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A N N U A L R E P O R T
2014
F i r s t D e f i a n c e F i n a n c i a l C o r p .
First Defiance Financial Corp.
601 Clinton Street
Defiance, OH 43512
419-782-5105
First-Fed.com
First Defiance Financial Corp.
511 Fifth Street
Defiance, OH 43512
419-784-5431
Firstinsurancegrp.com
First Defiance Financial Corp.
601 Clinton Street
Defiance, OH 43512
419-782-5104
Fdef.com
For investor relations information, visit Fdef.com
TO OUR SHAREHOLDERS
SHAREHOLDERS INFORMATION
DEAR FELLOW SHAREHOLDERS,
2014 was a very successful year for our
company. We recorded our third consecutive
year of record
earnings and
achieved a total
shareholder
return of over
34 percent. We
are delighted
to have carried
forward the
positive
momentum
gained over
the last several
years and to
have advanced
toward our
goal of being
a consistently
high performing
community bank.
As we celebrate
the success of
2014 and the
progress we’ve
accomplished,
Donald P. Hileman
President & CEO
William J. Small
Chairman
we gain even more confidence that we
are positioned to meet the economic and
regulatory environment challenges that
still lie ahead. The prolonged low interest
rate environment resulting from multiple
factors, while beneficial in some areas of our
operations such as cost of funds, has had a
damping effect and been an overall
indicator of weaker economic growth.
The Federal Reserve has taken multiple
actions to stimulate the economic engine
for the past several years, and the outlook
for rates to rise gives us confidence that we
are entering a period of sustainable growth.
This will provide additional opportunities
for greater utilization of our products and
services by current customers and the chance
to introduce new customers to First Federal
Bank’s community banking difference.
To be a high performing community bank,
we also need to meet our customers’
increasing expectations for personalized
service, added convenience and quick
response. We have established many
important initiatives this year to help us meet
these desires, including Mobile Deposit,
OnLine Account Opening and chat capabilities
to help guide customers through the
mortgage loan process wherever they may
be. We plan to enhance our digital delivery
services to allow customers to bank anytime,
anywhere and to serve those adjacent to
our footprint or in areas that do not have
full-service community banking centers. Not
only have we satisfied the needs of our retail
customers, we have designed a streamlined
lending process for small to mid-sized
business customers and added dedicated
Business Bankers to each of our market areas.
While our presence online is important, we
remain dedicated to building relationships
with our customers through our network of
banking center locations. Early in 2014, we
established a loan production office in
Columbus, Ohio; and in September, we
opened our second office in Fort Wayne,
Indiana, showcasing our relationship banking
model. Continued expansion is planned in
areas with strong growth opportunities. We
are committed to our strategy of providing
quality products and service while earning
trust and confidence from our customers.
2014 also represented a year of transition with
the retirement of James L. Rohrs, First Federal
Bank President and CEO, on December 31
after an accomplished banking career of
which 15 years were spent with First Federal
Bank. As a result of a solid succession plan,
we remain ready to meet the opportunities
and challenges of the year ahead under
the guidance of a skilled, experienced
leadership team. We are thankful to all of
our stakeholders, customers, employees and
shareholders for their continued support
and help in achieving continued success
for First Defiance.
Sincerely,
Donald P. Hileman
William J. Small
ANNUAL MEETING
In order to increase shareholder attendance and participation,
the Annual Meeting of Shareholders will be conducted
virtually at 2:00 p.m. on Tuesday, April 21, 2015.
Shareholders may access the Annual Meeting by going
to www.virtualshareholdermeeting.com/FDEF2015.
INVESTOR INFORMATION
Shareholders, investors and analysts interested in additional
information about First Defiance Financial Corp. may contact
Investor Relations at the corporate office, 419-782-5104.
TOTAL RETURN PERFORMANCE
350
300
250
200
150
100
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12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
PRICE RANGE
Year Ended December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$28.23
$29.00
$29.00
$35.70
Year Ended December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$23.75
$23.75
$28.46
$27.25
Low
$24.24
$26.50
$26.99
$26.95
Low
$18.42
$20.80
$22.49
$23.31
STOCK TRANSFER AGENT
Shareholders with questions concerning the transfer of shares,
lost certificates, dividend payments, dividend reinvestment,
receipt of multiple dividend checks, duplicate mailings or
changes of address should contact:
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
1-844-318-0128 or 1-720-358-3594
shareholder@broadridge.com
SECURITIES LISTING
First Defiance Financial Corp. common stock trades on the NASDAQ
Global Select Market under the symbol FDEF. As of March 2, 2015,
there were approximately 1,938 stockholders of record and 9,234,781
shares outstanding.
DIVIDEND POLICY
The First Defiance Financial Corp. Board reviews and determines on
a quarterly basis whether to declare a dividend. Dividends declared
in 2014 totaled $0.63 per share.
DIVIDEND REINVESTMENT PLAN
Shareholders may automatically reinvest dividends in additional
First Defiance Financial Corp. common stock through the Dividend
Reinvestment Plan, which also provides for purchase by voluntary
cash contributions. For additional information, please contact:
Broadridge Corporate Issuer Solutions
at 1-844-318-0128 or 1-720-358-3594.
AUDITORS
Crowe Horwath LLP
330 East Jefferson Boulevard
South Bend, Indiana 46624
GENERAL COUNSEL
Vorys, Sater, Seymour & Pease LLP
301 East Fourth Street, Suite 3500
Cincinnati, Ohio 45202
COMPANY PROFILE
First Defiance Financial Corp., headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the
Midwest and First Insurance Group. First Federal Bank operates 33 full-service branches and 43 ATMs in northwest
Ohio, southeast Michigan and northeast Indiana and a loan production office in Columbus, Ohio. First Insurance
Group is a full-service insurance agency with five offices throughout northwest Ohio.
Founded in the 1920s as Northwest Savings, First Federal Bank was chartered in 1935 as a federal mutual savings
and loan company. First Federal Bank converted to a mutual holding company and issued its first stock to the
public and employees in 1993. In September 1995, First Federal Bank converted to a full stock company,
trading stock on the NASDAQ national market under the ticker symbol FDEF. At the same time, First Defiance
Financial Corp. was founded as the holding company for First Federal Bank. In 1998, an additional business
line was added with the acquisition of an insurance agency, now known as First Insurance Group. The Bank’s
name was changed to First Federal Bank of the Midwest in 1999, to better reflect our community banking
business strategy.
Since 2003, First Defiance has acquired three banking offices, opened eight de novo offices, acquired
three insurance agencies and completed acquisitions of ComBanc, Inc. based in Delphos, Ohio; Genoa Savings and
Loan based in Genoa, Ohio; and Pavilion Bancorp, based in Adrian, Michigan.
Statements contained in this Annual Report may not be based on historical facts and are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21B of the Securities Act of 1934, as amended. Actual results could vary materially depending on risks and
uncertainties inherent in general and local banking and insurance conditions, competitive factors specific
to markets in which the Company and its subsidiaries operate, future interest rate levels, legislative and
regulatory decisions or capital market conditions. The Company assumes no responsibility to update this
information. For more details, please refer to the Company’s SEC filings, including its most recent Annual
Report on Form 10-K and quarterly reports on Form 10-Q.
SAFE HARBOR STATEMENT
Summary of Operating Costs
Net interest income
Provision for loan losses
(in thousands, except per share amounts)
2014
2013
% Change
$69,689
$67,611
3.07%
1,117
1,824
-38.76%
Non-interest income (excluding securities gains/losses)
30,709
31,018
-1.00%
Securities gains (losses)
Non-interest expense
Net income
Balance Sheet Data
Total assets
Loans, net
Deposits
Stockholders' equity
Allowance for loan losses
Share Information
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
Tangible book value per common share
Shares outstanding at end of period
Key Ratios
Average net interest margin
Return on average assets
Return on average equity
Efficiency ratio
932
(240)
488.33%
66,758
24,292
2014
65,052
22,235
2.62%
9.25%
2013
% Change
$2,178,952
$2,137,148
1,622,020
1,555,498
1,760,813
1,735,792
279,505
272,147
1.96%
4.28%
1.44%
2.70%
24,766
24,950
-0.74%
2014
$2.55
2.44
0.63
23.25
9,235
2014
3.68%
1.12%
8.78%
2013
% Change
$2.28
2.19
0.40
21.22
9,720
11.84%
11.42%
57.50%
9.57%
-4.99%
2013
% Change
3.76%
1.08%
8.39%
-2.13%
3.68%
4.72%
0.79%
65.32%
64.81%
$2.40
2.20
2.00
1.80
1.60
1.40
1.20
1.00
.80
.60
.40
.20
$1,800
1,600
1,400
1,200
1,000
800
600
400
200
600
400
200
Diluted Earnings Per Share
Total Assets (In Millions)
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
10
11
12
13
14
10
11
12
13
14
Deposits (In Millions)
Loans (In Millions)
$1,600
1,400
1,200
1,000
800
600
400
200
10
11
12
13
14
10
11
12
13
14
Stockholders Equity (In Millions)
$300
250
200
150
100
50
400
200
10
11
12
13
14
First Defiance Financial Corp. Board of Directors
William J. Small
Chairman,
First Defiance Financial Corp.
1, 5, 6 & 7
Donald P. Hileman
President &
Chief Executive Officer,
First Defiance Financial Corp.
5, 7 & 8
Stephen L. Boomer
Vice Chairman & Lead Director,
First Defiance Financial Corp.
President &
Chief Executive Officer,
Arps Dairy, Inc.
Defiance, Ohio
1, 2, 3, 4, 6, 7 & 8
John L. Bookmyer
Chief Executive Officer,
Pain Management Group
Findlay, Ohio
2, 3 & 5
Douglas A. Burgei, D.V.M.
Veterinarian,
Napoleon, Ohio
4, 5 & 8
Peter A. Diehl
Retired Business Owner,
Defiance, Ohio
2, 4 & 8
Jean A. Hubbard
Business Manager &
Corporate Treasurer,
The Hubbard Company
Defiance, Ohio
2, 3 & 8
Barbara A. Mitzel
Area Manager,
Consumers Energy
Adrian, Michigan
4, 5 & 6
Charles D. Niehaus
Managing Partner,
Niehaus & Associates, Ltd.
Toledo, Ohio
4 & 6
Samuel S. Strausbaugh
Chairman,
Chief Executive Officer &
Chief Financial Officer,
JB & Company, Inc.
Tiffin, Ohio
2, 3, 7 & 8
Key For Board of Directors:
1. Executive Committee
2. Audit Committee
3. Compensation Committee
4. Corporate Governance
Committee
5. Investment Committee
6. Trust Committee
7. First Insurance Group Board
8. Risk Committee
First Insurance Group, Inc. Corporate Officers
Donald P. Hileman
Chief Executive Officer
Kenneth G. Keller
Executive Vice President,
Group Health & Life
Michael R. Klein
President &
Chief Operating Officer
Marvin K. Dubbs, Jr.
Executive Vice President,
Property & Casualty
John Payak, III
Executive Vice President,
Property & Casualty
Tim Whetstone
Executive Vice President,
Property & Casualty
Lawrence H. Woods
Executive Vice President,
Property & Casualty
First Federal Bank of the Midwest
Corporate Officers
Donald P. Hileman
President &
Chief Executive Officer
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
John R. Reisner
Executive Vice President,
Chief Risk Officer &
Legal Counsel
Gregory R. Allen
Executive Vice President,
Community Banking
President
Dennis E. Rose, Jr.
Executive Vice President,
Director of Business Banking
Michael D. Mulford
Executive Vice President,
Chief Credit Officer
Timothy K. Harris
Executive Vice President,
Eastern Market Area
President
Marybeth Shunck
Executive Vice President,
Northern Market Area
President
James R. Williams
Executive Vice President,
Western Market Area
President
David D. Dygert
Executive Vice President,
Columbus Market Executive
Brent L. Beard
Senior Vice President,
Controller
Philip R. Bundy
Senior Vice President,
Fort Wayne Market
Executive
Craig A. Curtis
Senior Vice President,
Commercial Lending
Amy M. Daeger
Senior Vice President,
Director of Retail
Administration
David L. Kondas
Senior Vice President,
Director of Wealth
Management
Kathleen A. Miller
Senior Vice President,
Information Technology
Linda R. Moening
Senior Vice President,
Deposit & Loan
Operations Manager
Lisa R. Christy Nartker
Senior Vice President,
Trust Manager
Martha J. Woelke
Senior Vice President,
Retail Lending
First Defiance Financial Corp.
Corporate Officers
Donald P. Hileman
President &
Chief Executive Officer
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
John R. Reisner
Executive Vice President,
Chief Risk Officer &
Legal Counsel
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
(Mark One)
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year Ended
December 31, 2014
or
[
]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
0-26850
_____________
FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
_____________
OHIO
(State or other jurisdiction of incorporation or organization)
601 Clinton Street, Defiance, Ohio
(Address of principal executive offices)
34-1803915
(I.R.S. Employer Identification Number)
43512
(Zip code)
Registrant’s telephone number, including area code: (419) 782-5015
_______________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
The NASDAQ Stock Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
_______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [ X ]
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [ X ] Non-accelerated filer [ ] Smaller reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]
No [ X ]
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, 2014 was approximately $262.5 million.
As of February 20, 2015, there were issued and outstanding 9,222,676 shares of the Registrant’s common stock.
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2015
Annual Shareholders’ Meeting.
Documents Incorporated by Reference
- 1 -
First Defiance Financial Corp.
Annual Report on Form 10-K
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Page
3
26
32
32
34
34
34
37
38
57
59
132
132
132
132
132
132
133
133
134
135
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
SIGNATURES
- 2 -
- 2 -
Item 1. Business
PART I
First Defiance Financial Corp. (“First Defiance” or “the Company”) is a unitary thrift holding
company that, through its subsidiaries, First Federal Bank of the Midwest (“First Federal”), First
Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc.
(collectively, “the Subsidiaries”), focuses on traditional banking and property and casualty, life and
group health insurance products. First Federal’s banking activities include originating and servicing
residential, commercial, and consumer loans and providing a broad range of depository services. First
Insurance’s activities consist primarily of selling property and casualty, life and group health insurance
products. First Defiance Risk Management is a wholly owned insurance company subsidiary of the
Company to insure the Company and its subsidiaries against certain risks unique to the operations of the
Company and for which insurance may not be currently available or economically feasible in today’s
insurance marketplace. First Defiance Risk Management pools resources with several other similar
insurance company subsidiaries of financial institutions to spread a limited amount of risk among
themselves.
The Company’s philosophy is to grow and prosper, building long-term relationships based on top
quality service, high ethical standards and safe and sound assets. The Company operates as a locally
oriented, community-based financial services organization, augmented by experienced, centralized
support in select critical areas. The Company’s local market orientation is reflected in its market area
management and local advisory boards, which are comprised of local business persons, professionals and
other community representatives that assist area management in responding to local banking needs.
The Company’s operating objectives include expansion, diversification within its markets,
growth of its fee-based income and growth organically and through acquisitions of financial institutions,
branches and financial services businesses. The Company seeks merger or acquisition partners that are
culturally similar, have experienced management and possess either significant market area presence or
have the potential for improved profitability through financial management, economies of scale and
expanded services. The Company regularly evaluates merger and acquisition opportunities and conducts
due diligence activities related to possible transactions with other financial institutions. As a result,
merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or
acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the
payment of a premium over book and market values and, therefore, some dilution of the Company’s
tangible book value and net income per common share may occur in any future transaction.
At December 31, 2014, the Company had consolidated assets of $2.18 billion, consolidated
deposits of $1.76 billion, and consolidated stockholders’ equity of $279.5 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.
On February 18, 2014, the Company announced the signing of a definitive agreement to acquire
First Community Bank (FCB”). On April 21, 2014, First Federal and FCB jointly announced the
termination of the merger agreement. Both companies mutually agreed to terminate the agreement after it
became evident that completion of the merger would take significantly longer than originally expected.
The Company incurred $786,000 in costs related to the termination in the first quarter of 2014 that is
recorded in other non-interest expense.
First Defiance's website, 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 United State Securities and Exchange Commission (“SEC”).
- 3 -
- 3 -
The Subsidiaries
The Company’s core business operations are conducted through the Subsidiaries:
First Federal Bank of the Midwest: First Federal is a federally chartered stock savings bank
headquartered in Defiance, Ohio. It conducts operations through 26 full service banking center offices in
Allen, Defiance, Fulton, Hancock, Henry, Lucas, Ottawa, Paulding, Putnam, Seneca, Williams and Wood
counties in northwest Ohio, two full service banking center offices in Allen County in northeast Indiana,
five full service banking center offices in Lenawee County in southeast Michigan and one commercial
loan production office in Hilliard, Ohio that opened in the first half of 2014.
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 that are issued by federal agencies, including real estate mortgage investment conduits
(“REMICs”) and collateralized mortgage obligations (“CMOs”), and corporate bonds. First Federal’s
deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is a member
of the Federal Home Loan Bank (“FHLB”) System.
First Insurance Group of the Midwest: First Insurance is a wholly owned subsidiary of First
Defiance. First Insurance is an insurance agency that conducts business through offices located in the
Defiance, Maumee, Oregon, Bryan and Bowling Green, Ohio areas. First Insurance offers property and
casualty insurance, life insurance and group health insurance.
First Defiance Risk Management: First Defiance Risk Management was incorporated on
December 20, 2012, as a wholly-owned insurance company subsidiary of the Company to insure the
Company and the Subsidiaries against certain risks unique to the operations of the Company and for
which insurance may not be currently available or economically feasible in today’s insurance
marketplace. First Defiance Risk Management pools resources with several other similar insurance
company subsidiaries of financial institutions to spread a limited amount of risk among themselves.
Business Strategy
First Defiance’s primary objective is to be a high-performing community banking organization,
well regarded in its market areas. First Defiance accomplishes this through emphasis on local decision
making and empowering its employees with tools and knowledge to serve its customers’ needs. First
Defiance believes in a “Customer First” philosophy that is strengthened by its Trusted Advisor initiative.
First Defiance also has a tagline of “Better Together” as an indication of its commitment to local,
responsive, personalized service. First Defiance believes this strategy results in greater customer loyalty
and profitability through core relationships. First Defiance is focused on diversification of revenue
sources and increased market penetration in areas where the growth potential exists for a balance
between acquisition and organic growth. The primary elements of First Defiance’s business strategy are
commercial banking, consumer banking, including the origination and sale of single-family residential
loans, enhancement of fee income, wealth management and insurance sales, each united by a strong
customer service culture throughout the organization.
Commercial and Commercial Real Estate Lending - Commercial and commercial real estate
lending have been an ongoing focus and a major component of First Federal’s success. First Federal
provides primarily commercial real estate and commercial business loans with an emphasis on owner-
occupied commercial real estate and commercial business lending with a focus on the deposit balances
that accompany these relationships. First Federal’s client base tends to be small to middle market
- 4 -
- 4 -
customers with annual gross revenues generally between $1 million and $50 million. First Federal’s
focus is also on securing multiple guarantors in addition to collateral where possible. These customers
require First Federal to have a high degree of knowledge and understanding of their business in order to
provide them with solutions to their financial needs. First Federal’s Customer First philosophy and
culture complements this need of its clients. First Federal believes this personal service model
differentiates First Federal from its competitors, particularly the larger regional institutions. First Federal
offers a wide variety of products to support commercial clients including remote deposit capture and
other cash management services. First Federal also believes that the small business customer is a strong
market for First Federal. First Federal participates in many of the Small Business Administration lending
programs and has implemented a new program in 2014 targeting the small business customer.
Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting
to changes in the credit characteristics of industries is an ongoing focus.
Consumer Banking - First Federal offers customers a full range of deposit and investment
products including demand, checking, money market, certificates of deposits, Certificate of Deposit
Account Registry Service (“CDARS”) and savings accounts. First Federal offers a full range of
investment products through the wealth management department and a wide variety of consumer loan
products, including residential mortgage loans, home equity loans, and installment loans. First Federal
also offers online banking services, which include mobile banking, online bill pay along with debit cards.
Fee Income Development - Generation of fee income and the diversification of revenue sources
are accomplished through the mortgage banking operation, insurance subsidiary and the wealth
management department as First Defiance seeks to reduce reliance on retail transaction fee income.
Deposit Growth - First Federal’s focus has been to grow core deposits with an emphasis on total
relationship banking with both our retail and commercial customers. First Federal has initiated a pricing
strategy that considers the whole relationship of the customer. First Federal will continue to focus on
increasing its market share in the communities it serves by providing quality products with extraordinary
customer service, business development strategies and branch expansion. First Federal will look to grow
its footprint in areas believed to further complement its overall market share and complement its strategy
of being a high-performing community bank.
Asset Quality - Maintaining a strong credit culture is of the utmost importance to First Federal.
First Federal has maintained a strong credit approval and review process that has allowed the Company
to maintain a credit quality standard that balances the return with the risks of industry concentrations and
loan types. First Federal is primarily a collateral lender with an emphasis on cash flow performance,
while obtaining additional support from personal guarantees and secondary sources of repayment. First
Federal has directed its attention to loan types and markets that it knows well and in which it has
historically been successful. First Federal strives to have loan relationships that are well diversified in
both size and industry, and monitor the overall trends in the portfolio to maintain its industry and loan
type concentration targets. First Federal maintains a problem loan remediation process that focuses on
detection and resolution. First Federal maintains a strong process of internal control that subjects the loan
portfolio to periodic internal reviews as well as independent third-party loan review.
Expansion Opportunities - First Defiance believes it is well positioned to take advantage of
acquisitions or other business opportunities in its market areas. First Defiance believes it has a track
record of successfully accomplishing both acquisitions and de novo branching in its market area. This
track record puts the Company in a solid position to enter or expand its business. First Defiance has
successfully integrated acquired institutions in the past. First Defiance will continue to be disciplined as
well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its
primary geographic market area, which it knows well, and has been competing in for a long period of
time as well as surrounding market areas.
- 5 -
- 5 -
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 of
First Federal, Chief Executive Officer of First Federal, and the Chief Administration Office of First
Federal can each approve transactions up to $3.0 million. Two of the three officers are required to
approve transactions between $3.0 million and $5.0 million. All transactions in excess of $5.0 million
must be approved by the Board of Directors.
First Defiance’s investment portfolio includes 58 collateralized mortgage obligation (“CMO”)
issues totaling $81.1 million, all of which are fully amortizing securities. Management does not believe
the risks associated with any of its CMO investments are significantly different from risks associated
with other pass-through mortgage-backed securities. First Defiance did not have any off-balance sheet
derivative securities at December 31, 2014.
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 carrying value of securities at December 31, 2014 by contractual maturity is shown below.
Expected maturities will differ from contractual maturities because issuers 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 underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average contractual maturities
because of principal prepayments.
Contractually Maturing
Total
Weighted
Under 1 Average
Year
Rate
1 - 5
Years
Weighted
Average
Rate
6-10
Years
Weighted
Weighted
Average Over 10 Average
Years
Rate
Rate
Amount Yield
Mortgage-backed
securities
CMOs
U.S. government and
federal agency
obligations
Obligations of states and
political subdivisions (1)
Corporate bonds
Total
Unamortized premiums/
(discounts)
Unrealized gain on
securities available
for sale
Total
$ 8,970
15,243
3.34% $ 24,446
40,198
3.19
3.25% $14,242
20,854
2.94
3.16%
2.74
$ 7,396
3,557
(Dollars in Thousands)
3.07% $ 55,054
2.75
79,852 2.93
3.22%
- -
1,000
1.50
-
-
-
-
1,000
1.50
15 5.13
1,988 0.70
$ 26,216
6,945
1,925
$ 74,514
2.87
0.53
35,648
3,000
$ 73,744
3.74
1.15
41,279
3.76
- -
83,887
3.68
6,913 0.85
$ 52,232
$ 226,706
5,704
7,224
$ 239,634
(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%.
- 6 -
- 6 -
The carrying value of investment securities is as follows:
Available-for-sale securities:
Obligations of U.S. government corporations and
agencies
U.S. treasury bonds
Obligations of state and political subdivisions
CMOs, REMICS and mortgage-backed securities
Trust preferred stock and preferred stock
Corporate bonds
Total
Held-to-maturity securities:
Mortgage-backed securities
Obligations of state and political subdivisions
Total
2014
December 31
2013
(In Thousands)
2012
$ 980
-
88,532
142,816
1
6,992
$ 239,321
$ 4,921
-
80,220
101,133
2,954
8,942
$ 198,170
$ 11,069
1,002
82,611
88,927
1,608
8,884
$ 194,101
$ 158
155
$ 313
$ 201
186
$ 387
$ 291
217
$ 508
For additional information regarding First Defiance’s investment portfolio, refer to Note 5 –
Investment Securities to the consolidated financial statements.
Interest-Bearing Deposits
The Company had $71.0 million and $143.0 million in overnight investments at the Federal
Reserve at December 31, 2014 and 2013, respectively, which amount is included in interest-bearing
deposits. First Defiance had interest-earning deposits in the FHLB of Cincinnati and other financial
institutions amounting to $6.5 million and $2.3 million at December 31, 2014 and 2013, 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, 2014, First Federal serviced
14,267 loans totaling $1.35 billion. The vast majority of the loans serviced for others are fixed rate
conventional mortgage loans. The Company primarily sells its loans to Freddie Mac, Fannie Mae and
FHLB. At December 31, 2014, 62.46%, 36.55% and 0.83% of the Company’s sold loans were to Freddie
Mac, Fannie Mae and FHLB, respectively.
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 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:
- 7 -
- 7 -
2014
December 31
2013
2012
Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
Percentage
Percentage
Rate
of
Loans
Principal
Balance
Principal
Balance
of
Loans
Principal
Balance
Principal
Balance
of
Loans
Principal
Balance
Principal
Balance
(Dollars in Thousands)
Less than 3.00%
3.00% -3.99%
4.00% -4.99%
5.00% - 5.99%
6.00% - 6.99%
7.00% and over
Total
1,807
4,985
3,952
2,200
1,086
237
14,267
$ 194,998
544,117
386,949
147,057
62,379
11,138
$ 1,346,638
14.48%
40.41
28.73
10.92
4.63
0.83
100.00%
1,901
4,771
3,508
2,537
1,316
286
14,319
$ 220,376
544,512
333,469
177,999
80,457
14,428
$ 1,371,241
16.07%
39.71
24.32
12.98
5.87
1.05
100.00%
1,182
3,822
3,597
3,218
1,746
362
13,927
$ 148,144
454,634
346,528
243,077
116,855
19,479
$ 1,328,717
11.15%
34.22
26.08
18.29
8.79
1.47
100.00%
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.
2014
Number
of Loans
% of
Number
of Loans
Unpaid
Principal
Amount
Maturity
% of
Unpaid
Principal
Amount
December 31
2013
Number
of Loans
% of
Number
of Loans
Unpaid
Principal
Amount
(Dollars in Thousands)
2012
% of
Unpaid
Principal
Amount
Number
of Loans
% of
Number
of Loans
Unpaid
Principal
Amount
% of
Unpaid
Principal
Amount
1–5 years
6–10 years
11–15 years
16–20 years
21–25 years
More than 25
years
Total
810
1,204
4,082
1,720
1,575
1.18%
5.67% $ 15,932
64,979
8.44
4.83
385,409 28.62
28.61
155,783 11.57
12.06
143,062 10.62
11.04
846
1,009
4,340
1,704
1,218
5.91%
7.05
30.31
11.90
8.51
1.43%
$ 19,593
52,404
3.82
420,362 30.66
158,467 11.56
7.50
102,844
507
4,030
1,391
1,846
1,370
3.64% $ 10,537
395,066
134,916
163,929
60,618
28.94
9.99
13.25
9.84
0.79%
29.73
10.16
12.34
4.56
4,876
34.18
581,473 43.18
5,202
36.32
617,571 45.03
4,783
34.34
563,651
42.42
14,267
100.00% $1,346,638 100.00%
14,319
100.00% $1,371,241 100.00%
13,927
100.00% $1,328,717 100.00%
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 collateral. Real estate is not considered “readily marketable collateral.”
Certain types of loans are not subject to these limits. In applying these limits, loans to certain borrowers
may be aggregated. Notwithstanding the specified limits, a savings bank may lend to one borrower up to
$500,000 “for any purpose.” At December 31, 2014, First Federal’s limit on loans-to-one borrower was
$39.4 million and its five largest loans (including available lines of credit) or groups of loans to one
borrower, including related entities, were $25.9 million, $23.0 million, $21.8 million, $21.6 million and
$21.0 million. All of these loans or groups of loans were performing in accordance with their terms at
December 31, 2014.
Loan Portfolio Composition – The net increase or (decrease) in net loans receivable over the
prior year was $66.5 million, $57.0 million and $44.7 million at December 31, 2014, 2013, and 2012,
respectively. The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated
geographically in its northwest Ohio, northeast Indiana and southeast Michigan market areas.
Management has identified lending for income generating rental properties as an industry concentration.
Total loans for income generating property totaled $494.6 million at December 31, 2014, which
represents 29.3% of the Company’s loan portfolio.
The following table sets forth the composition of the Company’s loan portfolio by type of loan at
the dates indicated.
- 8 -
- 8 -
Real estate:
Single family residential
Five or more family
residential
Nonresidential real estate
Construction
Total real estate loans
Other:
Consumer finance
Commercial
Home equity and improvement
Total non-real estate loans
Total loans
Less:
Loans in process
Deferred loan origination fees
Allowance for loan losses
Net loans
2014
2013
December 31
2012
2011
2010
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
$ 206,437
12.2% $ 195,752
12.2%
$ 200,826
13.0%
$ 203,401
13.6%
$ 205,938
13.5%
156,530
683,958
112,385
1,159,310
9.3
40.6
6.7
68.8
148,952
670,666
86,058
1,101,428
9.2
41.6
5.3
68.3
122,275
675,110
37,788
1,035,999
15,466
399,730
111,813
527,009
1,686,319
0.9
23.7
6.6
31.2
100.0%
16,902
388,236
106,930
512,068
1,613,496
1.0
24.1
6.6
31.7
100.0%
15,936
383,817
108,718
508,471
7.9
43.7
2.5
67.1
1.0
24.9
7.0
32.9
126,246
649,746
31,552
1,010,945
8.4
43.3
2.1
67.4
120,534
646,478
30,340
1,003,290
7.9
42.2
2.0
65.6
18,887
349,053
122,143
490,083
1.3
23.2
8.1
32.6
22,848
369,959
133,593
526,400
1.5
24.2
8.7
34.4
1,544,470 100.0%
1,501,028 100.0%
1,529,690 100.0%
38,653
880
24,766
$ 1,622,020
32,290
758
24,950
$ 1,555,498
18,478
735
26,711
$ 1,498,546
13,243
709
33,254
$ 1,453,822
9,267
920
41,080
$ 1,478,423
In addition to the loans reported above, First Defiance had $4.5 million, $9.1 million, $22.1
million, $13.8 million, and $18.1 million in loans classified as held for sale at December 31, 2014, 2013,
2012, 2011 and 2010, respectively. The fair value of such loans, which are all single-family residential
mortgage loans, approximated their carrying value for all years presented.
Contractual Principal, Repayments and Interest Rates – The following table sets forth
certain information at December 31, 2014 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.
Years After December 31, 2014
Due Less
than 1
Due 1-2
Due 3-5
$ 272,347
$ 131,872
$ 572,069
Due 5-10
(In Thousands)
$
90,963
Due 10-15
Due 15+
Total
$ 27,210
$
64,849 $1,159,310
256,926
56,291
79,447
7,066
-
-
399,730
85,411
6,504
$ 621,188
8,699
4,039
$ 200,901
13,680
4,790
$ 669,986
2,821
121
$ 100,971
521
12
$ 27,743
$
681
-
111,813
15,466
65,530 $ 1,686,319
Real estate
Non-real estate:
Commercial
Home equity and
improvement
Consumer finance
Total
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.
- 9 -
- 9 -
The following table sets forth the dollar amount of gross loans due after one year from
December 31, 2014 which have fixed interest rates or which have floating or adjustable interest rates.
Real estate
Commercial
Other
Fixed
Rates
Floating or
Adjustable
Rates
(In Thousands)
Total
$ 306,609
120,351
34,768
$ 461,728
$ 580,354
22,453
596
$ 603,403
$ 886,963
142,804
35,364
$ 1,065,131
Originations, Purchases and Sales of Loans – The lending activities of First Federal 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 and builders,
newspaper and radio advertising and walk-in customers.
First Federal’s loan approval process for all types of loans is intended to assess the borrower’s
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 $2,000,000 in aggregate
exposure must be presented for approval to the Executive Loan Committee.
Residential mortgage applications are accepted by retail lenders or branch managers, who utilize
an automated underwriting system to review the loan request. First Federal also receives mortgage
applications via an online residential mortgage origination system. A final approval of all residential
mortgage applications is made by a member of a centralized underwriting staff within their designated
lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by the
Senior Loan Committee and, if necessary, by the Executive Loan Committee.
Retail lenders and branch managers are authorized to originate and approve direct consumer loan
requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess
of the lender’s approved lending limit may be approved by retail lending managers up to their approved
lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of
policy must be approved by Senior Loan Committee and, if necessary, by the Executive Loan Committee.
Indirect consumer loans originated by auto dealers are underwritten and approved by a designated
underwriter in accordance with company policy and lending limits.
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.
- 10 -
- 10 -
Adjustable-rate loans represented 11.9% of First Defiance’s total originations of one-to-four
family residential mortgage loans in 2014 compared to 9.2% and 7.1% during 2013 and 2012,
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 and loans held for sale during the periods indicated:
Loan originations:
Single family residential
Multi-family residential
Non-residential real estate
Construction
Commercial
Home equity and improvement
Consumer finance
Total loans originated
Loans purchased:
Loan reductions:
Loan pay-offs
Loans sold
Periodic principal repayments
2014
Years Ended December 31
2013
(In Thousands)
2012
$ 173,301 $ 326,700
50,874
113,999
67,530
435,248
41,552
10,043
1,045,946
4,545
46,181
159,959
66,264
524,073
45,934
10,632
1,026,344
16,594
$ 546,773
28,521
191,742
33,557
603,415
32,684
9,722
1,446,414
-
219,446
176,381
578,873
974,700
68,238 $
205,254
315,812
473,343
994,409
56,082
299,479
514,351
580,919
1,394,749
51,665
$
Net increase in total loans and loans held for sale
$
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, 2014, 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.
- 11 -
- 11 -
30 to 59 Days
60 to 89 Days
90 Days and Over
Total
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
(Dollars in Thousands)
One to four family
residential real estate
Nonresidential and Multi-
$
148
678
0.01%
0.04
$ 1,170
1,997
$
0.07%
0.12
944
3,320
0.06%
0.20
$ 2,262
5,995
0.14%
0.35
family residential
Commercial
Construction
Home Equity and
Improvement
Consumer Finance
Total
66
-
1,225
0.00
0.00
0.07
10
-
-
0.00
0.00
0.00
2,961
-
106
0.18
0.00
0.01
3,037
-
1,331
0.18
0.00
0.08
68
$ 2,185
56
0.00
0.12% $ 3,233
-
0.00
0.19% $ 7,331
124
0.00
0.45% $ 12,749
0.01
0.76%
Overall, the level of delinquencies at December 31, 2014 has decreased from the levels at
December 31, 2013, when First Defiance reported that 1.16% of its outstanding loans were at least 30
days delinquent. The level of total loans 90 or more days delinquent has decreased to 0.45% at December
31, 2014 from 0.73% at December 31, 2013. The level of total loans 60-89 days delinquent increased
slightly to 0.19% at December 31, 2014 from 0.14% at December 31, 2013. Overall, the level of loans
that were 30 to 59 days past due past due decreased from 0.29% at December 31, 2013 to 0.12% at
December 31, 2014. Management has assessed the collectability of all loans that are 90 days or more
delinquent as part of its procedures in establishing the allowance for loan losses.
Nonperforming Assets – All loans are reviewed on a regular basis and are placed on non-
accrual status when, in the opinion of management, the collectability of additional interest is not
expected. Generally, First Defiance places all loans more than 90 days past due on non-accrual status.
First Defiance also places loans on non-accrual when the loan is paying as agreed but the Company
believes the financial condition of the borrower is such that this classification is warranted. When a loan
is placed on non-accrual status, total unpaid interest accrued to date is reversed. Subsequent payments are
generally applied to the outstanding principal balance but may be recorded as interest income, depending
on the assessment of the ultimate collectability 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 allocating a portion of the allowance for loan
losses on cash flow dependent loans and by charging off the deficiency on collateral dependent loans.
Loans originated by First Federal having principal balances of $48.9 million, $57.3 million and
$71.1 million were considered impaired as of December 31, 2014, 2013 and 2012, respectively. The
decrease in impaired loans from 2013 to 2014 is due to a continued concerted effort by management and
the lending staff to work specific credits out of the bank or back to performing status. These amounts of
impaired loans 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 $1.6
million of interest received and recorded in income during 2014 related to impaired loans. There was
$2.1 million and $1.3 million recorded in 2013 and 2012, respectively. Unrecorded interest income based
on the loan’s contractual terms on these impaired loans and all non-performing loans in 2014, 2013 and
2012 was $1.2 million, $1.1 million, and $2.5 million, respectively. The average recorded investment in
impaired loans during 2014, 2013 and 2012 (excluding loans accounted for under FASB ASC Topic 310
Subtopic 30) was $50.3 million, $65.4 million and $53.3 million, respectively. The total allowance for
loan losses related to these loans was $1.3 million, $1.4 million, and $1.5 million at December 31, 2014,
2013 and 2012, respectively.
- 12 -
- 12 -
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 fair value less cost to sell. 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 a write-down of the value is recorded with a
corresponding charge to operations if it is determined that the carrying value of property exceeds its
estimated net realizable value. During 2014, First Defiance recognized $251,000 of expense related to
write-downs in value of real estate acquired by foreclosure. The balance of real estate owned at
December 31, 2014 was $6.2 million.
As of December 31, 2014, First Defiance’s total non-performing loans amounted to $24.1 million
or 1.47% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $27.8
million or 1.76% of total loans, at December 31, 2013. Non-performing loans are loans which are more
than 90 days past due or on nonaccrual. The nonperforming loan balance includes $20.5 million of loans
originated by First Federal also considered impaired or acquired loans accounted for under Topic 310
Subtopic 30.
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.
2014
2013
December 31
2012
(Dollars in Thousands)
2011
2010
Nonperforming loans:
One to four family residential real
estate
Nonresidential and multi-family
residential real estate
Commercial
Construction
Home Equity and Improvement
Consumer finance
Total nonperforming loans
Real estate owned
Other repossessed assets
Total repossessed assets
$ 3,332
$ 3,273
$ 3,602
$ 3,890
$ 7,232
15,174
4,993
-
619
12
24,130
6,181
-
6,181
15,834
8,327
-
413
-
27,847
5,859
-
5,859
23,090
5,661
-
217
-
32,570
3,805
-
3,805
28,150
6,884
-
394
10
39,328
3,608
20
3,628
21,737
11,547
64
446
14
41,040
9,591
-
9,591
Total nonperforming assets
$ 30,311
$ 33,706
$ 36,375
$ 42,956
$ 50,631
Restructured loans, accruing
$ 24,686
$ 27,630
$ 28,203
$ 3,380
$ 6,001
Total nonperforming assets as a
percentage of total assets
Total nonperforming loans as a
percentage of total loans*
Total nonperforming assets as a
percentage of total loans plus REO*
Allowance for loan losses as a percent
of total nonperforming assets
1.39%
1.58%
1.78%
2.08%
2.49%
1.47%
1.76%
2.14% 2.64%
2.70%
1.83%
2.12%
2.38% 2.88%
3.70%
81.71% 74.02% 73.43% 77.41%
81.14%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
- 13 -
- 13 -
Allowance for Loan Losses – First Defiance maintains an allowance for loan losses to absorb
probable incurred credit losses in the loan portfolio. The allowance for loan loss is made up of two
components. The first is a general reserve, which is used to record loan loss reserves for groups of
homogenous loans in which the Company estimates the losses incurred in the portfolio based on
quantitative and qualitative factors. Quantitative factors are primarily the historical loss experience of
the portfolio for the most recent three years. Qualitative factors that may lead the Company to add
additional general reserves on the non-impaired loan portfolio include such things as: changes in
international, national and local economic business conditions, changes in the value of underlying
collateral for collateral dependent loans, changes in the political and regulatory environment and changes
in the trends of the loan portfolio.
The second component of the allowance for loan loss is the specific reserve in which the
Company sets aside reserves based on the analysis of individual credits. In evaluating the adequacy of its
allowance each quarter, management grades all loans in the commercial portfolio. In establishing specific
reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes
judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and
the financial strength of any guarantors. If the loan is cash flow dependent, then a specific reserve is
established for the discount on the net present value of expected future cash flows. If the loan is
collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts
of any Small Business Association or Farm Service Agency guarantees. Internal loan review performs a
review of 75% of relationships between $1.0 million and $5.0 million (including all new), 25% of new
relationships between $250,000 and $1.0 million and all business banking loans. Management also
engages a third-party to do an annual review of all commercial loan and commercial real estate loan
relationships that exceed $5.0 million of aggregate exposure and all watchlist relationships that exceed
$500,000 of aggregate exposure over annually. Both of these loan reviews, among other things,
independently assess 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 remained static. To the extent that the
portfolio grows at a rapid rate or overall quality deteriorates, the provision generally will exceed charge-
offs, as in 2009 and 2010. However, in certain circumstances, as in 2011 through 2014, net charge-offs
may exceed the provision for loan losses when management determines that loans previously provided
for in the allowance for loan losses are uncollectible and should be charged off or as overall credit
improves. 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.
At December 31, 2014, First Defiance’s allowance for loan losses totaled $24.8 million
compared to $25.0 million at December 31, 2013. The following table sets forth the activity in First
Defiance’s allowance for loan losses during the periods indicated.
- 14 -
- 14 -
Allowance at beginning of year
Provision for credit losses
Charge-offs:
Single family residential real estate
Commercial real estate and multi-family
Commercial
Consumer finance
Home equity and improvement
Total charge-offs
Recoveries
Net charge-offs
Ending allowance
Allowance for loan losses to total non-
performing loans at end of year
Allowance for loan losses to total loans at end
of year*
Allowance for loan losses to net charge-offs
2014
Years Ended December 31
2012
2011
2013
(Dollars in Thousands)
2010
$ 24,950
1,117
$ 26,711
1,824
$ 33,254
10,924
$ 41,080
12,434
$ 36,547
23,177
(426)
(1,018)
(2,982)
(41)
(392)
(4,859)
3,558
(1,301)
$ 24,766
(643)
(2,475)
(1,230)
(94)
(757)
(5,199)
1,614
(3,585)
$ 24,950
(2,515)
(11,319)
(4,047)
(133)
(1,165)
(19,179)
1,712
(17,467)
$ 26,711
(2,753)
(13,150)
(4,398)
(95)
(1,052)
(21,448)
1,188
(20,260)
$ 33,254
(3,092)
(9,928)
(5,118)
(124)
(1,066)
(19,328)
684
(18,644)
$ 41,080
102.64%
89.60%
82.01%
84.56%
100.10%
1.50%
1.58%
1.75%
2.24%
2.70%
for the year
152.92%
Net charge-offs for the year to average loans
1.18%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
1,903.61% 695.96%
0.23%
0.08%
164.14%
1.41%
220.34%
1.21%
The provision for credit losses has decreased significantly in 2014 and 2013 from previous years
due to improved credit quality of the loan portfolio. Charge-offs trended downward in 2014 and 2013.
Management anticipates a stable level of net charge-offs in 2015 compared to 2014 and feels that the
level of the allowance for loan losses at December 31, 2014 is sufficient to cover the estimated losses
incurred but not yet recognized in the loan portfolio.
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.”
2014
2013
December 31
2012
2011
2010
Percent of
total loans
by category Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category
Amount
(Dollars in Thousands)
$ 2,715
18.9%
$ 2,981
17.5% $ 3,581
15.5% $ 4,158
15.7% $ 6,029
15.5%
13,721
49.9
14,508
50.8
14,899
51.6
20,490
51.7
22,355
23.7
5,678
24.1
6,325
24.9
6,576
23.2
10,871
50.1
24.2
7.5
1,783
100.0% $ 24,950
7.6
1,906
100.0% $ 26,711
8.0
2,030
100.0% $ 33,254
9.4
1,825
100.0% $ 41,080
10.2
100.0%
Single family
residential and
construction
Nonresidential and
Multi-family
residential real
estate
Other:
Commercial loans 6,509
Consumer and
home equity and
improvement loans 1,821
$ 24,766
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
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- 15 -
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. During 2007,
First Defiance issued $15.0 million of trust preferred securities through an unconsolidated affiliated trust.
Proceeds from the offering were used for general corporate purposes including funding of dividends and
stock buybacks as well as bolstering regulatory capital at the First Federal level. First Defiance also
issued $20.0 million of similar trust preferred securities in 2005.
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, savings accounts, and term certificate accounts. 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.
To supplement its funding needs, First Defiance also has the ability to utilize the national market
for Certificates of Deposit. First Defiance has used these deposits in the past and could in the future if
necessary. The total balance of national certificates of deposit was $0 at December 31, 2014 and 2013.
Average balances and average rates paid on deposits are as follows:
2014
Amount
Rate
Years Ended December 31
2013
Amount
(Dollars in Thousands)
Rate
2012
Amount
Rate
$ 350,677
-
$ 308,591
-
$ 266,913
-
733,637
198,919
466,951
$ 1,750,184
0.17%
0.05
0.85
0.30%
677,903
179,041
496,360
$ 1,661,895
0.17%
0.05
0.95
0.36%
629,568
164,508
558,648
$ 1,619,637
0.20%
0.07
1.21
0.50%
Non-interest-bearing
demand deposits
Interest bearing
demand deposits
Savings deposits
Time deposits
Totals
The following table sets forth the maturities of First Defiance’s retail certificates of deposit
having principal amounts greater than $100,000 at December 31, 2014 (In Thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
After December 31, 2015
Total retail certificates of deposit with
balances greater than $100,000
$
21,080
18,325
17,225
14,526
91,799
$ 162,955
At December 31, 2014, the Company had total deposits having principal amounts greater than
$250,000 of $412.2 million.
The following table details the deposit accrued interest payable as of December 31:
Interest bearing demand deposits and
money market accounts
Certificates of deposit
- 16 -
- 16 -
2014
2013
(In Thousands)
$
$
15
23
38
$
$
14
34
48
For additional information regarding First Defiance’s deposits see Note 11 to the financial
statements.
Borrowings— First Defiance may obtain advances from the FHLB of Cincinnati by pledging
certain of its residential mortgage loans, non-residential loans, multi-family loans, home equity 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.
Long-term:
FHLB advances
Weighted average interest rate
Short-term:
2014
December 31
2013
(Dollars in Thousands)
2012
$ 21,544
2.38%
$ 22,520
2.36%
$ 12,796
2.80%
Securities sold under agreement to repurchase
Weighted average interest rate
$ 54,759
0.28%
$ 51,919
0.31%
$ 51,702
0.63%
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.
Long-term:
FHLB advances:
Maximum balance
Average balance
Weighted average interest rate
2014
Years Ended December 31
2013
(Dollars in Thousands)
2012
$
22,520
21,993
2.38%
$
22,765
16,569
2.62%
$
81,838
66,121
3.67%
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.
Short-term:
FHLB advances:
Maximum balance
Average balance
Weighted average interest rate
Securities sold under agreement to repurchase:
Maximum balance
Average balance
Weighted average interest rate
2014
Years Ended December 31
2013
(Dollars in Thousands)
2012
$
$
-
-
-
$
50,000
1,164
0.09%
$
61,154
54,541
0.29%
57,182
50,877
0.44%
$
$
-
-
-
57,050
53,171
0.70%
First Defiance borrows funds under a variety of programs at the FHLB. As of December 31,
2014, there was $21.5 million outstanding under various long-term FHLB advance programs. First
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- 17 -
Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term
investment purposes. At December 31, 2014 and December 31, 2013, no outstanding balances existed
under First Defiance’s Cash Management Advance Line of Credit. The total available under this line is
$15.0 million. Additionally, First Defiance has $100.0 million available under a REPO line of credit.
Amounts are generally borrowed under these lines on an overnight basis. First Federal’s total borrowing
capacity at the FHLB is limited by various collateral requirements. Eligible collateral includes mortgage
loans, home equity loans, non-mortgage loans, cash, and investment securities. At December 31, 2014,
other than amounts available on the REPO and Cash Management line, First Federal had additional
borrowing capacity with the FHLB of $425.8 million as a result of these collateral requirements.
As a member of the FHLB of Cincinnati, First Federal must maintain a minimum investment in
the capital stock of that FHLB in an amount 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 $13.8 million at December 31, 2014 and $19.3
at December 31, 2013. First Federal also acquired $2.0 million in stock of the FHLB of Indianapolis from
the 2008 acquisition of the Bank of Lenawee, which had a balance of $10,000 at December 31, 2014 and
2013.
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.
For additional information regarding First Defiance’s FHLB advances and other debt see Notes
12 and 14 to the financial statements.
Subordinated Debentures - In March 2007, the Company sponsored an affiliated trust, First
Defiance Statutory Trust II (“Trust Affiliate II”) that issued $15.0 million of Guaranteed Capital Trust
Securities (“Trust Preferred Securities”). In connection with the transaction, the Company issued $15.5
million of Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) to Trust
Affiliate II. Trust Affiliate II was formed for the purpose of issuing Trust Preferred Securities to third-
party investors and investing the proceeds from the sale of these capital securities solely in Subordinated
Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of
the trust. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly
at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust
Preferred Securities issued by Trust Affiliate II was 1.74% and 1.75% as of December 31, 2014 and 2013
respectively.
The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and
unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust
Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the
Company’s option at any time now.
In October 2005, the Company formed an affiliated trust, First Defiance Statutory Trust I (“Trust
Affiliate I”) that issued $20.0 million of Trust Preferred Securities. In connection with the transaction,
the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was
formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the
proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The
Subordinated Debentures held by Trust Affiliate I are the sole assets of the trust. Distributions on the
Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the
three-month LIBOR rate plus 1.38%, or 1.62% and 1.63% as of December 31, 2014 and 2013
respectively.
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- 18 -
The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in
whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an
agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of
the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15,
2035, but can be redeemed by the Company at any time now.
Repurchase of Preferred Shares related to the Capital Purchase Program
In June 2012, the U.S. Treasury sold its preferred shares of the Company through a public
offering structured as a modified Dutch auction. The Company issued the preferred shares to the U.S.
Treasury in 2008 as part of the Company’s participation in the Capital Purchase Program. The Company
bid on its preferred shares in the auction after receiving approval from its regulators. The clearing price
per preferred share was $962.66 (compared to a par value of $1,000.00 per share) and the Company was
successful in repurchasing 16,560 of the 37,000 preferred shares outstanding through the auction process.
The Company also acquired an additional 19,440 preferred shares in the secondary market prior to the
end of the second quarter of 2012. The remaining 1,000 outstanding preferred shares were purchased at
par value on July 18, 2012. The clearing prices per preferred share purchased in the secondary market
were as follows: 1,100 shares at $997.50, 2,500 shares at $1,000.00 and 16,840 shares at $998.75.
The net balance sheet impact of the repurchase was a reduction to stockholders’ equity of $36.4
million which is comprised of a decrease in preferred shares of $37.0 million and a $642,000 increase to
retained earnings related to the discount on the shares repurchased, which is also included in net income
applicable to common shares for purposes of calculating earnings per share.
Included in the 2012 operating results is $181,000 of costs incurred by the Company related to
the U.S. Treasury’s offering. These costs were not tax-deductible.
Balance Sheet Restructure
In the fourth quarter of 2012, the Company executed a balance sheet restructuring strategy to
enhance the Company’s current and future profitability while increasing its capital ratios and protecting
the balance sheet against rising rates. The strategy required taking an after tax loss of approximately
$260,000 by selling $60 million in securities for a gain of $1.6 million and paying off $62.0 million in
FHLB advances with a prepayment penalty of $2.0 million.
Employees
First Defiance had 555 employees at December 31, 2014. None of these employees are
represented by a collective bargaining agent, and First Defiance believes that it maintains good
relationships with its personnel.
Competition
Competition in originating non-residential mortgage and commercial loans comes mainly from
commercial banks with banking center offices in the Company’s market area. Competition for the
origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage
companies. The distinction among market participants is based on a combination of price, 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 borrowers
than is furnished by competitors. First Federal has 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
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- 19 -
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.
Regulation
General – First Defiance and First Federal are subject to regulation, examination and oversight
by the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board (“Federal
Reserve”). Because the FDIC insures First Federal’s deposits, First Federal is also subject to examination
and regulation by the FDIC. In addition, First Federal is subject to regulation and examination by the
Consumer Financial Protection Bureau (the “CFPB”) established by the 2010 Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank Act”). First Defiance and First Federal must file
periodic reports with the Federal Reserve and the OCC and examinations are conducted periodically by
the Federal Reserve, OCC and the FDIC to determine whether First Defiance and First Federal are in
compliance with various regulatory requirements and are 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 – The federal banking regulators have adopted risk-based
capital guidelines for financial institutions and their holding companies, designed to absorb losses. The
guidelines provide a systematic analytical framework, which makes regulatory capital requirements
sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures
expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-
risk assets. Capital levels as measured by these standards are also used to categorize financial institutions
for purposes of certain prompt corrective action regulatory provisions.
Prior to January 1, 2015, the guidelines applicable to First Defiance and First Federal included a
minimum for the ratio of total capital to risk-weighted assets of 8%, with at least half of the ratio
composed of common shareholders’ equity, minority interests in certain equity accounts of consolidated
subsidiaries and a limited amount of qualifying preferred stock and qualified trust preferred securities,
less goodwill and certain other intangible assets (known as “Tier 1” risk-based capital). The guidelines
also provided for a minimum ratio of Tier 1 capital to average assets, or “leverage ratio,” of 3% for
savings and loan holding companies that meet certain criteria, including having the highest regulatory
rating, and 4% for all other savings and loan holding companies.
The risk-based capital guidelines adopted by the federal banking agencies are based on the
“International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the
Basel Committee on Banking Supervision (the “Basel Committee”) in 1988. In 2004, the Basel
Committee published a new capital adequacy framework (Basel II) for large, internationally active
banking organizations, and in December 2010 and January 2011, the Basel Committee issued an update
to Basel II (“Basel III”). The Basel Committee frameworks did not become applicable to financial
institutions supervised in the United States until adopted into United States law or regulations. Although
the United States banking regulators imposed some of the Basel II and Basel III rules on financial
institutions with $250 billion or more in assets or $10 billion of on-balance sheet foreign exposure, it was
- 20 -
- 20 -
not until July 2013 that the United States banking regulators issued final (or, in the case of the FDIC,
interim final) new capital rules applicable to smaller banking organizations which also implement certain
of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking
organizations, including First Defiance and First Federal, began transitioning to the new rules on January
1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new
capital conservation buffer and deductions from common equity capital phase in from January 1, 2016,
through January 1, 2019, and most deductions from common equity tier 1 capital will phase in from
January 1, 2015, through January 1, 2019.
The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5 percent, (b) a
Tier 1 capital ratio of at least 6.0 percent, rather than the former 4.0 percent, (c) a minimum total capital
ratio that remains at 8.0 percent, and (d) a minimum leverage ratio of 4 percent.
Common equity for the common equity tier 1 capital ratio includes common stock (plus related
surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock,
less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus
certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related
surplus and trust preferred securities that have been grandfathered (but which are not permitted going
forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments,
less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital
instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses,
subject to new eligibility criteria, less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain
deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a
securitization, investments in a banking organization’s own capital instruments and investments in the
capital of unconsolidated financial institutions (above certain levels). The deductions phase in from 2015
through 2019.
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To
derive the risk included in the balance sheet, one of several risk weights is applied to different balance
sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The
capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Some of the risk weightings have been changed effective
January 1, 2015.
The new rules also place restrictions on the payment of capital distributions, including dividends,
and certain discretionary bonus payments to executive officers if the company does not hold a capital
conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its
minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and
its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The capital
conservation buffer phases in starting on January 1, 2016, at .625 percent. The implementation of Basel
III is not expected to have a material impact on First Defiance’s or First Federal’s capital ratios.
The following table sets forth the amount and percentage level of regulatory capital of First
Federal at December 31, 2014, and the amount by which it exceeded the minimum capital requirements
in effect at that date. (Dollars in Thousands):
- 21 -
- 21 -
Tier 1 Capital (1)
Consolidated
First Federal
Tier 1 Capital (to Risk
Weighted Assets) (1)
Consolidated
First Federal
Total Capital (to Risk
Weighted Assets) (1)
Consolidated
First Federal
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$250,847
$238,221
11.89%
11.31%
$84,397
$84,278
$250,847
$238,221
13.89%
13.21%
$72,213
$72,136
$273,441
$260,791
15.15%
14.46%
$144,426
$144,272
4.0%
4.0%
4.0%
4.0%
8.0%
8.0%
N/A
$105,347
N/A
$108,204
N/A
5.0%
N/A
6.0%
N/A
$180,340
N/A
10.0%
(1) Core capital is computed as a percentage of adjusted total assets of $2.11 billion and $2.11 billion for
consolidated and First Federal, respectively. Risk-based capital is computed as a percentage of total risk-
weighted assets of $1.81 billion and $1.80 billion for consolidated and First Federal, respectively.
Prompt Corrective Action - The federal banking agencies have established a system of “prompt
corrective action” to resolve certain problems of undercapitalized institutions. This system is based on
five capital level categories for insured depository institutions: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The
federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a
bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank
within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator
determines, with the concurrence of the FDIC, that other action would better achieve regulatory
purposes. Banking operations otherwise may be significantly affected depending on a bank's capital
category. For example, a bank that is not "well capitalized" generally is prohibited from accepting
brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and
the holding company of any undercapitalized depository institution must guarantee, in part, specific
aspects of the bank's capital plan for the plan to be acceptable.
Effective January 1, 2015, in order to be "well-capitalized," a financial institution must have a
common equity tier 1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a Tier 1 risk-
based capital of at least 8% and a leverage ratio of at least 5%, and the institution must not be subject to
any written agreement, order, capital directive or prompt corrective action directive to meet and maintain
a specific capital level for any capital measure. As of December 31, 2014, First Federal met the ratio
requirements in effect at that date to be deemed "well-capitalized." See Note 17 of the Notes to
Consolidated Financial Statements which is incorporated herein by reference. Management of the
Company believes First Federal also meets the capital requirements to be deemed “well-capitalized”
under the new guidelines.
Dividends - Dividends paid by First Federal to First Defiance are subject to various regulatory
restrictions. First Federal paid $21.0 million in dividends to First Defiance in 2014 and $3.0 million in
2013. First Federal can initiate dividend payments equal to its net profits (as defined by statute) for 2013
and 2014 plus 2015 net profits. During 2015, First Federal can declare dividends in the amount of $23.1
million from its earnings in 2013 and 2014 and from any of its 2015 net profits to First Defiance. First
Insurance paid $1.2 million in dividends to First Defiance in 2014 and $1.5 million in dividends in 2013.
First Defiance’s ability to pay dividends to its shareholders is primarily dependent on the ability
of the Subsidiaries to pay dividends to First Defiance. The Federal Reserve expects First Defiance to
serve as a source of strength for First Federal and may require First Defiance to retain capital for further
investment in First Federal, rather than pay dividends to First Defiance shareholders. Payment of
dividends by First Federal may be restricted at any time at the discretion of its applicable regulatory
authorities, if they deem such dividends to constitute an unsafe or unsound banking practice. These
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provisions could have the effect of limiting First Defiance's ability to pay dividends on its common
shares.
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 5630, 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’s
(“FRB”) 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 and First
Insurance are affiliates of First Federal.
Holding Company Regulation - First Defiance is a unitary thrift holding company and is
subject to the Federal Reserve 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 Federal Reserve, 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.
Deposit Insurance - Substantially all of the deposits of First Federal are insured up to applicable
limits by the Deposit Insurance Fund of the FDIC, and First Federal is assessed deposit insurance
premiums to maintain the Deposit Insurance Fund. Insurance premiums for each insured institution are
determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the
institution’s primary federal regulator and other information deemed by the FDIC to be relevant to the
risk posed to the Deposit Insurance Fund by the institution. The assessment rate is then applied to the
amount of the institution’s deposits to determine the institution’s insurance premium.
The FDIC issued final rules effective April 2011 that changed the deposit insurance assessment
base, as required by the Dodd-Frank Act. As adopted, the final rule changed the deposit insurance
assessment base from domestic deposits to average assets less average tangible equity. The final rule also
set a target size for the Deposit Insurance Fund at 2% of insured deposits and implements a lower
assessment rate schedule when the fund reaches 1.15% and, in lieu of dividends, provides for a lower rate
schedule when the reserve ratio reaches 2% and 2.5%. The final rule went into effect beginning with the
second quarter of 2011. The change to the assessment base and assessment rates, as well as the Deposit
Insurance Fund restoration time frame, has lowered First Defiance’s deposit insurance assessment.
As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by,
federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to the Deposit Insurance
Fund. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance
of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging
in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written
agreement entered into with the FDIC. The management of First Federal does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
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Recent Developments
Impact of Legislation - Over the last several years, Congress and the U.S. Department of the
Treasury have enacted legislation and taken actions to address the disruptions in the financial system,
declines in the housing market, and the overall regulation of financial institutions and the financial
system. In this regard, the 2010 Dodd-Frank Act, includes provisions affecting large and small financial
institutions alike, including several provisions that profoundly affect the regulation of community banks,
thrifts, and bank and thrift holding companies, such as First Defiance. The Dodd-Frank Act relaxed rules
regarding interstate branching, allows financial institutions to pay interest on business checking accounts,
changed the scope of federal deposit insurance coverage, imposed new capital requirements on bank and
thrift holding companies, and imposed limits on debit card interchange fees charged by issuer banks
(commonly known as the Durbin Amendment).
The Dodd-Frank Act also established the CFPB as an independent bureau within the Federal
Reserve, which has broad authority to regulate consumer financial products and services and entities
offering such products and services, including banks.
The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will
concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required
under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination,
abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage
underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB
recently published numerous final regulations impacting the mortgage industry, including rules related to
ability-to-pay, mortgage servicing, and mortgage loan originator compensation and more regulations are
anticipated. First Defiance cannot predict the content of the final CFPB and other federal agency
regulations or the impact they might have on First Defiance’s financial results. The CFPB’s authority
over mortgage lending, and its authority to change regulations adopted in the past by other regulators, or
to rescind or ignore past regulatory guidance, could increase First Defiance’s compliance costs and
litigation exposure.
Volcker Rules - On December 10, 2013, the Board of Governors of the Federal Reserve System,
the OCC, the FDIC, the Securities and Exchange Commission, and the Commodity Futures Trading
Commission (“Regulators”) adopted the final version of the Volcker Rule (“Final Volcker Rule”). The
Final Volcker Rule restricts United States banks from making certain kinds of speculative investments
that do not benefit their customers. The Final Volcker Rule’s purpose is to put in place, as mandated
under Section 619 of the Dodd-Frank Act, regulations to help avoid the financial crisis that occurred
during the recent past. The Final Volcker Rule is intended to effectively reduce risks posed to banking
entities by proprietary trading activities and investments in or relationships with covered funds while
permitting banking entities to continue to provide client-oriented financial services that are critical to
capital generation and liquid markets.
On January 14, 2014, the Regulators issued an interim final rule (“Interim Final Volcker Rule”)
regarding the treatment of certain collateralized debt obligations backed by trust preferred securities
(“TruPS-backed CDOs”) under the Final Volcker Rule implementing Section 619 of the Dodd-Frank Act.
The Interim Final Volcker Rule, which does not technically amend the Final Volcker Rule but will
operate as a “companion rule” to the Final Volcker Rule, specifies that the Final Volcker Rule’s covered
fund restrictions do not apply to the ownership by a banking entity of an interest in, or sponsorship of,
any issuer of TruPS-backed CDOs if certain conditions are met. Contemporaneously with the Regulators
release of the Interim Final Volcker Rule, the Regulators issued a non-exclusive list of issuers of TruPS-
backed CDOs that meet the requirements of the Interim Final Volcker Rule. The Interim Final Volcker
Rule provides that a banking entity “may rely” on this list.
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First Defiance’s management team continues to actively monitor the implementation of the
Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the
business, financial condition, and results of operations of First Defiance. However, the ultimate effect of
the Dodd-Frank Act on the financial services industry in general, and First Defiance in particular,
continues to be uncertain.
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Item 1A. Risk Factors
The risks listed below present risks that could have a material impact on the Company’s financial
condition, results of operations, or business. The risks and uncertainties described below are the not the
only ones facing the Company. Additional risks and uncertainties that management is not aware of or
focused on or that management currently deems immaterial may also impair the Company’s business
operations.
Economic and financial market conditions may adversely affect First Defiance’s operations and
financial condition.
In recent years, economic growth and business activity across a wide range of industries and
regions in the U.S. has been slow and uneven. Furthermore, there are continuing concerns related to the
level of United States government debt and fiscal actions that may be taken to address that debt. There
can be no assurance that economic conditions will continue to improve, and these conditions could
worsen. In addition, ongoing federal budget negotiations, the implementation of the employer mandate
under the Patient Protection and Affordable Care Act and the level of United States debt may have a
destabilizing effect on financial markets.
First Defiance’s financial performance generally, and in particular the ability of borrowers to pay
interest on and repay principal of outstanding loans and the value of collateral securing those loans, as
well as demand for loans and other products and services First Defiance offers, is highly dependent upon
the business environment in the markets where the Company operates, mainly in the State of Ohio and in
the Great Lake Region. A favorable business environment is generally characterized by, among other
factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and
investor confidence, and strong business earnings. Unfavorable or uncertain economic and market
conditions can be caused by declines in economic growth, business activity or investor or business
confidence; limitations on the availability or increases in the cost of credit and capital; increases in
inflation or interest rates; high unemployment, natural disasters; or a combination of these or other
factors.
Overall, during recent years, the business environment has been adverse for many households
and businesses in the United States and globally. While economic conditions in the State of Ohio, the
United States and worldwide have shown signs of improvement, there can be no assurance that this
improvement will continue. Economic pressure on consumers and uncertainty regarding continuing
economic improvement may result in changes in consumer and business spending, borrowing and savings
habits. Such conditions could have a material adverse effect on the credit quality of the Company’s loans
and First Defiance’s results of operations and financial condition.
First Defiance’s loan portfolio includes a concentration of commercial real estate loans and
commercial loans, which involve risks specific to real estate value and the successful operations of
these businesses.
At December 31, 2014, First Federal’s portfolio of commercial real estate loans totaled $840.5
million, or approximately 49.8% of total loans. First Federal’s commercial real estate loans typically
have higher principal amounts than residential real estate loans, and many of our commercial real estate
borrowers have more than one loan outstanding. As a result, an adverse development on one loan can
expose First Defiance to greater risk of loss on other loans. Additionally, repayment of the loans is
generally dependent, in large part, on sufficient income from the properties securing the loans to cover
operating expenses and debt service. Economic conditions and events outside of the control of the
borrower or lender could negatively impact the future cash flow and market values of the affected
properties.
At December 31, 2014, First Federal’s portfolio of commercial loans totaled $399.7 million, or
approximately 23.7% of total loans. Commercial loans generally expose First Defiance to a greater risk
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of nonpayment and loss than commercial real estate or residential real estate loans since repayment of
such loans often depends on the successful operations and income stream of the borrowers. First
Federal’s commercial loans are primarily made based on the identified cash flow of the borrower and
secondarily on the underlying collateral provided by the borrower such as accounts receivable, inventory,
machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for
the repayment of these loans may be substantially dependent on the ability of the borrower to collect
amounts due from its customers. The collateral securing other loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the business. Credit support
provided by the borrower for most of these loans and the probability of repayment is based on the
liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.
First Defiance targets its business lending towards small and medium-sized businesses, many of
which have fewer financial resources than larger companies and may be more susceptible to economic
downturns. If general economic conditions negatively impact these businesses, First Defiance’s results of
operations and financial condition may be adversely affected.
Increases to the allowance for loan losses may cause First Defiance’s earnings to decrease.
First Federal makes a number of assumptions and judgments about the collectability of its loan
portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets
serving as collateral for the repayment of loans. In determining the amount of the allowance for loan
losses, First Federal relies on loan quality reviews, past loss experience, and an evaluation of economic
conditions, among other factors. If its assumptions prove to be incorrect, First Federal’s allowance for
loan losses may not be sufficient to cover actual losses, resulting in additions to the allowance. In
addition, bank regulators periodically review First Federal’s allowance and may require First Federal to
increase its allowance. Material additions to the allowance and any loan losses that exceed First Federal’s
reserves would materially adversely affect First Defiance’s results of operations and financial condition.
Changes in interest rates can adversely affect First Defiance’s profitability
First Defiance’s earnings and cash flows are largely dependent upon its net interest income. Net
interest income is the difference between interest income earned on interest-earning assets such as loans
and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed
funds. Interest rates are highly sensitive to many factors that are beyond First Defiance’s control,
including general economic conditions and policies of various governmental and regulatory agencies and,
in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in
interest rates, could influence not only the interest First Defiance receives on loans and securities and the
amount of interest it pays on deposits and borrowings, but such changes could also affect (i) First
Defiance’s ability to originate loans and obtain deposits, (ii) the fair value of First Defiance’s financial
assets and liabilities, and (iii) the average duration of certain assets and liabilities. If the interest rates
paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans
and other investments, First Defiance’s net interest income, and therefore earnings, could be adversely
affected. Earnings could also be adversely affected if the interest rates received on loans and other
investments fall more quickly than the interest rates paid on deposits and other borrowings. Any
substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on
First Defiance’s results of operations and financial condition.
First Federal originates a significant amount of residential mortgage loans that it sells in the
secondary market. The origination of residential mortgage loans is highly dependent on the local real
estate market and the current interest rates. Increasing interest rates tend to reduce the origination of
loans for sale and consequently fee income, which First Defiance reports as mortgage banking income.
Conversely, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster
than anticipated. This causes the value of mortgage servicing rights on the loans sold to be lower than
originally anticipated. If this happens, First Defiance may be required to write down the value of its
mortgage servicing rights faster than anticipated, which will increase expense and lower earnings.
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Accelerated repayments on loans and mortgage backed securities could result in the reinvestment of
funds at lower rates than the loans or securities were paying.
Laws and regulations may affect First Defiance’s results of operations.
The earnings of financial institutions are affected by the regulations and policies of various
regulatory authorities, including the Federal Reserve, the OCC, the FDIC and the CFPB. The Federal
Reserve has extensive supervisory authority over the Company, affecting a comprehensive range of
matters relating to ownership and control of First Defiance’s shares, First Defiance’s acquisition of other
companies and businesses, permissible activities for the Company to engage in, maintenance of adequate
capital levels and other aspects of operations. These supervisory and regulatory powers are intended
primarily for the protection for First Defiance’s depositors and borrowers and the deposit insurance fund,
rather than First Defiance’s shareholders.
Comprehensive revisions to the regulatory capital framework were finalized by the FRB, the
OCC, and the FDIC in 2013 and 2014. The revised regulations change what qualifies as regulatory
capital, raises minimum requirements and introduces the concept of additional capital buffers. The need
to maintain more and higher quality capital as well as greater liquidity going forward could limit our
business activities, including lending, and our ability to expand, either organically or through
acquisitions. In addition, the new liquidity standards could require us to increase our holdings of highly
liquid short-term investments, thereby reducing our ability to invest in longer-term assets even if more
desirable from a balance sheet management perspective.
The laws and regulations applicable to the banking industry could change at any time. As a
result of ongoing challenges facing the U.S. economy in particular, the potential exists for new laws and
regulations, and bank regulatory agencies are expected to be active in responding to concerns and trends
identified in examinations. Increased regulation could increase First Defiance’s cost of compliance and
reduce its income to the extent that they limit the manner in which First Defiance may conduct business,
including its ability to offer new products, charge fees for specific products and services, obtain
financing, attract deposits, make loans and achieve satisfactory interest spreads.
First Defiance’s ability to meet cash flow needs on a timely basis at a reasonable cost may
adversely affect net income.
First Defiance’s principal sources of liquidity are local deposits and wholesale funding sources
such as FHLB advances, Federal Funds purchased, securities sold under repurchase agreements, and
brokered or other out-of-market certificate of deposit purchases. Also, First Defiance maintains a
portfolio of securities that can be used as a secondary source of liquidity. First Defiance’s access to
funding sources in amounts adequate to finance or capitalize its activities or on terms that are acceptable
could be impaired by factors that affect First Defiance directly or the financial services industry or
economy in general, such as further disruptions in the financial markets or negative views and
expectations about the prospects for the financial services industry.
Other possible sources of liquidity include the sale or securitization of loans, the issuance of
additional collateralized borrowings beyond those currently utilized with the FHLB, the issuance of debt
securities and the issuance of preferred or common securities in public or private transactions, or
borrowings from a commercial bank. First Defiance does not currently have any borrowings from a
commercial bank, but it has used them in the past.
Any decline in available funding could adversely impact our ability to originate loans, invest in
securities, meet our expenses, pay dividends to First Defiance’s shareholders, or fulfill obligations such
as repaying First Defiance’s borrowings or meeting deposit withdrawal demands, any of which could
have a material adverse impact on our liquidity, business, results of operations and financial condition.
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Competition affects First Defiance’s earnings.
First Defiance’s continued profitability depends on its ability to continue to effectively compete
to originate loans and attract and retain deposits. Competition for both loans and deposits is intense in
the financial services industry. The Company competes in its market area by offering superior service
and competitive rates and products. The type of institutions First Defiance competes with include large
regional commercial banks, smaller community banks, savings institutions, mortgage banking firms,
credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of
their size and ability to achieve economies of scale, certain of First Defiance’s competitors can offer a
broader range of products and services than the Company can offer. To stay competitive in its market
area, First Defiance may need to adjust the interest rates on its products to match rates of its competition,
which could have a negative impact on net interest margin.
The increasing complexity of First Defiance’s operations presents varied risks that could affect its
earnings and financial condition.
First Defiance processes a large volume of transactions on a daily basis and is exposed to
numerous types of risks related to internal processes, people and systems. These risks include, but are
not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized
transactions by employees, errors relating to transaction processing and systems, breaches of data
security and our internal control system and compliance with a complex array of consumer and safety
and soundness regulations. First Defiance could also experience additional loss as a result of potential
legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with
applicable laws and regulations.
First Defiance has established and maintains a system of internal controls that provides
management with information on a timely basis and allows for the monitoring of compliance with
operational standards. These systems have been designed to manage operational risks at an appropriate,
cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics,
and business practices are followed. Losses from operational risks may still occur, however, including
losses from the effects of operational errors.
Unauthorized disclosure of sensitive or confidential client or customer information, whether
through a breach of the Company’s computer systems or otherwise, could severely harm its
business.
Potential misuse of funds or information by First Defiance’s employees or by third parties could
result in damage to First Defiance’s customers for which First Defiance could be held liable, subject First
Defiance to regulatory sanctions and otherwise adversely affect First Defiance’s financial condition and
results of operations.
First Defiance’s employees handle a significant amount of funds, as well as financial and
personal information. Although First Defiance has implemented systems to minimize the risk of
fraudulent taking or misuse of funds or information, there can be no assurance that such systems will be
adequate or that a taking or misuse of funds or information by employees, by third parties who have
authorized access to funds or information, or by third parties who are able to access funds or information
without authorization will never occur. First Defiance could be held liable for such an event and could
also be subject to regulatory sanctions. First Defiance could also incur the expense of developing
additional controls to prevent future such occurrences. Although First Defiance has insurance to cover
such potential losses, First Defiance cannot provide assurance that such insurance will be adequate to
meet any liability. In addition, any loss of trust or confidence placed in First Defiance by our clients
could result in a loss of business, which could adversely affect our financial condition and results of
operations.
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First Defiance could suffer a material adverse impact from interruptions in the effective operation
of, or security breaches affecting, First Defiance’s computer systems.
First Defiance relies heavily on information systems to conduct our business and to process,
record, and monitor transactions. Risks to the system result from a variety of factors, including the
potential for bad acts on the part of hackers, criminals, employees and others. As one example, in recent
years, some banks have experienced denial of service attacks in which individuals or organizations flood
the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the
ability of the bank to process transactions. First Defiance is also at risk for the impact of natural
disasters, terrorism and international hostilities on its systems or for the effects of outages or other
failures involving power or communications systems operated by others. These risks also arise from the
same types of threats to businesses with which First Defiance deals.
Potential adverse consequences of attacks on First Defiance’s computer systems or other threats
include damage to First Defiance’s reputation, loss of customer business, litigation and increased
regulatory scrutiny, which might also result in financial loss and require additional efforts and expense to
attempt to prevent such adverse consequences in the future.
If First Defiance forecloses on collateral property and owns the underlying real estate, First
Defiance may be subject to the increased costs associated with the ownership of real property,
resulting in reduced income.
A significant portion of First Defiance’s loan portfolio is secured by real property. During the
ordinary course of business, First Defiance may foreclose on and take title to properties securing certain
loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties.
If hazardous or toxic substances are found, First Defiance may be liable for remediation costs, as well as
for personal injury and property damage.
In addition, when First Defiance forecloses on real property, the amount First Defiance realizes
after a default is dependent upon factors outside of First Defiance’s control, including, but not limited to,
economic conditions, neighborhood real estate values, interest rates, real estate taxes, operating expenses
of the mortgaged properties, zoning laws, governmental rules, regulations and fiscal policies, and acts of
God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and
maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating
real property may exceed the rental income earned from such property, and First Defiance may have to
sell the property at a loss. The foregoing expenditures could adversely affect First Defiance’s financial
condition and results of operations.
First Defiance’s business strategy includes planned growth. First Defiance’s financial condition
and results of operations could be negatively affected if First Defiance fails to grow or fails to
manage its growth effectively.
First Defiance’s ability to grow successfully will depend on a variety of factors, including the
continued availability of desirable business opportunities, its ability to integrate acquisitions and manage
growth and First Defiance’s ability to raise capital. There can be no assurance that growth opportunities
will be available.
First Defiance may acquire other financial institutions or parts of institutions in the future, open
new branches, and consider new lines of business and new products or services. Expansions of its
business would involve a number of expenses and risks, including:
• the time and costs associated with identifying and evaluating potential acquisitions or expansions
into new markets;
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• the potential inaccuracy of estimates and judgments used to evaluate the business and risks with
respect to target institutions;
• the time and costs of hiring local management and opening new offices;
• the delay between commencing making acquisitions or engaging in new activities and the
generation of profits from the expansion;
• First Defiance’s ability to finance an expansion and the possible dilution to existing
shareholders;
• the diversion of management’s attention to the expansion;
• management’s lack of familiarity with new market areas;
• the integration of new products and services and new personnel into First Defiance’s existing
business;
• the incurrence and possible impairment of goodwill associated with an acquisition and effects on
First Defiance’s results of operations; and
• the risk of loss of key employees and customers.
Failure to manage First Defiance’s growth effectively could have a material adverse effect on its
business, future prospects, financial condition or results of operations and could adversely affect First
Defiance’s ability to successfully implement its business strategy.
First Defiance’s ability to pay dividends is subject to regulatory limitations which, to the extent
First Defiance requires such dividends in the future, may affect its ability to pay dividends or
repurchase its stock.
As a savings and loan holding company, First Defiance is a separate legal entity from First
Federal and does not have significant operations of its own. Dividends from First Federal provide a
significant source of capital for First Defiance. The availability of dividends from First Federal is limited
by various statutes and regulations. The federal banking regulators require that insured financial
institutions and their holding companies should generally only pay dividends out of current operating
earnings. It is possible, depending upon the financial condition of First Federal and other factors, that the
OCC, as First Federal’s primary regulator, could assert that the payment of dividends or other payments
by First Federal are an unsafe or unsound practice. In the event First Federal is unable to pay dividends
to First Defiance, First Defiance may not be able to pay its obligations as they become due, repurchase its
stock, or pay dividends on its common stock. Consequently, the potential inability to receive dividends
from First Defiance could adversely affect First Defiance’s business, financial condition, results of
operations or prospects.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2014, First Federal conducted its business from its main office at 601 Clinton
Street, Defiance, Ohio, and thirty-two other full-service banking centers in northwest Ohio, northeast
Indiana and southeast Michigan and a loan production office in Columbus, Ohio. First Insurance
conducted its business from leased office space at 511 Fifth Street, Defiance, Ohio; 209 West Poe Road,
Bowling Green, Ohio; 926 East High Street, Bryan, Ohio; 1755 Indian Wood Circle, Maumee, Ohio and
4350 Navarre Ave, Oregon, Ohio.
In February 2014, First Federal opened its loan production office at 4501 Cemetery Road,
Hilliard, Ohio. This office is owned.
In August 2014, First Federal opened its branch at 9909 Illinois Road, Fort Wayne, Indiana. This
building is owned by First Federal.
In December 2014, First Insurance moved from 419 Fifth Street to 511 Fifth Street, Defiance,
Ohio. This office is leased.
First Defiance maintains its headquarters in the main office of First Federal at 601 Clinton Street,
Defiance, Ohio. Back-office operation departments, including information technology, loan processing
and underwriting, deposit processing, accounting and risk management are headquartered in an
operations center located at 25600 Elliott Road, Defiance, Ohio.
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The following table sets forth certain information with respect to the offices and other properties
of the Company at December 31, 2014
. See Note 9 to the Consolidated Financial Statements.
Description/address
Main Office, First Federal
601 Clinton St., Defiance, OH
Operations Center
25600 Elliott Rd., Defiance, OH
Mobile Banking
1011 W. Beecher St., Adrian, MI
Branch Offices, First Federal
204 E. High St., Bryan, OH
211 S. Fulton St., Wauseon, OH
625 Scott St., Napoleon, OH
1050 East Main St., Montpelier, OH
926 East High St., Bryan, OH
1800 Scott St., Napoleon, OH
1177 N. Clinton St., Defiance, OH
905 N. Williams St., Paulding, OH
201 E. High St., Hicksville, OH
3900 N. Main St., Findlay, OH
11694 N. Countyline St., Fostoria, OH
1226 W. Wooster, Bowling Green, OH
301 S. Main St., Findlay, OH
405 E. Main St., Ottawa, OH
124 E. Main St., McComb, OH
7591 Patriot Dr., Findlay, OH
417 W Dussell Dr., Maumee, OH
230 E. Second St., Delphos, OH
105 S. Greenlawn Ave., Elida, OH
2600 Allentown Rd., Lima, OH
22020 W. State Rt. 51, Genoa, OH
3426 Navarre Ave., Oregon, OH
1077 Louisiana Ave., Perrysburg, OH
2565 Shawnee Rd., Lima, OH
1595 Dupont Rd., Fort Wayne, IN
135 South Main St., Glandorf, OH
300 N. Main St., Adrian, MI
1701 W. Maumee St., Adrian, MI
211 W. Main St., Morenci, MI
539 S. Meridian, Hudson, MI
1449 W. Chicago Blvd., Tecumseh, MI
1200 North Main St., Bowling Green OH
9909 Illinois Rd, Fort Wayne, IN
4501 Cemetery Rd, Hilliard, OH
First Insurance Group
511 Fifth Street, Defiance, OH
209 West Poe Road, Bowling Green, OH
926 E. High Street, Bryan, OH
1755 Indian Wood Circle, Maumee, OH
4350 Navarre Ave, Oregon, OH
Leased/
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned, Land Lease
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned, Land Lease
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Net Book Valu
of Property
Deposits
(In Thousands)
$
4,268
$ 226,546
5,143
183
611
406
951
250
86
1,221
827
708
327
896
613
945
902
309
177
1,086
789
947
307
1,007
798
877
1,040
1,355
12
-
673
157
153
535
1,443
1,616
1,409
959
N/A
N/A
135,309
55,435
76,717
37,968
-
30,435
38,795
62,084
32,044
46,753
42,589
97,300
57,550
84,736
22,687
35,754
52,475
95,204
40,048
43,508
30,562
32,509
34,576
63,235
23,788
15,837
71,326
42,955
32,686
43,013
48,291
5,626
2,472
N/A
Leased
Leased
Leased
Leased
Leased
14
6
-
-
-
$ 34,006
N/A
N/A
N/A
N/A
N/A
$ 1,760,813
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Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings that are incidental to and occur 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. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol
“FDEF.” As of February 20, 2015, the Company had approximately 1,939 shareholders of record.
The table below shows the reported high and low sales prices of the common shares and cash
dividends declared per common share during the periods indicated in 2014 and 2013.
Year Ending
December 31, 2014
Low
High
Dividend
High
December 31, 2013
Low
Dividend
Quarter ended:
March 31
June 30
September 30
December 31
$ 28.23
29.00
29.00
35.70
$ 24.24
26.50
26.99
26.95
$0.15
0.15
0.15
0.175
$ 23.75
23.75
28.46
27.25
$ 18.42
20.80
22.49
23.31
$0.10
0.10
0.10
0.10
The line graph below compares the yearly percentage change in cumulative total shareholder return
on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the
SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31,
2009, and the reinvestment of all dividends are assumed. The performance graph represents past
performance and should not be considered to be an indication of future performance.
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Index
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
12/31/09
100.00
100.00
100.00
100.00
12/31/10
105.40
118.15
117.98
81.06
Period Ending
12/31/11
129.68
117.22
104.68
71.50
12/31/12
172.62
138.02
124.77
92.45
12/31/13
237.53
193.47
179.33
114.00
12/31/14
318.48
222.16
185.73
130.30
The following table provides information regarding First Defiance’s purchases of its common
shares during the fourth quarter period ended December 31, 2014:
Period
October 1 – October 31, 2014
November 1 – November 30, 2014
December 1 – December 31, 2014
Total
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
35,836
47,649
70,363
153,848
$27.98
30.16
31.36
$30.20
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs (1)
35,836
47,649
70,363
153,848
Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs
(2)
451,910
404,261
333,898
333,898
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(1) The reported shares were repurchased pursuant to First Defiance’s publicly announced stock repurchase
programs, which became effective September 30, 2013 and October 20, 2014. Up to 489,000 and 469,000
shares, respectively, were authorized to be purchased under the programs. There is no expiration date for
the October 20, 2014 program. During the fourth quarter 2014, the Company completed all 489,000 share
purchases that were authorized under its previously announced repurchased program in the Company’s
Form 8-K filed on September 30, 2013.
(2) The number of shares shown represents, as of the end of each period, the maximum number of shares of
common stock that may yet be purchased under publicly announced stock repurchase programs. The shares
may be purchased, from time to time, depending on market conditions.
The information set forth under the caption “Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters − Equity Compensation
Plans” of this Form 10-K is incorporated herein by reference.
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Item 6. Selected Financial Data
The following table is derived from the Company’s audited financial statements as of and for the
five years ended December 31, 2014. The following consolidated selected financial data should be read
in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes included elsewhere in this Form
10-K. The operating results of the acquired companies are included with the Company’s results of
operations since their respective dates of acquisition.
2010
$2,035,517
166,091
1,478,423
41,080
50,631
1,576,356
116,885
240,331
0.75
0.75
25.00
17.16
2014
As of and For the Year Ended December 31
2012
(Dollars in Thousands, Except Per Share Data)
2011
2013
Financial Condition:
Total assets
Investment securities
Loans receivable, net
Allowance for loan losses
Nonperforming assets (1)
Deposits and borrowers’ escrow balances
FHLB advances
Stockholders’ equity
Share Information:
$ 2,178,952
239,634
1,622,020
24,766
30,311
1,763,122
21,544
279,505
$ 2,137,148
198,557
1,555,498
24,950
33,706
1,737,311
22,520
272,147
$ 2,046,948
194,609
1,498,546
26,711
36,375
1,668,945
12,796
258,128
$2,068,190
233,580
1,453,822
33,254
42,956
1,597,643
81,841
278,127
Basic earnings per share
Diluted earnings per share
Book value per common share
Tangible book value per common share
Cash dividends per common share
Dividend payout ratio
Weighted average diluted shares outstanding
Shares outstanding end of period
2.55
2.44
30.17
23.25
0.63
2.28
2.19
27.91
21.22
0.40
25.00%
9,975
9,235
17.45%
10,171
9,720
1.86
1.81
26.44
19.63
0.20
10.75%
9,998
9,729
1.44
1.42
24.74
17.78
0.05
-
3.47% NM
8,153
8,118
9,540
9,726
Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before tax
Federal income tax
Net Income
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread (2)
Net interest margin (2)
Ratio of operating expense to
average total assets
Efficiency ratio (3)
Capital Ratios:
Equity to total assets at end of period
Tangible common equity to tangible assets
at end of period
Average equity to average assets
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period (1)
Allowance for loan losses to total
loans*
Net charge-offs to average loans
$
76,248
6,559
69,689
1,117
31,641
66,758
33,455
9,163
24,292
1.12%
8.78%
3.57%
3.68%
3.09%
65.32%
12.83%
10.09%
12.79%
1.39%
1.50%
0.08%
$
$
$
$
74,781
7,170
67,611
1,824
30,778
65,052
31,513
9,278
22,235
1.08%
8.39%
3.65%
3.76%
80,943
11,937
69,006
10,924
34,374
65,780
26,676
8,012
18,664
0.90%
6.99%
3.64%
3.81%
87,067
17,186
69,881
12,434
27,516
62,764
22,199
6,665
15,534
0.75%
5.89%
3.69%
3.88%
3.16%
64.81%
3.19%
63.93%
3.05%
63.62%
95,865
25,702
70,163
23,177
27,590
63,463
11,113
3,005
8,108
0.39%
3.40%
3.68%
3.89%
3.09%
63.89%
12.73%
12.61%
13.45%
11.81%
9.94%
12.92%
9.64%
12.95%
8.65%
12.82%
7.06%
11.62%
1.58%
1.58%
0.23%
1.78%
1.75%
1.18%
2.08%
2.24%
1.41%
2.49%
2.70%
1.21%
(1)
Nonperforming assets consist of non-accrual loans that are contractually past due 90 days or more and real estate, mobile homes
and other assets acquired by foreclosure or deed-in-lieu thereof.
(2)
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-
earning assets. 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%.
(3)
Efficiency ratio represents non-interest expense divided by the sum of tax-equivalent net interest income plus non-interest income,
excluding securities gain or losses, net.
* Total loans are net of undisbursed loan funds and deferred fees and costs.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Annual Report on Form 10-K that are not statements of
historical fact constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (“Act”), notwithstanding that such statements are not specifically
identified as such. In addition, certain statements may be contained in the Company’s future filings with
the SEC, in press releases, and in oral and written statements made by or with the approval of the
Corporation that are not statements of historical fact and constitute forward-looking statements within the
meaning of the Act. Examples of forward-looking statements include, but are not limited to:
(i) projections of revenues, expenses, income or loss, earnings or loss per common share, the payment or
nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives
and expectations of First Defiance or its management or Board of Directors, including those relating to
products or services; (iii) statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”,
“continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ
materially from those in such statements. Factors that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not limited to:
• Local, regional, national and international economic conditions and the impact they may have on
the Company and its customers and the Company’s assessment of that impact.
• Volatility and disruption in national and international financial markets.
• Government intervention in the U.S. financial system.
• Changes in the level of non-performing assets and charge-offs.
• Changes in estimates of future reserve requirements based upon the periodic review thereof
under relevant regulatory and accounting requirements.
• The effects of and changes in trade and monetary and fiscal policies and laws, including the
interest rate policies of the Federal Reserve Board.
•
Inflation, interest rate, securities market and monetary fluctuations.
• Political instability.
• Acts of God or of war or terrorism.
• The timely development and acceptance of new products and services and perceived overall
value of these products and services by users.
• Changes in consumer spending, borrowing and saving habits.
• Changes in the financial performance and/or condition of the Company’s borrowers.
• Technological changes including core system conversions.
• Acquisitions and integration of acquired businesses.
• The ability to increase market share and control expenses.
• Changes in the competitive environment among financial holding companies and other financial
service providers.
• The effect of changes in laws and regulations (including laws and regulations concerning taxes,
banking, securities and insurance) with which the Company and the subsidiaries must comply.
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• The effect of changes in accounting policies and practices, as may be adopted by the regulatory
agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting
Standards Board and other accounting standard setters.
• The costs and effects of legal and regulatory developments including the resolution of legal
proceedings or regulatory or other governmental inquiries and the results of regulatory
examinations or reviews.
• Greater than expected costs or difficulties related to the integration of new products and lines of
business.
• The Company’s success at managing the risks involved in the foregoing items.
Forward-looking statements speak only as of the date on which such statements are made. The
Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the occurrence of
unanticipated events.
The following section presents information to assess the financial condition and results of
operations of First Defiance. This section should be read in conjunction with the consolidated financial
statements and the supplemental financial data contained elsewhere in this Annual Report on Form 10-K.
Overview
First Defiance is a unitary thrift holding company that conducts business through its subsidiaries,
First Federal, First Insurance and First Defiance Risk Management.
First Federal is a federally chartered stock savings bank that provides financial services to
communities based in northwest Ohio, northeast Indiana, and southeastern Michigan where it operates 33
full service banking centers in twelve northwest Ohio counties, one northeast Indiana county, and one
southeastern Michigan county. First Federal operates one loan production office in one central Ohio county.
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 and wealth management services through its extensive branch network.
First Insurance sells a variety of property and casualty, group health and life and individual
health and life insurance products. First Insurance is an insurance agency that does business in the
Defiance, Bryan, Bowling Green, Maumee and Oregon, Ohio areas.
First Defiance Risk Management is a wholly owned insurance company subsidiary of the
Company to insure the Company and its subsidiaries against certain risks unique to the operations of the
Company and for which insurance may not be currently available or economically feasible in today’s
insurance marketplace. First Defiance Risk Management pools resources with several other similar
insurance company subsidiaries of financial institutions to spread a limited amount of risk among
themselves. First Defiance Risk Management was incorporated on December 20, 2012.
Financial Condition
Assets at December 31, 2014 totaled $2.18 billion compared to $2.14 billion at December 31,
2013, an increase of $41.8 million or 2.0%. Cash and cash equivalents decreased $66.4 million to $112.9
million at December 31, 2014 from $179.3 million at December 31, 2013. The increase in assets was due
to an increase in the deposit base, net loans and securities as of December 31, 2014 somewhat offset by a
decrease in interest-bearing deposits.
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Securities
The securities portfolio increased $41.1 million to $239.6 million at December 31, 2014. The
2014 activity in the portfolio included $70.1 million of purchases, $2.9 million of amortization and
maturities, $17.9 million of principal pay-downs and $14.9 million of securities being sold. There was a
net increase of $5.8 million in market value on available-for-sale securities. For additional information
regarding First Defiance’s investment securities see Note 5 to the financial statements.
Loans
Loans receivable, net of undisbursed loan funds and deferred fees and costs, increased $66.3
million to $1.65 billion at December 31, 2014. For more details on the loan balances, see Note 7 – Loans
Receivable in the Notes to the Financial Statements.
The majority of First Defiance’s non-residential real estate and commercial loans are to small
and mid-sized businesses. The combined commercial, non-residential real estate and multi-family real
estate loan portfolios totaled $1.24 billion and $1.21 billion at December 31, 2014 and 2013,
respectively, and accounted for approximately 73.6% and 74.9% of First Defiance’s loan portfolio at the
end of those respective periods. First Defiance believes it has been able to establish itself as a leader in
its market area in the commercial and commercial real estate lending area by hiring experienced lenders
and providing a high level of customer service to its commercial lending clients.
The one-to-four family residential portfolio totaled $206.4 million at December 31, 2014,
compared with $195.8 million at the end of 2013. At the end of 2014, those loans comprised 12.2% of
the total loan portfolio, up from 12.1% at December 31, 2013.
Construction loans, which include one-to-four family and commercial real estate properties,
increased to $112.4 million at December 31, 2014 compared to $86.1 million at December 31, 2013.
These loans accounted for approximately 6.7% and 5.3% of the total loan portfolio at December 31, 2014
and 2013, respectively.
Home equity and home improvement loans increased to $111.8 million at December 31, 2014,
from $106.9 million at the end of 2013. At the end of 2014, those loans comprised 6.6% of the total loan
portfolio, flat with December 31, 2013.
Consumer finance and mobile home loans were $15.5 million at December 31, 2014, down from
$16.9 million at the end of 2013. These loans comprised just 0.9% and 1.1% of the total portfolio at
December 31, 2014 and 2013, respectively.
In order to properly assess the collateral dependent loans included in its loan portfolio, the
Company has established policies regarding the monitoring of the collateral underlying such loans. The
Company requires an appraisal that is less than one year old for all new collateral dependent real estate
loans, and all renewed collateral dependent real estate loans where significant new money is extended.
The appraisal process is handled by the Credit Department, which selects the appraiser and orders the
appraisal. First Defiance’s loan policy prohibits the account officer from talking or communicating with
the appraiser to insure that the appraiser is not influenced by the account officer in any way in making
their determination of value.
First Federal generally does not require updated appraisals for performing loans unless
significant new money is requested by the borrower.
When a collateral dependent loan is downgraded to classified status, First Federal reviews the
most current appraisal on file and if necessary, based on First Federal’s assessment of the appraisal, such
as age, market, etc. First Federal will discount this amount to a more appropriate current value based on
inputs from lenders and realtors. This amount may then be discounted further by First Federal’s
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- 40 -
estimation of the selling costs. In most instances, if the appraisal is more than twelve to fifteen months
old, a new appraisal may be required. Finally, First Federal assesses whether there is any collateral short
fall, taking into consideration guarantor support and liquidity, and determines if a charge off is necessary.
When a collateral dependent loan moves to non-performing status, First Federal generally gets a
new third party appraisal and charges the loan down appropriately based upon the new appraisal and an
estimate of costs to liquidate the collateral. All properties that are moved into the Other Real Estate
Owned (“OREO”) category are supported by current appraisals, and the OREO is carried at the lower of
cost or fair value, which is determined based on appraised value less First Federal’s estimate of the
liquidation costs.
First Federal does not adjust any appraisals upward without written documentation of this
valuation change from the appraiser. When setting reserves and charge offs on classified loans, appraisal
values may be discounted downward based upon First Federal’s experience with liquidating similar
properties.
All loans over 90 days past due and/or on non-accrual are classified as non-performing loans.
Non-performing status automatically occurs in the month in which the 90-day delinquency occurs.
As stated above, once a collateral dependent loan is identified as non-performing, First Federal
generally gets an appraisal.
Appraisals are received within approximately 60 days after they are requested. The First Federal
Loan Loss Reserve Committee reviews the amount of each new appraisal and makes any necessary
charge off decisions at its meeting prior to the end of each quarter.
Any partially charged-off collateral dependent loans are considered non-performing, and as such,
would need to show an extended period of time with satisfactory payment performance as well as cash
flow coverage capability supported by current financial statements before First Federal will consider an
upgrade to performing status. First Federal may consider moving the loan to accruing status after
approximately six months of satisfactory payment performance.
For loans where First Federal determines that an updated appraisal is not necessary, other means
are used to verify the value of the real estate, such as recent sales of similar properties on which First
Federal had loans as well as calls to appraisers, brokers, realtors and investors. First Federal monitors
and tracks its loan to value quarterly to determine accuracy and any necessary charge offs. Based on
these results, changes may occur in the processes used.
Loan modifications constitute a troubled debt restructuring (“TDR”) if First Federal for
economic or legal reasons related to the borrower’s financial difficulties grants a concession to the
borrower that it would not otherwise consider. For loans that are considered Troubled Debt
Restructurings, First Federal either computes the present value of expected future cash flows discounted
at the original loan’s effective interest rate or it may measure impairment based on the fair value of the
collateral. For those loans measured for impairment utilizing the present value of future cash flows
method, any discount is carried as a reserve in the allowance for loan and lease losses. For those loans
measured for impairment utilizing the fair value of the collateral, any shortfall is charged off. As of
December 31, 2014 and December 31, 2013, First Federal Bank had $24.7 million and $27.6 million,
respectively, of loans that were still performing and which were classified as TDRs.
Allowance for Loan Losses
The allowance for loan losses represents management’s assessment of the estimated probable
incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy
of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to
economic conditions, changes in interest rates and the effect of such changes on collateral values and
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borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and
non-performing loan balances. The allowance for loan losses is a material estimate that is susceptible to
significant fluctuation and is established through a provision for loan losses based on management’s
evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring
procedures, the Company utilizes an outside party to conduct an independent loan review of all
commercial loan and commercial real estate loan relationships that exceed $5.0 million of aggregate
exposure and all watchlist relationships that exceed $500,000 of aggregate exposure over an annual
period. Management utilizes the results of this outside loan review to assess the effectiveness of its
internal loan grading system as well as to assist in the assessment of the overall adequacy of the
allowance for loan losses associated with these types of loans.
The provision for loan losses is determined by management as the amount to be added to the
allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level
which, in management’s best estimate, is necessary to absorb incurred credit losses within the existing
loan portfolio in the normal course of business. The allowance for loan loss is made up of two basic
components. The first component is the specific allowance in which the company sets aside reserves
based on the analysis of individual credits that are cash flow dependent, yet there is a discount between
the present value of the future cash flows and the carrying value. This was $1.3 million at December 31,
2014. The second component is the general reserve. The general reserve is used to record loan loss
reserves for groups of homogenous loans in which the Company estimates the losses incurred in the
portfolios based on quantitative and qualitative factors. Due to the uncertainty of risks in the loan
portfolio, the Company’s judgment regarding the amount of the allowance necessary to absorb loans
losses is approximate.
Due to regulatory guidance, the Company no longer carries specific reserves on collateral
dependent loans, and instead usually charges off any shortfall. First Federal analyzes all loans on its
classified and special mention lists at least quarterly and makes judgments about the risk of loss based on
the cash flow of the borrower, the value of any collateral and the financial strength of any guarantor in
determining the amount of impairment of individual loans and the charge off to be taken.
For purpose of the general reserve analysis, the loan portfolio is stratified into nine different loan
pools based on loan type and by market area to allocate historic loss experience. The loss experience
factor applied to the non-impaired loan portfolio was based upon historical losses of the most recent
weighted rolling twelve quarters ending December 31, 2014.
The stratification of the loan portfolio resulted in a quantitative general allowance of $7.8 million
at December 31, 2014 compared to $11.2 million at December 31, 2013. The decrease in the quantitative
allowance was due to a decrease in the historical loss factors relating to commercial, commercial real
estate, residential and consumer loans.
In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide
additional general reserves on the non-impaired loan portfolio for various factors. The overall qualitative
factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative
factors: economic, environment and risk.
ECONOMIC
1)
2)
Changes in international, national and local economic business conditions and
developments, including the condition of various market segments.
Changes in the value of underlying collateral for collateral dependent loans.
ENVIRONMENT
3)
4)
Changes in the nature and volume in the loan portfolio.
The existence and effect of any concentrations of credit and changes in the level
of such concentrations.
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RISK
5)
6)
7)
8)
9)
Changes in lending policies and procedures, including underwriting standards
and collection, charge-off and recovery practices.
Changes in the quality and breadth of the loan review process.
Changes in the experience, ability and depth of lending management and staff.
Changes in the trends of the volume and severity of delinquent and classified
loans, and changes in the volume of non-accrual loans, trouble debt
restructuring, and other loan modifications.
Changes in the political and regulatory environment.
The qualitative analysis at December 31, 2014 indicated a general reserve of $15.7 million
compared with $12.3 million at December 31, 2013. Management reviews the overall economic,
environmental and risk factors quarterly and determines appropriate adjustments to these sub-factors
based on that review.
The economic factors for most loan segments were decreased in 2014 primarily due to the results
of two items: the continued strength in the regional and national economy, and continued improvement in
unemployment rates in the Northwest Ohio and adjoining market counties in Indiana and Michigan
relative to the same period in 2013.
The environmental factors have increased in 2014, reflecting increases in the residential,
commercial, construction and commercial real estate during the year primarily due to: the significant
growth in balances achieved amidst highly competitive conditions on pricing and terms and the continued
growth in our new Business Banking initiative, and balances generated from the expansion into the
Columbus market through a new loan production office.
Environmental factors also increased due to changes in lending management and staff. Recent
changes to staff include the retirement of First Federal’s President and the departures of the Credit
Department Manager and the Senior Lender for the Southern market, all key positions contributing to the
credit quality of the bank. Appropriate organizational changes have been implemented to address these
personnel changes with the appointment of a new Community Banking President, the promotion of an
experienced credit analyst to the manager role and the initiation of a recruiting effort to fill the vacant
lender position.
The risk factors for residential, commercial and commercial real estate have increased in 2014,
even though the overall levels of non-performing assets reflect a continued improvement from 2013,
because these levels remain elevated compared to the Company’s peers. In addition, management has
given significant consideration to the changes to the historical loss factors over the course of the year.
The three-year rolling average has led to reductions in the quantitative factors that management believes
to be outpacing the overall reduction of risk in the loan portfolio. While recent experience in net losses
has clearly improved, management has quantified the difference between a three-year loss look back and
a four-year loss look back and has concluded that an adjustment to the qualitative factors for the
difference is appropriate at this time.
First Defiance’s general reserve percentages for main loan segments not otherwise classified
ranged from 0.30% for construction loans to 1.64% for commercial loans.
As a result of the quantitative and qualitative analysis, along with the change in specific reserves,
the Company’s provision for loan losses for 2014 was $1.1 million compared to $1.8 million for 2013.
The allowance for loan losses was $24.8 million at December 31, 2014 and $25.0 million at December
31, 2013 and represented 1.50% and 1.58% of loans, net of undisbursed loan funds and deferred fees and
costs, respectively. That decrease was mainly the result of the lower quantitative factors driven by lower
charge offs and improvement in overall credit risk profile as well as the overall higher balance of loans.
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The pace of the decline in real estate values has slowed and in some markets has stabilized. While some
collateral dependent loans no longer have enough collateral value to support the outstanding balance,
Management believes it has processes in place to identify and assess market values. Management has
expanded its credit monitoring functions even further beyond its traditionally strong focus. Additional
asset review functions and more delinquent loan reporting requirements have been added to assist in this
monitoring. Management will continually review credit concentrations by industry and has placed lower
limits on lending within certain types of loan categories. Management has also segmented the
commercial real estate portfolio to track the general performance of these segments to further refine the
predictive process of identifying potential problem loans. The provision was offset by charge offs of $4.9
million and recoveries of $3.6 million resulting in a decrease to the overall allowance for loan loss of
$184,000. In management’s opinion, the overall allowance for loan losses of $24.8 million as of December
31, 2014 is adequate.
Management also assesses the value of real estate owned as of the end of each accounting period
and recognizes write-downs to the value of that real estate in the income statement if conditions dictate.
In 2014, First Defiance recorded real estate owned write-downs that totaled $251,000. These amounts
were included in other non-interest expense. Management believes that the values recorded at December
31, 2014 for real estate owned and repossessed assets represent the realizable value of such assets.
Total classified loans decreased to $47.3 million at December 31, 2014, compared to $55.6
million at December 31, 2013.
First Defiance’s ratio of allowance for loan losses to non-performing loans was 102.6% at
December 31, 2014 compared with 89.6% at December 31, 2013. Management monitors collateral values
of all loans included on the watch list that are collateral dependent and believes that allowances for those
loans at December 31, 2014 are appropriate.
At December 31, 2014, First Defiance had total non-performing assets of $30.3 million,
compared to $33.7 million at December 31, 2013. Non-performing assets include loans that are 90 days
past due, real estate owned and other assets held for sale.
The decrease in non-performing loans between December 31, 2013 and December 31, 2014 is in
commercial loans. The balance of commercial non-performing loans was $3.3 million higher at
December 31, 2013 compared to December 31, 2014.
Non-performing loans in the single-family residential, non-residential and multi-family
residential real estate and commercial loan categories represent 1.61%, 1.81% and 1.25% of the total
loans in those categories respectively at December 31, 2014 compared to 1.67%, 1.93% and 2.14%
respectively for the same categories at December 31, 2013. Management believes that the current
allowance for loan losses is appropriate and that the provision for loan losses recorded in 2014 is
consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.
First Federal’s Asset Review Committee meets monthly to review the status of work-out strategies
for all criticized relationships, which include all non-accrual loans. Based on such factors as anticipated
collateral values in liquidation scenarios, cash flow projections, assessment of net worth of guarantors and
all other factors which may mitigate risk of loss, the Asset Review Committee makes recommendations
regarding proposed charge-offs which are approved by the Senior Loan Committee or the Loan Loss
Reserve Committee.
For the twelve months ended and as of December 31, 2014, commercial real estate, which
represented 49.84% of total loans, accounted for a net recovery of 126.98% and 62.88% of nonaccrual
loans, and commercial loans, which represented 23.70% of total loans, accounted for 195.76% of net
charge-offs and 20.69% of nonaccrual loans. For the twelve months ended and as of December 31, 2013,
commercial real estate, which represented 50.80% of total loans, accounted for 45.69% of net charge-offs
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and 56.86% of nonaccrual loans, and commercial loans, which represented 24.06% of total loans,
accounted for 26.22% of net charge-offs and 29.90% of nonaccrual loans.
Table 1 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2014
As of December 31, 2014
Net
Charge-offs
(In Thousands)
$ 231
-
(1,652)
2,547
(24)
199
% of Total Net
Nonaccrual
% of Total Non-
Charge-offs
Loans
Accrual Loans
17.76%
0.00%
(126.98)%
195.76%
(1.84)%
15.30%
(In Thousands)
$ 3,332
-
15,174
4,993
12
619
13.81%
0.00%
62.88%
20.69%
0.05%
2.57%
$ 1,301
100.00%
$ 24,130
100.00%
For the Twelve Months Ended December 31, 2013
As of December 31, 2013
Net
Charge-offs
(In Thousands)
$ 361
-
1,638
940
14
632
% of Total Net
Nonaccrual
% of Total Non-
Charge-offs
Loans
Accrual Loans
10.07%
0.00%
45.69%
26.22%
0.39%
17.63%
(In Thousands)
$ 3,273
-
15,834
8,327
-
413
11.76%
0.00%
56.86%
29.90%
0.00%
1.48%
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
$ 3,585
100.00%
$ 27,847
100.00%
The following table sets forth information concerning the allocation of First Defiance’s
allowance for loan losses by loan categories at December 31, 2014 and December 31, 2013.
Table 2 – Allowance for Loan Loss Allocation by Loan Category
December 31, 2014
December 31, 2013
Percent of
total loans
Amount by category Amount
(Dollars in Thousands)
12.24% $ 2,847
$ 2,494
134
6.66%
221
13,721
6,509
117
49.84% 14,508
5,678
23.70%
148
0.92%
Percent of
total loans
by category
12.13%
5.33%
50.80%
24.06%
1.05%
1,704
$ 24,766
6.63%
1,635
100.00% $ 24,950
6.63%
100.00%
Residential
Construction
Commercial real
estate
Commercial
Consumer
Home equity and
improvement
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- 45 -
Loans Acquired with Impairment
Certain loans acquired had evidence that the credit quality of the loan had deteriorated since its
origination and, in management’s assessment at the acquisition date, it was probable that First Defiance
would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic
310 Subtopic 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans were
recorded based on management’s estimate of the fair value of the loans.
As of December 31, 2014, the total contractual receivable for those loans was $413,000 and the
recorded value was $186,000.
High Loan-to-Value Mortgage Loans
The majority of First Defiance’s mortgage loans are collateralized by one-to-four-family
residential real estate, have loan-to-value ratios of 80% or less, and are made to borrowers in good credit
standing. First Federal usually requires residential mortgage loan borrowers whose loan-to-value is
greater than 80% to purchase private mortgage insurance (“PMI”). Management also periodically reviews
and monitors the financial viability of its PMI providers.
First Federal originates and retains a limited number of residential mortgage loans with loan-to-
value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable
strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be
approved by First Federal’s senior loan committee. Management monitors the balance of one-to-four
family residential loans, including home equity loans and committed lines of credit that exceed certain
loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences
and one-to-four family construction loans, 75% for developed land and 65% for raw land). Total loans
that exceed those standards described above at December 31, 2014 totaled $50.0 million, compared to
$43.7 million at December 31, 2013. These loans are generally paying as agreed.
First Defiance does not make interest-only first-mortgage residential loans, nor does it have
residential mortgage loan products or other consumer products that allow negative amortization.
Goodwill and Intangible Assets
Goodwill was $61.5 million at December 31, 2014 and 2013. No impairment of goodwill was
recorded in 2014 or 2013. Core deposit intangibles and other intangible assets decreased to $2.4 million
at December 31, 2014 compared to $3.5 million at December 31, 2013. During 2014, changes to the core
deposit intangibles and other intangibles were due to the recognition of $1.1 million of amortization
expense.
Deposits
Total deposits at December 31, 2014 were $1.76 billion compared to $1.74 billion at December
31, 2013, an increase of $25.0 million or 1.4%. Non-interest bearing checking accounts grew by $30.6
million, money market and interest bearing checking accounts grew by $11.8 million, and savings grew
by $18.6 million while retail certificates of deposit declined by $35.9 million. Management can utilize
the national market for certificates of deposit to supplement its funding needs if necessary. For more
details on the deposit balances in general see Note 11 – Deposits.
Borrowings
FHLB advances totaled $21.5 million at December 31, 2014 compared to $22.5 million at
December 31, 2013. The balance at the end of 2014 includes $12.0 million of convertible advances with
rates ranging from 2.35% to 3.04%. These advances are all callable by the FHLB, at which point they
would convert to a three-month LIBOR advance if not paid off. Those advances have final maturity dates
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ranging from 2015 to 2018. In addition, First Defiance has two fixed-rate advances totaling $9.5 million
with rates ranging from 1.78% to 4.10%.
At December 31, 2014, First Defiance also had $54.8 million of securities that were sold with
agreements to repurchase, compared to $51.9 million at December 31, 2013.
Capital Resources
Total stockholders’ equity increased $7.4 million to $279.5 million at December 31, 2014. This
increase is a result of net income of $24.3 million and an increase in the market value of the available-
for-sale security portfolio in the amount of $3.8 million mostly offset by common stock repurchases and
$5.9 million in common stock dividends. In 2014, 553,136 shares were repurchased, resulting in a $15.5
million decrease in stockholders’ equity, and 53,200 stock options were exercised resulting in a $921,000
increase in stockholder’s equity. In 2013, 70,966 shares were repurchased, resulting in a $1.8 million
decrease in stockholders’ equity, and a total of 35,147 stock options were exercised resulting in a
$350,000 increase in stockholders’ equity.
Results of Operations
Summary
First Defiance reported net income of $24.3 million for the year ended December 31, 2014
compared to $22.2 million and $18.7 million for the years ended December 31, 2013 and 2012,
respectively. Net income applicable to common shares was $24.3 million in 2014 compared with $22.2
million in 2013 and $18.0 million in 2012. On a diluted per common share basis, First Defiance earned
$2.44 in 2014, $2.19 in 2013 and $1.81 in 2012.
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.
Net interest income was $69.7 million for the year ended December 31, 2014 compared to $67.6
million and $69.0 million for the years ended December 31, 2013 and 2012, respectively. The tax-
equivalent net interest margin was 3.68%, 3.76% and 3.81% for the years ended December 31, 2014,
2013 and 2012, respectively. The margin was down slightly between 2013 and 2014. Interest-earning
asset yields decreased 13 basis points (to 4.01% in 2014 from 4.14% in 2013) and the cost of interest
bearing liabilities between the two periods decreased 6 basis points (to 0.43% in 2014 from 0.49% in
2013).
Total interest income increased by $1.4 million or 2.0% to $76.2 million for the year ended
December 31, 2014 from $74.8 million for the year ended December 31, 2013. The increase in interest
income was due to a volume increase in loans and investment securities in 2014. Interest income from
loans increased to $68.7 million for 2014 compared to $68.1 million in 2013, which represents an
increase of 0.9%.
During the same period, the average balance of investment securities increased to $223.5 million
for 2014 from $191.0 million for the year ended December 31, 2013. Interest income from investment
securities increased to $6.6 million in 2014 compared to $5.6 million in 2013, which represents an
increase of 17.5%. The overall duration of investments increased to 4.9 years at December 31, 2014 from
4.5 years at December 31, 2013.
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Interest expense decreased by $611,000 in 2014 compared to 2013, to $6.6 million from $7.2
million. This decrease was due to a six basis point decline in the average cost of interest-bearing
liabilities in 2014. Interest expense related to interest-bearing deposits was $5.3 million in 2014 and $5.9
million in 2013. Expenses on FHLB advances and other interest-bearing funding sources were $528,000
and $161,000 respectively in 2014 and $434,000 and $222,000 respectively in 2013. Interest expense
recognized by the Company related to subordinated debentures was $587,000 in 2014 and $601,000 in
2013.
Total interest income decreased by $6.1 million or 7.6% to $74.8 million for the year ended
December 31, 2013 from $80.9 million for the year ended December 31, 2012. The decrease in interest
income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable
which declined 46 basis points to 4.46% at December 31, 2013. Interest income from loans decreased to
$68.1 million for 2013 compared to $72.6 million in 2012 which represents a decline of 6.3%.
During the same period, the average balance of investment securities decreased to $191.0 million
for 2013 from $247.4 million for the year ended December 31, 2012. Interest income from the investment
portfolio decreased to $5.6 million for 2013 from $7.1 million for 2012. The decline in average balance
and interest income was a result of a balance sheet restructure that took place late in 2012. The tax-
equivalent yield on the investment portfolio was 3.78% in 2013 compared to 3.63% in 2012. The overall
duration of investments increased to 4.5 years at December 31, 2013 from 3.5 years at December 31,
2012.
Interest expense decreased by $4.8 million in 2013 compared to 2012, to $7.2 million from $11.9
million. This decrease was due to a thirty basis point decline in the average cost of interest-bearing
liabilities in 2013. Interest expense related to interest-bearing deposits was $5.9 million in 2013 and $8.2
million in 2012. Expenses on FHLB advances and other interest-bearing funding sources were $434,000
and $222,000 respectively in 2013 and $2.4 million and $373,000 respectively in 2012. Interest expense
recognized by the Company related to subordinated debentures was $601,000 in 2013 and $971,000 in
2012.
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The following table shows an analysis of net interest margin on a tax equivalent basis for the years
ended December 31, 2014, 2013 and 2012:
Table 3 – Net Interest Margin
Year Ended December 31
Average
Balance
2014
Interest
(1)
Yield/
Rate (2)
Average
Balance
(In Thousands)
2013
Interest
(1)
Yield/
Rate
Average
Balance
2012
Interest
(1)
Yield/
Rate
Interest-Earning Assets:
Loans receivable
$ 1,574,753
$68,828
4.37% $ 1,528,176
$68,147
4.46% $ 1,477,681
$72,724
4.92%
Securities
223,534
8,227
3.79%
191,039
7,158
3.78%
247,442
8,675
3.63%
Interest-earning deposits
134,114
349
0.26%
106,742
282
0.26%
116,562
14,677
642
4.37%
19,505
826
4.23%
20,655
1,947,078
78,046
4.01%
1,845,462
76,413
4.14%
1,862,340
82,598
4.44%
300
899
0.26%
4.35%
FHLB stock
Total interest-earning
assets
Non-interest-earning
assets
215,390
Total Assets
$2,162,468
206,788
$2,052,250
201,212
$2,063,552
Interest-Bearing Liabilities:
Interest-bearing deposits
FHLB advances
Subordinated debentures
Other borrowings
Total interest-bearing
liabilities
Non-interest bearing
demand deposits
Total including non-
interest- bearing
demand deposits
Other non-interest
liabilities
Total Liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income;
interest rate spread (3)
Net interest margin (4)
Average interest-earning
assets to average interest-
bearing liabilities
$ 1,399,507 $5,283
528
587
161
21,995
36,131
54,524
0.38% $ 1,353,304 $5,913
434
2.40%
1.62%
601
222
0.30%
17,733
36,133
50,877
0.44% $ 1,352,724 $8,169
2,424
2.45%
971
1.66%
373
0.44%
66,121
36,169
53,155
0.60%
3.67%
2.68%
0.70%
1,512,157
6,559
0.43%
1,458,047
7,170
0.49%
1,508,169
11,937
0.79%
350,677
−
308,591
−
266,913
−
1,862,834
6,559
0.35%
1,766,638
7,170
0.41%
1,775,082
11,937
0.67%
23,097
1,885,931
276,537
20,547
1,787,185
265,065
21,276
1,796,358
267,194
$ 2,162,468
$ 2,052,250
$ 2,063,552
$71,487
3.57%
$69,243
3.65%
$70,661
3.64%
3.68%
128.8%
3.76%
3.81%
126.6%
123.5%
(1)
Interest on certain tax exempt loans (amounting to $271,000, $129,000 and $192,000 in 2014, 2013 and 2012 respectively) and tax-exempt
securities ($3.1 million, $2.9 million and $2.9 million in 2014, 2013, and 2012) is not taxable for Federal income tax purposes. The average
balance of such loans was $7.8 million, $4.2 million and $4.9 million in 2014, 2013, and 2012 while the average balance of such securities was
$82.2 million, $76.0 million and $73.7 million in 2014, 2013, and 2012, 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, 2014, the yields earned and rates paid were as follows: loans receivable, 4.23%; securities, 3.09%; FHLB stock,4.00%; total
interest-earning assets, 4.08%; deposits, 0.28%; FHLB advances, 2.38%; other borrowings, 0.28%, subordinated debentures,1.67%; total
including non- interest-bearing liabilities, 0.33%; and interest rate spread, 3.75%.
Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.
(3)
(4) Net interest margin is net interest income divided by average interest-earning assets.
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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 tax-equivalent interest income and
interest 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.
Table 4 – Changes in Interest Rates and Volumes
Year Ended December 31
(In Thousands)
Increase
(decrease)
due to
rate
2014 vs. 2013
Increase
(decrease)
due to
volume
Total
increase
(decrease)
Increase
(decrease)
due to
rate
2013 vs. 2012
Increase
(decrease)
due to
volume
Total
increase
(decrease)
$ (1,371)
(129)
$ 2,052
1,198
$
681
1,069
$ (7,000)
565
$ 2,423
(2,082)
$ (4,577)
(1,517)
(4)
26
71
(210)
67
(184)
8
(24)
(26)
(49)
(18)
(73)
$ (1,478)
$ 3,111
$ 1,633
$ (6,451)
$
266
$ (6,185)
$
$
(828)
(9)
(14)
(76)
$
198
103
-
15
(630)
94
(14)
(61)
$ (2,260)
(620)
(369)
(135)
$
4
(1,370)
(1)
(16)
$ (2,256)
(1,990)
(370)
(151)
$
(927)
$
316
$
(611)
$ (3,384)
$ (1,383)
$ (4,767)
Interest-Earning Assets
Loans
Securities
Interest-earning
deposits
FHLB stock
Total interest-earning
assets
Interest-Bearing Liabilities
Deposits
FHLB advances
Subordinated Debentures
Notes Payable
Total interest- bearing
liabilities
Increase (decrease) in net interest income
$ 2,244
$ (1,418)
Provision for Loan Losses – First Defiance’s provision for loan losses was $1.1 million for the
year ended December 31, 2014 compared to $1.8 million for December 31, 2013 and $10.9 million for
December 31, 2012.
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 incurred 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 loans (including
loans which meet the FASB ASC Topic 310 definition of impaired), the amount of loans 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. See also Allowance for Loan Losses in Management’s Discussion and Analysis and Note 7 to
the audited financial statements.
Noninterest Income – Noninterest income increased by $863,000 or 2.8% in 2014 to $31.6
million from $30.8 million for the year ended December 31, 2013. That followed a decrease of $3.6
million or 10.5% in 2013 from $34.4 million in 2012.
Service fees and other charges increased to $10.3 million for the year ended December 31, 2014
from $10.0 million for 2013 but decreased from $10.8 million for 2012. The increase in noninterest
income in 2014 from 2013 is due to new fee structures and product redesigns that were implemented in
the third quarter of 2014.
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First Federal’s overdraft privilege program generally provides for the automatic payment of
modest overdraft limits on all accounts deemed to be in good standing when the account is accessed
using paper-based check processing, a teller withdrawal, a point-of-sale terminal, an ACH transaction, an
online banking or voice-response transfer, or an ATM. To be in good standing, an account must be
brought to a positive balance within a 30-day period and have not excessively used the overdraft
privilege program. Overdraft limits are established for all customers without discrimination using a risk
assessment approach for each account classification. The approach includes a systematic review and
evaluation of the normal deposit flows made to each account classification to establish reasonable and
prudent negative balance limits that would be routinely repaid by normal, expected and reoccurring
deposits. The risk assessment by portfolio approach assumes a minimal degree of undetermined credit
risk associated with unidentified individual accounts that are overdrawn for 30 or more days. Consumer
accounts overdrawn for more than 60 days are automatically charged off. Fees are charged as a one-time
fee per occurrence, up to five charges per day, and the fee charged for an item that is paid is equal to the
fee charged for a non-sufficient fund item that is returned.
Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s
balance sheet. The fees charged for this service are established based both on the return of processing
costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for
similar services. These fees are considered to be compensation for providing a service to the customer
and therefore deemed to be noninterest income rather than interest income. Fee income recorded for the
years ending December 31, 2014 and 2013 related to the overdraft privilege product, net of adjustments
to the allowance for uncollectible overdrafts, were $3.1 million and $3.5 million, respectively. Accounts
charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $16,000
at December 31, 2014 and $22,000 at December 31, 2013.
Noninterest income also includes gains, losses and impairment on investment securities. In 2014,
First Defiance realized a $932,000 net gain on securities compared to a $240,000 net loss in 2013 and a
$2.1 million net gain in 2012. In 2013 and 2012, First Defiance recognized other-than-temporary
impairment (“OTTI”) charges for certain impaired investment securities, where, in management’s
opinion, the value of the investment will not be recovered. The total OTTI charges in 2013 were
$337,000 and gains on sale or call of securities were $97,000. Management recorded $337,000 of OTTI
in 2013 on its investment of two trust preferred collateralized debt obligation (“CDOs”) that were
considered disallowed under the Interim Final Volcker Rule announced on January 14, 2014 and which
required the Company to liquidate these securities. The Company held eight CDOs at December 31,
2013. Four of those CDOs were written down in full prior to January 1, 2010. The remaining four
CDOs had a total amortized cost of $3.4 million at December 31, 2013. Of these four, all were identified
as having OTTI. In 2012, the total OTTI charges were $5,000 and gains on sale or call of securities were
$2.1 million. There were no OTTI charges in 2014. The Company only holds three CDOs at December
31, 2014 with a zero value.
In October 2012, the Company executed a balance sheet restructuring strategy to enhance the
Company’s current and future profitability while increasing its capital ratios and protecting the balance
sheet against rising rates. The strategy required taking an after tax loss of approximately $260,000 through
selling $60.0 million in securities for a gain of $1.6 million and paying off $62.0 million in FHLB advances
with a prepayment penalty of $2.0 million.
Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing
mortgage loans for others, an offset for amortization of mortgage servicing rights, and adjustments for
impairment in the value of mortgage servicing rights. Mortgage banking income totaled $5.6 million,
$8.4 million and $9.7 million in 2014, 2013 and 2012, respectively. The $2.8 million decrease in 2014
from 2013 is attributable to a $2.4 million decrease in the gain on sale of loans and a $1.1 million
negative change in the valuation adjustments on mortgage servicing rights partially offset by a decrease
of $697,000 in mortgage servicing rights amortization expense. The negative valuation adjustment is a
reflection of the decrease in the fair value of certain sectors of the Company’s portfolio of mortgage
servicing rights. First Defiance originated $153.8 million of residential mortgages for sale into the
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secondary market in 2014 compared with $291.7 million in 2013. The $1.3 million decrease in 2013
from 2012 is attributable to a $4.9 million decrease in the gain on sale of loans, partially offset by a $2.0
million positive change in the valuation adjustments on mortgage servicing rights and a decrease of $1.5
million in mortgage servicing rights amortization expense. The positive valuation adjustment is a
reflection of the increase in the fair value of certain sectors of the Company’s portfolio of mortgage
servicing rights. First Defiance originated $291.7 million of residential mortgages for sale into the
secondary market in 2013 compared with $521.5 million in 2012. The balance of the mortgage servicing
right valuation allowance stands at $911,000 at the end of 2014. See Note 8 to the financial statements.
Insurance commission income increased $232,000 or 2.4% to $9.9 million in 2014 from $9.6
million in 2013 mainly due to an increase in general production in the property and casualty line of
business. Insurance commission income increased $951,000 or 11.0% to $9.6 million in 2013 from $8.7
million in 2012 in large part due to an increase in contingent income of $436,000. Contingent
commissions are bonus payments received by First Insurance for effective underwriting.
Income from bank owned life insurance increased $919,000 or 104.1% to $1.8 million in 2014
from $883,000 in 2013 and $924,000 in 2012. The increase is the result of a tax-free benefit from a
bank-owned life insurance policy due to a death claim in 2014.
Noninterest Expense – Total noninterest expense for 2014 was $66.8 million compared to $65.1
million for the year ended December 31, 2013 and $65.8 million for the year ended December 31, 2012.
Compensation and benefits increased $1.2 million or 3.6% in 2014 to $35.5 million from $34.3
million in 2013. The increase in compensation and benefits is due to merit increases, higher health
insurance costs and an increase in incentive expense as a direct reflection of the improved financial
performance of the Company. Financial institutions tax, previously the state franchise tax, decreased
$561,000 or 24.2% in 2014 to $1.8 million from $2.3 million in 2013 due to a change in the tax
assessment calculation since switching in 2014 to the financial institution tax. Data processing increased
$731,000 or 14.3% in 2014 to $5.9 million from $5.1 million in 2013 from the Company’s ongoing
projects to enhance product delivery coupled with an increase in electronic transaction volumes. The
other noninterest expense category, excluding the financial institution tax, increased $483,000 primarily
due to $786,000 in cost associated with the termination of First Federal’s merger agreement with First
Community Bank in the first quarter of 2014. This was mostly offset by lower real estate owned
expenses in 2014.
Compensation and benefits increased $1.7 million or 5.3% in 2013 to $34.3 million from $32.6
million in 2012. The increase in compensation and benefits is due to merit increases and an increase in
incentive expense of $481,000 as a direct reflection of the improved financial performance of the
Company as well as increased medical insurance costs. FDIC insurance costs decreased $1.1 million or
40.0% to $1.6 million from $2.7 million in 2012. The FDIC decrease is due to the improvement in the
Company’s risk category in 2013. State franchise tax decreased $172,000 or 6.9% in 2013 to $2.3
million from $2.5 million in 2012. Occupancy costs decreased $903,000 or 11.9% in 2013 to $6.7
million from $7.6 million in 2012 due to an increase in deferred rent liabilities in 2012. Data processing
increased $465,000 or 10.0% in 2013 to $5.1 million from $4.7 million in 2012 from the Company’s
ongoing projects to enhance product offerings and gain efficiencies through the utilization of technology.
The other noninterest expense category, excluding the state franchise tax, decreased $778,000 primarily
due to a one-time penalty of $2.0 million for the prepayment of $62 million in FHLB advances as part of
the Company’s balance sheet restructure in 2012. This was primarily offset by higher real estate owned
expenses and an increase in management consulting in 2013.
Income Taxes – Income taxes totaled to $9.2 million in 2014 compared to $9.3 million in 2013
and $8.0 million in 2012. The effective tax rates for those years were 27.4%, 29.4%, and 30.0%,
respectively. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of
investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal
income tax. See Note 18 – Income Taxes in the Notes to the financial statements for further details.
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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 way 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, northeast Indiana and southeast Michigan market areas. Management has also identified
lending for income-generating rental properties as an industry concentration. Total loans for income-
generating property totaled $494.6 million at December 31, 2014, which represents 29.3% of the
Company’s loan portfolio. Management believes it has the skill and experience to manage any risks
associated with this type of lending. Loans in this category are generally paying as agreed without any
unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30
days or more past due, was 0.12% at December 31, 2014. There are no other 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 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 $30.1 million, $39.4 million and $31.9 million in
2014, 2013 and 2012, respectively. 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 and increases and decreases in other assets and
liabilities.
The primary investing activity of First Defiance is lending, which is funded with cash provided
from operating and financing activities, as well as proceeds from payment on existing loans and proceeds
from maturities of investment securities. In 2014 and 2013, the Company purchased $16.6 million and $4.5
million, respectively, in portfolio residential home loans.
In considering the more typical investing activities, during 2014, $20.4 million and $14.9 million
was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale
investment securities, respectively, and $73.2 million was used by an increase in loans while $70.1 million
was used to purchase available-for-sale investment securities. During 2013, $35.1 million and $4.0 million
was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale
investment securities, respectively, and $70.8 million was used by an increase in loans while $49.2 million
was used to purchase available-for-sale investment securities. During 2012, $60.1 million and $72.3 million
was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale
investment securities, respectively, and $65.0 million was used by an increase in loans while $91.5 million
was used to purchase available-for-sale investment securities.
Principal financing activities include the gathering of deposits, the utilization of FHLB advances,
and the sale of securities under agreements to repurchase such securities and borrowings from other banks.
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For 2014, total deposits increased by $25.8 million. For 2013, total deposits increased by $68.4 million.
The amount of deposits acquired from out-of-market sources decreased in 2013 by $2.0 million. For 2012,
total deposits increased by $71.3 million. The amount of deposits acquired from out of market sources
decreased in 2012 by $8.6 million. In 2014, securities sold under repurchase arrangements increased by
$2.8 million. Also in 2014, the Company paid $5.9 million in common stock dividends coupled with
paying $15.5 million in common stock repurchases. In 2013, securities sold under repurchase arrangements
increased by $217,000 and the Company acquired $10.0 million in FHLB advances and paid $3.9 million in
common stock dividends. In 2012, securities sold under repurchase arrangements decreased by $8.7 million
and the Company paid off $69.0 million in FHLB advances primarily as a result of the balance sheet
restructure and paid $36.4 million as a result of redeeming its preferred stock both decreasing the financing
activity. 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.
At December 31, 2014, First Defiance had the following commitments to fund deposit, advance,
borrowing obligations and post-retirement benefits:
Table 5 – Contractual Obligations
Contractual Obligations
Certificates of deposit
FHLB fixed advances including interest (1)
Subordinated debentures
Securities sold under repurchase agreements
Lease obligations
Post-retirement benefits
Total contractual obligations
Maturity Dates by Period at December 31, 2014
Total
$449,859
22,437
36,083
54,759
6,899
1,808
$571,845
Less than
1 year
$189,880
8,948
-
54,759
706
157
$254,450
1-3 years
(In Thousands)
$153,334
2,424
-
-
1,204
333
$157,295
4-5 years
After 5
years
$106,538
11,065
-
-
912
364
$118,879
$107
-
36,083
-
4,077
954
$41,221
(1) Includes principal payments of $21,544 and interest payments of $893
At December 31, 2014, First Defiance had the following commitments to fund loan or line of credit
obligations:
Table 6 - Commitments
Commitments
Fixed commitments to make loans
Variable commitments to make loans
Fixed unused lines of credit
Variable unused lines of credit
Total loan commitments
Total
Amounts
Committed
$37,546
69,232
20,385
307,449
434,612
Amount of Commitment Expiration by Period
Less than
1 year
$34,312
49,646
12,593
213,794
310,345
1-3 years
(In Thousands)
4-5 years
$1
4,711
4,378
23,780
32,870
$1,269
10,925
3,405
6,237
21,836
After 5
years
$1,964
3,950
9
63,638
69,561
Standby letters of credit
17,886
13,856
3,590
440
-
Total Commitments
$452,498
$324,201
$36,460
$22,276
$69,561
In addition to the above commitments, at December 31, 2014 First Defiance had commitments to
sell $11.6 million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage.
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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, and brokered
certificates of deposit. At December 31, 2014, First Defiance had $425.8 million in capacity under its
agreements with the FHLB.
First Federal is subject to various capital requirements of the OCC. At December 31, 2014, First
Federal had capital ratios that exceeded the standard to be considered “well capitalized.” For additional
information about First Defiance and First Federal’s capital requirements, see Note 17 – Regulatory Matters
to the Consolidated December 31, 2014 Financial Statements.
Critical Accounting Policies
First Defiance has established various accounting policies that 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, northeast Indiana and southeast Michigan regions 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 that
may have an impact on the economy as a whole.
In addition to the identification of specific customers 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, and other factors in providing for loan losses that have not been
specifically classified. Management believes that the level of its allowance for loan loss is sufficient to
cover the estimates loss incurred but not yet recognized on the loan portfolio. Refer to the section titled
“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.
Valuation of Mortgage Servicing Rights - First Defiance believes the valuation 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
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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 8 - Mortgage Banking, for a
further description of First Defiance’s valuation process, methodology and assumptions along with
sensitivity analyses.
Goodwill - First Defiance has two reporting units: First Federal and First Insurance. At
December 31, 2014, First Defiance had goodwill of $61.5 million, including $51.0 million in First
Federal, representing 83% of total goodwill and $10.5 million in First Insurance, representing 17% of
total goodwill. The carrying value of goodwill is tested annually for impairment or more frequently if it is
determined appropriate. The evaluation for impairment involves comparing the current estimated fair
value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of
a reporting unit exceeds its carrying value, no additional testing is required and impairment loss is not
recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation
procedures are performed and could result in impairment of goodwill being recorded. Further valuation
procedures would include allocating the estimated fair value to all assets and liabilities of the reporting
unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less
than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that
excess.
If for any future period First Defiance determines that there has been impairment in the carrying
value of goodwill balances, First Defiance will record a charge to earnings, which could have a material
adverse effect on net income, but not risk-based capital ratios.
First Defiance has core deposit and other intangible assets resulting from acquisitions which are
subject to amortization. First Defiance determines the amount of identifiable intangible assets based upon
independent core deposit and customer relationship analyses at the time of the acquisition. Intangible
assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable. No events or changes in circumstances that
would indicate that the carrying amount of any identifiable intangible assets may not be recoverable had
occurred during the years ended December 31, 2014 and 2013.
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Item 7A. Quantitative and Qualitative Disclosures 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. At December 31, 2014, the results of the simulation
indicate that in an environment where interest rates rise 100 basis points over a 24 month period, First
Defiance’s net interest income would increase by 1.56% over the base case scenario. 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.
The majority of First Federal’s lending activities are in 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 Federal’s non-
residential and multi-family real estate loan portfolio was $840.5 million, which was split between
$154.9 million of fixed-rate loans and $685.6 million of adjustable-rate loans, at December 31, 2014. The
commercial loan portfolio increased to $399.7 million, which was split between $174.5 million of fixed-
rate loans and $225.2 million of adjustable-rate loans, at December 31, 2014. Certain 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 seven years. First Federal also has significant balances of home equity
and improvement loans ($111.8 million at December 31, 2014) of which $85.3 million fluctuate with
changes in the prime lending rate and $26.5 million of home equity and improvement loans have fixed
rates. First Federal also has consumer loans ($15.5 million at December 31, 2014) which tend to have a
shorter duration than residential mortgage loans. Also, to limit its interest rate risk, as well as to provide
liquidity, First Federal sells a majority of its fixed-rate mortgage originations into the secondary market.
In addition to the simulation analysis, First Federal also prepares an “economic value of equity”
(“EVE”) analysis. This analysis generally calculates the net present value of First Federal’s assets and
liabilities in rate shock environments that range from –400 basis points to +400 basis points. However,
the likelihood of a decrease in interest rates beyond 100 basis points as of December 31, 2014 was
considered to be remote given the current interest rate levels and therefore was not included in this
analysis. The results of this analysis are reflected in the following table.
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Table 7 – Economic Value of Equity Analysis
December 31, 2014
Economic Value of Equity
Change in Rates
$ Amount
$ Change
% Change
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
475,594
467,028
457,038
446,184
427,864
403,088
(Dollars in Thousands)
47,730
39,164
29,174
18,320
-
(24,776)
11.16%
9.15%
6.82%
4.28%
-
(5.79)%
December 31, 2013
Change in Rates
$ Amount
$ Change
% Change
Economic Value of Equity
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
474,469
467,691
458,844
447,701
432,790
413,917
(Dollars in Thousands)
41,679
34,901
26,054
14,911
-
(18,873)
9.63%
8.06%
6.02%
3.45%
-
(4.36)%
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
23.65%
22.79%
21.89%
20.95%
19.74%
18.33%
391 bp
305 bp
215 bp
121 bp
–
(141) bp
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
23.83%
23.10%
22.28%
21.38%
20.33%
19.19%
350 bp
277 bp
195 bp
105 bp
–
(114) bp
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of
December 31, 2014, First Federal would experience a 6.82% increase in its economic value of equity.
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 relatively low because both its assets and liabilities have relatively
short durations. The average duration of its assets at December 31, 2014 was 1.86 years while the average
duration of its liabilities was 3.27 years.
In evaluating First Federal’s exposure to interest rate risk, certain shortcomings inherent in 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.
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Item 8. Financial Statements and Supplementary Data
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, as such term is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of management, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in the 2013 Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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 risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate.
Based on our evaluation under the framework in the 2013 Internal Control – Integrated Framework,
management concluded that our internal control over financial reporting was effective as of December 31,
2014.
Crowe Horwath LLP, the independent registered public accounting firm that audited the consolidated
financial statements of the Company included in this Annual Report on Form 10-K, has issued a report
on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.
The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2014, is included below.
Donald P. Hileman Kevin T. Thompson
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated statements of financial condition of First Defiance
Financial Corp. (the “Company”) as of December 31, 2014 and 2013 and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 2014. We also have audited First Defiance Financial
Corp.’s internal control over financial reporting as of December 31, 2014, based on criteria established in
the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the “COSO”). The Company's management is responsible for these
financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on the Company's internal control over financial
reporting 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 audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
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.
- 60 -
- 60 -
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of First Defiance Financial Corp. as of December 31, 2014 and 2013, and
the results of its operations and its cash flows for each of the three years in the period ended December
31, 2014 in conformity with accounting principles generally accepted in the United States of America.
Also in our opinion, First Defiance Financial Corp. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2014, based on criteria established in the 2013
Internal Control – Integrated Framework issued by the COSO.
Crowe Horwath LLP
South Bend, Indiana
February 27, 2015
- 61 -
- 61 -
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
First Defiance Financial Corp
Consolidated Statements of Financial Condition (continued)
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions
Federal funds sold
Securities available-for-sale, carried at fair value
Securities held-to-maturity, carried at amortized cost (fair value $308 and
$393 at December 31, 2014 and 2013 respectively)
Loans held for sale
Loans receivable, net of allowance of $24,766 and
$24,950 at December 31, 2014 and 2013, respectively
Mortgage servicing rights
Accrued interest receivable
Federal Home Loan Bank (FHLB) stock
Bank owned life insurance
Premises and equipment
Real estate and other assets held for sale (REO)
Goodwill
Core deposit and other intangibles
Deferred taxes
Other assets
Total assets
December 31
2014
2013
(Dollars In Thousands, except share
and per share data)
$ 41,936
$ 36,318
71,000
112,936
143,000
179,318
239,321
198,170
313
239,634
4,535
387
198,557
9,120
1,622,020
1,555,498
9,012
6,037
13,802
47,013
9,106
5,778
19,350
42,715
40,496
38,597
6,181
5,859
61,525
61,525
2,395
-
3,497
565
13,366
7,663
$ 2,178,952
$ 2,137,148
December 31
2014
2013
(Dollars In Thousands, except share
and per share data)
$ 379,552
1,381,261
$ 348,943
1,386,849
1,760,813
1,735,792
21,544
54,759
36,083
22,520
51,919
36,083
2,309
1,519
1,176
22,763
1,899,447
-
17,168
1,865,001
–
–
–
–
127
878
127
878
136,266
136,403
4,114
200,600
(62,480)
279,505
545
182,290
(48,096)
272,147
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase and other
Subordinated debentures
Advance payments by borrowers
Deferred taxes
Other liabilities
Total liabilities
Stockholders’ equity:
no shares issued
Commitments and Contingent (Note 6)
Preferred stock, $.01 par value per share: 37,000 shares authorized;
Preferred stock, $.01 par value per share:
4,963,000 shares authorized; no shares issued
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,735,313 and 12,735,313 shares issued
and 9,234,534 and 9,719,521 shares outstanding, respectively
Common stock warrant
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $2,214 and $294, respectively
Retained earnings
Treasury stock, at cost, 3,500,779 and 3,015,792
shares respectively
Total stockholders’ equity
See accompanying notes.
Total liabilities and stockholders’ equity
$ 2,178,952
$ 2,137,148
- 62 -
- 62 -
- 63 -
First Defiance Financial Corp
Consolidated Statements of Financial Condition (continued)
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase and other
Subordinated debentures
Advance payments by borrowers
Deferred taxes
Other liabilities
Total liabilities
Commitments and Contingent (Note 6)
Stockholders’ equity:
December 31
2014
2013
(Dollars In Thousands, except share
and per share data)
$ 379,552
1,381,261
$ 348,943
1,386,849
1,760,813
1,735,792
21,544
54,759
36,083
22,520
51,919
36,083
2,309
1,519
1,176
22,763
1,899,447
-
17,168
1,865,001
Preferred stock, $.01 par value per share: 37,000 shares authorized;
no shares issued
Preferred stock, $.01 par value per share:
4,963,000 shares authorized; no shares issued
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,735,313 and 12,735,313 shares issued
and 9,234,534 and 9,719,521 shares outstanding, respectively
Common stock warrant
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $2,214 and $294, respectively
Retained earnings
Treasury stock, at cost, 3,500,779 and 3,015,792
shares respectively
Total stockholders’ equity
–
–
–
–
127
878
127
878
136,266
136,403
4,114
200,600
(62,480)
279,505
545
182,290
(48,096)
272,147
Total liabilities and stockholders’ equity
$ 2,178,952
$ 2,137,148
See accompanying notes.
- 63 -
- 63 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
2014
2012
Years Ended December 31
2013
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31
2014
2013
2012
(In Thousands)
$ 24,292 $22,235
$18,664
Net income
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale
securities arising during the period
Reclassification adjustment for (gains) losses realized in
income
Other-than-temporary impairment losses on AFS
securities realized in income
Net unrealized gains (losses)
Income tax effect
Net of tax amount
Change in unrealized gain on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical
plan realized during the period
Net amortization and deferral
Net gain (loss) activity during the period
Income tax effect
Net of tax amount
Total other comprehensive income (loss)
Comprehensive income
6,763
(932)
-
5,831
(2,040)
3,791
(377)
35
(342)
120
(222)
3,569
$ 27,861
(6,309)
(97)
337
(6,069)
2,124
(3,945)
287
46
(117)
216
(3,729)
2,360
(2,139)
5
226
(79)
147
148
51
(69)
130
277
333
199
$18,506
$18,941
See accompanying notes
Interest Income
Loans
Investment securities:
Taxable
Tax-exempt
Interest-bearing deposits
FHLB stock dividends
Total interest income
Interest Expense
Deposits
Federal Home Loan Bank advances and other
Subordinated debentures
Securities sold under agreement to repurchase
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Service fees and other charges
Mortgage banking income
Insurance commissions
Gain on sale of non-mortgage loans
Gain (loss) on sale or call of securities
Other-than-temporary impairment (OTTI) losses on investment securities
Total gains (impairment losses) on investment securities
Losses recognized in other comprehensive income
Net impairment loss recognized in earnings
Trust income
Income from bank owned life insurance
Other noninterest income
Total noninterest income
Noninterest Expense
Compensation and benefits
Occupancy
FDIC insurance
Data processing
Other noninterest expense
Total noninterest expense
Income before income taxes
Federal income taxes
Net Income
Dividends Accrued on Preferred Shares
Accretion on Preferred Shares
Redemption of Preferred Shares
Net Income Applicable to Common Shares
Earnings per common share:
Basic
Diluted
Dividends declared per common share
See accompanying notes
$
68,682
$
68,077
$
72,621
3,507
3,068
349
642
76,248
5,283
528
587
161
6,559
69,689
1,117
68,572
10,258
5,602
9,859
181
932
-
-
-
1,240
1,802
1,767
31,641
35,543
6,683
1,419
5,856
17,257
66,758
33,455
9,163
24,292
-
-
-
24,292
2.55
2.44
0.63
$
$
$
$
$
$
$
$
2,695
2,901
282
826
74,781
5,913
434
601
222
7,170
67,611
1,824
65,787
10,045
8,443
9,627
101
97
(337)
-
(337)
969
883
950
30,778
34,301
6,675
1,616
5,125
17,335
65,052
31,513
9,278
22,235
-
-
-
22,235
2.28
2.19
0.40
$
$
$
$
$
$
$
$
4,241
2,882
300
899
80,943
8,169
2,424
971
373
11,937
69,006
10,924
58,082
10,779
9,665
8,676
70
2,139
(31)
26
(5)
616
924
1,510
34,374
32,566
7,578
2,691
4,660
18,285
65,780
26,676
8,012
18,664
(900)
(359)
642
18,047
1.86
1.81
0.20
$
$
$
$
$
$
$
$
- 64 -
- 64 -
65
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31
For the Years Ended December 31
2014
2014
2013
2013
(In Thousands)
(In Thousands)
2012
2012
$ 24,292 $22,235
$ 24,292 $22,235
$18,664
$18,664
6,763
6,763
(6,309)
(6,309)
2,360
2,360
(932)
(932)
(97)
(97)
(2,139)
(2,139)
-
5,831
-
5,831
337
(6,069)
337
(6,069)
(2,040)
3,791
(2,040)
3,791
2,124
(3,945)
2,124
(3,945)
5
226
5
226
(79)
147
(79)
147
(377)
35
(342)
120
(222)
148
148
287
287
(377)
46
51
51
46
35
199
333
199
333
(342)
(69)
(117)
(69)
(117)
120
130
216
130
216
(222)
3,569
$ 27,861
(3,729)
(3,729)
3,569
$18,506
$18,506
$ 27,861
277
277
$18,941
$18,941
Net income
Change in securities available-for-sale (AFS):
Net income
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale
securities arising during the period
Unrealized holding gains (losses) on available-for-sale
securities arising during the period
Reclassification adjustment for (gains) losses realized in
Reclassification adjustment for (gains) losses realized in
income
Other-than-temporary impairment losses on AFS
securities realized in income
Net unrealized gains (losses)
income
Other-than-temporary impairment losses on AFS
securities realized in income
Net unrealized gains (losses)
Income tax effect
Net of tax amount
Income tax effect
Net of tax amount
Change in unrealized gain on postretirement benefit:
Change in unrealized gain on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical
Net gain (loss) on defined benefit postretirement medical
plan realized during the period
plan realized during the period
Net amortization and deferral
Net amortization and deferral
Net gain (loss) activity during the period
Net gain (loss) activity during the period
Income tax effect
Income tax effect
Net of tax amount
Net of tax amount
Total other comprehensive income (loss)
Comprehensive income
Total other comprehensive income (loss)
Comprehensive income
See accompanying notes
See accompanying notes
65
65
- 65 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
Preferred
Stock
Preferred
Stock
Common
Stock
Common
Stock
Common
Stock
Warrant
Common
Stock
Warrant
Additional
Paid-In
Capital
Additional
Paid-In
Capital
Accumulated
Accumulated
Other
Other
Comprehensive
Comprehensive
Income (Loss)
Income (Loss)
Retained
Earnings
Retained
Earnings
Balance at January 1, 2012
Net income
Balance at January 1, 2012
Net income
Other comprehensive income
Other comprehensive income
Stock option expense
Stock option expense
500 net shares issued under stock option plan,
500 net shares issued under stock option plan,
with no income tax benefit
with no income tax benefit
Restricted share activity under stock incentive
Restricted share activity under stock incentive
Plans
Plans
836 shares issued direct purchases
836 shares issued direct purchases
Preferred stock dividends accrued
Preferred stock dividends accrued
Accretion on preferred shares
Accretion on preferred shares
16,560 shares purchased in Treasury auction
16,560 shares purchased in Treasury auction
20,440 shares purchased in open market
20,440 shares purchased in open market
Common stock dividends declared
Common stock dividends declared
Balance at December 31, 2012
Net income
Balance at December 31, 2012
Net income
$ 36,641
$ 36,641
$ 127
$
$ 127
$
878
359
359
(16,560)
(16,560)
(20,440)
(20,440)
$
$
-
$ 127
-
$
$ 127
$
878
with $54 in income tax benefit
Other comprehensive loss
Other comprehensive loss
Stock option expense
Stock option expense
35,147 net shares issued under stock option plan,
35,147 net shares issued under stock option plan,
with $54 in income tax benefit
Restricted share activity under stock incentive
Restricted share activity under stock incentive
Plans
Plans
2,768 shares issued direct purchases
2,768 shares issued direct purchases
70,966 shares repurchased
70,966 shares repurchased
Common stock dividends declared
Common stock dividends declared
Balance at December 31, 2013
Net income
Balance at December 31, 2013
Net income
$
with $103 in income tax benefit
Other comprehensive income
Other comprehensive income
Stock option expense
Stock option expense
52,258 net shares issued under stock option plan,
52,258 net shares issued under stock option plan,
with $103 in income tax benefit
Restricted share activity under stock incentive
Restricted share activity under stock incentive
Plans including 13,087 shares issued
Plans including 13,087 shares issued
2,804 shares issued direct purchases
2,804 shares issued direct purchases
553,136 shares repurchased
553,136 shares repurchased
Common stock dividends declared
Common stock dividends declared
Balance at December 31, 2014
Balance at December 31, 2014
$
$
-
$ 127
-
$
$ 127
$
878
$
-
$ 127
-
$
$ 127
$
878
Treasury
Stock
Treasury
Stock
Total
Total
Stockholder’s
Stockholder’s
Equity
Equity
$ (47,351)
$ (47,351)
$ 278,127
$ 278,127
18,664
18,664
277
277
104
104
(4)
(4)
8
8
4
4
878
$ 135,825
$ 135,825
$ 3,997
$ 3,997
$ 148,010
18,664
$ 148,010
18,664
277
277
104
104
116
1
116
1
(900)
(900)
(359)
(359)
618
618
24
24
(1,950)
(1,950)
$ 164,103
$ 164,103
22,235
22,235
$ 4,274
$ 4,274
878
$ 136,046
$ 136,046
30
13
30
13
$ (47,300)
$ (47,300)
(3,729)
(3,729)
44
44
(34)
(34)
327
20
327
20
3,569
3,569
78
78
88
88
(334)
31
(334)
31
(97)
(97)
481
481
350
350
(44)
(44)
500
500
44
44
(1,821)
(1,821)
878
$ 136,403
$ 136,403
$ 545
$ 545
(3,907)
$ 182,290
24,292
(3,907)
$ 182,290
24,292
$ (48,096)
$ (48,096)
(45)
(45)
878
878
921
921
212
212
45
45
(15,519)
(15,519)
(122)
(122)
76
76
(15,519)
(15,519)
(5,937)
(5,937)
$ 279,505
$ 279,505
878
$ 136,266
$ 136,266
$ 4,114
$ 4,114
(5,937)
$ 200,600
(5,937)
$ 200,600
$ (62,480)
$ (62,480)
146
146
14
14
(900)
(900)
-
-
(15,942)
(15,942)
(20,416)
(20,416)
(1,950)
(1,950)
$ 258,128
$ 258,128
22,235
22,235
(3,729)
(3,729)
44
44
783
783
64
64
(1,821)
(1,821)
(3,907)
(3,907)
$ 272,147
$ 272,147
24,292
24,292
3,569
3,569
78
78
See accompanying notes
See accompanying notes
66
66
- 66 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
Preferred
Common
Stock
Stock
Paid-In
Capital
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Common
Stock
Warrant
Total
Stockholder’s
Equity
Accumulated
Additional
Other
$ 36,641
$ 127
$
878
$ 135,825
$ 3,997
$ 148,010
$ (47,351)
$ 278,127
18,664
277
359
(16,560)
(20,440)
$
-
$ 127
$
878
$ 136,046
$ 4,274
$ 164,103
$ (47,300)
$ 258,128
104
116
1
44
(34)
327
20
78
88
(334)
31
(4)
(900)
(359)
618
24
(1,950)
22,235
(97)
(44)
(3,907)
24,292
(45)
(5,937)
8
30
13
481
500
44
(1,821)
878
212
45
(15,519)
(3,729)
3,569
18,664
277
104
4
146
14
(900)
-
(15,942)
(20,416)
(1,950)
22,235
(3,729)
44
350
783
64
(1,821)
(3,907)
24,292
3,569
78
921
(122)
76
(15,519)
(5,937)
$
-
$ 127
$
878
$ 136,403
$ 545
$ 182,290
$ (48,096)
$ 272,147
$
-
$ 127
$
878
$ 136,266
$ 4,114
$ 200,600
$ (62,480)
$ 279,505
Balance at January 1, 2012
Net income
Other comprehensive income
Stock option expense
500 net shares issued under stock option plan,
with no income tax benefit
Restricted share activity under stock incentive
Plans
836 shares issued direct purchases
Preferred stock dividends accrued
Accretion on preferred shares
16,560 shares purchased in Treasury auction
20,440 shares purchased in open market
Common stock dividends declared
Balance at December 31, 2012
Net income
Other comprehensive loss
Stock option expense
35,147 net shares issued under stock option plan,
with $54 in income tax benefit
Restricted share activity under stock incentive
Plans
2,768 shares issued direct purchases
70,966 shares repurchased
Common stock dividends declared
Balance at December 31, 2013
Net income
Other comprehensive income
Stock option expense
52,258 net shares issued under stock option plan,
with $103 in income tax benefit
Restricted share activity under stock incentive
Plans including 13,087 shares issued
2,804 shares issued direct purchases
553,136 shares repurchased
Common stock dividends declared
Balance at December 31, 2014
See accompanying notes
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Provision for depreciation
Net amortization of premium and discounts on loans,
securities, deposits and debt obligations
Amortization of mortgage servicing rights
Net (recovery) impairment of mortgage servicing rights
Amortization of intangibles
Gain on sale of loans
Loss on sale or disposals of property, plant and
equipment
(Gain) loss on sale or write-down of REO
OTTI losses on investment securities
(Gain) loss on sale or call of securities
Change in deferred taxes
Proceeds from sale of loans held for sale
Origination of loans held for sale
Stock option expense
Restricted stock unit expense (credit)
Income from bank owned life insurance
Change in interest receivable and other assets
Change in accrued interest and other liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity
securities
Proceeds from maturities, calls and paydowns of available-for-sale
securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of REO
Proceeds from sale of office properties and equipment
Purchases of available-for-sale securities
Purchases of office properties and equipment
Investment in bank owned life insurance
Proceeds from FHLB stock redemption
Proceeds from bank owned life insurance death benefit
Purchase of portfolio mortgage loans
Proceeds from sale of non-mortgage loans
Net increase in loans receivable
Net cash provided by (used) in investing activities
Years Ended December 31
2013
2014
2012
$ 24,292
$ 22,235
$ 18,664
1,117
2,952
1,020
1,401
(116)
1,102
(3,517)
-
(73)
-
(932)
(179)
159,305
(153,753)
78
(122)
(1,802)
(5,962)
5,254
30,065
1,824
3,110
1,235
2,098
(1,261)
1,241
(5,817)
1
883
337
(97)
1,519
308,260
(294,941)
44
783
(883)
1,327
(2,535)
39,363
10,924
3,416
1,497
3,562
759
1,413
(10,669)
179
427
5
(2,139)
779
520,376
(521,464)
104
146
(924)
17
4,838
31,910
73
121
152
20,400
14,913
2,108
84
(70,149)
(4,935)
(3,406)
5,548
910
(16,594)
20,592
(73,206)
(103,662)
35,072
60,057
4,027
2,899
-
(49,230)
(2,045)
-
1,305
-
(4,545)
13,369
(70,845)
(69,872)
72,262
3,444
10
(91,513)
(3,223)
(5,000)
-
-
-
4,644
(65,005)
(24,172)
66
67
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FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows (continued)
(Dollar Amounts in Thousands)
Notes to the Consolidated Financial Statements
1. Basis of Presentation
Financing Activities
Net increase in deposits
Repayment of Federal Home Loan Bank long-term advances
Proceeds from Federal Home Loan Bank long-term advances
Cash paid for redemption of preferred stock
Increase (decrease) in securities sold under repurchase agreements
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Net cash paid for repurchase of common stock
Proceeds from exercise of stock options
Proceeds from treasury stock sales
Net cash (used) provided by financing activities
Years Ended December 31
2013
2014
2012
25,810
(976)
-
-
2,840
(5,937)
-
(15,519)
921
76
7,215
68,368
(276)
10,000
-
217
(3,907)
-
(1,821)
350
64
72,995
71,318
(69,045)
-
(36,358)
(8,684)
(1,950)
(1,136)
-
4
14
(45,837)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(66,382)
179,318
$ 112,936
42,486
136,832
$ 179,318
(38,099)
174,931
$ 136,832
Supplemental cash flow information:
Interest paid
Income taxes paid
Transfers from loans to other real estate owned and other
assets held for sale
$ 6,557
$ 8,950
$ 7,179
$ 10,500
$ 12,251
$ 4,000
$ 2,357
$ 5,836
$ 4,048
Transfer from loans held for sale to loans
$ 1,178
$ 3,231
$ -
Securities traded but not yet settled
$ -
$ 742
$ 405
results could differ.
See accompanying notes.
First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that
conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First
Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management,
Inc. (“First Defiance Risk Management”). 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, trust and wealth management services. First
Insurance is an insurance agency that does business in the Defiance, Bryan, Bowling Green, Maumee and
Oregon, Ohio areas, offering property and casualty, and group health and life insurance products. First Defiance
Risk Management was incorporated on December 20, 2012, as a wholly owned insurance company subsidiary
of the Company to insure the Company and its subsidiaries against certain risks unique to the operations of the
Company and for which insurance may not be currently available or economically feasible in today’s insurance
marketplace.
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. These estimates and
assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income applicable to common shares (net income
less dividend requirements for preferred stock, accretion of preferred stock discount and redemption of
preferred stock) by the weighted average number of shares of common stock outstanding during the period. All
outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered
participating securities for the calculation. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options, warrants, restricted stock awards and stock
grants. See also Note 4.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive
income (loss) includes unrealized gains and losses on available-for-sale securities and the net unrecognized
actuarial losses and unrecognized prior service costs associated with the Company’s Defined Benefit
Postretirement Medical Plan. All items included in other comprehensive income are reported net of tax. See
also Notes 5 and 16 and the Statements of Comprehensive Income.
68
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69
Notes to the Consolidated Financial Statements
1. Basis of Presentation
First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that
conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First
Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management,
Inc. (“First Defiance Risk Management”). 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, trust and wealth management services. First
Insurance is an insurance agency that does business in the Defiance, Bryan, Bowling Green, Maumee and
Oregon, Ohio areas, offering property and casualty, and group health and life insurance products. First Defiance
Risk Management was incorporated on December 20, 2012, as a wholly owned insurance company subsidiary
of the Company to insure the Company and its subsidiaries against certain risks unique to the operations of the
Company and for which insurance may not be currently available or economically feasible in today’s insurance
marketplace.
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. These estimates and
assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual
results could differ.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income applicable to common shares (net income
less dividend requirements for preferred stock, accretion of preferred stock discount and redemption of
preferred stock) by the weighted average number of shares of common stock outstanding during the period. All
outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered
participating securities for the calculation. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options, warrants, restricted stock awards and stock
grants. See also Note 4.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive
income (loss) includes unrealized gains and losses on available-for-sale securities and the net unrecognized
actuarial losses and unrecognized prior service costs associated with the Company’s Defined Benefit
Postretirement Medical Plan. All items included in other comprehensive income are reported net of tax. See
also Notes 5 and 16 and the Statements of Comprehensive Income.
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- 69 -
Cash Flows
Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home
Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”). Cash and amounts due from depository
institutions include required balances on hand or on deposit at the FHLB and Federal Reserve of approximately
$6,456,000 and $1,506,000, respectively, at December 31, 2014 to meet regulatory reserve and clearing
requirements. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits
in other financial institutions and repurchase agreements.
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
other comprehensive income (loss) until realized. Realized gains and losses are included in gains (losses) on
securities or other-than-temporary impairment losses on securities. Realized gains and losses on securities sold
are recognized on the trade date based on the specific identification method.
Interest income includes amortization of purchase premiums and discounts. Premiums and discounts are
amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities
where prepayments are expected. Securities with unrealized losses are reviewed quarterly to determine if value
impairment is other–than-temporary. In performing this review management considers the length of time and
extent that fair value has been less than cost, the financial condition of the issuer, the impact of changes in
market interest rates on market value and whether the Company intends to sell or it would be more than likely
required to sell the securities prior to their anticipated recovery. If either of the criteria regarding intent or
requirement to sell is met, the entire difference between amortized cost and fair value is recognized as
impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of
impairment is split into two components as follows: (1) other-than-temporary impairment (“OTTI”) related to
credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is
recognized in other comprehensive income. The credit loss is defined as the difference between the present
value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire
amount of impairment is recognized through earnings.
FHLB Stock
First Federal is a member of the FHLB system. Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at
cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of
par value. Both cash and stock dividends are reported as income. At December 31, 2014, the Company holds
$13.8 million at the FHLB of Cincinnati and $10,000 at the FHLB of Indianapolis.
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff
are reported at the principal amount outstanding, net of deferred loan fees and costs, purchase premiums and
discounts and the allowance for loan losses. Deferred fees net of deferred incremental loan origination costs,
are amortized to interest income generally over the contractual life of the loan using the interest method without
anticipating prepayments. The recorded investment in loans includes accrued interest receivable and net
deferred fees and costs and undisbursed loan amounts.
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 aggregate cost or fair value, as determined by outstanding commitments from
investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage
loans sold is reduced by the amount allocated to the servicing right. Gains or losses on sales of mortgage loans
are based on the difference between the selling price and the carrying value of the related loan sold.
During 2014, 2013 and 2012, the Company had realized or accrued losses totaling $298,000, $597,000 and
$73,000 pertaining to loans sold to Fannie Mae and Freddie Mac but repurchased due to underwriting issues.
Repurchase losses are recognized when the Company determines they are probable and estimable.
Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90
days delinquent or impaired is discontinued when, in management’s opinion, the borrower may be unable to
meet payments as they become due. For these loans, interest accrual is 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 and the collection of principal and interest is reasonably assured.
Acquired Loans
collected.
Valuation allowances for all acquired loans subject to FASB ASC Topic 310 reflect only those losses incurred
after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be
The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews
each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is
probable that it will be unable to collect all amounts due according to the loan’s contractual terms. If both
conditions exist, the Company determines whether each such loan is to be accounted for individually or whether
such loans will be assembled into pools of loans based on common risk characteristics (credit score, loan type
and date of origination). The Company considers expected prepayments, and estimates the amount and timing
of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and
subsequently aggregated pool of loans.
The Company determines the excess of the loan’s or pool’s scheduled contractual principal and contractual
interest payments over all cash flows expected at acquisition as an amount that should not be accreted
(nonaccretable difference). The remaining amount—representing the excess of the loan’s cash flows expected
to be collected over the amount paid—is accreted into interest income over the remaining life of the loan or
pool (accretable yield).
Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected, and
evaluates whether the present value of its loans determined using the effective interest rates has decreased and,
if so, recognizes a loss. The present value of any subsequent increase in the loan’s or pool’s actual cash flows
or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or
pool. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of
accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.
70
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71
are amortized to interest income generally over the contractual life of the loan using the interest method without
anticipating prepayments. The recorded investment in loans includes accrued interest receivable and net
deferred fees and costs and undisbursed loan amounts.
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 aggregate cost or fair value, as determined by outstanding commitments from
investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage
loans sold is reduced by the amount allocated to the servicing right. Gains or losses on sales of mortgage loans
are based on the difference between the selling price and the carrying value of the related loan sold.
During 2014, 2013 and 2012, the Company had realized or accrued losses totaling $298,000, $597,000 and
$73,000 pertaining to loans sold to Fannie Mae and Freddie Mac but repurchased due to underwriting issues.
Repurchase losses are recognized when the Company determines they are probable and estimable.
Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90
days delinquent or impaired is discontinued when, in management’s opinion, the borrower may be unable to
meet payments as they become due. For these loans, interest accrual is 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 and the collection of principal and interest is reasonably assured.
Acquired Loans
Valuation allowances for all acquired loans subject to FASB ASC Topic 310 reflect only those losses incurred
after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be
collected.
The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews
each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is
probable that it will be unable to collect all amounts due according to the loan’s contractual terms. If both
conditions exist, the Company determines whether each such loan is to be accounted for individually or whether
such loans will be assembled into pools of loans based on common risk characteristics (credit score, loan type
and date of origination). The Company considers expected prepayments, and estimates the amount and timing
of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and
subsequently aggregated pool of loans.
The Company determines the excess of the loan’s or pool’s scheduled contractual principal and contractual
interest payments over all cash flows expected at acquisition as an amount that should not be accreted
(nonaccretable difference). The remaining amount—representing the excess of the loan’s cash flows expected
to be collected over the amount paid—is accreted into interest income over the remaining life of the loan or
pool (accretable yield).
Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected, and
evaluates whether the present value of its loans determined using the effective interest rates has decreased and,
if so, recognizes a loss. The present value of any subsequent increase in the loan’s or pool’s actual cash flows
or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or
pool. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of
accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.
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Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable
incurred losses 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 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. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be charged off.
For 2013 and 2014, management used a three-year look-back period in calculating the historical loss ratio.
Management is not certain that the relatively low levels of charge offs incurred in previous quarters are
sustainable given low levels of economic growth in certain markets of the Company’s footprint warranting the
use of a three-year look-back period. All quarters are given equal weighting in the calculation.
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 loss 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. Loans are considered past due when the contractual amounts due with
respect to principal and interest are not received within 30 days of the contractual due date. All loans are
placed on nonaccrual status at 90 days past due unless the loan is adequately secured and is in process of
collection. Any loan in the portfolio may be placed on nonaccrual status prior to becoming 90 days past due
when collection of principal or interest is in doubt.
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. Impaired loans have been recognized in conformity with FASB ASC Topic
310.
A loan is impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loans agreement. Loans, for which
terms have been modified and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings and classified as impaired. A cash flow analysis of the net present value is
performed and an allowance may be established based on the outcome of that analysis, or if the loan is deemed
to be collateral dependent an allowance is established based on the fair value of collateral. All modifications
are reviewed by the First Federal’s senior loan committee to determine whether or not the modification
constitutes a troubled debt restructure. Commercial and commercial real estate loans are individually evaluated
for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net of
the allowance allocation which is determined based on the present value of estimated future cash flows using
the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are
collectively evaluated for impairment, and accordingly, they are not separately identified for impairment
disclosures.
The general component covers non-impaired loans and is based on historical loss experience adjusted for
current factors. The historical loss experience is determined by portfolio segment and is based on the actual
loss history experienced by the Company over the most recent three years. Loss experience is adjusted for
other economic factors based on the identified risks, credit related or trends present for each portfolio segment.
These economic factors include consideration of the following: levels of and trends in delinquencies and
impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects
of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management and other relevant staff; national and local
economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The
following portfolio segments have been identified:
Commercial Real Estate Loans (consisting of multi-family residential and non-residential): Commercial real
estate loans are subject to underwriting standards and processes similar to commercial and industrial loans.
These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on
the successful operation of the property. Loan performance may be adversely affected by factors impacting the
general economy or conditions specific to the real estate market such as geographic location and/or property
type.
Commercial Loans: Commercial credit is extended primarily to middle market customers. Such credits are
typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and
other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful
amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and
projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The
cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in
value due to economic or individual performance factors. Minimum standards and underwriting guidelines have
been established for all commercial loan types.
Consumer Finance Loans: Consumer finance loans are generally made to borrowers for a specific consumer
purchase and are made based on their ability to repay with their current debt to income as well as the underlying
collateral value of the item being purchased. Credit scores are part of the decision process of whether or not
credit is extended. Minimum standards and underwriting guidelines have been established for all consumer
loan types.
1-4 Family Residential Real Estate Loans: 1-4 family residential real estate loans can be categorized two
different ways. One part of this portfolio is owner occupied and are made based primarily on the ability of the
individual borrower to support the payments as well as the payments of any other debt the borrower may have
outstanding at the time the loan is made. The other part of this portfolio is non-owner occupied income
producing property and is made primarily based on the cash flow stream from rental income as well as the cash
flow support from the borrower’s unrelated cash flow. Both types of loans have a secondary repayment source
of the underlying collateral and generally the loans are not extended at higher than an 80% LTV. Minimum
standards and underwriting guidelines have been established for all 1-4 family residential real estate loan types.
Construction Loans: The Company defines construction loans as loans where the loan proceeds are controlled
by the Company and used exclusively for the improvement of real estate in which the Company holds a
mortgage.
loans.
Home Equity and Improvement Loans: Home Equity and Improvement loans are made to borrowers based on
their ability to repay with their current debt to income as well as the underlying collateral value of the real
estate taken as security. Minimum standards and underwriting guidelines have been established for all 1-4
family residential real estate loan types.
Consumer finance, 1-4 family residential real estate (including construction) and home equity and improvement
loans are subject to adverse employment conditions in the local economy which could increase default rate on
72
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73
These economic factors include consideration of the following: levels of and trends in delinquencies and
impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects
of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management and other relevant staff; national and local
economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The
following portfolio segments have been identified:
Commercial Real Estate Loans (consisting of multi-family residential and non-residential): Commercial real
estate loans are subject to underwriting standards and processes similar to commercial and industrial loans.
These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on
the successful operation of the property. Loan performance may be adversely affected by factors impacting the
general economy or conditions specific to the real estate market such as geographic location and/or property
type.
Commercial Loans: Commercial credit is extended primarily to middle market customers. Such credits are
typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and
other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful
amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and
projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The
cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in
value due to economic or individual performance factors. Minimum standards and underwriting guidelines have
been established for all commercial loan types.
Consumer Finance Loans: Consumer finance loans are generally made to borrowers for a specific consumer
purchase and are made based on their ability to repay with their current debt to income as well as the underlying
collateral value of the item being purchased. Credit scores are part of the decision process of whether or not
credit is extended. Minimum standards and underwriting guidelines have been established for all consumer
loan types.
1-4 Family Residential Real Estate Loans: 1-4 family residential real estate loans can be categorized two
different ways. One part of this portfolio is owner occupied and are made based primarily on the ability of the
individual borrower to support the payments as well as the payments of any other debt the borrower may have
outstanding at the time the loan is made. The other part of this portfolio is non-owner occupied income
producing property and is made primarily based on the cash flow stream from rental income as well as the cash
flow support from the borrower’s unrelated cash flow. Both types of loans have a secondary repayment source
of the underlying collateral and generally the loans are not extended at higher than an 80% LTV. Minimum
standards and underwriting guidelines have been established for all 1-4 family residential real estate loan types.
Construction Loans: The Company defines construction loans as loans where the loan proceeds are controlled
by the Company and used exclusively for the improvement of real estate in which the Company holds a
mortgage.
Home Equity and Improvement Loans: Home Equity and Improvement loans are made to borrowers based on
their ability to repay with their current debt to income as well as the underlying collateral value of the real
estate taken as security. Minimum standards and underwriting guidelines have been established for all 1-4
family residential real estate loan types.
Consumer finance, 1-4 family residential real estate (including construction) and home equity and improvement
loans are subject to adverse employment conditions in the local economy which could increase default rate on
loans.
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Servicing Rights
Goodwill and Other Intangibles
Servicing rights are recognized separately when they are acquired through sales of loans. Servicing rights are
initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is
based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based
on a valuation model that calculates the present value of estimated future net servicing income. The valuation
model incorporates assumptions that market participants would use in estimating future net servicing income,
such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results
to published industry data in order to validate the model results and assumptions. All classes of servicing assets
are subsequently measured using the amortization method which requires servicing rights to be amortized into
non-interest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying loans, driven, generally, by changes in market interest rates.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying
amount. Impairment is determined by stratifying rights into groupings based on predominant risk
characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation
allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the
Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a
reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are
reported with mortgage banking income on the income statement. The fair values of servicing rights are subject
to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates
and losses.
Servicing fee income, which is reported on the income statement with mortgage banking income, is recorded for
fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a
fixed amount per loan, and are recorded as income when earned. The amortization of mortgage servicing rights
is netted against loan servicing fee income. Servicing fees totaled $3.6 million, $3.6 million and $3.4 million for
the years ended December 31, 2014, 2013 and 2012. Late fees and ancillary fees related to loan servicing are
not material. See Note 8.
Bank Owned Life Insurance
The Company has purchased life insurance policies for certain key employees. Bank owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the
cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment and Long Lived Assets
Land is carried at cost. 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
Furniture, fixtures and equipment
20 to 50 years
3 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles are periodically evaluated for
impairment. See Note 9.
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase
price over the fair value of the net assets of businesses acquired. Goodwill resulting from business
combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net
assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life are not amortized, but tested for
impairment at least annually. The Company has selected November 30 as the date to perform the annual
impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to
their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s
balance sheet.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from
whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on
an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10
to 20 years for core deposit and customer relationship intangibles. See Note 10.
Real Estate and Other Assets Held for Sale
Other assets held for sale are comprised of properties acquired through foreclosure proceedings or acceptance
of a deed in lieu of foreclosure. These assets are initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis. Losses arising from the acquisition of such property are charged against the
allowance for loan losses at the time of acquisition. These properties are carried at the lower of cost or fair
value, less estimated costs to dispose. If fair value declines subsequent to foreclosure, the property is written
down against expense. Costs after acquisition are expensed.
Stock Compensation Plans
Compensation cost is recognized for stock options and restricted share awards issued to employees and
directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options. Restricted shares awards are valued at the market value of Company
stock at the date of the grant. Compensation cost is recognized over the required service period, generally
defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-
line basis over the requisite service period for the entire award. See Note 20.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as
more fully disclosed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets
for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the
Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.
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75
Goodwill and Other Intangibles
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase
price over the fair value of the net assets of businesses acquired. Goodwill resulting from business
combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net
assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life are not amortized, but tested for
impairment at least annually. The Company has selected November 30 as the date to perform the annual
impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to
their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s
balance sheet.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from
whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on
an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10
to 20 years for core deposit and customer relationship intangibles. See Note 10.
Real Estate and Other Assets Held for Sale
Other assets held for sale are comprised of properties acquired through foreclosure proceedings or acceptance
of a deed in lieu of foreclosure. These assets are initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis. Losses arising from the acquisition of such property are charged against the
allowance for loan losses at the time of acquisition. These properties are carried at the lower of cost or fair
value, less estimated costs to dispose. If fair value declines subsequent to foreclosure, the property is written
down against expense. Costs after acquisition are expensed.
Stock Compensation Plans
Compensation cost is recognized for stock options and restricted share awards issued to employees and
directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options. Restricted shares awards are valued at the market value of Company
stock at the date of the grant. Compensation cost is recognized over the required service period, generally
defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-
line basis over the requisite service period for the entire award. See Note 20.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as
more fully disclosed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets
for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the
Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.
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Mortgage Banking Derivatives
Income Taxes
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward
commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair
values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the
interest on the loan is locked. The Company enters into forward commitments for the future delivery of
mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting
from its commitments to fund the loans. Changes in fair values of these derivatives are included in mortgage
banking income.
Operating Segments
Management considers the following factors in determining the need to disclose separate operating segments:
(1) The nature of products and services, which are all financial in nature; (2) The type and class of customer for
the products and services; in First Defiance’s case retail customers for retail bank and insurance products and
commercial customers for commercial loan, deposit, life, health and property and casualty insurance needs; (3)
The methods used to distribute products or provide services; such services are delivered through banking and
insurance offices and through bank and insurance customer contact representatives. Retail and commercial
customers are frequently targets for both banking and insurance products; (4) The nature of the regulatory
environment; both banking and insurance entities are subject to various regulatory bodies and a number of
specific regulations.
Quantitative thresholds as stated in Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 280, Segment Reporting are monitored. For the year ended December 31, 2014, the
reported revenue for First Insurance was 9.1% of total revenue for First Defiance. Total revenue includes net
interest income (before provision for loan losses) plus non-interest income. Net income for First Insurance for
the year ended December 31, 2014 was 4.2% of consolidated net income. Total assets of First Insurance at
December 31, 2014 were 0.6% of total assets. First Insurance does not meet any of the quantitative thresholds
of FASB ASC Topic 280. Accordingly, all of the financial service operations are considered by management to
be aggregated in one reportable segment.
Dividend Restriction
Accounting Standards Updates
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the savings
bank to the holding company. See Note 17 for further details on restrictions.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and
commercial letters of credit, issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded
as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are any such matters that will have a material effect on the financial
statements.
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Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.
A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Realization
of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and
recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely
than not that all of the deferred tax assets will be realized.
An effective tax rate of 35% is used to determine after-tax components of other comprehensive income (loss)
included in the statements of stockholders’ equity. See Note 18.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions
not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and
losses not immediately recognized. Employee 401(k) plan expense is the amount of matching contributions.
Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Retirement Plans
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
In January 2014, the FASB issued ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing
Projects." ASU 2014-01 applies to all reporting entities that invest in qualified affordable housing projects
through limited liability entities. The pronouncement permits reporting entities to make an accounting policy
election to account for these investments using the proportional amortization method if certain conditions exist.
The pronouncement also requires disclosure that enables users of its financial statements to understand the
nature of these investments. Under the proportional amortization method, an entity amortizes the initial cost of
the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment
performance in the income statement as a component of income tax expense (benefit). The pronouncement
should be applied retrospectively for all periods presented, effective for annual periods and interim reporting
periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The
Company elected to early adopt ASU 2014-01 in January 2014 and such adoption did not have a material
impact on the Company’s Consolidated Financial Statements. As of December 31, 2014, the Company had
$4.6 million in qualified investments recorded in other assets, $3.0 million in unfunded commitments recorded
in other liabilities and $117,000 of tax credits (benefit) recorded in federal income taxes.
In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in ASU 2014-04 to Topic
310, “Receivables - Troubled Debt Restructurings by Creditors,” is to reduce diversity by clarifying when an in
77
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.
A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Realization
of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and
recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely
than not that all of the deferred tax assets will be realized.
An effective tax rate of 35% is used to determine after-tax components of other comprehensive income (loss)
included in the statements of stockholders’ equity. See Note 18.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions
not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement Plans
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and
losses not immediately recognized. Employee 401(k) plan expense is the amount of matching contributions.
Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
Accounting Standards Updates
In January 2014, the FASB issued ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing
Projects." ASU 2014-01 applies to all reporting entities that invest in qualified affordable housing projects
through limited liability entities. The pronouncement permits reporting entities to make an accounting policy
election to account for these investments using the proportional amortization method if certain conditions exist.
The pronouncement also requires disclosure that enables users of its financial statements to understand the
nature of these investments. Under the proportional amortization method, an entity amortizes the initial cost of
the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment
performance in the income statement as a component of income tax expense (benefit). The pronouncement
should be applied retrospectively for all periods presented, effective for annual periods and interim reporting
periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The
Company elected to early adopt ASU 2014-01 in January 2014 and such adoption did not have a material
impact on the Company’s Consolidated Financial Statements. As of December 31, 2014, the Company had
$4.6 million in qualified investments recorded in other assets, $3.0 million in unfunded commitments recorded
in other liabilities and $117,000 of tax credits (benefit) recorded in federal income taxes.
In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized
Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in ASU 2014-04 to Topic
310, “Receivables - Troubled Debt Restructurings by Creditors,” is to reduce diversity by clarifying when an in
77
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4. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
Numerator for basic and diluted earnings per
common share-net income applicable to common
shares
Denominator:
Denominator for basic earnings per common
share-weighted-average common shares,
including participating securities
Effect of dilutive securities:
Employee stock options
Warrants
Dilutive potential common shares
Denominator for diluted earnings per common
share
Basic earnings per common share
Diluted earnings per common share
2014
2013
2012
(In Thousands, Except Per Share Amounts)
$ 24,292
$ 22,235
$ 18,047
9,511
9,764
9,728
111
353
464
87
320
407
51
219
270
9,975
2.55
2.44
$
$
10,171
2.28
2.19
$
$
9,998
1.86
1.81
$
$
Shares subject to issue upon exercise of option of 10,500 in 2014, 132,750 in 2013 and 229,550 in 2012 were
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received
physical possession of residential real estate property collateralizing a consumer mortgage loan such that the
loan receivable should be derecognized and the real estate property recognized. The amendments are effective
for fiscal years, and interim periods within those years, beginning after December 15, 2014. An entity can elect
to adopt the amendments using either a modified retrospective transition method or a prospective transition
method. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on
the Company’s Consolidated Financial Statements.
In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of
an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." The
amendments in the ASU require that a performance target that affects vesting and that could be achieved after
the requisite service period be treated as a performance condition. A reporting entity should apply existing
guidance in Topic 718, Compensation - Stock Compensation, as it relates to awards with performance
conditions that affect vesting to account for such awards. The performance target should not be reflected in
estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in
which it becomes probable that the performance target will be achieved and should represent the compensation
cost attributable to the period(s) for which the requisite service has already been rendered. If the performance
target becomes probable of being achieved before the end of the requisite service period, the remaining
unrecognized compensation cost should be recognized prospectively over the remaining requisite service
period. The total amount of compensation cost recognized during and after the requisite service period should
reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that
ultimately vest. The requisite service period ends when the employee can cease rendering service and still be
eligible to vest in the award if the performance target is achieved. The amendments in this ASU are effective
for interim or annual reporting periods beginning after December 15, 2015; early adoption is permitted.
Entities may apply the amendments in this ASU either: (1) prospectively to all awards granted or modified after
the effective date; or (2) retrospectively to all awards with performance targets that are outstanding as of the
beginning of the earliest annual period presented in the financial statements and to all new or modified awards
thereafter. The adoption of ASU No. 2014-12 is not expected to have a material impact on the Company's
Consolidated Financial Statements.
3. Acquisitions
On July 1, 2011, First Defiance acquired PDI, an insurance agency headquartered in Maumee and Oregon,
Ohio, for a cash purchase price of $4.8 million and future consideration to be paid in cash in 2012, 2013, and
2014. As of December 31, 2014, management has reported goodwill of approximately $4.0 million and
identifiable intangible assets of $689,000 consisting of a customer relationship intangible of $482,000 and a
non-compete intangible of $207,000. The transaction included a contingent payable with a maximum cash
payout of $822,800, of which $157,000, $596,000 and $70,000 was paid in 2014, 2013 and 2012, respectively.
$20,000 was expensed in 2014 with the final payout. The Company accounted for the transaction under the
acquisition method of accounting which requires purchased assets and assumed liabilities to be recorded at their
respective acquisition date fair value. Disclosure of pro forma results of this acquisition is not material to the
Company’s consolidated financial statements.
78
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79
4. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
Numerator for basic and diluted earnings per
common share-net income applicable to common
shares
Denominator:
Denominator for basic earnings per common
share-weighted-average common shares,
including participating securities
Effect of dilutive securities:
Employee stock options
Warrants
Dilutive potential common shares
Denominator for diluted earnings per common
share
Basic earnings per common share
Diluted earnings per common share
2012
2013
2014
(In Thousands, Except Per Share Amounts)
$ 24,292
$ 22,235
$ 18,047
9,511
9,764
9,728
111
353
464
87
320
407
51
219
270
9,975
2.55
2.44
$
$
10,171
2.28
2.19
$
$
9,998
1.86
1.81
$
$
Shares subject to issue upon exercise of option of 10,500 in 2014, 132,750 in 2013 and 229,550 in 2012 were
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
79
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5. Investment Securities
The following tables summarize the amortized cost and fair value of available-for-sale securities and held-to-
maturity investment securities at December 31, 2014 and 2013 and the corresponding amounts of gross
unrealized gains and losses:
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
(In Thousands)
2014
Available-for-sale
Obligations of U.S. government corporations
and agencies
Mortgage-backed securities - residential
REMICs
Collateralized mortgage obligations
Trust preferred stock and preferred stock
Corporate bonds
Obligations of state and political
$
$
1,000
58,380
1,820
80,252
-
6,913
$
-
1,476
19
1,280
1
85
subdivisions
Total Available-for-Sale
83,732
$ 232,097
4,827
$ 7,688
$
(20)
-
-
(411)
-
(6)
(27)
(464)
$ 980
59,856
1,839
81,121
1
6,992
88,532
$ 239,321
Gross
Amortized Unrecognized Unrecognized
Gains
Losses
Gross
Cost
Fair
Value
Held-to-Maturity
FHLMC certificates
FNMA certificates
GNMA certificates
Obligations of states and political
subdivisions
Total Held-to-Maturity
(In Thousands)
$
$
26
93
39
155
313
$
$
-
2
1
-
3
$
$
(8)
-
-
-
(8)
$ 18
95
40
155
$ 308
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
Held-to-Maturity
FHLMC certificates
FNMA certificates
GNMA certificates
Obligations of states and political
subdivisions
Total Held-to-Maturity
Gross
Gross
Amortized Unrecognized Unrecognized
Cost
Gains
Losses
Fair
Value
(In Thousands)
$
$
$
$
31
120
50
186
387
-
4
2
-
6
-
-
-
-
-
31
124
52
186
393
$
$
$
$
The amortized cost and fair value of the investment securities portfolio at December 31, 2014 is shown below
by contractual maturity. Expected maturities will differ from contractual maturities if borrowers have the right
to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity tables
below, mortgage-backed securities and collateralized mortgage obligations, which are not due at a single
maturity date, have not been allocated over maturity groupings.
2014
Available-for-sale
Due in one year or less
Due after one year through
Due after five years through
five years
ten years
Due after ten years
MBS/CMO/REMIC
Total
Held-to-maturity
Due after five years through
ten years
MBS/CMO
Total
Available-for-Sale
Amortized
Cost
Fair
Value
(In Thousands)
$
2,004
$
2,017
9,714
10,066
38,648
41,279
140,452
40,861
43,561
142,816
$ 232,097
$ 239,321
$
$
155
158
155
153
$ 313
$ 308
2013
Available-for-sale
Obligations of U.S. government corporations
and agencies
Mortgage-backed securities - residential
Collateralized mortgage obligations
Trust preferred stock and preferred stock
Corporate bonds
Obligations of state and political
(In Thousands)
Securities pledged at year-end 2014 and 2013 had a carrying amount of $141.2 million and $132.7 million and
were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
$
$
5,000
41,368
59,865
3,264
8,854
-
765
739
683
129
$
(79)
(841)
(763)
(993)
(41)
$ 4,921
41,292
59,841
2,954
8,942
As of December 31, 2014, the Company’s investment portfolio consisted of 356 securities, 26 of which were in
an unrealized loss position. The Company does not hold any single security that is greater than 10% of the
Company’s equity at December 31, 2014.
subdivisions
Total Available-for-Sale
78,426
$ 196,777
2,704
$ 5,020
(910)
$ (3,627)
80,220
$ 198,170
80
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81
Gross
Amortized Unrecognized Unrecognized
Gains
Losses
Gross
Cost
Fair
Value
Held-to-Maturity
FHLMC certificates
FNMA certificates
GNMA certificates
Obligations of states and political
subdivisions
Total Held-to-Maturity
(In Thousands)
$
$
31
120
50
186
387
$
$
-
4
2
-
6
$
$
-
-
-
-
-
$
$
31
124
52
186
393
The amortized cost and fair value of the investment securities portfolio at December 31, 2014 is shown below
by contractual maturity. Expected maturities will differ from contractual maturities if borrowers have the right
to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity tables
below, mortgage-backed securities and collateralized mortgage obligations, which are not due at a single
maturity date, have not been allocated over maturity groupings.
2014
Available-for-sale
Due in one year or less
Due after one year through
five years
Due after five years through
ten years
Due after ten years
MBS/CMO/REMIC
Total
Held-to-maturity
Due after five years through
ten years
MBS/CMO
Total
Available-for-Sale
Fair
Value
Amortized
Cost
(In Thousands)
$
2,004
$
2,017
9,714
10,066
38,648
41,279
140,452
$ 232,097
40,861
43,561
142,816
$ 239,321
$
155
158
$ 313
$
155
153
$ 308
Securities pledged at year-end 2014 and 2013 had a carrying amount of $141.2 million and $132.7 million and
were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
As of December 31, 2014, the Company’s investment portfolio consisted of 356 securities, 26 of which were in
an unrealized loss position. The Company does not hold any single security that is greater than 10% of the
Company’s equity at December 31, 2014.
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The following table summarizes First Defiance’s securities that were in an unrealized loss position at December
31, 2014 and December 31, 2013:
Duration of Unrealized Loss Position
Less than 12 Months
Gross
Unrealized
Loss
Fair
Value
12 Months or Longer
Gross
Unrealized
Loss
Fair
Value
(In Thousands)
Total
Fair
Value
Unrealized
Loses
$
-
$
-
$
980
$
(20)
$
980
$
(20)
4,466
-
1,194
18
(138)
-
(8)
(8)
14,633
994
1,499
-
(273)
(6)
(19)
-
19,099
994
2,693
18
(411)
(6)
(27)
(8)
$
5,678
$
(154)
$ 18,106
$
(318)
$
23,784
$ (472)
$
4,921
$
(79)
$
residential
24,846
(841)
$
-
-
-
-
375
582
-
-
-
-
(39)
(993)
$
4,921
$
(79)
24,846
(841)
26,530
2,959
(763)
(41)
19,584
(910)
582
(993)
26,530
2,959
(763)
(41)
19,209
(871)
-
-
$ 78,465
$ (2,595)
$
957
$ (1,032)
$
79,422
$ (3,627)
At December 31, 2014
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Collateralized mortgage
obligations
Corporate bonds
Obligations of state and political
subdivisions
Held to maturity securities:
FHLMC certificates
Total temporarily impaired
securities
At December 31, 2013
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Mortgage-backed securities -
Collateralized mortgage
obligations
Corporate bonds
Obligations of state and political
subdivisions
Trust preferred stock and
preferred stock
Total temporarily impaired
securities
With the exception of trust preferred securities and corporate bonds, the above securities all have fixed interest
rates, and all securities have 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 and it is not more than likely that the Company will be
required to sell the investments before anticipated recovery.
Realized gains from the sales and calls of investment securities totaled $932,000 ($652,000 after tax) in 2014
while there were realized gains of $97,000 ($68,000 after tax) and $2.1 million ($1.4 million after tax) in 2013
and 2012, respectively.
Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or
market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating
the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity
are generally evaluated for OTTI under FASB ASC Topic 320. Certain collateralized debt obligations
(“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.
When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an
entity intends to sell the security or more likely than not will be required to sell the security before recovery of
its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will
be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the
OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost
82
- 82 -
83
basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not
more likely than not that the entity will be required to sell the security before recovery of its amortized cost
basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and
the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the
present value of cash flows expected to be collected compared to the book value of the security and is
recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive
income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall
become the new amortized cost basis of the investment.
In 2014, management determined there was no OTTI. In 2013, management determined that two CDOs had
OTTI resulting in a write-down of $337,000 ($219,000 after tax). The 2013 OTTI was related to two CDOs
that were disallowed under the Final Interim Volcker Rule of the Dodd-Frank Act released on January 14, 2014,
requiring the Company to liquidate these securities before a certain date. The Company received Level 1
pricing and wrote these two CDOs to that value as of December 31, 2013 and subsequently sold these two
securities on January 15, 2014. In 2012, management determined that one CDO had OTTI resulting in a write-
down of $4,500 ($2,900 after tax).
The Company holds three CDOs at December 31, 2014 with a zero value.
The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) relating to the CDOs
was zero at December 31, 2014. There was $645,000 of OTTI recognized in accumulated other comprehensive
income at December 31, 2013.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for
the years ended December 31, 2014, 2013 and 2012 (In Thousands):
Beginning balance, January 1
Additions for amounts related to credit loss for which an OTTI
was not previously recognized
2014
2013
2012
$ 3,513 $ 3,176 $ 3,251
-
337
-
Reductions for amounts realized for securities sold/redeemed during the
period
(3,513)
(80)
Reductions for amounts related to securities for which the Company
intends to sell or that it will be more likely than not that the Company
will be required to sell prior to recovery of amortized cost basis
Reductions for increase in cash flows expected to be collected that are
Recognized over the remaining life of the security
Increases to the amount related to the credit loss for which
Other-than-temporary was previously recognized
-
-
-
-
-
-
5
-
-
-
Ending balance, December 31
$ - $ 3,513 $ 3,176
basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not
more likely than not that the entity will be required to sell the security before recovery of its amortized cost
basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and
the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the
present value of cash flows expected to be collected compared to the book value of the security and is
recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive
income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall
become the new amortized cost basis of the investment.
In 2014, management determined there was no OTTI. In 2013, management determined that two CDOs had
OTTI resulting in a write-down of $337,000 ($219,000 after tax). The 2013 OTTI was related to two CDOs
that were disallowed under the Final Interim Volcker Rule of the Dodd-Frank Act released on January 14, 2014,
requiring the Company to liquidate these securities before a certain date. The Company received Level 1
pricing and wrote these two CDOs to that value as of December 31, 2013 and subsequently sold these two
securities on January 15, 2014. In 2012, management determined that one CDO had OTTI resulting in a write-
down of $4,500 ($2,900 after tax).
The Company holds three CDOs at December 31, 2014 with a zero value.
The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) relating to the CDOs
was zero at December 31, 2014. There was $645,000 of OTTI recognized in accumulated other comprehensive
income at December 31, 2013.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for
the years ended December 31, 2014, 2013 and 2012 (In Thousands):
Beginning balance, January 1
Additions for amounts related to credit loss for which an OTTI
was not previously recognized
2014
2013
$ 3,513 $ 3,176 $ 3,251
2012
-
337
-
Reductions for amounts realized for securities sold/redeemed during the
period
(3,513)
Reductions for amounts related to securities for which the Company
intends to sell or that it will be more likely than not that the Company
will be required to sell prior to recovery of amortized cost basis
Reductions for increase in cash flows expected to be collected that are
Recognized over the remaining life of the security
Increases to the amount related to the credit loss for which
Other-than-temporary was previously recognized
-
-
-
-
-
-
-
(80)
-
-
5
Ending balance, December 31
$ - $ 3,513 $ 3,176
83
- 83 -
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
Proceeds
Gross realized gains
Gross realized losses
2014
$ 14,913
1,574
(642)
6. Commitments and Contingent Liabilities
Loan Commitments
2013
(In Thousands)
$
2012
4,027
97
-
$ 72,262
2,163
(24)
Loan commitments are made to accommodate the financial needs of 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):
Commitments to make loans
Unused lines of credit
Standby letters of credit
Total
Fixed Rate
37,546
20,385
-
57,931
$
$
2014
Variable Rate
$
$
69,232
307,449
17,886
394,567
Fixed Rate
57,914
18,047
-
75,962
$
$
2013
$
Variable Rate
59,632
257,939
17,680
335,251
$
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan
commitments at December 31, 2014 have interest rates ranging from 2.00% to 18.00% and maturities ranging
from less than 1 year to 30 years.
In addition to the above commitments, at December 31, 2014, First Defiance had commitments to sell $11.6
million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage.
84
- 84 -
7. Loans
Loans receivable consist of the following:
Real Estate:
Secured by 1-4 family residential
Secured by multi-family residential
Secured by commercial real estate
Construction
Other Loans:
Commercial
Home equity and improvement
Consumer Finance
Total loans
Deduct:
December 31,
2014
December 31,
2013
(In Thousands)
$
206,437
156,530
683,958
112,385
1,159,310
399,730
111,813
15,466
527,009
1,686,319
$
195,752
148,952
670,666
86,058
1,101,428
388,236
106,930
16,902
512,068
1,613,496
Undisbursed loan funds
Net deferred loan origination fees and costs
Allowance for loan loss
Totals
(38,653)
(880)
(24,766)
$ 1,622,020
(32,290)
(758)
(24,950)
$ 1,555,498
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
The following table discloses allowance for loan loss activity year to date as of December 31, 2014, December
31, 2013, and December 31, 2012 by portfolio segment (In Thousands):
Year to Date December 31,
2014
1-4 Family
Residential
Real Estate
Multi- Family
Residential
Real Estate
Commercial
Real Estate
Construction
Commercial
Home Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$ 2,847
$ 2,508
$ 12,000
$ 134
$ 5,678
$ 1,635
$ 148
$ 24,950
Charge-Offs
(426)
-
(1,018)
-
(2,982)
(392)
(41)
(4,859)
Recoveries
Provisions
188
7
2,670
-
435
(115)
(62)
(2,384)
87
3,378
193
268
65
3,558
(55)
1,117
Ending Allowance
$ 2,494
$ 2,453
$ 11,268
$ 221
$ 6,509
$ 1,704
$ 117
$ 24,766
Year to Date December 31,
2013
1-4 Family
Residential
Real Estate
Multi- Family
Residential
Real Estate
Commercial
Real Estate
Construction
Commercial
Home Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$ 3,506
$ 2,197
$ 12,702
$ 75
$ 6,325
$ 1,759
$ 147
$ 26,711
Charge-Offs
(643)
(6)
(2,469)
-
(1,230)
(757)
(94)
(5,199)
Recoveries
Provisions
282
-
837
-
(298)
317
930
59
290
293
125
508
80
1,614
15
1,824
Ending Allowance
$ 2,847
$ 2,508
$ 12,000
$ 134
$ 5,678
$ 1,635
$ 148
$ 24,950
85
- 85 -
Year-to-Date December 31,
2012
1-4 Family
Residential
Real Estate
Multi- Family
Residential
Real Estate
Commercial
Real Estate
Construction
Commercial
Home Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$ 4,095
$ 2,850
$ 17,640
$ 63
$ 6,576
$ 1,856
$ 174
$ 33,254
Charge-Offs
(2,515)
(555)
(10,764)
-
(4,047)
(1,165)
(133)
(19,179)
Recoveries
Provisions
177
1,749
122
(220)
895
-
359
4,931
12
3,437
95
973
64
1,712
42
10,924
Ending Allowance
$ 3,506
$ 2,197
$ 12,702
$ 75
$ 6,325
$ 1,759
$ 147
$ 26,711
86
- 86 -
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The following table presents the average balance, interest income recognized and cash basis income
recognized on impaired loans by class of loans (In Thousands):
Twelve Months Ended December 31,
2014
Interest
Income
Recognized
Cash Basis
Income
Recognized
Average
Balance
Residential Owner
Occupied
Residential Non
Owner Occupied
Total 1-4 Family
Residential Real
Estate
Multi-Family
Residential Real
Estate
CRE Owner Occupied
CRE Non Owner
Occupied
Agriculture Land
Other CRE
Total Commercial
Real Estate
Construction
Commercial Working
Capital
Commercial Other
Total Commercial
Home Equity and
Home Improvement
Consumer Finance
Total Impaired
Loans
$
6,177
$
317
$
313
3,920
10,097
903
8,906
18,164
611
1,694
29,375
233
2,790
4,576
7,366
2,233
47
143
460
4
145
807
14
20
986
12
29
14
43
95
3
143
456
4
142
809
14
22
987
15
29
12
41
94
3
$ 50,254
$ 1,603
$1,600
- 89 -
- 89 -
The following table presents the average balance, interest income recognized and cash basis income
recognized on impaired loans by class of loans (In Thousands):
Twelve Months Ended December 31,
2013
Interest
Income
Recognized
Cash Basis
Income
Recognized
Average
Balance
Residential Owner
Occupied
Residential Non
Owner Occupied
Total 1-4 Family
Residential Real
Estate
Multi-Family
Residential Real
Estate
CRE Owner Occupied
CRE Non Owner
Occupied
Agriculture Land
Other CRE
Total Commercial
Real Estate
Construction
Commercial Working
Capital
Commercial Other
Total Commercial
Home Equity and
Home Improvement
Consumer Finance
Total Impaired
Loans
$
6,529
$
345
$
343
4,453
10,982
1,176
14,313
22,339
987
4,162
41,801
165
2,085
6,521
8,606
2,631
83
162
507
27
376
901
26
43
1,346
10
33
75
108
121
6
163
506
28
386
909
16
38
1,349
8
36
70
106
117
6
$ 65,444
$ 2,125
$2,120
- 90 -
- 90 -
The following table presents the average balance, interest income recognized and cash basis income
recognized on impaired loans by class of loans (In Thousands):
Twelve Months Ended December 31,
2012
Interest
Income
Recognized
Cash Basis
Income
Recognized
Average
Balance
Residential Owner
Occupied
Residential Non
Owner Occupied
Total 1-4 Family
Residential Real
Estate
Multi-Family
Residential Real
Estate
CRE Owner Occupied
CRE Non Owner
Occupied
Agriculture Land
Other CRE
Total Commercial
Real Estate
Construction
Commercial Working
Capital
Commercial Other
Total Commercial
Home Equity and
Home Improvement
Consumer Finance
Total Impaired
Loans
$
2,946
$
137
$
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5,291
8,237
826
11,755
17,156
1,062
6,672
36,645
9
2,021
5,018
7,039
563
25
173
310
22
190
540
31
15
776
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26
87
113
33
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177
313
21
176
559
23
15
773
-
29
90
119
33
3
$ 53,344
$ 1,257
$1,262
- 91 -
- 91 -
The following table presents loans individually evaluated for impairment by class of loans (In
Thousands):
The following table presents the current balance of the aggregate amounts of non-performing assets,
comprised of non-performing loans and real estate owned on the dates indicated:
December 31, 2014
December 31, 2013
Unpaid
Principal
Balance*
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Unpaid
Principal
Balance*
Allowance
for Loan
Losses
Allocated
Recorded
Investment
$ 3,967
3,763
7,730
$ 3,859
3,670
7,529
$ -
-
-
$ 4,744
4,844
9,588
$ 4,729
4,329
9,058
$ -
-
-
2,627
7,109
4,106
213
2,923
14,351
150
1,155
3,966
5,121
2,192
35
2,482
6,481
3,759
208
2,378
12,826
150
1,157
3,663
4,820
2,140
34
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-
-
-
-
-
-
-
-
-
-
-
989
11,105
9,399
629
3,274
24,407
300
3,147
6,063
9,210
1,985
53
840
8,376
7,740
488
2,452
19,056
263
3,146
5,415
8,561
1,992
53
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-
-
-
-
-
-
-
-
-
-
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With no allowance recorded:
Residential Owner Occupied
Residential Non Owner Occupied
Total 1-4 Family Residential Real
Estate
Multi-Family Residential Real Estate
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Total Commercial Real Estate
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
Total loans with no allowance recorded
$ 32,206
$ 29,981
$ -
$ 46,532
$ 39,823
$ -
Total 1-4 Family Residential Real
Estate
204,588
1,184
943
2,276
3,327
With an allowance recorded:
Residential Owner Occupied
Residential Non Owner Occupied
Total 1-4 Family Residential Real
Estate
Multi-Family Residential Real Estate
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Total Commercial Real Estate
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
Total loans with an allowance recorded
* Presented gross of charge offs
$ 2,112
636
2,748
$ 2,114
638
2,752
$ 204
12
216
$ 1,100
84
1,184
$ 1,103
84
1,187
$ 218
2
220
-
2,667
13,020
333
137
16,157
-
649
264
913
101
-
$ 19,919
-
2,257
12,606
320
108
15,291
-
650
269
919
102
-
$ 19,064
-
148
842
10
3
1,003
-
21
9
30
24
-
$ 1,273
-
3,212
12,756
195
82
16,245
-
-
176
176
436
-
$ 18,041
-
2,765
12,803
197
53
15,818
-
-
176
176
437
-
$ 17,618
-
166
946
7
2
1,121
-
-
6
6
45
-
$ 1,392
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
Construction
Commercial Working Capital
Commercial Other
Total Commercial
- 92 -
- 92 -
Non-accrual loans
Loans over 90 days past due and still accruing
Total non-performing loans
Real estate and other assets held for sale
Total non-performing assets
December 31,
December 31,
(In Thousands)
2014
$ 24,130
-
24,130
6,181
$ 30,311
2013
$ 27,847
-
27,847
5,859
$ 33,706
Troubled debt restructuring, still accruing
$ 24,686
$ 27,630
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2014 by class of loans (In Thousands):
Residential Owner Occupied
Residential Non Owner Occupied
$ 141,597
62,991
$ 39
110
$ 1,079
$ 365 $ 1,483
$ 1,702
105
578
793
1,625
Current
30-59 days
60-89 days 90+ days
Past Due
Accrual
Total
Total Non
Multi-Family Residential Real Estate
156,413
-
-
247
2,546
Total Commercial Real Estate
680,205
437
1,996
3,319
5,752
12,631
149
247
163
119
-
155
-
-
67
67
1,566
416
14
-
1,753
1,308
-
258
3,482
1,843
14
413
7,004
2,582
686
2,359
-
-
-
951
2,012
951
2,089
1,103
3,897
2,963
3,040
5,000
-
-
10
10
-
57
299,500
243,341
93,529
43,835
73,722
135,009
262,982
397,991
110,940
15,326
- 93 -
Home Equity and Home Improvement
Consumer Finance
1,236
68
106
-
1,342
125
619
12
Total Loans
$ 1,639,185
$ 2,204
$ 3,247
$ 7,331
$ 12,782
$ 24,135
The following table presents the current balance of the aggregate amounts of non-performing assets,
comprised of non-performing loans and real estate owned on the dates indicated:
Non-accrual loans
Loans over 90 days past due and still accruing
Total non-performing loans
Real estate and other assets held for sale
Total non-performing assets
December 31,
2014
December 31,
2013
(In Thousands)
$ 24,130
-
24,130
6,181
$ 30,311
$ 27,847
-
27,847
5,859
$ 33,706
Troubled debt restructuring, still accruing
$ 24,686
$ 27,630
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2014 by class of loans (In Thousands):
Current
30-59 days
60-89 days 90+ days
Total
Past Due
Total Non
Accrual
Residential Owner Occupied
Residential Non Owner Occupied
$ 141,597
62,991
$ 39
110
$ 1,079
105
$ 365 $ 1,483
793
578
$ 1,702
1,625
Total 1-4 Family Residential Real
Estate
204,588
Multi-Family Residential Real Estate
156,413
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
299,500
243,341
93,529
43,835
149
247
163
119
-
155
1,184
943
2,276
3,327
-
-
247
2,546
1,566
416
14
-
1,753
1,308
-
258
3,482
1,843
14
413
7,004
2,582
686
2,359
Total Commercial Real Estate
680,205
437
1,996
3,319
5,752
12,631
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
73,722
135,009
262,982
397,991
110,940
15,326
-
-
67
67
1,236
68
-
-
10
10
-
57
-
-
-
951
2,012
951
2,089
1,103
3,897
2,963
3,040
5,000
106
-
1,342
125
619
12
Total Loans
$ 1,639,185
$ 2,204
$ 3,247
$ 7,331
$ 12,782
$ 24,135
- 93 -
- 93 -
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2013 by class of loans: (In Thousands)
Current
30-59 days
60-89 days 90+ days
Total
Past Due
Total Non
Accrual
Residential Owner Occupied
Residential Non Owner Occupied
$ 126,855
65,292
$ 1,530
531
$ 191 $ 1,009 $ 2,730
1,320
386
403
$ 1,329
1,943
Total 1-4 Family Residential Real
Estate
192,147
2,061
594
1,395
4,050
3,272
Multi-Family Residential Real Estate
149,134
-
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
311,253
225,433
81,954
45,297
334
1,067
21
-
-
495
918
-
-
-
-
583
3,671
902
73
1,287
4,500
2,887
94
1,287
7,492
4,717
630
2,412
Total Commercial Real Estate
663,937
1,422
1,413
5,933
8,768
15,251
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
53,730
155,373
230,054
385,427
105,657
16,759
-
-
37
37
-
-
26
-
-
-
419
3,566
419
3,629
2,917
5,419
26
3,985
4,048
8,336
1,163
131
155
-
413
-
1,731
131
413
-
Total Loans
$ 1,566,791
$ 4,814
$ 2,188 $ 11,726
$ 18,728
$ 27,855
Troubled Debt Restructurings
As of December 31, 2014 and 2013, the Company has a recorded investment in troubled debt
restructurings (“TDRs”) of $33.0 million and $33.4 million, respectively. The Company has allocated
$1.1 million and $1.2 million, of specific reserves to those loans at December 31, 2014 and 2013, and has
committed to lend additional amounts totaling up to $69,000 and $300,000 at December 31, 2014 and
2013.
The Company offers various types of concessions when modifying a loan, however, forgiveness of
principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower.
Commercial and industrial loans modified in a TDR often involve temporary interest-only payments,
term extensions, and converting revolving credit lines to term loans. Additional collateral or an
additional guarantor is often requested when granting a concession. Commercial mortgage loans
modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in
order to lower payments, and sometimes reducing the interest rate lower than the current market rate.
Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are
lowered, either through interest rate reductions or principal only payments for a period of time, to
accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and
amortization are extended. Home equity modifications are made infrequently and usually involve
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- 94 -
providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All
retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a
concession is made.
Of the loans modified in a TDR, $8.3 million are on non-accrual status and partial charge-offs have in
some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial
effect of increasing the allowance associated with the loan. If the loan is determined to be collateral
dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is
a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the
allowance is measured based on the present value of expected future cash flows discounted at the loan’s
pre-modification effective interest rate.
The following table presents loans by class modified as TDRs that occurred during the years ending
December 31, 2014, 2013, and 2012 (Dollars in Thousands):
Loans Modified as a TDR for the
Twelve Months Ended December
31, 2014
Loans Modified as a TDR for the
Twelve Months Ended December
31, 2013
Loans Modified as a TDR for the
Twelve Months Ended December
31, 2012
Number of
Loans
Recorded
Investment (as of
period end)
Number of
Loans
Recorded
Investment (as
of period end)
Number of
Loans
Recorded
Investment (as of
period end)
18
3
2
3
-
-
4
16
17
4
67
$ 1,726
517
27
403
-
-
1,353
2,020
471
15
$ 6,532
10
5
9
2
2
3
3
5
15
3
57
$ 752
390
714
1,364
269
417
662
940
561
15
$ 6,084
87
8
9
13
3
1
-
7
127
27
282
$ 6,052
666
3,859
13,942
474
59
-
1,196
2,663
124
$ 29,035
TDRs
Residential Owner Occupied
Residential Non Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Commercial Working Capital
Commercial Other
Home Equity and Home
Improvement
Consumer Finance
Total
The loans described above increased the allowance for loan losses (“ALLL”) by $234,000 for the year
ended December 31, 2014, $27,000 for the year ended December 31, 2013, and decreased the ALLL by
$1.2 million for the year ended December 31, 2012.
Of the 2014 modifications, 16 were made TDRs due to the fact that the borrower has filed bankruptcy, 5
were made TDRs due to a rate reduction, 1 was made a TDR due to an interest only period, 8 were made
TDRs due to extending the amortization, 2 were made TDRs due to a reduction in the payment, 9 were
made TDRs due to advancing or renewing funds to a watchlist credit, 4 were made to term out lines of
credit, 5 were made to extend the maturity of existing loans, and 20 were made TDRs to refinance current
debt for payment relief.
- 95 -
- 95 -
The following table presents loans by class modified as TDRs for which there was a payment default
within twelve months following the modification during the years ending December 31, 2014, 2013, and
2012:
Twelve Months Ended
December 31, 2014 ($ in
thousands)
Twelve Months Ended
December 31, 2013 ($ in
thousands)
Twelve Months Ended
December 31, 2012 ($ in
thousands)
TDRs
That Subsequently Defaulted:
Number of
Loans
Residential Owner Occupied
Residential Non Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Commercial Working Capital
Commercial Other
Home Equity and Home
Improvement
Consumer
Total
1
1
-
-
-
-
2
5
-
-
9
Recorded
Investment
(as of Period
End)
$ 80
178
-
-
-
-
868
865
-
-
Number of
Loans
6
-
2
1
-
1
1
4
3
-
Recorded
Investment
(as of Period
End)
$ 409
-
290
212
-
323
149
740
315
-
Number of
Loans
6
2
-
3
-
-
1
4
7
-
Recorded
Investment
(as of Period
End)
$ 462
203
-
555
-
-
529
1,600
166
-
$ 1,991
18
$ 2,438
23
$ 3,515
The TDRs that subsequently defaulted described above decreased the ALLL by $14,000 after $176,000
in charge-offs for the year ended December 31, 2014, increased the ALLL by $21,000 after $58,000 in
charge-offs for the year ended December 31, 2013, and increased the ALLL by $631,000 after $1.5
million in charge-offs for the year ended December 31, 2012.
A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days contractually
past due under the modified terms.
The terms of certain other loans were modified during the periods ending December 31, 2014 and 2013
that did not meet the definition of a TDR. The modification of these loans involved a modification of the
terms of a loan to borrowers who were not experiencing financial difficulties. A total of 153 loans were
modified under this definition during the twelve month period ended December 31, 2014 and a total of
152 loans were modified under this definition during the twelve month period ended December 31, 2013.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed
regarding the probability that the borrower will be in payment default on any of its debt in the
foreseeable future without the modification.
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to
service their debt such as: current financial information, historical payment experience, credit
documentation, public information, and current economic trends, among other factors. Loans are
analyzed individually by classifying the loans as to credit risk. This analysis includes all non-
homogeneous loans, such as commercial and commercial real estate loans and certain homogenous
mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First
Defiance uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves
management's close attention. If left uncorrected, these potential weaknesses may result in
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- 96 -
deterioration of the repayment prospects for the loan or of the institution's credit position at some
future date.
deterioration of the repayment prospects for the loan or of the institution's credit position at some
future date.
Substandard. Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Substandard. Loans classified as substandard are inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as
substandard, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as
substandard, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Not Graded. Loans classified as not graded are generally smaller balance residential real estate,
home equity and consumer installment loans which are originated primarily by using an
automated underwriting system. These loans are monitored based on their delinquency status
and are evaluated individually only if they are seriously delinquent.
Not Graded. Loans classified as not graded are generally smaller balance residential real estate,
home equity and consumer installment loans which are originated primarily by using an
automated underwriting system. These loans are monitored based on their delinquency status
and are evaluated individually only if they are seriously delinquent.
Loans not meeting the criteria above that are analyzed individually as part of the above described process
are considered to be pass rated loans. As of December 31, 2014, and based on the most recent analysis
performed, the risk category of loans by class of loans is as follows (In Thousands):
Loans not meeting the criteria above that are analyzed individually as part of the above described process
are considered to be pass rated loans. As of December 31, 2014, and based on the most recent analysis
performed, the risk category of loans by class of loans is as follows (In Thousands):
Class
Class
Pass
Pass
Mention Substandard Doubtful
Mention Substandard Doubtful
Special
Special
Not
Not
Graded
Graded
Total
Total
Residential Owner Occupied
Residential Owner Occupied
Residential Non Owner Occupied
Residential Non Owner Occupied
$ 4,230
$ 4,230
51,327
51,327
$ 131
$ 131
2,404
2,404
$ 3,048
$ 3,048
4,872
4,872
$ 365 $ 135,306
5,174
$ 365 $ 135,306
5,174
7
7
$ 143,080
$ 143,080
63,784
63,784
Total 1-4 Family Real Estate
Total 1-4 Family Real Estate
55,557
55,557
2,535
2,535
7,920
7,920
372
372
140,480
140,480
206,864
206,864
Multi-Family Residential Real Estate
Multi-Family Residential Real Estate
152,290
152,290
220
220
3,236
3,236
CRE Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Agriculture Land
Other CRE
Other CRE
273,406
224,073
90,875
40,147
273,406
224,073
90,875
40,147
18,448
7,898
1,849
63
18,448
7,898
1,849
63
9,953
13,186
819
3,466
9,953
13,186
819
3,466
Total Commercial Real Estate
Total Commercial Real Estate
628,501
628,501
28,258
28,258
27,424
27,424
Construction
Construction
62,355
62,355
-
-
150
150
Commercial Working Capital
Commercial Working Capital
Commercial Other
Commercial Other
128,229
253,576
128,229
253,576
6,287
6,504
6,287
6,504
1,444
4,991
1,444
4,991
Total Commercial
Total Commercial
381,805
381,805
12,791
12,791
6,435
6,435
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
914
914
156,660
156,660
1,175
27
-
572
1,175
27
-
572
302,982
245,184
93,543
44,248
302,982
245,184
93,543
44,248
-
1,774
1,774
685,957
685,957
-
11,217
11,217
73,722
73,722
-
-
-
-
-
-
-
-
135,960
265,071
135,960
265,071
-
401,031
401,031
Home Equity and Home Improvement
Home Equity and Home Improvement
Consumer Finance
Consumer Finance
-
-
-
-
-
-
-
-
1,647
125
1,647
125
106
-
106
-
110,529
15,326
110,529
15,326
112,282
15,451
112,282
15,451
Total Loans
Total Loans
$ 1,280,508
$ 1,280,508
$ 43,804
$ 43,804
- 97 -
- 97 -
- 97 -
$ 46,937 $ 478 $ 280,240
$ 46,937 $ 478 $ 280,240
$ 1,651,967
$ 1,651,967
As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by
As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by
class of loans is as follows (In Thousands):
class of loans is as follows (In Thousands):
Class
Class
Pass
Pass
Special
Special
Mention Substandard Doubtful
Mention Substandard Doubtful
Not
Not
Graded
Graded
Total
Total
Residential Owner Occupied
Residential Owner Occupied
Residential Non Owner Occupied
Residential Non Owner Occupied
$ 4,287
$ 4,287
51,660
51,660
$ 18
$ 18
2,894
2,894
$ 3,515
$ 3,515
5,699
5,699
$ - $ 121,765
$ - $ 121,765
6,359
6,359
-
-
$ 129,585
$ 129,585
66,612
66,612
Total 1-4 Family Real Estate
Total 1-4 Family Real Estate
55,947
55,947
2,912
2,912
9,214
9,214
-
-
128,124
128,124
196,197
196,197
Multi-Family Residential Real Estate
Multi-Family Residential Real Estate
145,407
145,407
875
875
1,888
1,888
CRE Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Agriculture Land
Other CRE
Other CRE
291,770
291,770
200,790
200,790
80,418
80,418
40,676
40,676
10,584
10,584
10,254
10,254
578
578
2,074
2,074
11,665
11,665
17,185
17,185
1,051
1,051
3,104
3,104
Total Commercial Real Estate
Total Commercial Real Estate
613,654
613,654
23,490
23,490
33,005
33,005
Construction
Construction
43,465
43,465
-
-
263
263
Commercial Working Capital
Commercial Working Capital
Commercial Other
Commercial Other
148,703
148,703
219,790
219,790
3,429
3,429
6,994
6,994
3,660
3,660
6,899
6,899
Total Commercial
Total Commercial
368,493
368,493
10,423
10,423
10,559
10,559
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
964
964
149,134
149,134
1,734
1,734
91
91
-
-
731
731
315,753
315,753
228,320
228,320
82,047
82,047
46,585
46,585
2,556
2,556
672,705
672,705
10,002
10,002
53,730
53,730
-
-
-
-
-
-
155,792
155,792
233,683
233,683
389,475
389,475
Home Equity and Home Improvement
Home Equity and Home Improvement
Consumer Finance
Consumer Finance
-
-
-
-
-
-
-
-
755
755
31
31
45
45
-
-
106,587
106,587
16,860
16,860
107,387
107,387
16,891
16,891
Total Loans
Total Loans
$ 1,226,966
$ 1,226,966
$ 37,700
$ 37,700
$ 55,715
$ 55,715
$ 45 $ 265,093
$ 45 $ 265,093
$ 1,585,519
$ 1,585,519
- 98 -
- 98 -
- 98 -
Certain loans acquired had evidence that the credit quality of the loan had deteriorated since its
origination and in management’s assessment at the acquisition date it was probable that First Defiance
would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic
310 Subtopic 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans have
been recorded based on management’s estimate of the fair value of the loans. Details of these loans are as
follows:
Balance at January 1, 2012
Principal payments received
Loans charged off
Additional provision for loan loss
Loan accretion recorded
Balance at December 31, 2012
Principal payments received
Loans charged off
Additional provision for loan loss
Loan accretion recorded
Balance at December 31, 2013
Principal payments received
Loans charged off
Additional provision for loan loss
Loan accretion recorded
Balance at December 31, 2014
Contractual
Amount
Receivable
$
2,206
(697)
(487)
(167)
-
855
(108)
(41)
(203)
-
503
(90)
-
-
-
$ 413
Impairment
Discount
(In Thousands)
$
1,003
-
(487)
-
(173)
343
-
(41)
-
(29)
273
-
-
-
(46)
$ 227
Recorded
Loan
Receivable
$
$
1,203
(697)
-
(167)
173
512
(108)
-
(203)
29
230
(90)
-
-
46
186
Loans to executive officers, directors, and their affiliates are as follows:
Beginning balance
New loans
Effect of changes in composition of related parties
Repayments
Ending Balance
Years Ended December 31
2013
2014
(In Thousands)
$ 3,712
9,800
(6)
(7,618)
$ 5,888
$ 3,489
8,874
-
(8,651)
$ 3,712
- 99 -
- 99 -
8. Mortgage Banking
Net revenues from the sales and servicing of mortgage loans consisted of the following:
Gain from sale of mortgage loans
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue
Amortization of mortgage servicing rights
Mortgage servicing rights valuation adjustments
Net revenue from sale and servicing of mortgage
loans
Years Ended December 31
2013
(In Thousands)
$ 5,716
2014
$ 3,335
2012
$ 10,599
3,552
(1,401)
116
2,267
3,564
(2,098)
1,261
2,727
3,387
(3,562)
(759)
(934)
$ 5,602
$ 8,443
$ 9,665
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.35 billion at
December 31, 2014 and $1.37 billion at December 31, 2013.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows:
2014
Years Ended December 31
2013
(In Thousands)
2012
Mortgage servicing assets:
Balance at beginning of period
Loans sold, servicing retained
Amortization
Carrying value before valuation allowance
at end of period
Valuation allowance:
Balance at beginning of period
Impairment recovery (charges)
Balance at end of period
Net carrying value of MSRs at end of period
Fair value of MSRs at end of period
$ 10,133
1,191
(1,401)
$ 10,121
2,110
(2,098)
$ 10,219
3,464
(3,562)
9,923
10,133
10,121
(1,027)
116
(911)
$ 9,012
$ 9,304
(2,288)
1,261
(1,027)
$ 9,106
$ 9,686
(1,529)
(759)
(2,288)
$ 7,833
$ 7,833
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related
mortgage loans serviced.
The Company established an accrual for secondary market buy-backs totaling $359,000 for 2014, which
was partially offset by reversing $67,000 of accrued expenses in the first quarter of 2014 related to the
Freddie Mac post-foreclosure review that began in the third quarter of 2013 and was reversed in 2014 with
no losses resulting. This resulted in secondary market buy-back expense of $298,000 for the full year of
2014 compared to $597,000 and $73,000 of expense for the same period in 2013 and 2012, respectively.
- 100 -
- 100 -
The Company’s servicing portfolio is comprised of the following:
Investor
Fannie Mae
Freddie Mac
Federal Home Loan Bank
Other
Totals
December 31
2014
2013
Number of
Loans
Principal
Outstanding
Number of
Loans
Principal
Outstanding
(In Thousands)
5,215
8,911
118
23
14,267
$ 503,369
828,724
12,972
1,573
$ 1,346,638
5,304
8,873
116
26
14,319
$ 527,666
829,594
12,093
1,888
$ 1,371,241
Custodial escrow balances maintained in connection with serviced loans were $10.9 million and $10.4
million at December 31, 2014 and 2013, respectively.
Significant assumptions at December 31, 2014 used in determining the value of MSRs include a
weighted average prepayment speed assumption (“PSA”) of 209 and a weighted average discount rate of
10.04%. Significant assumptions at December 31, 2013 used in determining the value of MSRs include a
weighted average prepayment rate of 212 PSA and a weighted average discount rate of 10.04%.
A sensitivity analysis of the current fair value to immediate 10% and 20% adverse changes in those
assumptions as of December 31, 2014 is presented below. These sensitivities are hypothetical. Changes
in fair value based on 10% and 20% 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.
Assumption:
Decline in fair value from increase in prepayment rate
Declines in fair value from increase in discount rate
$ 358
224
$ 759
492
10% Adverse 20% Adverse
Change
Change
(In Thousands)
- 101 -
- 101 -
9. Premises and Equipment
Premises and equipment are summarized as follows:
Cost:
Land
Land improvements
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Construction in process
Less allowances for depreciation and amortization
December 31
2014
2013
(In Thousands)
$
$
8,218
1,310
42,022
469
30,646
809
83,474
42,978
40,496
$
$
7,960
1,310
39,716
469
28,654
514
78,623
40,026
38,597
Depreciation expense was $3.0 million, $3.1 million and $3.4 million for the years ended December 31,
2014, 2013 and 2012, respectively.
Lease Agreements
The Company has entered into lease agreements covering the five First Insurance Group offices, two
banking center locations, two land leases for which the Company owns the banking centers, one land
lease which is primarily used for parking, one land lease for future branch development and numerous
stand-alone Automated Teller Machine sites with varying terms and options to renew.
Future minimum commitments under non-cancelable operating leases are as follows (In Thousands):
2015
2016
2017
2018
2019
Thereafter
Total
$
$
706
696
508
461
451
4,077
6,899
Rentals under operating leases amounted to $653,000, $723,000 and $1.2 million in 2014, 2013, and
2012, respectively.
10. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the year is as follows:
Beginning balance
Goodwill acquired or adjusted during the year
Ending balance
December 31
2014
2013
(In Thousands)
$ 61,525
-
$ 61,525
$ 61,525
-
$ 61,525
- 102 -
- 102 -
Acquired Intangible Assets
Activity in intangible assets for the years ended December 31, 2014, 2013 and 2012 was as follows:
Balance as of January 1, 2012
Amortization of intangible assets
Balance as of December 31, 2012
Amortization of intangible assets
Balance as of December 31, 2013
Amortization of intangible assets
Balance as of December 31, 2014
Gross
Carrying
Amount
$ 14,302
-
14,302
-
14,302
-
$ 14,302
$
Accumulated
Amortization
(In Thousands)
(8,151)
(1,413)
(9,564)
(1,241)
(10,805)
(1,102)
$ (11,907)
Net
Value
$
$
6,151
(1,413)
4,738
(1,241)
3,497
(1,102)
2,395
Estimated amortization expense for each of the next five years and thereafter is as follows (In
Thousands):
2015
2016
2017
2018
2019
Thereafter
Total
11. Deposits
The following schedule sets forth interest expense by type of deposit:
$
$
687
501
372
301
195
339
2,395
2014
Years Ended December 31
2013
(In Thousands)
2012
Checking and money market accounts
Savings accounts
Certificates of deposit
Totals
$
$
1,236
90
3,957
5,283
$
$
1,125
90
4,698
5,913
$
$
1,368
116
6,685
8,169
Accrued interest payable on deposit accounts amounted to $38,000 and $48,000 at December 31, 2014
and 2013, respectively, which was comprised of $23,000 and $15,000 for certificates of deposit and
checking and money market accounts, respectively, at December 31, 2014 and $34,000 and $14,000 for
certificates of deposit and checking and money market accounts, respectively, at December 31, 2013.
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A summary of deposit balances is as follows:
Non-interest bearing checking accounts
Interest bearing checking and money market accounts
Savings deposits
Retail certificates of deposit less than $100,000
Retail certificates of deposit greater than $100,000
December 31
2014
2013
(In Thousands)
$
379,552
727,729
203,673
286,904
162,955
$ 1,760,813
$
348,943
715,939
185,121
313,335
172,454
$ 1,735,792
Scheduled maturities of certificates of deposit at December 31, 2014 are as follows (In Thousands):
2015
2016
2017
2018
2019
2020 and thereafter
Total
$
$
189,880
108,655
44,679
48,036
58,502
107
449,859
At December 31, 2014 and 2013, deposits of $851.8 million and $823.7 million, respectively, were in
excess of $100,000. Time deposits at December 31, 2014 and 2013, deposits of $27.0 million and $27.7
million, respectively, were in excess of the $250,000 FDIC insurance limit. At December 31, 2014 and
2013, $60.8 million and $54.1 million, respectively, in investment securities were pledged as collateral
against public deposits for certificates in excess of $100,000 and an additional $80.4 million and $78.5
million of securities were pledged at December 31, 2014 and December 31, 2013, respectively, as
collateral against deposits from private entities in excess of $100,000.
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, certain first mortgage home equity
loans, certain multi-family or non-residential real estate loans, and certain agriculture real estate loans as
security for these advances. Advances secured by investment securities must have collateral of at least
105% of the borrowing. Advances secured by residential mortgages must have collateral of at least 125%
of the borrowings. Advances secured by multi-family or non-residential real estate loans, and agriculture
real estate loans must have collateral of at least 300% of the borrowings. 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, 2014 and December 31, 2013 were $644.1 million and $676.6 million, respectively. First
Federal may obtain advances of up to approximately $425.8 million from the FHLB at December 31,
2014.
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At year-end, advances from the FHLB were as follows:
Principal Terms
December 31, 2014
Putable advances
Amortizable mortgage advances
December 31, 2013
Putable advances
Amortizable mortgage advances
Advance
Amount
(In Thousands)
Range of Maturities
Weighted
Average
Interest
Rate
$ 12,000 January 2015 to March 2018
9,544 December 2015 to September 2018
2.72%
1.95%
$ 21,544
$ 12,000
January 2015 to March 2018
10,520 December 2015
2.72%
1.95%
$ 22,520
Putable advances are callable at the option of the FHLB on a quarterly basis.
Estimated future minimum payments by fiscal year based on maturity date and current interest rates are
as follows (In Thousands):
2015
2016
2017
2018
Total minimum payments
Less amounts representing interest
Totals
$
8,948
1,212
1,212
11,065
22,437
(893)
$21,544
First Defiance also utilizes short-term advances from the FHLB to meet cash flow needs and for short-
term investment purposes. First Defiance borrows short-term advances under a variety of programs at
FHLB. At December 31, 2014 and December 31, 2013, there were no amounts outstanding under First
Defiance’s Cash Management Advance line of credit. The total available under this line is $15.0 million.
In addition, First Defiance has a $100.0 million REPO Advance line of credit available. There were no
borrowings against this line at December 31, 2014 and December 31, 2013. Amounts are generally
borrowed under the Cash Management and REPO lines on an overnight basis.
13. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trust
In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (“Trust
Affiliate II”) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities).
In connection with the transaction, the Company issued $15.5 million of Junior Subordinated Deferrable
Interest Debentures (“Subordinated Debentures”) to Trust Affiliate II. The Company formed Trust
Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the
proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The
Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not
considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not
consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as
a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable
quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on
the Trust Preferred Securities issued by Trust Affiliate II was 1.74% and 1.75% as of December 31, 2014
and 2013 respectively.
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The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole
or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement
that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the
guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can
be redeemed at the Company’s option at any time now.
The Company also sponsors an affiliated trust, First Defiance Statutory Trust I (“Trust Affiliate I”), that
issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the
Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was
formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the
proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The
Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not
considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not
consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as
a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable
quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on
the Trust Preferred Securities issued by Trust Affiliate I was 1.62% and 1.63% as of December 31, 2014
and 2013 respectively.
The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole
or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement
that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the
guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035,
but can be redeemed at the Company’s option at any time now.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under
current regulatory guidelines and interpretations.
A summary of all junior subordinated debentures issued by the Company to affiliates follows. These
amounts represent the par value of the obligations owed to these affiliates, including the Company’s
equity interest in the trusts. Junior subordinated debentures owed to the following affiliates were as
follows:
First Defiance Statutory Trust I due December 2035
First Defiance Statutory Trust II due June 2037
Total junior subordinated debentures owed to
unconsolidated subsidiary Trusts
December 31
2014
2013
(In Thousands)
$
20,619
15,464
$
20,619
15,464
$
36,083
$
36,083
Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the
option of the issuer.
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14. Notes Payable and Other Short-term Borrowings
Total short-term borrowings, revolving and term debt is summarized as follows:
Securities sold under agreement to repurchase
Amounts outstanding at year-end
Year-end interest rate
Average daily balance during year
Maximum month-end balance during the year
Average interest rate during the year
Years Ended December 31
2014
2013
(In Thousands, Except Percentages)
$ 54,759
$ 51,919
0.28%
54,541
61,154
0.29%
0.31%
50,877
57,182
0.44%
As of December 31, 2014 and December 31, 2013, First Federal had the following lines of credit
facilities available for short-term borrowing purposes:
An $11.2 million line of credit with the Federal Reserve Bank Discount Window at an interest
rate of 50 basis points over the fed funds rate. The fed funds rate as of December, 31, 2014 was
0.25%.
A $15 million line of credit with the Bank of America. The rate on this line of credit is Bank of
America’s fed funds rate, which floats daily.
15. Other Noninterest Expense
The following is a summary of other noninterest expense:
Legal and other professional fees
Marketing
State franchise taxes
REO expenses and write-downs
Printing and office supplies
Amortization of intangibles
Postage
Check charge-offs and fraud losses
Credit and collection expense
Other *
Total other noninterest expense
2012
2014
Years Ended December 31
2013
(In Thousands)
$ 2,947
1,563
2,323
1,584
449
1,241
531
172
915
5,610
$ 17,335
$ 2,571
1,400
2,495
1,121
527
1,413
567
153
948
7,090
$ 18,285
$ 3,622
1,820
1,762
743
466
1,102
594
142
395
6,611
$ 17,257
*Included in Other for 2012 is $2.0 million in FHLB pre-payment penalties.
16. 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. First Federal employees retiring after April 1, 1997 are provided medical benefits at a cost based on
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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.
First Federal employees who were born after December 31, 1950 are not eligible for the medical
coverage described above at retirement. Rather, a one-time 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.
Included in accumulated other comprehensive income at December 31, 2014, 2013 and 2012 are the
following amounts that have not yet been recognized in net periodic benefit cost:
Unrecognized prior service cost
Unrecognized actuarial losses
Total recognized in Accumulated Other
Comprehensive Income
Income tax effect
Net amount recognized in Accumulated Other
Comprehensive Income
$
2014
65
832
897
(314)
December 31
2013
(In Thousands)
$
78
477
$
555
(194)
2012
30
858
888
(311)
$
583
$
361
$
577
The prior service cost and actuarial loss included in other comprehensive income and expected to be
recognized in net postretirement benefit cost during the fiscal year-ended December 31, 2015 is $12,000
($8,000 net of tax) and $39,000 ($25,000 net of tax), respectively.
Reconciliation of Funded Status and Accumulated Benefit Obligation
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:
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Participant contribution
Actuarial (gains) / losses
Benefits paid
Benefit obligation at end of year
Change in fair value of plan assets:
Balance at beginning of year
Employer contribution
Participant contribution
Benefits paid
Balance at end of year
Funded status at end of year
December 31
2014
2013
(In Thousands)
$
$
2,878
63
136
28
377
(219)
3,263
-
191
28
(219)
-
(3,263)
$
$
3,140
82
118
25
(347)
(139)
2,878
-
114
25
(139)
-
(2,878)
- 108 -
- 108 -
Net periodic postretirement benefit cost includes the following components:
Service cost-benefits attributable to service during the period
Interest cost on accumulated postretirement benefit
obligation
Net amortization and deferral
Net periodic postretirement benefit cost
Net (gain) / loss during the year
Impact of prior year acquisition
Amortization of prior service cost and actuarial losses
Total recognized in comprehensive income
Total recognized in net periodic postretirement benefit
cost and other comprehensive income
2014
$
63
Years Ended December 31
2013
(In Thousands)
$
82
2012
$
88
136
35
234
377
-
(35)
342
118
46
246
(347)
60
(46)
(333)
120
51
259
(148)
-
(51)
(199)
$
576
$
(87)
$
60
The following assumptions were used in determining the components of the postretirement benefit
obligation:
Weighted average discount rates:
Used to determine benefit obligations at December 31
Used to determine net periodic postretirement benefit cost for years ended
December 31
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend
rate)
Year that rate reaches ultimate trend rate
2014
4.25%
4.75%
7.00%
5.00%
2019
2013
2012
4.75%
4.00%
4.00%
4.25%
7.50%
8.00%
5.00%
2019
5.00%
2019
The following benefits are expected to be paid over the next five years and in aggregate for the next five
years thereafter. Because the plan is unfunded, the expected net benefits to be paid and the estimated
Company contributions are the same amount.
2015
2016
2017
2018
2019
2020 through 2024
Expected to be Paid
(In Thousands)
$ 157
155
178
178
186
954
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:
One-Percentage-Point
Increase
Year Ended December 31
2013
2014
One-Percentage-Point
Decrease
Year Ended December 31
2013
2014
(In Thousands)
Effect on total of service and interest cost
Effect on postretirement benefit obligation
$
26
417
$
28
351
$ (22)
(352)
$ (24)
(299)
The Company expects to contribute $157,000 before reflecting expected Medicare retiree drug subsidy
payments in 2015.
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- 109 -
17. Regulatory Matters
First Federal is subject to minimum capital adequacy guidelines. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by regulators,
which could have a material impact on First Federal’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, First Federal must maintain capital
amounts in excess of specified minimum ratios based on quantitative measures of First Federal’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
Quantitative measures to ensure capital adequacy require First Federal to maintain minimum amounts
and ratios (as set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and Tier 1 capital to adjusted total assets.
The following schedule presents First Defiance consolidated and First Federal’s regulatory capital ratios
as of December 31, 2014 and December 31, 2013 (Dollars in Thousands):
December 31, 2014
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$250,847
$238,221
11.89%
11.31%
$84,397
$84,278
$250,847
$238,221
13.89%
13.21%
$72,213
$72,136
$273,441
$260,791
15.15%
14.46%
$144,426
$144,272
4.0%
4.0%
4.0%
4.0%
8.0%
8.0%
N/A
$105,347
N/A
$108,204
N/A
5.0%
N/A
6.0%
N/A
$180,340
N/A
10.0%
Tier 1 Capital (1)
Consolidated
First Federal
Tier 1 Capital (to Risk
Weighted Assets) (1)
Consolidated
First Federal
Total Capital (to Risk
Weighted Assets) (1)
Consolidated
First Federal
(1) Core capital is computed as a percentage of adjusted total assets of $2.11 billion and $2.11 billion for
consolidated and the bank, respectively. Risk-based capital is computed as a percentage of total risk-weighted
assets of $1.81 billion and $1.80 billion for consolidated and the bank, respectively.
December 31, 2013
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$246,258
$235,699
11.86%
11.36%
$83,045
$82,978
$246,258
$235,699
13.98%
13.39%
$70,473
$70,418
$268,317
$257,741
15.23%
14.64%
$140,947
$140,836
4.0%
4.0%
4.0%
4.0%
8.0%
8.0%
N/A
$103,722
N/A
$105,627
N/A
5.0%
N/A
6.0%
N/A
$176,046
N/A
10.0%
Tier 1 Capital (1)
Consolidated
First Federal
Tier 1 Capital (to Risk
Weighted Assets) (1)
Consolidated
First Federal
Total Capital (to Risk
Weighted Assets) (1)
Consolidated
First Federal
- 110 -
- 110 -
(1) Core capital is computed as a percentage of adjusted total assets of $2.00 billion and $1.99 billion for
consolidated and the bank, respectively. Risk-based capital is computed as a percentage of total risk-weighted
assets of $1.64 billion and $1.64 billion for consolidated and the bank, respectively.
Management believes that, as of December, 31, 2014, First Federal was “well capitalized” based on the
ratios presented above. There are no conditions or events since the most recent notification from any of
the regulatory agencies regarding those capital standards that management believes have changed any of
the well capitalized categorizations of First Federal.
First Federal is subject to the regulatory capital requirements administered by the OCC and FDIC.
Regulatory authorities can initiate certain mandatory actions if First Federal fails to meet the minimum
capital requirements, which could have a direct material effect on the Corporation’s financial statements.
Management believes, as of December 31, 2014, that First Federal meets all capital adequacy
requirements to which they are subject.
First Defiance is a unitary thrift holding company and is regulated by the Federal Reserve. First
Defiance does not have prompt corrective action capital requirements as of December 31, 2014.
Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various
regulatory restrictions. First Federal paid $21.0 million in dividends to First Defiance in 2014 and $3.0
million in 2013. First Federal can initiate dividend payments equal to its net profits (as defined by
statute) for 2013 and 2014 plus 2015 net profits. During 2015, First Federal can declare dividends in the
amount of $23.1 million from its earnings in 2013 and 2014 and from any of its 2015 net profits to First
Defiance. First Insurance paid $1.2 million in dividends to First Defiance in 2014 and $1.5 million in
dividends in 2013.
18. Income Taxes
The components of income tax expense are as follows:
Current:
Federal
State and local
Deferred
2014
Years Ended December 31
2013
(In Thousands)
2012
$
$
9,198
144
(179)
9,163
$
$
7,751
9
1,518
9,278
$
$
7,862
(50)
200
8,012
The provision for income taxes differs from that computed at the statutory corporate tax rate as follows:
2014
Years Ended December 31
2013
(In Thousands)
11,030
$
$
11,709
2012
94
(1,152)
(816)
(390)
(282)
9,163
$
4
(1,043)
(449)
(415)
151
9,278
$
9,337
(32)
(1,047)
(374)
-
128
8,012
Tax expense at statutory rate (35%)
Increases (decreases) in taxes from:
State income tax – net of federal tax benefit
Tax exempt interest income, net of TEFRA
Bank owned life insurance
Captive insurance
Other
Totals
$
$
- 111 -
- 111 -
Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Significant components of First Defiance’s deferred federal income tax assets and liabilities are as
follows:
Deferred federal income tax assets:
Allowance for loan losses
Postretirement benefit costs
Deferred compensation
Impaired loans
Capital loss carry-forward
Impaired investments
Accrued vacation
Allowance for real estate held for sale losses
Deferred loan origination fees and costs
Other
Total deferred federal income tax assets
Deferred federal income tax liabilities:
FHLB stock dividends
Goodwill
Mortgage servicing rights
Fixed assets
Other intangible assets
Loan mark to market
Net unrealized gains on available-for-sale securities
Prepaid expenses
Other
Total deferred federal income tax liabilities
Net deferred federal income tax asset (liability)
December 31
2014
2013
(In Thousands)
8,743
1,149
1,629
524
-
-
623
333
311
1,481
14,793
2,299
5,019
3,181
1,714
270
315
2,528
622
21
15,969
(1,176)
$
$
8,798
1,013
1,412
986
555
971
581
277
265
718
15,576
3,238
4,586
3,211
1,693
607
515
488
617
56
15,011
565
$
$
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 and the ability to carryback any losses. 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, 2014.
The Company had capital loss carry-forwards of zero and $1.6 million as of December 31, 2014 and
December 31, 2013. During 2014 the Company generated capital gains through the sale of FHLB stock
which fully utilized the capital loss carry-forward.
Retained earnings at December 31, 2014 include approximately $11.0 million for which no tax provision
for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31,
1987, which is the end of the Company’s base year for purposes of calculating the bad debt deduction for
tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb
bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability
on the above amount at December 31, 2014 was approximately $3.85 million.
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- 112 -
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (In
Thousands):
Balance at January 1, 2012
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions due to the statute of limitations
Settlements
Balance at December 31, 2012
Balance at January 1, 2013
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions due to the statute of limitations
Settlements
Balance at December 31, 2013
Balance at January 1, 2014
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions due to the statute of limitations
Settlements
Balance at December 31, 2014
$
$
$
$
$
$
141
-
-
-
(76)
-
65
65
-
-
-
(65)
-
-
-
-
-
-
-
-
-
The Company does not expect the total amount of unrecognized tax benefits to significantly increase in
the next twelve months.
The total amount of interest and penalties recorded in the income statement, net of the related federal tax
effect, for the year ended December 31, 2014 was zero, and the amount accrued for interest and penalties
(net of the related federal tax effect) at December 31, 2014 was zero.
The total amount of interest and penalties recorded in the income statement, net of the related federal tax
effect, for the year ended December 31, 2013 was a net reversal of $26,000, and the amount accrued for
interest and penalties (net of the related federal tax effect) at December 31, 2013 was zero.
The total amount of interest and penalties recorded in the income statement, net of the related federal tax
effect, for the year ended December 31, 2012 was a net reversal of $22,000, and the amount accrued for
interest and penalties (net of the related federal tax effect) at December 31, 2012 was $26,000.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state
of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2010.
The Company currently operates primarily in the states of Ohio and Michigan, which tax financial
institutions based on their equity rather than their income.
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19. Employee Benefit Plans
401(k) Plan
Employees of First Defiance are eligible to participate in the First Defiance Financial Corp. 401(k)
Employee Savings Plan (the “First Defiance 401(k)”) if they meet certain age and service requirements.
Beginning in 2009, under the First Defiance 401(k), First Defiance matches 100% of the participants’
contributions up to 3% of compensation and then 50% of the participants’ contributions for the next 2%
of compensation. Previously, matching contributions were 50% of the first 3% of participants
contributions. 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
$919,000, $868,000 and $799,000 for the years ended December 31, 2014, 2013 and 2012, respectively.
There were no discretionary contributions in any of those years.
Group Life Plan
On June 30, 2010, First Federal adopted the First Federal Bank of the Midwest Executive Group Life
Plan – Post Separation (the “Group Life Plan”) in which various employees, including the Company’s
named executive officers, may participate. Under the terms of the Group Life Plan, First Federal will
purchase and own life insurance policies covering the lives of employees selected by the board of
directors of First Federal as participants. There was $167,000, ($35,000), and $76,000 of expense
recorded for the years ended December 31, 2014, 2013 and 2012, respectively, with a liability of
$892,000, $724,000 and $760,000 for future benefits recorded at December 31, 2014, 2013 and 2012,
respectively. In 2014, management changed the discount rate to 4.25% to reflect the current interest rate
environment which resulted in an increase of the group life plan liability as of December 31, 2014.
20. Stock Compensation Plans
First Defiance has established equity based compensation plans for its directors and employees. On
March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders
Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The
2010 Equity Plan replaced all plans existing at the time of its approval. All awards outstanding under
prior plans remain in effect in accordance with their respective terms. Any new awards will be made
under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares
through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or
other stock-based awards.
As of December 31, 2014, 173,720 options have been granted pursuant to the 2010 equity plan and
previous plans, and remain outstanding at option prices based on the market value of the underlying
shares on the date the options were granted. Options granted under all plans vest 20% per year except for
the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually.
All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the
scheduled expiration date or three months after the retirement date.
In March 2012, the Company approved a 2012 Short-Term Equity Incentive Plan (a “STIP”) and a 2012
Long-Term Equity Incentive Plan (a “LTIP”) for selected members of management. The plans were
effective January 1, 2012 and provide for cash and/or equity benefits if certain performance targets are
achieved. Equity awards issued under these plans will reduce the amount of awards available to be
issued under the 2010 Equity Plan.
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Under the 2012 STIP the participants may earn up to 25% to 45% of their salary for potential payout
based on the achievement of certain corporate and/or market area performance targets during the calendar
year. The final value of the awards to be made under the 2012 STIP will be determined as of
December 31 of each year and will be paid out in cash and/or equity, as elected by the participant, in
accordance with the following vesting schedule: 50% in the first quarter after the calendar year, 25% on
the one-year anniversary of the grant date, and 25% on the second-year anniversary. The participants are
required to be employed on the day of payout in order to receive an award.
Under the 2012 LTIP the participants may earn up to 25% to 45% of their salary for potential payout
based on the achievement of certain corporate performance targets either over a two or three year period.
The final amount of benefit under the under the 2012 LTIP was determined as of December 31, 2014.
The benefits earned under the plan will be paid out in cash and/or equity, as elected by the participant, in
the first quarter following the close of the performance period. The participants are required to be
employed on the day of payout in order to receive the payment.
In March 2013, the Company approved a 2013 STIP and a 2013 LTIP for selected members of
management. Under the 2013 STIP the participants may earn up to 25% to 45% of their salary for
potential payout based on the achievement of certain corporate performance targets during the calendar
year. The final amount of awards earned under the 2013 STIP was paid out in cash in the first quarter of
2014.
Under the 2013 LTIP the participants may earn up to 25% to 45% of their salary, depending upon their
position, for potential payout in the form of equity awards based on the achievement of certain corporate
performance targets over a three year period. The Company granted 86,065 RSUs to the participants in
the 2013 LTIP effective January 1, 2013, which represents the maximum target award. The amount of
benefit under the 2013 LTIP will be determined individually at the 12 month period ending December 31,
2013, the 24 month period ending December 31, 2014 and the 36 month period ending December 31,
2015. The awards’ vesting will be as follows: 16.7% of the target award after the end of the performance
period ending December 31, 2013; 27.8% of the target award at the end of the performance period ending
December 31, 2014; and 55.5% of the target award at the end of the performance period ending
December 31, 2015. The RSUs shall vest between 0% and 100% of the applicable portion of the target
award based on the portion of the performance targets that are achieved. RSUs settle in common shares
in the first quarter following the close of the applicable performance period. The participants are
required to be employed on the day of payout in order to receive the payment. A total of 6,425 RSU’s
were issued to the participants in the second quarter of 2014 for the year one performance period ended
December 31, 2013.
In March 2014, the Company approved a 2014 STIP and a 2014 LTIP for selected members of
management.
Under the 2014 STIP, the participants may earn up to 30% to 45% of their salary for potential payout
based on the achievement of certain corporate performance targets during the calendar year. The final
amount of benefits under the 2014 STIP were determined as of December 31, 2014 and will be paid out
in cash in the first quarter of 2015. The participants are required to be employed on the day of payout in
order to receive such payment.
Under the 2014 LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in
the form of equity awards based on the achievement of certain corporate performance targets over a
three-year period. The Company granted 30,538 RSU’s to the participants in the 2014 LTIP effective
January 1, 2014, which represents the maximum target award. The amount of benefit under the 2014
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LTIP will be determined individually at the end of the 36 month performance period ending
December 31, 2016. The awards will vest 100% of the target award at the end of the performance period
ending December 31, 2016. The benefits earned under the 2014 LTIP will be paid out in equity in the
first quarter of 2017. The participants are required to be employed on the day of payout in order to
receive such payment.
The fair value of each option award is estimated on the date of grant using the Black-Scholes model.
Expected volatilities are based on historical volatilities of the Company’s common shares. The Company
uses historical data to estimate option exercise and post-vesting termination behavior. The expected term
of options granted is based on historical data and represents the period of time that options granted are
expected to be outstanding, which takes into account that the options are not transferable. The risk-free
interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant.
The fair value of stock options granted during the year ended December 31, 2014 was determined at the
date of grant using the Black-Scholes stock option-pricing model and the following assumptions:
Expected average risk-free rate
Expected average life
Expected volatility
Expected dividend yield
Twelve Months ended
December 31, 2014
1.51%
7.44 years
44.62%
2.22%
Following is activity under the plans during 2014:
Stock options:
Options outstanding, January 1, 2014
Forfeited or cancelled
Exercised
Granted
Options outstanding, December 31, 2014
Vested or expected to vest at
December 31, 2014
Exercisable at December 31, 2014
Options
Outstanding
251,020
(34,600)
(53,200)
10,500
173,720
$
Weighted
Average
Exercise Price
20.76
26.52
18.11
26.97
20.80
$
173,720
163,220
$
$
20.80
20.40
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in 000’s)
2.72
2.72
2.31
$
2,303
$ 2,303
2,229
$
Information related to the stock option plans follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
Year Ended December 31
2012
2013
2014
(In Thousands, except per share amounts)
$ 310
350
54
-
$ 542
963
103
$ 10.79
$ 4
5
-
-
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As of December 31, 2014, there was $94,000 of total unrecognized compensation costs related to
unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized
over a weighted-average period of 4.1 years.
At December 31, 2014, 91,812 RSU’s were outstanding. Compensation expense is recognized over the
performance period based on the achievement of established targets. Total expense of $541,000, $1.0
million and $677,000 was recorded during the years ended December 31, 2014, 2013 and 2012,
respectively, and approximately $739,000 and $540,000 is included within other liabilities at December
31, 2014 and 2013, respectively, related to the STIPs and LTIPs.
Restricted Stock Units
Stock Grants
Unvested Shares
Unvested at January 1, 2014
Granted
Vested
Forfeited
Unvested at December 31, 2014
Shares
106,061
30,538
(7,320)
(37,467)
91,812
Weighted-Average
Grant Date
Fair Value
$ 18.66
25.77
18.63
18.71
$ 21.00
Shares
-
13,087
(7,320)
-
5,767
Weighted-Average
Grant Date
Fair Value
$ -
21.87
18.63
-
$ 25.97
The maximum amount of compensation expense that may be earned for the 2014 STIP and the 2012,
2013 and 2014 LTIPs at December 31, 2014 is approximately $3.8 million in the aggregate. However,
the estimated expense expected to be earned as of December 31, 2014 based on the performance
measures in the plans, is $1.7 million of which $394,000 is unrecognized at December 31, 2014 and will
be recognized over the remaining performance period.
As of December 31, 2014 and 2013, 193,067 and 202,405 shares, respectively, were available for grant
under the 2010 Equity Plan. Options forfeited or cancelled under all plans except the 2010 Equity Plan
are no longer available for grant to other participants.
21. Parent Company Statements
Condensed parent company financial statements, which include transactions with subsidiaries, follow:
Statements of Financial Condition
Assets
Cash and cash equivalents
Investment in banking subsidiary
Investment in non-bank subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Accrued liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31
2014
2013
(In Thousands)
$
$
$
$
9,067
291,485
14,424
1,174
316,150
36,083
562
279,505
316,150
$
$
$
$
8,228
285,813
13,518
1,774
309,333
36,083
1,103
272,147
309,333
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Statements of Income
2014
Years Ended December 31
2013
(In Thousands)
2012
Dividends from subsidiaries
Interest on investments
Interest expense
Other income
Noninterest expense
Income before income taxes and equity in earnings of subsidiaries
Income tax credit
Income before equity in earnings of subsidiaries
Undistributed equity in (distributions in excess of)
earnings of subsidiaries
Net income
Comprehensive income
$
22,200 $
-
(587)
2
(861)
20,754
(485)
21,239
4,500 $
18
(601)
1
(853)
3,065
(415)
3,480
37,300
12
(971)
-
(1,013)
35,328
(669)
35,997
3,053
24,292 $
27,861 $
$
$
18,755
22,235 $
18,506 $
(17,333)
18,664
18,941
Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Distribution in excess of (undistributed equity in) earnings
of subsidiaries
Change in other assets and liabilities
Net cash provided by (used in) operating activities
Investing activities:
Investment in non-bank subsidiary
Sale of available-for-sale securities
Net cash provided by investing activities
Financing activities:
Repurchase of common stock
Cash dividends paid
Stock Options Exercised
Treasury stock sales
Preferred Stock payoff
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2014
Years Ended December 31
2013
(In Thousands)
2012
$ 24,292
$ 22,235
$ 18,664
(3,053)
59
21,298
-
-
-
(15,519)
(5,937)
921
76
-
(20,459)
839
8,228
$9,067
(18,755)
176
3,656
-
1,002
1,002
(1,821)
(3,907)
350
64
-
(5,314)
(656)
8,884
17,333
97
36,094
(250)
1,000
750
-
(3,086)
4
14
(36,358)
(39,426)
(2,582)
11,466
$8,228
$8,884
22. Fair Value
FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the asset or
liability. The price in the principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets and liabilities; it is not a
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forced transaction. Market participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows
or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount
that currently would be required to replace the service capacity of an asset (replacement cost). Valuation
techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or liability. Inputs may be observable, meaning those
that reflect the assumptions market participants would use in pricing the asset or liability developed
based on the best information available. In that regard, FASB ASC Topic 820 established a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date.
• Level 2: Inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. These might include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable
for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or
inputs that are derived principally from or corroborated by market data by a correlation or
other means.
• Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect
an entity’s own assumptions about the assumptions that market participants would use in
pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Available for sale securities - Securities classified as available for sale are generally reported at fair
value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent
pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair
value measurements consider observable data that may include dealer quotes, market spreads, cash flows
and the bonds’ terms and conditions, among other things. Securities in Level 1 include federal agency
preferred stock securities. Securities in Level 2 include U.S. Government agencies, mortgage-backed
securities, corporate bonds and municipal securities. The Company classified its pooled trust preferred
collateralized debt obligations as Level 1 and Level 3 at December 31, 2013. The portfolio consisted of
collateralized debt obligations backed by pools of trust preferred securities issued by financial
institutions and insurance companies. Two collateralized debt obligations backed by insurance
companies were classified as Level 1 at December 31, 2013 due to receiving a Level 1 price at which the
securities were subsequently sold on January 15, 2014 as a result of these securities being disallowed
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under the final interim Volcker rule. The two collateralized debt obligations backed by financial
institutions are allowed under the final interim Volcker Rule and classified as Level 3 based on the lack
of observable market data, the Company estimated fair values based on the observable data available and
reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow
model, which used appropriately adjusted discount rates reflecting credit and liquidity risks.
Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals
obtained from licensed real estate appraisers and in certain circumstances consideration of offers
obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use
three methods to derive value: cost, sales or market comparison and income approach. The cost method
bases value on the cost to replace the current property. Value of market comparison approach evaluates
the sales price of similar properties in the same market area. The income approach considers net
operating income generated by the property and an investors required return. Adjustments are routinely
made in the appraisal process by the independent appraisers to adjust for differences between the
comparable sales and income data available. Comparable sales adjustments are based on known sales
prices of similar type and similar use properties and duration of time that the property has been on the
market to sell. Such adjustments made in the appraisal process are typically significant and result in a
Level 3 classification of the inputs for determining fair value.
Real Estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded
at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then
reviewed monthly by members of the asset review committee for valuation changes and are accounted for
at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real
estate appraisals which may utilize a single valuation approach or a combination of approaches including
cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments may be significant and typically result in a Level 3 classification of the
inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by
certified general appraisers (for commercial properties) or certified residential appraisers (for residential
properties) whose qualifications and licenses have been reviewed and verified by the Company. Once
received, a member of the Company’s asset quality or collections department reviews the assumptions
and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 20% to account for
other factors that may impact the value of collateral. In determining the value of impaired collateral
dependent loans and other real estate owned, significant unobservable inputs may be used, which
include: physical condition of comparable properties sold, net operating income generated by the
property and investor rates of return.
Mortgage servicing rights – On a quarterly basis, mortgage servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying
amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the
servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that
calculates the present value of estimated future net servicing income. The valuation model utilizes
assumptions that market participants would use in estimating future net servicing income and are
validated against available market data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly
based on derivative valuation models using quoted prices for similar assets adjusted for specific
attributes of the commitments and other observable market data at the valuation date (Level 2).
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The following table summarizes the financial assets measured at fair value on a recurring basis
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair
value:
Assets and Liabilities Measured on a Recurring Basis
December 31, 2014
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Available for sale securities:
Obligations of U.S. Government
corporations and agencies
Mortgage-backed - residential
REMICs
Collateralized mortgage obligations
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Mortgage banking derivative - asset
Mortgage banking derivative - liability
$
$
$ -
-
-
-
1
1,989
980
59,856
1,839
81,121
-
5,003
$
-
-
-
-
-
-
980
59,856
1,839
81,121
1
6,992
-
-
-
88,532
351
24
-
-
88,532
351
24
December 31, 2013
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Available for sale securities:
Obligations of U.S. Government
corporations and agencies
Mortgage-backed - residential
Collateralized mortgage obligations
Trust preferred stock
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Mortgage banking derivative - asset
Mortgage banking derivative - liability
$ - $ 4,921 $ - $ 4,921
41,292
59,841
2,236
718
8,942
-
-
1,654
718
-
41,292
59,841
-
-
8,942
-
-
582
-
-
-
-
-
80,220
295
-
-
-
80,220
295
-
There was one corporate bond security that had recent documented trade activity resulting in that security
being transferred to Level 1 from Level 2 during the period ended December 31, 2014. Trust preferred
stock in the amount of $1,654,000 was transferred from level 3 to level 1 in 2013 due to two securities
being disallowed under the final interim Volcker Rule resulting in the company selling these two
securities on January 15, 2014 after obtaining a Level 1 price. The selling price (Level 1) was used to
determine the fair value at December 31, 2013.
The table below presents a reconciliation and income classification of gains and losses for all assets
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years
ended December 31, 2014 and 2013:
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Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
(In Thousands)
Beginning balance
Total gains or losses (realized/unrealized)
Included in earnings (realized)
Included in other comprehensive income
(presented gross of taxes)
Amortization
Sales
Transfers in and/or out of Level 3
Ending balance
2014
$
582
2013
$
1,474
(329)
993
-
(1,246)
-
-
$
(337)
1,099
-
-
(1,654)
582
$
Changes in Unrealized Gains/Losses Recorded in Earnings
For the Year Relating to Level 3 Assets Still Held at Reporting
Date for the Year Ended December 31
(In Thousands)
Interest income on securities
Trust Preferred Stock
2014
$ 24
2013
$ 83
2012
$ 160
Other changes in fair value
(24)
(420)
(84)
Total
$ -
$ (337)
$ 76
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The following table summarizes the financial assets measured at fair value on a non-recurring basis
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair
value:
Assets and Liabilities Measured on a Non-Recurring Basis
December 31, 2014
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
Total Fair
Value
Impaired loans
1-4 Family Residential Real
Estate
Multi Family Residential
Commercial Real Estate
Commercial
Home Equity and
Improvement
Total impaired loans
Mortgage servicing rights
Real estate held for sale
Residential
CRE
Total Real Estate held for
sale
$ -
-
-
-
-
-
-
-
-
$ -
-
-
$ 419
269
6,665
340
$ 419
269
6,665
340
-
-
1,034
-
-
-
98
7,791
-
-
739
739
98
7,791
1,034
-
739
739
December 31, 2013
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
Total Fair
Value
Impaired loans
1-4 Family Residential Real
Estate
Multi Family Residential
Commercial Real Estate
Home Equity and
Improvement
Total impaired loans
Mortgage servicing rights
Real estate held for sale
Residential
CRE
Total Real Estate held for
sale
$ -
-
-
-
-
-
-
-
-
$ -
-
-
$ 259
338
9,590
$ 259
338
9,590
-
-
1,370
-
-
-
531
10,718
-
112
1,278
1,390
531
10,718
1,370
112
1,278
1,390
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For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of
December 31, 2014, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair
Value
Valuation Technique
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Applies to all classes
$7,791 Appraisals which utilize
net
comparison,
sales
income and cost approach
$739 Appraisals which utilize
net
sales
income and cost approach
comparison,
Unobservable Inputs
(Dollars in Thousands)
Discounts for collection
issues and changes
in
market conditions
Range of
Inputs
Weighted
Average
10-30%
11%
Discounts for changes in
market conditions
20-40%
28%
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring
basis as of December 31, 2013, the significant unobservable inputs used in the fair value
measurements were as follows:
Fair
Value
Valuation Technique
Unobservable Inputs
(Dollars in Thousands)
Range of
Inputs
Weighted
Average
Trust preferred stock
$582 Discounted cash flow
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Applies to all classes
$10,718 Appraisals which utilize
net
comparison,
sales
income and cost approach
$1,390 Appraisals which utilize
net
comparison,
sales
income and cost approach
Constant prepayment rate
Expected asset default
Expected recoveries
2-40%
0-30%
10-15%
40%
15%
10%
Discounts for collection
issues and changes
in
market conditions
10-30%
10%
Discounts for changes in
market conditions
20-40%
26%
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a fair value of $7.8 million, with a $19,000 valuation allowance and a fair value of
$10.7 million with no valuation allowance at December 31, 2014 and 2013, respectively. A provision
expense of $3.0 million and $3.2 million for the years ended December 31, 2014 and 2013 related to
these impaired loans was included in earnings.
Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $1.0
million with a valuation allowance of $911,000 and a fair value of $1.4 million with a valuation
allowance of $1.0 million at December 31, 2014 and 2013, respectively. A recovery of $116,000 and
$1.3 million for the years ended December 31, 2014 and 2013 was included in earnings.
Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for
changes in market conditions. The change in fair value of real estate held for sale was $251,000 and
$740,000 for the years ended December 31, 2014 and 2013 which was recorded directly as an adjustment
to current earnings through non-interest expense.
- 124 -
- 124 -
In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative
condensed consolidated statement of financial condition based on carrying amount and estimated fair
values of financial instruments as of December 31, 2014 and December 31, 2013. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of First Defiance.
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, 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 and are classified as Level 1.
It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its
transferability.
The fair value of loans that 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, resulting in a Level 3 classification. Impaired loans are valued
at the lower of cost or fair value as previously described. The allowance for loan losses is considered to
be a reasonable adjustment for credit risk. The methods utilized to estimate the fair value of loans do not
necessarily represent an exit price. The fair value of loans held for sale is estimated based on binding
contracts and quotes from third party investors resulting in a Level 2 classification.
The fair value of accrued interest receivable is equal to the carrying amounts resulting in a Level 2 or
Level 3 classification, which is consistent with its underlying value.
The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at
the reporting date (i.e., carrying value) and are classified as Level 1. The fair value of savings, NOW and
certain money market accounts are equal to their carrying amounts and are a Level 2 classification. Fair
values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits resulting in a Level 2 classification.
The fair values of securities sold under repurchase agreements are equal to their carrying amounts
resulting in a Level 2 classification. The carrying value of subordinated debentures and deposits with
fixed maturities is estimated based on discounted cash flow analyses based on interest rates currently
being offered on instruments with similar characteristics and maturities resulting in a Level 3
classification.
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 resulting in a Level 2
classification. The cost or value of any call or put options is based on the estimated cost to settle the
option at December 31, 2014.
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- 125 -
Financial Assets:
Cash and cash equivalents
Investment securities
Federal Home Loan Bank Stock
Loans, net, including loans
held for sale
Accrued interest receivable
Financial Liabilities:
Deposits
Advances from Federal Home
Loan Bank
Securities sold under repurchase
agreements
Subordinated debentures
Financial Assets:
Cash and cash equivalents
Investment securities
Federal Home Loan Bank Stock
Loans, net, including loans
held for sale
Accrued interest receivable
Financial Liabilities:
Deposits
Advances from Federal Home
Loan Bank
Securities sold under repurchase
agreements
Subordinated debentures
Fair Value Measurements at December 31, 2014
(In Thousands)
Total
Level 1
Level 2
Level 3
Carrying
Value
$ 112,936
239,634
13,802
$ 112,936
239,629
N/A
$ 112,936 $ - $ -
-
237,639
N/A
N/A
1,990
N/A
1,626,555
6,037
1,632,507
6,037
-
3
4,741
846
1,627,766
5,188
$ 1,760,813
$ 1,762,733
$ 379,552 $ 1,383,181
$ -
21,544
21,772
54,759
36,083
54,759
35,307
-
-
-
21,772
54,759
-
-
-
35,307
Fair Value Measurements at December 31, 2013
(In Thousands)
Total
Level 1
Level 2
Level 3
Carrying
Value
$ 179,318
198,557
19,350
$ 179,318
198,563
N/A
$ 179,318 $ - $ -
582
195,609
N/A
N/A
2,372
N/A
1,564,618
5,778
1,568,929
5,778
-
4
9,140
696
1,559,789
5,078
$ 1,735,792
$ 1,738,216
$ 348,943 $ 1,389,273
$ -
22,520
22,713
51,919
36,083
51,919
35,237
-
-
-
22,713
51,919
-
-
-
35,237
- 126 -
- 126 -
23. Derivative Financial Instruments
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market
and forward commitments for the future delivery of mortgage loans to third-party investors are
considered derivatives. It is the Company’s practice to enter into forward commitments for the future
delivery of residential mortgage loans when interest rate lock commitments are entered into in order to
economically hedge the effect of changes in interest rates resulting from its commitments to fund the
loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had
approximately $7.4 million and $7.5 million of interest rate lock commitments at December 31, 2014 and
2013, respectively. There were $11.6 million and $12.1 million of forward commitments for the future
delivery of residential mortgage loans at December 31, 2014 and 2013, respectively.
The fair value of these mortgage banking derivatives are reflected by a derivative asset or a derivative
liability. The table below provides data about the carrying values of these derivative instruments:
Assets
December 31, 2014
(Liabilities)
December 31, 2013
Assets (Liabilities)
Carrying
Value
Carrying
Value
Derivative
Net Carrying
Value
Carrying
Value
Carrying
Value
Derivative
Net Carrying
Value
(In Thousands)
Derivatives not designated as
hedging instruments
Mortgage Banking
Derivatives
$
351 $
24 $
327 $
295 $
- $
295
The table below provides data about the amount of gains and losses recognized in income on derivative
instruments not designated as hedging instruments:
Twelve Months Ended December 31,
2014
2013
2012
Derivatives not designated as hedging
instruments
(In Thousands)
Mortgage Banking Derivatives – Gain (Loss)
$ 27
$ (526)
$ 249
The above amounts are included in mortgage banking income with gain on sale of mortgage loans.
During 2014 and 2013, management determined that a group of loans, previously classified as held for
sale, were no longer sellable and were transferred back into the portfolio. As a result, a $5,000 and
$34,000 loss related to a fair value adjustment on those loans was recorded in 2014 and 2013,
respectively. No such adjustments were made in 2012.
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- 127 -
24. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
March 31
June 30
September 30
December 31
Three Months Ended
2014
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for
$
18,474
1,678
16,796
103
(In Thousands, Except Per Share Amounts)
$
$
$
18,774
1,645
17,129
446
19,286
1,623
17,663
406
loan losses
Gain on sale, call or write-down
of securities
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
16,693
16,683
-
7,326
16,661
7,358
2,179
5,179
$
471
7,146
16,357
7,943
2,254
5,689
$
17,257
460
8,896
16,771
9,842
2,773
7,069
$
$
19,714
1,613
18,101
162
17,939
1
7,341
16,969
8,312
1,957
6,355
Earnings per common share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
$ 0.53
$ 0.51
$ 0.59
$ 0.57
$ 0.75
$ 0.71
$ 0.68
$ 0.65
9,681
10,108
9,607
10,066
9,445
9,903
9,316
9,801
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- 128 -
2013
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for
loan losses
Gain on sale, call or write-down
of securities
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Amounts)
$
$
18,476
1,949
16,527
425
18,732
1,814
16,918
448
$
16,102
16,470
53
8,909
17,199
7,865
2,306
5,559
$
44
7,804
15,674
8,644
2,535
6,109
$
$
18,836
1,680
17,156
476
16,680
-
7,289
16,045
7,924
2,445
5,479
$
$
18,737
1,727
17,010
475
16,535
(337)
6,808
15,926
7,080
1,992
5,088
Earnings per common share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
25. Preferred Stock
$ 0.57
$ 0.55
$ 0.63
$ 0.60
$ 0.56
$ 0.54
$ 0.52
$ 0.50
9,736
10,105
9,774
10,156
9,780
10,212
9,766
10,198
On December 5, 2008, as part of the Capital Purchase Program (“CPP”), the Company entered into a
Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the
U.S. Treasury, pursuant to which the Company sold $37.0 million worth of shares of newly authorized
Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.01 per share and liquidation value $1,000
per share (the “Senior Preferred Shares”) and also issued warrants (the “Warrants”) to the U.S. Treasury
to acquire an additional 550,595 of common shares having an exercise price of $10.08 per share. The
Warrants have a term of 10 years.
The Senior Preferred Shares qualified as Tier 1 capital and paid cumulative dividends at a rate of 5% per
annum for the first five years, and 9% per annum thereafter. The Senior Preferred Shares could be
redeemed by the Company after three years. The Senior Preferred Shares were not subject to any
contractual restrictions on transfer, except that the U.S. Treasury or any its transferees may affect any
transfer that, as a result of such transfer, would require the Company to become subject to the periodic
reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends
or distributions on, or purchase, redeem or otherwise acquire for consideration, its common shares was
subject to restrictions, including a restriction against increasing dividends from the last quarterly cash
dividend per share of $0.26 declared on the common stock prior to October 14, 2008. The redemption,
purchase or other acquisition of trust preferred securities of the Company or its affiliates also was
restricted.
The Purchase Agreement also subjected the Company to certain of the executive compensation
limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”). As a condition
to the closing of the transaction, the Company’s Senior Executive Officers (as defined in the Purchase
Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury
or the Company for any changes to such officer’s compensation or benefits that are required to comply
with the regulation issued by the U.S. Treasury under the CPP and acknowledged that the regulation may
require modification of the compensation, bonus, incentive and other benefit plans, arrangements and
policies and agreements as they relate to the period the U.S. Treasury owns the Senior Preferred Shares
- 129 -
- 129 -
of the Company; and (ii) entered into a letter agreement with the Company amending the Benefit Plans
with respect to such Senior Executive Officers as may be necessary, during the period that the U.S.
Treasury owns the Senior Preferred Shares, as necessary to comply with Section 111(b) of the EESA.
In June 2012, the U.S. Treasury sold its preferred shares of the Company through a public offering
structured as a modified Dutch auction. The Company bid on its preferred shares in the auction after
receiving approval from its regulators. The clearing price per preferred share was $962.66 (compared to
a par value of $1,000.00 per share) and the Company was successful in repurchasing 16,560 of the
37,000 preferred shares outstanding through the auction process. The Company also acquired an
additional 19,440 preferred shares in the secondary market prior to the end of the second quarter of 2012.
The remaining 1,000 outstanding preferred shares were purchased at par value on July 18, 2012. The
clearing prices per preferred share purchased in the secondary market were as follows: 1,100 shares at
$997.50, 2,500 shares at $1,000.00 and 16,840 shares at $998.75.
The net balance sheet impact was a reduction to stockholders’ equity of $36.4 million which is comprised
of a decrease in preferred stock of $37.0 million and a $642,000 increase to retained earnings related to
the discount on the shares repurchased, which is also included in net income applicable to common
shares for purposes of calculating earnings per share.
Included in the 2012 operating results is $181,000 of costs incurred by the Company related to the U.S.
Treasury’s offering. All these costs were incurred in the second quarter of 2012. These costs are not tax-
deductible.
26. Balance Sheet Restructure
In October 2012, the Company executed a balance sheet restructuring strategy to enhance the Company’s
current and future profitability while increasing its capital ratios and protecting the balance sheet against
rising rates. The strategy required taking an after tax loss of approximately $260,000 through selling $60.0
million in securities for a gain of $1.6 million and paying off $62.0 million in FHLB advances with a
prepayment penalty of $2.0 million.
27. Other Comprehensive Income (Loss)
The before and after tax amounts allocated to each component of other comprehensive income (loss) are
presented in the table below. Reclassification adjustments related to securities available for sale are
included in gains on sale or call of securities and OTTI losses on investment securities in the
accompanying consolidated condensed statements of income. Reclassification adjustments related to the
defined benefit postretirement medical plan are included in compensation and benefits in the
accompanying consolidated condensed statements of income.
Twelve months ended December 31, 2014:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period
Reclassification adjustment for net gains included in net income
Net loss on defined benefit postretirement medical plan realized
during the period
Net amortization and deferral on defined benefit postretirement
medical plan
Total other comprehensive income
Before Tax
Amount
Tax Expense
(Benefit)
(In Thousands)
Net of Tax
Amount
$
6,763
(932)
$ 2,320
(280)
$
(377)
(132)
35
5,610
$
12
$ 2,041
$
4,443
(652)
(245)
23
3,569
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- 130 -
Twelve months ended December 31, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period
Reclassification adjustment for net losses included in net income
Net gain on defined benefit postretirement medical plan realized
during the period
Net amortization and deferral on defined benefit postretirement
medical plan
Total other comprehensive loss
Before Tax
Amount
Tax Expense
(Benefit)
(In Thousands)
Net of Tax
Amount
$
240
(6,309) $ (2,216)
92
$
287
101
46
$
16
(5,736) $ (2,007)
$
(4,093)
148
186
30
(3,729)
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Securities
Available
For Sale
Accumulated
Other
Post-
retirement Comprehensive
Benefit
Income
Balance January 1, 2014
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
(In Thousands)
$
906
$
(361 ) $
4,443
(222 )
(652 )
-
Net other comprehensive income during period
3,791
(222 )
Balance December 31, 2014
$
4,697
$
(583 ) $
Balance January 1, 2013
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated other
comprehensive income
$
4,851
$
(577 ) $
(4,093)
216
148
-
Net other comprehensive loss during period
(3,945)
216
545
4,221
(652 )
3,569
4,114
4,274
(3,877)
148
(3,729)
Balance December 31, 2013
$
906
$
(361 ) $
545
- 131 -
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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
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 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, 2014. 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, 2014, are effective.
The information set forth under “Management’s Report on Internal Control Over Financial
Reporting” and “Report of Independent Registered Public Accounting Firm” included in Item 8 above is
incorporated herein by reference.
There were no changes in First Defiance’s internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter
ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect First
Defiance’s internal control over financial reporting.
Item 9B. Other Information
None
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required herein is incorporated by reference from the sections captioned:
“Proposal 1 - Election of Directors”, “Executive Officers”, and “Section 16(a) Beneficial Ownership
Reporting Compliance” of the definitive proxy statement to be filed on or about March 31, 2015 (the
“Proxy Statement”).
First Defiance has adopted a Code of Ethics applicable to all officers, directors and employees
that complies with SEC requirements, and is available on its Internet site at www.fdef.com under
Governance Documents.
Item 11. Executive Compensation
Information required by this item is set forth under the captions “Compensation Discussions
and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee
Report” and “Compensation Committee Interlocks and Insider Participation” of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information set forth under the caption “Beneficial Ownership” of the Proxy Statement is
incorporated herein by reference.
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- 132 -
Equity Compensation Plans
The following table provides information as of December 31, 2014 with respect to the shares of
First Defiance common stock that may be issued under First Defiance’s existing equity compensation
plans.
Number of securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Plan Category
Equity Compensation Plans Approved by
Security Holders
(a)
173,720
(b)
$20.80
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a))
(c)
193,067
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions “Composition of the Board” and “Related Person
Transactions” of the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption “Independent Registered Public Accounting Firm”
of the Proxy Statement is incorporated herein by reference.
- 133 -
- 133 -
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
Financial Statements
(1) The following documents are filed as Item 8 of this Form 10-K.
(C)
(A) Report of Independent Registered Public Accounting Firm (Crowe Horwath LLP)
Consolidated Statements of Financial Condition as of December 31, 2014
(B)
and 2013
Consolidated Statements of Income for the years ended December 31, 2014,
2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31,
2014, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31,
2014, 2013 and 2012
(D)
(E)
(F)
(G) Notes to Consolidated Financial Statements
(2) Separate financial statement schedules are not being filed because of the absence of
conditions under which they are required or because the required information is included in
the consolidated financial statements or the related notes.
(3) The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The
management contracts and compensation plans or arrangements required to be filed with this
Form 10-K are listed as Exhibits 10.1 through 10.35.
- 134 -
- 134 -
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.
February 27, 2015
FIRST DEFIANCE FINANCIAL CORP.
By: /s/ Kevin T. Thompson
Kevin T. Thompson, 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 February
27, 2015.
Signature
Title
/s/ William J. Small
William J. Small
/s/ Donald P. Hileman
Donald P. Hileman
/s/ Kevin T. Thompson
Kevin T. Thompson
/s/ Stephen L. Boomer
Stephen L. Boomer
/s/ John L. Bookmyer
John L. Bookmyer
/s/ Dr. Douglas A. Burgei
Dr. Douglas A. Burgei
/s/ Peter A. Diehl
Peter A. Diehl
/s/ Barb A. Mitzel
Barb A. Mitzel
/s/ Jean A. Hubbard
Jean A. Hubbard
/s/ Samuel S. Strausbaugh
Samuel S. Strausbaugh
/s/ Charles D. Niehaus
Charles D. Niehaus
Chairman of the Board
President and Chief
Executive Officer
Executive Vice President and Chief
Financial Officer (principal accounting officer)
Director, Vice Chairman
Director
Director
Director
Director
Director
Director
Director
- 135 -
- 135 -
Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed
with the SEC. The SEC allows us to incorporate by reference information in this document. The
information incorporated by reference is considered to be part of this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F
Street, N.E., Washington D.C. 20549. The SEC also maintains an internet web site that contains
reports, proxy statements, and other information about issuers, like First Defiance, who file
electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other
information filed by First Defiance with the SEC are also available at the First Defiance Financial
Corp. web site. The address of the site is http://www.fdef.com. Except as specifically incorporated by
reference into this Annual Report on Form 10-K, information on those web sites is not part of this
report.
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.17
10.18
10.19
10.21
10.22
10.23
10.24
10.25
Description
Articles of Incorporation
Code of Regulations
Amendment to Articles of Incorporation
Agreement to furnish instruments and agreements defining
rights of holders of long-term debt
Form of Warrant for Purchase of Shares of Common Stock
1996 Stock Option Plan
Form of Incentive Stock Option Award Agreement under 2001 Plan
Form of Nonqualified Stock Option Award Agreement under 1996 Plan
1996 Management Recognition Plan and Trust
2001 Stock Option and Incentive Plan
Employment Agreement with James L. Rohrs
Employment Agreement with Donald P. Hileman
Employment Agreement with Gregory R. Allen
2005 Stock Option and Incentive Plan
Letter Agreement, dated December 5, 2008, between First Defiance and the
U.S. Treasury
2008 Long Term Incentive Compensation Plan (LTIP)
Form of Contingent Award Agreement under LTIP
Form of Stock Option Award Agreement under 2005 Plan
Form of Option Award Agreement with EESA restriction under 2005 Plan
First Federal Executive Group Life Plan – Post Separation
2010 Equity Incentive Plan
First Defiance Deferred Compensation Plan
Form of Restricted Stock Award Agreement
2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement
2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement
2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement
(with TARP Restrictions)
10.26
2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement
(with TARP Restrictions)
10.27
First Amendment to First Defiance Financial Corp. 2010 Equity Incentive
Plan
10.28
10.29
First Defiance Financial Corp. and Affiliates Incentive Compensation Plan
First Defiance Financial Corp. Long-Term Restricted Stock Unit Award
Agreement (2012 Long Term Incentive – TARP Applicable)
10.30
First Defiance Financial Corp. Long-Term Restricted Stock Unit Award
10.31
10.32
Agreement (2012 Long Term Incentive)
Underwriting Agreement dated June 13, 2012
Employment Agreement with Donald P. Hileman
(1)
(1)
(10)
(15)
(14)
(2)
(3)
(3)
(7)
(5)
(6)
(16)
(8)
(9)
(11)
(12)
(13)
(4)
(19)
(17)
(18)
(30)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(31)
- 136 -
- 136 -
10.33
10.34
10.35
10.36
21
23.1
31.1
Employment Agreement with Kevin T. Thompson
Form of Restricted Stock Award Agreement
Consulting Agreement with William J. Small
Change of Control and Non-Compete Agreement with Dennis E. Rose, Jr.
List of Subsidiaries of the Company
Consent of Crowe Horwath LLP
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101*
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Condensed Balance Sheet, (ii) the Consolidated Condensed
Statements of Income, (iii) the Consolidated Condensed Statements of
Changes in Equity, (iv) the Consolidated Condensed Statements of Cash
Flows, and (v) the Notes to Consolidated Condensed Financial
Statements tagged as blocks of text and in detail.
(32)
(33)
(34)
(15)
(15)
(15)
(15)
(15)
(15)
(15)
(15)
(1)
(2)
(3)
(4)
(5)
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(8)
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Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-1 (File
No. 33-93354)
Incorporated herein by reference to like numbered exhibit in Registrant’s 2001 Form 10-K (Film
No. 02580719)
Incorporated herein by reference to like numbered exhibit in Registrant’s 2004 Form 10-K (Film
No. 0568550)
Incorporated herein by reference to like numbered exhibit in Registrant’s 2008 Form 10-K (Film
No. 09683948)
Incorporated herein by reference to Appendix B to the 2001 Proxy Statement (Film No.
1577137)
Incorporated herein by reference to exhibit 10.2 in Form 8-K filed October 1, 2007 (Film No.
071144951)
Incorporated herein by reference to exhibit 10.2 in Registrant’s 2001 Form 10-K (Film No.
02580719)
Incorporated herein by reference to exhibit 10.4 in Form 8-K filed October 1, 2007 (Film No.
071144951)
Incorporated herein by reference to Appendix A to the 2005 Proxy Statement (Film No.
05692264)
Incorporated herein by reference to exhibit 3 in Form 8-K filed December 8, 2008 (Film No.
081236105)
Incorporated herein by reference to exhibit 10 in Form 8-K filed December 8, 2008 (Film No.
081236105)
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 12, 2008 (Film No.
081245224)
Incorporated herein by reference to exhibit 10.2 in Form 8-K filed December 12, 2008 (Film No.
081245224)
Incorporated herein by reference to exhibit 4 in Form 8-K filed December 8, 2008 (Film No.
081236105)
Included herein
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 16, 2009 (Film No.
091245196)
Incorporated herein by reference to exhibit 10.1 in Form 10-Q filed November 2, 2010 (Film No.
101158262)
Incorporated herein by reference to Annex A to 2010 Proxy Statement (Film No. 10693151)
- 137 -
- 137 -
(19)
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Incorporated herein by reference to like numbered exhibit in Registrant’s 2010 Form 10-K (Film
No. 10652528)
Incorporated herein by reference to exhibit 10.1 in Form 10-Q filed May 5, 2011 (Film No.
11803357)
Incorporated herein by reference to exhibit 10.1 in Form 10-Q filed November 8, 2011 (Film No.
111188059)
Incorporated herein by reference to exhibit 10.2 in Form 10-Q filed November 8, 2011 (Film No.
111188059)
Incorporated herein by reference to exhibit 10.3 in Form 10-Q filed November 8, 2011 (Film No.
111188059)
Incorporated herein by reference to exhibit 10.4 in Form 10-Q filed November 8, 2011 (Film No.
111188059)
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed March 15, 2012 (Film No.
12694926)
Incorporated herein by reference to exhibit 10.2 in Form 8-K filed March 15, 2012 (Film No.
12694926)
Incorporated herein by reference to exhibit 10.3 in Form 8-K filed March 15, 2012 (Film No.
12694926)
Incorporated herein by reference to exhibit 10.4 in Form 8-K filed March 15, 2012 (Film No.
12694926)
Incorporated herein by reference to exhibit 1.1 in Form 8-K filed June 15, 2012 (Film No.
12910514)
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 23, 2005 (Film No.
051284175)
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 30, 2013 (Film No.
131303552)
Incorporated herein by reference to exhibit 10.2 in Form 8-K filed December 30, 2013 (Film No.
131303552)
Incorporated herein by reference to exhibit 10.3 in Form 8-K filed December 30, 2013 (Film No.
131303552)
Incorporated herein by reference to exhibit 10.4 in Form 8-K filed December 30, 2013 (Film No.
131303552
* As provided in Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are
deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability
under those sections.
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TO OUR SHAREHOLDERS
SHAREHOLDERS INFORMATION
DEAR FELLOW SHAREHOLDERS,
2014 was a very successful year for our
company. We recorded our third consecutive
year of record
earnings and
achieved a total
shareholder
return of over
34 percent. We
are delighted
to have carried
forward the
positive
momentum
gained over
the last several
years and to
have advanced
toward our
goal of being
a consistently
high performing
community bank.
As we celebrate
the success of
2014 and the
progress we’ve
accomplished,
Donald P. Hileman
President & CEO
William J. Small
Chairman
we gain even more confidence that we
are positioned to meet the economic and
regulatory environment challenges that
still lie ahead. The prolonged low interest
rate environment resulting from multiple
factors, while beneficial in some areas of our
operations such as cost of funds, has had a
damping effect and been an overall
indicator of weaker economic growth.
The Federal Reserve has taken multiple
actions to stimulate the economic engine
for the past several years, and the outlook
for rates to rise gives us confidence that we
are entering a period of sustainable growth.
This will provide additional opportunities
for greater utilization of our products and
services by current customers and the chance
to introduce new customers to First Federal
Bank’s community banking difference.
To be a high performing community bank,
we also need to meet our customers’
increasing expectations for personalized
service, added convenience and quick
response. We have established many
important initiatives this year to help us meet
these desires, including Mobile Deposit,
OnLine Account Opening and chat capabilities
to help guide customers through the
mortgage loan process wherever they may
be. We plan to enhance our digital delivery
services to allow customers to bank anytime,
anywhere and to serve those adjacent to
our footprint or in areas that do not have
full-service community banking centers. Not
only have we satisfied the needs of our retail
customers, we have designed a streamlined
lending process for small to mid-sized
business customers and added dedicated
Business Bankers to each of our market areas.
While our presence online is important, we
remain dedicated to building relationships
with our customers through our network of
banking center locations. Early in 2014, we
established a loan production office in
Columbus, Ohio; and in September, we
opened our second office in Fort Wayne,
Indiana, showcasing our relationship banking
model. Continued expansion is planned in
areas with strong growth opportunities. We
are committed to our strategy of providing
quality products and service while earning
trust and confidence from our customers.
2014 also represented a year of transition with
the retirement of James L. Rohrs, First Federal
Bank President and CEO, on December 31
after an accomplished banking career of
which 15 years were spent with First Federal
Bank. As a result of a solid succession plan,
we remain ready to meet the opportunities
and challenges of the year ahead under
the guidance of a skilled, experienced
leadership team. We are thankful to all of
our stakeholders, customers, employees and
shareholders for their continued support
and help in achieving continued success
for First Defiance.
Sincerely,
Donald P. Hileman
William J. Small
ANNUAL MEETING
In order to increase shareholder attendance and participation,
the Annual Meeting of Shareholders will be conducted
virtually at 2:00 p.m. on Tuesday, April 21, 2015.
Shareholders may access the Annual Meeting by going
to www.virtualshareholdermeeting.com/FDEF2015.
INVESTOR INFORMATION
Shareholders, investors and analysts interested in additional
information about First Defiance Financial Corp. may contact
Investor Relations at the corporate office, 419-782-5104.
TOTAL RETURN PERFORMANCE
350
300
250
200
150
100
50
e
e
u
u
l
a
l
V
a
x
V
e
d
x
n
I
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d
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I
0
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
PRICE RANGE
Year Ended December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$28.23
$29.00
$29.00
$35.70
Year Ended December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$23.75
$23.75
$28.46
$27.25
Low
$24.24
$26.50
$26.99
$26.95
Low
$18.42
$20.80
$22.49
$23.31
STOCK TRANSFER AGENT
Shareholders with questions concerning the transfer of shares,
lost certificates, dividend payments, dividend reinvestment,
receipt of multiple dividend checks, duplicate mailings or
changes of address should contact:
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
1-844-318-0128 or 1-720-358-3594
shareholder@broadridge.com
SECURITIES LISTING
First Defiance Financial Corp. common stock trades on the NASDAQ
Global Select Market under the symbol FDEF. As of March 2, 2015,
there were approximately 1,938 stockholders of record and 9,234,781
shares outstanding.
DIVIDEND POLICY
The First Defiance Financial Corp. Board reviews and determines on
a quarterly basis whether to declare a dividend. Dividends declared
in 2014 totaled $0.63 per share.
DIVIDEND REINVESTMENT PLAN
Shareholders may automatically reinvest dividends in additional
First Defiance Financial Corp. common stock through the Dividend
Reinvestment Plan, which also provides for purchase by voluntary
cash contributions. For additional information, please contact:
Broadridge Corporate Issuer Solutions
at 1-844-318-0128 or 1-720-358-3594.
AUDITORS
Crowe Horwath LLP
330 East Jefferson Boulevard
South Bend, Indiana 46624
GENERAL COUNSEL
Vorys, Sater, Seymour & Pease LLP
301 East Fourth Street, Suite 3500
Cincinnati, Ohio 45202
2
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A N N U A L R E P O R T
2014
F i r s t D e f i a n c e F i n a n c i a l C o r p .
First Defiance Financial Corp.
601 Clinton Street
Defiance, OH 43512
419-782-5105
First-Fed.com
First Defiance Financial Corp.
511 Fifth Street
Defiance, OH 43512
419-784-5431
Firstinsurancegrp.com
First Defiance Financial Corp.
601 Clinton Street
Defiance, OH 43512
419-782-5104
Fdef.com
For investor relations information, visit Fdef.com