts are generally
borrowed under the Cash Management and REPO lines on an overnight basis. Other
advances may be borrowed under the FHLB's short-term fixed or LIBOR based
programs. Information concerning short-term advances is summarized as follows:
Years Ended December 31
2004 2003
----------------------------------
(In Thousands, Except Percentages)
Average balance during the year $ 15,577 $ 2,296
Maximum month-end balance during the year 28,500 14,250
Average interest rate during the year 1.55% 1.31%
13. Notes Payable and Other Short-term Borrowings
Total short term borrowings, revolving and term debt is summarized as follows:
December 31
2004 2003
--------------------------
(In Thousands)
Securities sold under agreement to repurchase (rate of 1.57% at
December 31, 2004) $ 11,804 $ 12,267
Revolving line of credit facility to financial institution,
unsecured, at fed funds rate (2.25% at December 31, 2004) 3,000 --
-------------------------
Total borrowed money $ 14,804 $ 12,267
=========================
-89-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
13. Notes Payable and Other Short-term Borrowings (continued)
As of December 31, 2004, First Defiance had the following line of credit
facilities available for short-term borrowing purposes:
A $3.0 million revolving line of credit with a financial institution. The
line is unsecured and has an interest rate at the fed funds rate. There
was $3.0 million outstanding on the line at December 31, 2004. The maximum
borrowed under the line at any point in time during 2004 was $3.0 million
and the average balance outstanding for the year was $877,000.
A $15 million revolving line of credit facility with a financial
institution. The facility is unsecured and has an interest rate of fed
funds rate plus 0.45%. There were no amounts outstanding on the line at
December 31, 2004 or 2003. The maximum borrowed at any point in time in
2004 under the line was $15.0 million and the average balance outstanding
for the year was $244,000.
A $20 million fed funds line of credit with a financial institution. The
line is unsecured and has an interest rate of the institution's fed funds
rate. There were no amounts outstanding on the line at December 31, 2004.
The maximum borrowed at any point in time in 2004 under the line was $20.0
million and the average balance outstanding for the year was $228,000.
A $10.0 million revolving line of credit with a financial institution. The
line is secured by the stock of First Federal Bank and the interest rate
is either the lender's prime rate or LIBOR plus 1.75%, whichever is
selected by First Defiance. This line was not used in 2004.
-90-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Postretirement Benefits
First Defiance sponsors a defined benefit postretirement plan that is intended
to supplement Medicare coverage for certain retirees who meet minimum age
requirements. First Federal employees 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. First Federal employees retiring after April 1, 1997 are
provided medical benefits at a cost based on their combined age and years of
service at retirement. 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. First Federal employees retiring before July
1, 1997 receive dental and vision care in addition to medical coverage. First
Federal employees 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
annually in a medical spending account. Funds in that account may be used for
payment of uninsured medical expenses. First Federal employees who were born
after December 31, 1950 are not eligible for the medical coverage described
above at retirement. Rather, a medical spending account of up to $10,000 (based
on the participant's age and years of service) will be established to reimburse
medical expenses for those individuals. First Insurance employees who were born
before December 31, 1950 can continue coverage until they reach age 65, or in
lieu of continuing coverage, can elect the medical spending account option,
subject to eligibility requirements. Employees hired or acquired after January
1, 2003 are eligible only for the medical spending account option.
-91-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Postretirement Benefits (continued)
The plan is not currently funded. The following table summarizes benefit
obligation and plan asset activity for the plan measured as of December 31 each
year:
December 31
2004 2003
-------------------------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,553 $ 1,303
Service cost 48 36
Interest cost 97 83
Participant contribution 28 31
Plan amendments 31 (269)
Actuarial losses (3) 485
Benefits paid (124) (116)
-------------------------
Benefit obligation at end of year 1,630 1,553
Change in fair value of plan assets:
Balance at beginning of measurement period -- --
Employer contribution 96 85
Participant contribution 28 31
Benefits paid (124) (116)
-------------------------
Balance at end of measurement period -- --
-------------------------
Funded status (1,630) (1,553)
Unrecognized prior service cost (benefit) 71 (222)
Unrecognized net loss 516 804
-------------------------
Accrued postretirement benefit obligation included in other
liabilities in consolidated statement of financial condition $ (1,043) $ (971)
=========================
-92-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Postretirement Benefits (continued)
Net periodic postretirement benefit cost includes the following components:
Years Ended December 31
2004 2003 2002
------------------------------------
(In Thousands)
Service cost-benefits attributable to service
during the period $ 48 $ 36 $ 31
Interest cost on accumulated postretirement
benefit obligation 97 83 76
Net amortization and deferral 23 14 8
------------------------------------
Net periodic postretirement benefit cost $ 168 $ 133 $ 115
====================================
The following assumptions were used in determining the components of the
postretirement benefit obligation:
2004 2003
--------------------
Weighted average discount rates:
Used to determine benefit obligations at December 31 6.00% 6.00%
Used to determine net periodic postretirement benefit
cost for years ended December 31 6.00% 6.50%
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year 8.50% 8.50%
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate) 4.00% 4.00%
The following benefits are expected to be paid over the next five years
and in aggregate for the next five years thereafter:
Before Reflecting Impact of
Medicate Part D Medicare Part D
-------------------------------------
(In Thousands)
2005 $ 96 $ --
2006 101 16
2007 106 17
2008 115 18
2009 118 19
2010 through 2014 693 111
-93-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
14. Postretirement Benefits (continued)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effect (in thousands):
One- One-
Percentage- Percentage-
Point Point
Increase Decrease
---------------------------
Effect on total of service and interest cost $ 22 $ (18)
Effect on postretirement benefit obligation 204 (172)
Prescription drug coverage was added to Medicare under the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the Act). As a result, the
accumulated postretirement benefit obligation (APBO) at the end of 2004 reflects
a reduction of approximately 15%. The net postretirement benefit cost for 2004
was similarly affected.
The decrease in the gross liability for active participants is attributed to
past and future years of employment and decreases the APBO and service cost.
The decrease in APBO was not immediately recognized; instead such change will be
amortized along with other unrecognized gains and losses. Net per capita claims
cost and the costs borne by retirees have been assumed to decrease in 2006 due
to this legislation but no other assumptions were affected. The Company has
assumed that it will opt for coverage under Medicare Part D rather than the
Federal subsidy approach. As specific authoritative guidance for matters related
to the Act are pending, new guidance could require First Defiance to change
previously reported information.
-94-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
15. Regulatory Matters
First Defiance and First Federal are 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 the consolidated 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, 2004 and 2003, First Federal meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Office of Thrift Supervision (OTS)
categorized First Federal as well capitalized under the regulatory framework.
The following schedule presents First Federal's regulatory capital ratios:
Required for Capital Required to be
Actual Adequacy Purposes Well Capitalized
--------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------
As of December 31, 2004
Tangible Capital $ 102,342 9.29% $ 16,533 1.50% N/A N/A
Tier 1 (Core) Capital 102,342 9.29% 44,089 4.00% $ 55,111 5.00%
Tier 1 Capital to
risk-weighted assets 102,342 11.59% 35,326 4.00% 52,989 6.00%
Risk-Based Capital 112,267 12.71% 70,653 8.00% 88,316 10.00%
As of December 31, 2003
Tangible Capital $ 94,144 9.30% $ 15,181 1.50% N/A N/A
Tier 1 (Core) Capital 94,144 9.30% 40,483 4.00% $ 50,603 5.00%
Tier 1 Capital to
risk-weighted assets 94,144 12.41% 30,340 4.00% 45,510 6.00%
Risk-Based Capital 102,976 13.58% 60,680 8.00% 75,850 10.00%
-95-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
16. Income Taxes
The components of income tax expense for continuing operations (credit) are as
follows:
Years Ended December 31
2004 2003 2002
-----------------------------------------
(In Thousands)
Current:
Federal $ 4,677 $ 4,783 $ 3,399
State and local 35 33 24
Deferred (credit) 90 874 (437)
-----------------------------------------
$ 4,802 $ 5,690 $ 2,986
=========================================
The provision for income taxes differs from that computed at the statutory
corporate tax rate as follows:
Years Ended December 31
2004 2003 2002
-----------------------------------------
(In Thousands)
Tax expense at statutory rate $ 5,457 $ 6,220 $ 3,292
Increases (decreases) in taxes from:
Goodwill amortization and impairment -- -- 70
State income tax - net of federal tax benefit 23 21 15
Tax exempt interest income (544) (517) (487)
Bank owned life insurance (332) (283) (50)
Other 198 249 146
-----------------------------------------
Totals $ 4,802 $ 5,690 $ 2,986
=========================================
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.
-96-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
16. Income Taxes (continued)
Significant components of First Defiance's deferred federal income tax assets
and liabilities are as follows:
December 31
2004 2003
---------------------------
(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses $ 3,477 $ 3,082
Postretirement benefit costs 365 340
Deferred compensation and management recognition plans 337 310
State income tax 10 9
Accrued disposition costs -- 125
Other 219 190
---------------------------
Total deferred federal income tax assets 4,408 4,056
Deferred federal income tax liabilities:
Net unrealized gains on available-for-sale securities 1,147 2,163
FHLB stock dividends 1,868 2,303
Deferred loan origination fees and costs (net) 88 23
Fixed assets 967 724
Mortgage servicing rights 587 421
Goodwill 685 281
---------------------------
Total deferred federal income tax liabilities 5,342 5,915
---------------------------
Net deferred federal income tax liability $ (934) $ (1,859)
===========================
The realization of the Company's deferred tax assets is dependent upon the
Company's ability to generate taxable income in future periods and the reversal
of deferred tax liabilities during the same period. The Company has evaluated
the available evidence supporting the realization of its deferred tax assets and
determined it is more likely than not that the assets will be realized and thus
no valuation allowance was required at December 31, 2004.
-97-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
16. Income Taxes (continued)
Retained earnings at December 31, 2004 include financial statement tax bad debt
reserves of $9.52 million for which no tax has been provided. The reserves do
not have to be recaptured for tax purposes unless retained earnings of First
Federal fall below $9.52 million.
17. Employee Benefit Plans
Employees of First Defiance are eligible to participate in the First Defiance
Financial Corp. 401(k) Employee Savings Plan (First Defiance 401(k)) if they
meet certain age and service requirements. Under the First Defiance 401(k),
First Defiance matches 50% of the participants' contributions, to a maximum of
3% of compensation. The First Defiance 401(k) also provides for a discretionary
First Defiance contribution in addition to the First Defiance matching
contribution. First Defiance matching contributions totaled $293,000, $258,000
and $213,000 for the years ended December 31, 2004, 2003 and 2002 respectively.
There were no discretionary contributions in any of those years.
First Defiance also has established an Employee Stock Ownership Plan (ESOP)
covering all employees of First Defiance age 21 or older who have at least one
year of credited service. Contributions to the ESOP are made by First Defiance
and are determined by First Defiance's Board of Directors at their discretion.
The contributions may be made in the form of cash or First Defiance common
stock. The annual contributions may not be greater than the amount deductible
for federal income tax purposes and cannot cause First Federal to violate
regulatory capital requirements.
To fund the plan, the ESOP borrowed funds from First Defiance for the purpose of
purchasing shares of First Defiance common stock. The ESOP acquired a total of
863,596 shares in 1993 and 1995. The loan outstanding at December 31, 2004 was
$2,262,000. Principal and interest payments on the loan are due in equal
quarterly installments through June of 2008. The loan is collateralized by the
shares of First Defiance's common stock and is repaid by the ESOP with funds
from the Company's contributions to the ESOP, dividends on unallocated shares
and earnings on ESOP assets.
-98-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
17. Employee Benefit Plans (continued)
As principal and interest payments on the loan are 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
records 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 the 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 $956,000, $802,000, and $691,000,
for 2004, 2003 and 2002, respectively. As of December 31, 2004, 694,594 ESOP
shares have been released for allocation of which 682,397 were allocated to
participants. The 169,002 unreleased shares have a fair value of $5.9 million at
December 31, 2004. A total of $457,000 and $391,000 of dividends in 2004 and
2003, respectively, were used for debt service.
Employees of The Leader participated in the ESOP. Upon the closing of the sale
of The Leader, all account balances of employees of The Leader vested and these
benefits were distributed to the former Leader participants based on their
benefit election. A total of 47,946 shares were allocated to these employees.
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
deferred compensation amounting to $800,000 in 1993 and $2,817,452 in 1996. The
$800,000 contributed in 1993 was used to purchase 172,722 shares of First
Defiance common stock. All shares acquired in 1993 were granted on July 19,
1993. A total of 258,921 of the shares acquired in 1996 have been granted as of
December 31, 2004, not including 47,032 shares forfeited by participants who
terminated before their shares vested. The shares vest at a rate of 20% per year
over five years. First Defiance is amortizing the deferred compensation and
recording additions to stockholder's equity as the shares vest. Compensation
expense attributable to the MRP amounted to $6,000, $20,000, and $52,000, in
2004, 2003 and 2002, respectively.
-99-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
18. Stock Option Plans
First Defiance has established incentive stock option plans for its directors
and its employees and has reserved 1,376,485 shares of common stock for issuance
under the plans. A total of 1,116,204 shares are reserved for employees and
260,281 shares are reserved for directors. As of December 31, 2004, 638,593
options (600,136 for employees and 38,457 for directors) have been granted and
remain outstanding at option prices based on the market value of the underlying
shares on the date the options were granted. There are 88,836 options granted
under the 1993 plan that are currently exercisable, 303,457 options granted
under the 1996 plan that vest at 20% per year beginning in 1997 of which 293,068
are fully vested and currently exercisable and 246,300 options granted under the
2001 plan which vest at 20% per year beginning in 2002, of which 93,050 are
fully vested and currently exercisable. All options expire ten years from date
of grant. Vested options of retirees expire on the earlier of the scheduled
expiration date or five years after the retirement date for the 1993 and 2001
plans and on the earlier of the scheduled expiration date or twelve months after
the retirement date for the 1996 plan.
FASB Statement No. 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 cost 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 pro forma results of operations included in Note 2 use a fair value method
of accounting for stock options in accordance with SFAS No. 123. The estimated
fair value of the options are 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 assumptions outlined in Note 2.
-100-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
18. Stock Option Plans (continued)
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.
The following table summarizes stock option activity for 2004, 2003, and 2002:
Option Weighted Average
Outstanding Option Prices
------------------------------
Balance at January 1, 2002 975,782 $ 11.76
Granted 9,000 18.50
Exercised or cashed out (172,873) 10.31
Expired or canceled (4,589) 17.15
------------------------------
Balance at December 31, 2002 807,320 12.12
Granted 57,000 20.47
Exercised (136,537) 10.95
Expired or canceled (1,050) 15.32
------------------------------
Balance at December 31, 2003 726,733 $ 12.99
Granted 48,750 27.03
Exercised (135,390) 11.49
Expired or canceled (1,500) 18.40
------------------------------
Balance at December 31, 2004 638,593 $ 14.37
==============================
As of December 31, 2004 and 2003, 20,753 and 68,003 shares, respectively, were
available for grant under the Company's stock option plans. Upon the sale of The
Leader in 2002, certain option holders were paid cash for the value of their
vested options in lieu of issuing shares. These 65,000 options are not available
for future grants.
-101-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
18. Stock Option Plans (continued)
Information about stock options outstanding is as follows:
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Contractual Exercise
Exercise Prices Outstanding Price Life (in years) Exercisable Price
- ------------------------------------------------------------------------------------------------------
$8.25 - $12.99 237,949 $ 10.61 1.70 237,560 $ 10.62
$13.00 - $17.99 289,744 14.06 4.94 222,144 14.08
$18.00 - $22.99 55,150 19.43 7.92 13,750 19.38
$23.00 - $27.70 55,750 26.97 9.25 1,500 26.62
----------------------------------------------------------------------------
Total 638,593 $ 14.37 4.37 554,427 $ 12.54
============================================================================
19. Parent Company and Regulatory Restrictions
Dividends paid by First Federal to First Defiance are subject to various legal
and regulatory restrictions. Because First Federal paid $10 million in dividends
to First Defiance in 2003 and 2004, it can initiate dividend payments in 2005
equal to or less than $12.5 million plus the 2005 net profits, as defined by
statutes, without prior regulatory approval. First Federal can apply to the OTS
to pay a dividend in excess of $12.5 million plus 2005 net profits.
-102-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
19. Parent Company and Regulatory Restrictions (continued)
Condensed parent company financial statements, which include transactions with
subsidiaries, follow:
December 31
Statements of Financial Condition 2004 2003
--------------------------
(In Thousands)
Assets
Cash and cash equivalents $ 466 $ 2,066
Investment securities, available for sale, carried at
fair value 1,073 1,078
Investment in subsidiaries 124,179 119,318
Loan receivable from First Defiance Employee Stock
Ownership Plan 2,312 2,817
Other assets 12 10
--------------------------
Total assets $ 128,042 $ 125,289
==========================
Liabilities and stockholders' equity:
Accrued liabilities $ 1,168 $ 1,020
Stockholders' equity 126,874 124,269
--------------------------
Total liabilities and stockholders' equity $ 128,042 $ 125,289
==========================
Years Ended December 31
Statements of Income 2004 2003 2002
-----------------------------------------
(In Thousands)
Interest on loan to ESOP $ 214 $ 257 $ 295
Interest expense on notes payable (3) (4) (164)
Other income 45 42 7
Noninterest expense (470) (568) (593)
-----------------------------------------
Loss before income taxes and equity in earnings of
subsidiaries (214) (273) (455)
Income tax (credit) (56) (75) (138)
-----------------------------------------
Loss before equity in earnings of subsidiaries (158) (198) (317)
Equity in earnings of subsidiaries 10,954 12,280 15,396
-----------------------------------------
Net income $ 10,796 $ 12,082 $ 15,079
=========================================
-103-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
19. Parent Company and Regulatory Restrictions (continued)
Years Ended December 31
Statements of Cash Flows 2004 2003 2002
--------------------------------------------
(In Thousands)
Operating activities:
Net income $ 10,796 $ 12,082 $ 15,079
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Equity in earnings of subsidiaries (10,954) (12,280) (15,396)
Dividends received from subsidiary 5,500 5,000 35,000
Change in other assets and liabilities 147 515 (362)
--------------------------------------------
Net cash (used in) provided by operating activities 5,489 5,317 34,321
Investing activities:
Purchase First Insurance and Investment -- -- (200)
Principal payments received on ESOP loan 505 464 425
Purchase of available-for-sale securities -- -- (1,000)
--------------------------------------------
Net cash (used in) provided by investing activities 464 (775)
Financing activities:
Net (decrease) increase in short-term line of credit -- -- (18,250)
Stock options exercised 2,108 1,731 1,171
Purchase of common stock for treasury (4,691) (4,406) (10,275)
Cash dividends paid (5,011) (3,939) (3,449)
--------------------------------------------
Net cash used in financing activities (7,594) (6,614) (30,803)
--------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,600) (833) 2,743
Cash and cash equivalents at beginning of year 2,066 2,899 156
--------------------------------------------
Cash and cash equivalents at end of year $ 466 $ 2,066 $ 2,899
============================================
Non cash operating activities - change in deferred taxes
on net unrealized gains (losses) on
available-for-sale securities $ (1) $ 6 $ 7
============================================
Noncash investing activities - change in net unrealized
(loss) gain on available-for-sale securities $ (5) $ 18 $ (27)
============================================
Noncash financing activities - cash dividends declared
but not paid $ 1,343 $ 1,220 $ 920
============================================
-104-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
20. 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, 2004 and 2003. FASB Statement 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.
Much of the information used to arrive at "fair value" is highly subjective and
judgmental in nature and therefore the results may not be precise. Subjective
factors include, among other things, estimated cash flows, risk characteristics
and interest rates, all of which are subject to change. With the exception of
investment securities, the Company's financial instruments are not readily
marketable and market prices do not exist. Since negotiated prices for the
instruments, which are not readily marketable depend greatly on the motivation
of the buyer and seller, the amounts that will actually be realized or paid per
settlement or maturity of these instruments could be significantly different.
The carrying amount of cash and cash equivalents, warehouse and term notes
payable and advance payments by borrowers for taxes and insurance, as a result
of their short-term nature, is considered to be equal to fair value.
For investment securities, fair value has been based or current market
quotations. If market prices are not available, fair value has been estimated
based upon the quoted price of similar instruments.
The fair value of loans which reprice within 90 days is equal to their carrying
amount. For other loans, the estimated fair value is calculated based on
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms. The fair value of loans have not been adjusted for
credit risk.
SFAS No. 107 requires that the fair value of demand, savings, NOW and certain
money market accounts be equal to their carrying amount. The Company believes
that the fair value of these deposits is greater than that prescribed by SFAS
No. 107.
For deposits with fixed maturities, fair value is estimated based on interest
rates currently being offered on deposits with similar characteristics and
maturities.
-105-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
20. Fair Value Statement of Consolidated Financial Condition (continued)
FHLB advances with maturities greater than 90 days are valued based on
discounted cash flow analysis, using interest rates currently being quoted for
similar characteristics and maturities.
The cost or value of any call or put options are based on the estimated cost to
settle the option at December 31, 2004.
December 31, 2004 December 31, 2003
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Values Value Fair Values
-----------------------------------------------------------
(In Thousands)
Assets:
Cash and cash equivalents $ 20,521 $ 20,521 $ 37,783 $ 37,783
Investment securities 139,258 139,379 171,035 171,197
Loans, net 881,207 878,205 741,126 756,373
----------------------------------------------------------
1,040,986 $1,038,105 949,944 $ 965,353
========== ==========
Other assets 85,681 90,655
---------- ----------
Total assets $1,126,667 $1,040,599
========== ==========
Liabilities and stockholders' equity:
Deposits $ 797,701 $ 798,287 $ 729,996 $ 734,488
Advances from Federal Home
Loan Bank 181,213 183,750 164,522 176,304
Short term borrowings and other
interest bearing liabilities 11,804 11,804 12,267 12,267
Advance payments by borrowers
for taxes and insurance 278 278 231 231
----------------------------------------------------------
990,996 $ 994,119 907,016 $ 923,290
========== ==========
Other liabilities 8,797 9,314
---------- ----------
Total liabilities 999,793 916,330
Stockholders' equity 126,874 124,269
---------- ----------
Total liabilities and
stockholders' equity $1,126,667 $1,040,599
========== ==========
-106-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
21. Change in Accounting Method
On January 1, 2002, First Defiance adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As required by FAS No. 142, goodwill is no longer amortized
into the income statement over an estimated life but rather is tested at least
annually for impairment based on specific guidance included in FAS No. 142.
Based on an impairment test performed as of January 1, 2002, the Company
determined that a portion of previously recorded goodwill related to its First
Insurance business unit was impaired. The amount of impairment as of January 1,
2002, which was $238,000 or $194,000 after tax, is reflected in the financial
statements as a cumulative effect of an accounting change in the 2002 statement
of income.
22. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations,
which reflects the classification of The Leader as a discontinued operation:
Three Months Ended
March 31 June 30 September 30 December 31
------------------------------------------------------
(In Thousands, Except Per Share Amounts)
2004
Interest income $ 12,825 $ 13,010 $ 13,839 $ 14,444
Interest expense 4,806 4,881 5,258 5,435
------------------------------------------------------
Net interest income 8,019 8,129 8,581 9,009
Provision for loan losses 379 490 376 304
------------------------------------------------------
Net interest income after
provision for loan losses 7,640 7,639 8,205 8,705
Gain on sale of securities 98 293 302 732
Noninterest income 3,324 3,838 3,248 3,478
Noninterest expense 7,464 7,134 9,469 7,837
------------------------------------------------------
Income before income taxes 3,598 4,636 2,286 5,078
Income taxes 1,105 1,492 606 1,599
------------------------------------------------------
Net income $ 2,493 $ 3,144 $ 1,680 $ 3,479
======================================================
Earnings per share:
Basic $ 0.41 $ 0.51 $ 0.28 $ 0.57
Diluted $ 0.39 $ 0.49 $ 0.26 $ 0.55
Average shares outstanding:
Basic 6,113 6,125 6,084 6,063
Diluted 6,427 6,385 6,340 6,341
-107-
First Defiance Financial Corp.
Notes to Consolidated Financial Statements (continued)
22. Quarterly Consolidated Results of Operations (Unaudited) (continued)
Three Months Ended
March 31 June 30 September 30 December 31
------------------------------------------------------
(In Thousands, Except Per Share Amounts)
2003
Interest income $ 11,791 $ 12,162 $ 13,028 $ 12,955
Interest expense 5,357 5,320 5,198 4,980
------------------------------------------------------
Net interest income 6,434 6,842 7,830 7,975
Provision for loan losses 335 353 497 534
------------------------------------------------------
Net interest income after
provision for loan losses 6,099 6,489 7,333 7,441
Gain on sale of securities 631 288 -- 656
Noninterest income 4,160 5,049 4,825 3,179
Noninterest expense 7,015 7,701 6,776 6,886
------------------------------------------------------
Income before income taxes 3,875 4,125 5,382 4,390
Income taxes 1,157 1,246 1,715 1,572
------------------------------------------------------
Net income $ 2,718 $ 2,879 $ 3,667 $ 2,818
======================================================
Earnings per share:
Basic $ 0.45 $ 0.48 $ 0.61 $ 0.47
Diluted $ 0.43 $ 0.46 $ 0.58 $ 0.44
Average shares outstanding:
Basic 6,074 6,013 6,002 6,038
Diluted 6,330 6,254 6,293 6,380
-108-
Report of Independent Registered Public Accounting Firm
On Consolidated Financial Statements
The Board of Directors
First Defiance Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of First Defiance Financial Corp. and subsidiaries as of December 31, 2004 and
2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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. and subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First Defiance
Financial Corp.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee on Sponsoring Organizations of the Treadway Commission
and our report dated March 8, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 8, 2005
-109-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
Item 9a. Controls and Procedures
First Defiance's management carried out an evaluation, under the
supervision and with the participation of the chief executive officer and the
chief financial officer, of the effectiveness of the design and operation of
First Defiance's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2004,
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the chief
executive officer along with the chief financial officer concluded that First
Defiance's disclosure controls and procedures as of December 31, 2004, are
effective in timely alerting them to material information relating to First
Defiance Financial Corp. (including its consolidated subsidiaries) required to
be included in First Defiance's periodic filings under the Exchange Act.
There were no changes in First Defiance's internal control over financial
reporting during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect First Defiance's
internal control over financial reporting.
Management's report on internal control over financial reporting is on
page 53.
Item 9b. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference from pages 5
through 11 of the definitive proxy statement dated March 18, 2005.
Item 11. Executive Compensation
The information required herein is incorporated by reference from the
Board Fees section on page 11, the Executive Compensation section on page 12,
the Report of the Compensation Committee on pages 13 and 14, the Stock Options
section on page 16, the Employment Agreements section on page 17, and the
Performance Graph on page 18 of the definitive proxy statement dated March 15,
2004.
-110-
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information required herein is incorporated by reference from the
Beneficial Ownership section beginning on page 3 of the definitive proxy
statement dated March 18, 2005.
First Defiance maintains the 1993 Stock Incentive Plan, the 1993
Directors' Stock Option plan, the 1996 Stock Option Plan, the 2001 Stock Option
and Incentive Plan (collectively, the "Plans") and the 1996 Management
Recognition Plan and Trust ("MRP") under which it may issue equity securities to
its directors, officers and employees in exchange for goods and services. All of
the Plans and the MRP were approved by the shareholders of First Defiance.
The following table shows, as of December 31, 2004, the number of common
shares issuable upon the exercise of outstanding stock options, the weighted
average exercise price of those stock options, and the number of common shares
remaining for future issuance under the Plans and the MRP, excluding shares
issuable upon exercise of outstanding stock options.
Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities to remaining available for
be issued upon Weighted-average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants and outstanding options, (excluding securities
Plan Category rights warrants and rights reflected in column (a))
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c)
--------------------------------------------------------------------------
1993 Stock Incentive Plan 88,836 $ 11.86 -0-
1996 Stock Option Plan 303,457 $ 12.34 2,053
2001 Stock Option and
Incentive Plan 246,600 $ 17.78 18,700
1996 Management
Recognition Plan and Trust N/A N/A 155
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference from the
Indebtedness of Management section on page 19 of the definitive proxy statement
dated March 18, 2005.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference
under the caption "Independent Registered Public Accounting Firm" on page 19 of
the definitive proxy statement dated March 18, 2005.
-111-
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The following consolidated financial statements are filed as a part
of this document under "Item 8. Financial Statements and Supplementary
Data."
Consolidated Statements of Financial Condition as of December 31,
2004 and 2003
Consolidated Statements of Income for the years ended December 31,
2004, 2003, and 2002
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the years ended December
31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a) (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
Consolidated Financial Statements incorporated herein by reference and
therefore have been omitted.
-112-
(a) (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
- -----------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
3.2 Code of Regulations (1)
3.2 Bylaws (1)
10.1 1996 Stock Option Plan (2)
10.2 Form of Incentive Stock Option Award Agreement (3)
10.3 Form of Nonqualified Stock Option Award Agreement (3)
10.4 1996 Management Recognition Plan and Trust (2)
10.5 2001 Stock Option and Incentive Plan (4)
10.6 1993 Stock Incentive Plan (1)
10.7 Employment Agreement with William J. Small (5)
10.8 Employment Agreement with James L. Rohrs (2)
10.9 Employment Agreement with John C. Wahl (2)
10.10 Employment Agreement with Gregory R. Allen (6)
10.11 Agreement and Plan of Merger dated as of October 13, 2004, by and
among First Defiance, First Federal, First Federal Interim Bank
and The Genoa Savings and Loan Company (7)
10.12 Description of Annual Bonus (3)
13 Annual Report to Shareholders and Notice of Annual Meeting of
Shareholders and Proxy Statement (3)
14 Code of Ethics (3)
21 List of Subsidiaries of the Company (3)
23 Consent of Ernst & Young LLP (3)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of (3)
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of (3)
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3)
(1) Incorporated herein by reference to the like numbered exhibit in the
Registrant's Form S-1 (File No. 33-93354).
(2) Incorporated herein by reference to like numbered exhibit in Registrant's
2001 Form 10-K
(3) Included herein
(4) Incorporated herein by reference to Appendix B to the 2001 Proxy Statement
-113-
(5) Incorporated herein by reference to like numbered exhibit in Registrant's
2000 Form 10-K
(6) Incorporated herein by reference to like numbered exhibit in Registrant's
2002 Form 10-K
(7) Incorporated herein by reference to Exhibit 2.1 in Registrant's Form 8-K
filed on October 15. 2004.
-114-
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 11, 2005 By: /s/ John C. Wahl
-------------------------------
John C. Wahl, Exec.V.P,
Chief Financial Officer
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 11, 2005.
Signature Title
- --------------------------------- ----------------------------------------
/s/ William J. Small Chairman of the Board, President and
- --------------------------------- Chief Executive Officer
William J. Small
/s/ John C. Wahl Executive Vice President and
- --------------------------------- Chief Financial Officer
John C. Wahl
/s/ James L. Rohrs Director, Executive Vice President
- ---------------------------------
James L. Rohrs
/s/ Don C. Van Brackel Director, Vice Chairman
- ---------------------------------
Don C. Van Brackel
/s/ John L. Bookmyer Director
- ---------------------------------
John L. Bookmyer
/s/ Stephen L. Boomer Director
- ---------------------------------
Stephen L. Boomer
/s/ Dr. Douglas A. Burgei Director
- ---------------------------------
Dr. Douglas A. Burgei
/s/ Peter A. Diehl Director
- ---------------------------------
Peter A. Diehl
/s/ Dr. John U. Fauster, III Director
- ---------------------------------
Dr. John U. Fauster, III
/s/ Dwain I. Metzger Director
- ---------------------------------
Dwain I. Metzger
/s/ Gerald W. Monnin Director
- ---------------------------------
Gerald W. Monnin
/s/ Thomas A. Voigt Director
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Thomas A. Voigt
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