BACK COVER
First Defiance Financial Corp.
601 Clinton Street
Defiance, OH 43512
419-782-5104
Fdef.com
First Federal Bank of the Midwest
601 Clinton Street
Defiance, OH 43512
419-782-5015
First-Fed.com
First Insurance Group
511 Fifth Street
Defiance, OH 43512
419-784-5431
Firstinsurancegrp.com
For investor relations information, visit Fdef.com
FRONT COVER
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FIRST DEFIANCE
FINANCIAL CORP.
ANNUAL REPORT
to our shareholders
In 2015, we accomplished our fourth
consecutive year of record earnings, once
again placing First Defiance Financial
Corp. in a promising position for 2016. Our
focus on key areas to improve financial
performance and increase shareholder
value will continue as we build on this
momentum. These areas include core
balance sheet growth, particularly loan
and deposit growth, overall revenue
growth, expense control and improved
asset quality. We enter 2016 in a still
very challenging rate environment. The
continuation of lower rates in 2016 is a
broad indicator of weaker economic
growth. While we are seeing clear signs
of a strengthening economy, the pace
and level of improvement are less clear.
The Federal Reserve has taken action
by raising rates in 2015 for the first time
in seven years, and we expect that rates
will rise again in 2016 indicating more
confidence that we are in for a period of
sustainable economic growth. With the
strength, structure and risk profile of our
balance sheet, we believe that we are
prepared for the changes ahead. We will
continue to overcome challenges with
the expected rise in rates by the Federal
Reserve, as we have done in 2015.
It’s important to reflect on the excellent
progress made in 2015 toward achieving
our strategic goals. We were especially
pleased by the significant improvement
in credit quality reflected by lower charge
offs and overall lower non-performing
assets. With our encouraging recent
performance, balanced approach and
long-term focus on shareholder value, we
look to constantly drive our performance
through
initiatives that will help us
obtain our goal of being a consistently
high-performing community bank.
10K REPORT
This year, we accomplished many
important
including
initiatives
enhancements to electronic and mobile
capabilities, giving our customers more
choices on how they bank with us.
We are delighted with the increases in
both electronic and mobile transactions,
including online account opening,
mobile deposits, electronic payments
and use of mobile wallet features like
Apple Pay®. This gives us confidence that
we are dedicating the proper resources to
provide our clients with the technology
institution.
in a financial
they desire
The digital delivery environment
is
changing at an accelerated pace, and
we are committed to meeting customer
for quality products and
demands
services by being a technology leader
amongst community banks. We strive
to make banking with First Federal Bank
a hassle-free experience from anywhere
and at any time.
Donald P. Hileman
President & CEO
this
institution
is to be the premier
Our mission
financial services
in every
market we serve, while generating
a solid return on the investment of
shareholders. We believe we
our
through our
can accomplish
commitment not only
the
to
communities we serve but through
accuracy,
efficiency,
innovation,
consistency and friendliness. As an
organization, with $2.3 billion in assets
and a business philosophy
focused
on building relationships, we are in a
unique position to offer a complete
array of products and services, while
retaining flexibility to react to our
customers’ needs. Our current leadership
team has the experience and skills to
meet the opportunities and challenges
head on in the next year. We appreciate
in
and
your
First Defiance Financial Corp. We
believe that our partnership with our
shareholders, customers, employees
and communities makes us all stronger.
We truly are better together.
investment
interest
Donald P. Hileman
President & CEO
shareholders information
12/31/14
12/31/15
Defiance
company profile
Annual Meeting
In order to
increase shareholder attendance
the Annual Meeting of
and participation,
Shareholders will be conducted virtually at
2:00 p.m. on Tuesday, April 19, 2016. Shareholders
may access the Annual Meeting by going to
Financial
www.virtualshareholdermeeting.com/fdef2016
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.
Corp.,
First
headquartered in Defiance, Ohio, is the
holding company for First Federal Bank
of the Midwest and First Insurance Group.
First Federal Bank operates 34 full-service
branches and 41 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 six
offices throughout northwest Ohio.
l
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a
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l
a
x
V
e
d
x
n
e
I
d
n
I
350
300
250
200
150
100
50
Total Return Performance
Total Return Performance
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
acquired
Since 2003, First Defiance has acquired
three banking offices, opened eight
de novo offices,
four
insurance agencies and completed
Inc. based
acquisitions of ComBanc,
in Delphos, Ohio; Genoa Savings and
Loan based in Genoa, Ohio; and Pavilion
12/31/12
12/31/13
Bancorp, based in Adrian, Michigan.
12/31/11
0
12/31/10
First
in 1993.
SNL Bank NASDAQ
SNL Midwest Thrift
First Defiance Financial Corp.
NASDAQ Composite
Price Range
Year Ended December 31, 2015
safe harbor statement
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
1-844-318-0128 or 1-720-358-3594
shareholder@broadridge.com
Stock Transfer Agent
Shareholders with questions concerning
the
transfer of shares,
lost certificates, dividend
Securities Listing
Statements contained in this Annual
receipt of
payments, dividend
reinvestment,
Report may not be based on
First Defiance Financial Corp. common stock trades on the
Founded in the 1920s as Northwest
multiple dividend checks, duplicate mailings or
historical facts and are “forward-looking
NASDAQ Global Select Market under the symbol FDEF. As of
Savings,
Federal Bank was
changes of address should contact:
February 22, 2016, there were approximately 1,851 stockholders of
statements” within the meaning of
chartered in 1935 as a federal mutual
record and 8,938,777 shares outstanding.
Section 27A of the Securities Act of
savings and loan company. First Federal
1933, as amended, and Section 21B of
Dividend Policy
Bank converted to a mutual holding
the Securities Act of 1934, as amended.
company and issued its first stock to the
The First Defiance Financial Corp. Board reviews and determines on a
results could vary materially
Actual
In
public and employees
quarterly basis whether to declare a dividend. Dividends declared in
depending on risks and uncertainties
September 1995, First Federal Bank
2015 totaled $0.775 per share.
inherent in general and local banking
converted to a full stock company,
Dividend Reinvestment Plan
and insurance conditions, competitive
trading stock on the NASDAQ national
factors specific to markets in which the
Shareholders may automatically reinvest dividends in additional
market under the ticker symbol FDEF. At
First Defiance Financial Corp. common stock
the
Company and its subsidiaries operate,
the same time, First Defiance Financial
Dividend Reinvestment Plan, which also provides for purchase by
future
legislative
levels,
Corp. was founded as the holding
voluntary cash contributions. For additional information, please
regulatory decisions or capital
and
company for First Federal Bank. In 1998,
contact: Broadridge Corporate Issuer Solutions at 1-844-318-0128
market
The Company
an additional business line was added
or 1-720-358-3594.
assumes no responsibility to update this
with the acquisition of an insurance
information. For more details, please
Auditors
agency, now known as First Insurance
refer to the Company’s SEC filings,
Group. The Bank’s name was changed to
Crowe Horwath LLP
including its most recent Annual Report
First Federal Bank of the Midwest in 1999,
330 East Jefferson Boulevard
on Form 10-K and quarterly reports on
to better reflect our community banking
South Bend, Indiana 46624
Form 10-Q.
business strategy.
General Counsel
Vorys, Sater, Seymour & Pease LLP
301 East Fourth Street, Suite 3500
Cincinnati, Ohio 45202
HIGH
$28.23
HIGH
$34.64
Year Ended December 31, 2014
Second Quarter
Second Quarter
Fourth Quarter
Fourth Quarter
Third Quarter
Third Quarter
interest rate
First Quarter
First Quarter
conditions.
$32.42
$26.50
$26.99
$26.95
$29.05
$35.03
$24.24
$35.01
through
$29.00
$29.00
$42.46
$38.21
$35.70
$39.95
LOW
LOW
Apple Pay® is a registered trademark of Apple Inc.
to our shareholders
company profile
In 2015, we accomplished our fourth
pleased by the significant improvement
consecutive year of record earnings, once
in credit quality reflected by lower charge
again placing First Defiance Financial
offs and overall lower non-performing
Corp. in a promising position for 2016. Our
assets. With our encouraging recent
Donald P. Hileman
President & CEO
focus on key areas to improve financial
performance, balanced approach and
Our mission
is to be the premier
performance and increase shareholder
long term focus on shareholder value, we
financial services
institution
in every
value will continue as we build on this
look to constantly drive our performance
market we serve, while generating
momentum. These areas include core
through
initiatives that will help us
a solid return on the investment of
balance sheet growth, particularly loan
obtain our goal of being a consistently
our
shareholders. We believe we
and deposit growth, overall revenue
high-performing community bank.
can accomplish
this
through our
growth, expense control and improved
asset quality. We enter 2016 in a still
very challenging rate environment. The
continuation of lower rates in 2016 is a
broad indicator of weaker economic
growth. While we are seeing clear signs
of a strengthening economy, the pace
and level of improvement are less clear.
The Federal Reserve has taken action
by raising rates in 2015 for the first time
in seven years, and we expect that rates
will rise again in 2016 indicating more
confidence that we are in for a period of
sustainable economic growth. With the
strength, structure and risk profile of our
balance sheet, we believe that we are
prepared for the changes ahead. We will
continue to overcome challenges with
the expected rise in rates by the Federal
Reserve, as we have done in 2015.
This year, we accomplished many
important
initiatives
including
enhancements to electronic and mobile
capabilities, giving our customers more
choices on how they bank with us.
We are delighted with the increases in
both electronic and mobile transactions,
including online account opening,
mobile deposits, electronic payments
and use of mobile wallet features like
Apple Pay®. This gives us confidence that
we are dedicating the proper resources to
provide our clients with the technology
they desire
in a financial
institution.
The digital delivery environment
is
changing at an accelerated pace, and
we are committed to meeting customer
demands
for quality products and
services by being a technology leader
amongst community banks. We strive
commitment not only
to
the
communities we serve but through
innovation,
efficiency,
accuracy,
consistency and friendliness. As an
organization, with $2.3 billion in assets
and a business philosophy
focused
on building relationships, we are in a
unique position to offer a complete
array of products and services, while
retaining flexibility to react to our
customers’ needs. Our current leadership
team has the experience and skills to
meet the opportunities and challenges
head on in the next year. We appreciate
your
interest
and
investment
in
First Defiance Financial Corp. We
believe that our partnership with our
shareholders, customers, employees
and communities makes us all stronger.
We truly are better together.
It’s important to reflect on the excellent
to make banking with First Federal Bank
progress made in 2015 toward achieving
a hassle-free experience from anywhere
our strategic goals. We were especially
and at any time.
Donald P. Hileman
President & CEO
Financial
Defiance
Corp.,
First
headquartered in Defiance, Ohio, is the
holding company for First Federal Bank
of the Midwest and First Insurance Group.
First Federal Bank operates 34 full-service
branches and 41 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 six
offices throughout northwest Ohio.
First
in 1993.
Founded in the 1920s as Northwest
Savings,
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
In
public and employees
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.
acquired
Since 2003, First Defiance has acquired
three banking offices, opened eight
de novo offices,
four
insurance agencies and completed
Inc. based
acquisitions of ComBanc,
in Delphos, Ohio; Genoa Savings and
Loan based in Genoa, Ohio; and Pavilion
Bancorp, based in Adrian, Michigan.
safe harbor statement
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.
results could vary materially
Actual
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
legislative
regulatory decisions or capital
and
market
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.
interest rate
conditions.
levels,
Apple Pay® is a registered trademark of Apple Inc. financial highlights
Summary of Operating Results
Net interest income
Provision for loan losses
Non-interest income (excluding securities gains/losses)
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
(in thousands, except per share amounts)
2015
2014 % Change
$74,055
$69,689
1,117
30,709
932
66,758
24,292
6.3%
-87.8%
3.5%
-97.6%
1.7%
8.8%
2014 % Change
$2,297,676
$2,178,952
1,776,835
1,622,020
1,836,137
1,760,813
280,197
279,505
25,382
24,766
5.5%
9.5%
4.3%
0.3%
2.5%
2014 % Change
$2.55
2.44
0.625
23.25
9,235
12.6%
15.6%
24.0%
2.3%
-1.4%
2014 % Change
136
31,781
22
67,889
26,423
2015
2015
$2.87
2.82
0.775
23.79
9,102
2015
3.81%
1.19%
9.52%
3.68%
1.12%
8.78%
3.5%
5.8%
8.3%
-3.5%
11
12
13
14
15
11
12
13
14
15
11
12
13
14
15
63.01%
65.32%
Diluted Earnings Per Share
Deposits (in millions)
Loans (in millions)
11
12
13
14
15
11
12
13
14
15
11
12
13
14
15
Dividends Per Share
Return on Average Assets (percent)
Return on Average Equity (percent)
3.60
3.20
2.80
2.40
2.00
1.60
1.20
.80
.40
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
160
140
120
100
80
60
40
20
0
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
16
14
12
10
8
6
4
2
0
financial highlights
Summary of Operating Results
Non-interest income (excluding securities gains/losses)
Net interest income
Provision for loan losses
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
(in thousands, except per share amounts)
2015
2014 % Change
$74,055
$69,689
2014 % Change
$2,297,676
$2,178,952
1,776,835
1,622,020
1,836,137
1,760,813
280,197
279,505
25,382
24,766
136
31,781
22
67,889
26,423
2015
2015
$2.87
2.82
0.775
23.79
9,102
2015
3.81%
1.19%
9.52%
1,117
30,709
932
66,758
24,292
$2.55
2.44
0.625
23.25
9,235
3.68%
1.12%
8.78%
2014 % Change
63.01%
65.32%
6.3%
-87.8%
3.5%
-97.6%
1.7%
8.8%
5.5%
9.5%
4.3%
0.3%
2.5%
12.6%
15.6%
24.0%
2.3%
-1.4%
3.5%
5.8%
8.3%
-3.5%
Diluted Earnings Per Share
3.60
3.20
2.80
2.40
2.00
1.60
1.20
.80
.40
Deposits (in millions)
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
Loans (in millions)
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
11
12
13
14
15
11
12
13
14
15
11
12
13
14
15
2014 % Change
Dividends Per Share
Return on Average Assets (percent)
Return on Average Equity (percent)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
160
140
120
100
80
60
40
20
0
16
14
12
10
8
6
4
2
0
11
12
13
14
15
11
12
13
14
15
11
12
13
14
15
board of directors
William J. Small
Chairman,
First Defiance Financial Corp.
1, 4, 5, 6, 7 & 8
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.
Retired 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
Key For Board of Directors:
1. Executive Committee
2. Audit Committee
3. Compensation Committee
4. Corporate Governance
Committee
Peter A. Diehl
Retired Business Owner,
Defiance, Ohio
2, 4, & 6
Jean A. Hubbard
Business Manager &
Corporate Treasurer,
The Hubbard Company
Defiance, Ohio
2, 3 & 8
Barbara A. Mitzel
Director of Public Affairs,
Consumers Energy
Adrian, Michigan
4, 5 & 6
Charles D. Niehaus
Managing Partner,
Niehaus & Associates, Ltd.
Toledo, Ohio
4, 6 & 8
Samuel S. Strausbaugh
President,
Chief Executive Officer &
Chief Financial Officer,
JB & Company, Inc.
Tiffin, Ohio
2, 3, 7 & 8
5. Investment Committee
6. Trust Committee
7. First Insurance Group Board
8. Risk Committee
First Federal Bank of the Midwest Corporate Officers
Donald P. Hileman
President &
Chief Executive Officer
David D. Dygert
Executive Vice President,
Columbus Market Executive
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
John R. Reisner
Executive Vice President,
Chief Risk Officer &
Legal Counsel
Sharon L. Davis
Executive Vice President,
Director of Human Resources
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
Brent L. Beard
Senior Vice President,
Controller
Craig A. Curtis
Senior Vice President,
Commercial Lending
Amy M. Daeger
Senior Vice President,
Director of Retail
Administration
Brian A. Eitniear
Senior Vice President,
Director of Corporate Services
Charles V. Hoecherl
Senior Vice President,
Treasury Management Sales
David L. Kondas
Senior Vice President,
Director of Wealth
Management
Amy L. Hackenberg
Executive Vice President,
Southern Market Area President
Kathleen A. Miller
Senior Vice President,
Information Technology
Timothy K. Harris
Executive Vice President,
Eastern Market Area President
Linda R. Moening
Senior Vice President,
Bank Operations
Marybeth Shunck
Executive Vice President,
Northern Market Area President
Dirk VanHeyst
Senior Vice President,
Commercial Lending
James R. Williams
Executive Vice President,
Western Market Area President
Martha J. Woelke
Senior Vice President,
Retail Lending
Danielle R. Figley
Corporate Secretary
10K REPORT
First Insurance Group, Inc. Corporate Officers
John Payak, III
Donald P. Hileman
Chief Executive Officer
Executive Vice President,
Property & Casualty
First Defiance Financial Corp. Corporate Officers
John R. Reisner
Donald P. Hileman
Executive Vice President,
President &
Chief Risk Officer &
Chief Executive Officer
Legal Counsel
Tim Whetstone
Executive Vice President,
Property & Casualty
Lawrence H. Woods
Executive Vice President,
Property & Casualty
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
Sharon L. Davis
Executive Vice President,
Director of Human Resources
Danielle R. Figley
Corporate Secretary
Michael R. Klein
President &
Chief Operating Officer
Marvin K. Dubbs, Jr.
Executive Vice President,
Property & Casualty
Kenneth G. Keller
Executive Vice President,
Group Health & Life
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, 2015
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
_______________
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(b) of the Act:
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. []
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, 2015 was approximately $338.1 million.
As of February 19, 2016, there were issued and outstanding 8,938,777 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 2016
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
24
29
29
31
31
31
34
35
54
57
129
129
129
129
129
130
130
130
131
132
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” or “the
Bank”), 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.
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 premiums 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, 2015, the Company had consolidated assets of $2.30 billion, consolidated
deposits of $1.84 billion, and consolidated stockholders’ equity of $280.2 million. The Company was
incorporated in Ohio in June of 1995. Its principal executive offices are located at 601 Clinton Street,
Defiance, Ohio 43512, and its telephone number is (419) 782-5015.
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”).
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 twenty-seven 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.
First Federal is primarily engaged in community banking. It attracts deposits from the general
public through its offices and website 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
- 3 -
- 3 -
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, Lima and Bowling Green, Ohio areas. First Insurance offers property
and casualty insurance, life insurance and group health insurance. On September 1, 2015, First Insurance
acquired a group medical benefits business from Buckeye Insurance Consultants, Inc. located in Lima,
Ohio. See Note 3 of the Notes to Consolidated Financial Statements for further details regarding the
Buckeye Insurance Consultants, Inc. acquisition.
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, including a focus on the deposit
balances that accompany these relationships. First Federal’s client base tends to be small to middle
market 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 implemented a 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.
- 4 -
- 4 -
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 and online bill pay.
Fee Income Development - Generation of fee income and the diversification of revenue sources
are accomplished through the mortgage banking operation, First Insurance 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 monitors 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 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.
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, Controller of First Federal, and the Chief Administration Officer 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 59 collateralized mortgage obligation (“CMO”)
issues totaling $71.8 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, 2015.
- 5 -
- 5 -
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, 2015 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
$ 10,378
12,347
3.28% $ 28,432
39,062
3.08
3.25% $13,175
16,755
2.94
3.20%
2.77
$ 13,860
1,890
(Dollars in Thousands)
3.14% $ 65,845
2.40
70,054 2.91
3.22%
- -
3,000
1.49
-
-
-
-
3,000
1.49
830 1.59
- -
$ 23,555
9,426
4,955
$ 84,875
3.27
1.10
37,060
-
$ 66,990
3.72
-
38,488
3.67
- -
85,804
3.63
4,955 1.10
$ 54,238
$ 229,658
800
6,220
$ 236,678
(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%.
The carrying value of investment securities is as follows:
Available-for-sale securities:
Obligations of U.S. government corporations and
agencies
Obligations of state and political subdivisions
CMOs, REMICS and mortgage-backed securities
Trust preferred stock and preferred stock
Corporate bonds
Total
2015
December 31
2014
(In Thousands)
2013
$ 2,994
90,389
138,074
1
4,977
$ 236,435
$ 980
88,532
142,816
1
6,992
$ 239,321
$ 4,921
80,220
101,133
2,954
8,942
$ 198,170
Held-to-maturity securities:
Mortgage-backed securities
Obligations of state and political subdivisions
Total
$ 119
124
$ 243
$ 158
155
$ 313
$ 201
186
$ 387
For additional information regarding First Defiance’s investment portfolio, refer to Note 5 –
Investment Securities to the consolidated financial statements.
- 6 -
- 6 -
Interest-Bearing Deposits
The Company had $41.0 million and $71.0 million in overnight investments at the Federal
Reserve at December 31, 2015 and 2014, 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 $1.6 million and $6.5 million at December 31, 2015 and 2014, 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, 2015, First Federal serviced
14,260 loans totaling $1.34 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, 2015, 62.93%, 36.03% and 0.94% 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:
2015
December 31
2014
2013
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
1,836
5,606
3,924
1,761
922
209
14,258
$ 188,916
603,875
379,917
110,616
50,937
9,461
$ 1,343,722
14.06%
44.94
28.28
8.23
3.79
0.70
100.00%
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%
Loan servicing fees decrease as the principal balance on the outstanding loan decreases and as
the remaining time to maturity of the loan shortens.
- 7 -
- 7 -
The following table sets forth certain information regarding the remaining maturity of the
mortgage loans serviced by the Company as of the dates shown.
2015
December 31
2014
Number
of Loans
% of
Number
of Loans
Unpaid
Principal
Amount
Maturity
% of
Unpaid
Principal
Amount
Number
of Loans
% of
Number
of Loans
Unpaid
Principal
Amount
(Dollars in Thousands)
% of
Unpaid
Principal
Amount
2013
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
680
1,563
3,759
1,635
1,833
0.80%
4.77% $ 10,801
89,364
6.65
349,986 26.05
144,249 10.74
169,889 12.64
10.97
26.36
11.47
12.85
810
1,204
4,082
1,720
1,575
5.67%
8.44
28.61
12.06
11.04
1.18%
$ 15,932
64,979
4.83
385,409 28.62
155,783 11.57
143,062 10.62
846
1,009
4,340
1,704
1,218
5.91% $ 19,593
52,404
7.05
420,362
30.31
158,467
11.90
102,844
8.51
1.43%
3.82
30.66
11.56
7.50
4,788
33.58
579,433 43.12
4,876
34.18
581,473 43.18
5,202
36.32
617,571
45.03
14,258
100.00% $1,343,722 100.00%
14,267
100.00% $1,346,638 100.00%
14,319
100.00% $1,371,241 100.00%
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, 2015, First Federal’s limit on loans-to-one borrower was
$39.3 million and its five largest loans (including available lines of credit) or groups of loans to one
borrower, including related entities, were $28.3 million, $24.1 million, $23.0 million, $22.9 million and
$21.0 million. All of these loans or groups of loans were performing in accordance with their terms at
December 31, 2015.
Loan Portfolio Composition – The net increase in net loans receivable over the prior year was
$154.8 million, $66.5 million and $57.0 million at December 31, 2015, 2014, and 2013, 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 $564.1 million at December 31, 2015, which represents 30.2% of the
Company’s loan portfolio.
- 8 -
- 8 -
The following table sets forth the composition of the Company’s loan portfolio by type of loan at
the dates indicated.
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
2015
2014
December 31
2013
2012
2011
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
$ 205,330
11.0% $ 206,437
12.2%
$ 195,752
12.2%
$ 200,826
13.0%
$ 203,401
13.6%
167,558
780,870
163,877
1,317,635
9.0
41.8
8.7
70.5
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
16,281
419,349
116,962
552,592
1,870,227
0.9
22.4
6.2
29.5
100.0%
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
9.2
41.6
5.3
68.3
1.0
24.1
6.6
31.7
122,275
675,110
37,788
1,035,999
7.9
43.7
2.5
67.1
126,246
649,746
31,552
1,010,945
8.4
43.3
2.1
67.4
15,936
383,817
108,718
508,471
1.0
24.9
7.0
32.9
18,887
349,053
122,143
490,083
1.3
23.2
8.1
32.6
1,613,496 100.0%
1,544,470 100.0%
1,501,028 100.0%
66,902
1,108
25,382
$ 1,776,835
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
In addition to the loans reported above, First Defiance had $5.5 million, $4.5 million, $9.1
million, $22.1 million, and $13.8 million in loans classified as held for sale at December 31, 2015, 2014,
2013, 2012 and 2011, 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, 2015 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, 2015
Due Less
than 1
Due 1-2
Due 3-5
$ 363,755
$ 199,795
$ 560,572
Due 5-10
(In Thousands)
$
99,618
Due 10-15
Due 15+
Total
$ 29,450
$
64,445 $1,317,635
282,149
49,660
81,388
6,152
-
-
419,349
101,274
7,135
$ 754,313
7,090
3,727
$ 260,272
5,526
5,304
$ 652,790
2,022
106
$ 107,898
438
9
$ 29,897
$
612
-
116,962
16,281
65,057 $ 1,870,227
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, 2015 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
$ 307,003
110,483
24,271
$ 441,757
$ 646,877
26,717
563
$ 674,157
$ 953,880
137,200
24,834
$ 1,115,914
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 the 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 10.3% of First Defiance’s total originations of one-to-four
family residential mortgage loans in 2015 compared to 11.9% and 9.2% during 2014 and 2013,
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:
2015
Years Ended December 31
2014
(In Thousands)
2013
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
Net increase in total loans and loans held for sale
Asset Quality
$ 241,658 $ 173,301
46,181
159,959
66,264
524,073
45,934
10,632
1,026,344
16,594
44,352
241,969
116,224
465,543
54,676
10,235
1,174,657
-
$ 326,700
50,874
113,999
67,530
435,248
41,552
10,043
1,045,946
4,545
265,311
231,067
493,383
989,761
$ 184,896 $
219,446
176,381
578,873
974,700
68,238
$
205,254
315,812
473,343
994,409
56,082
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, 2015, 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-
$
482
822
0.03%
0.04
$ 1,020
1,324
$
0.05%
0.07
620
4,147
0.03%
0.23
$ 2,122
6,293
0.11%
0.34
family residential
Commercial
Construction
Home Equity and
Improvement
Consumer Finance
Total
217
-
0.01
0.00
46
-
0.00
0.00
2,375
-
0.13
0.00
2,638
-
0.14
0.00
727
27
$ 2,275
92
0.04
0.00
2
0.12% $ 2,484
44
0.01
0.00
23
0.13% $ 7,209
863
0.00
0.00
52
0.39% $ 11,968
0.05
0.00
0.64%
Overall, the level of delinquencies at December 31, 2015 decreased from the levels at December
31, 2014, when First Defiance reported that 0.76% of its outstanding loans were at least 30 days
delinquent. The level of total loans 90 or more days delinquent has decreased to 0.39% at December 31,
2015 from 0.45% at December 31, 2014. The level of total loans 60-89 days delinquent decreased
slightly to 0.13% at December 31, 2015 from 0.19% at December 31, 2014. Overall, the level of loans
that were 30 to 59 days past due past due remained steady at 0.12% at both December 31, 2015 and
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 $41.9 million, $48.9 million and
$57.3 million were considered impaired as of December 31, 2015, 2014 and 2013, respectively. The
decrease in impaired loans from 2013 to 2015 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 $1.3
million of interest received and recorded in income during 2015 related to impaired loans. There was
$1.6 million and $2.1 million recorded in 2014 and 2013, respectively. Unrecorded interest income based
on the loan’s contractual terms on these impaired loans and all non-performing loans in 2015, 2014 and
2013 was $1.5 million, $1.2 million, and $1.1 million, respectively. The average recorded investment in
impaired loans during 2015, 2014 and 2013 (excluding loans accounted for under FASB ASC Topic 310
Subtopic 30) was $51.8 million, $50.3 million and $65.4 million, respectively. The total allowance for
loan losses related to these loans was $0.4 million, $1.3 million, and $1.4 million at December 31, 2015,
2014 and 2013, respectively.
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- 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 2015, First Defiance recognized $297,000 of expense related to
write-downs in value of real estate acquired by foreclosure. The balance of real estate owned at
December 31, 2015 was $1.3 million.
As of December 31, 2015, First Defiance’s total non-performing loans amounted to $16.3 million
or 0.90% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $24.1
million or 1.47% of total loans, at December 31, 2014. Non-performing loans are loans which are more
than 90 days past due or on nonaccrual. The nonperforming loan balance includes $13.4 million of loans
that were originated by First Federal and also considered impaired.
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.
Nonperforming loans:
One to four family residential real
2015
2014
December 31
2013
(Dollars in Thousands)
2012
2011
estate
$ 2,610
$ 3,332
$ 3,273
$ 3,602
$ 3,890
Nonresidential and multi-family
residential real estate
Commercial
Home Equity and Improvement
Consumer finance
Total nonperforming loans
Real estate owned
Other repossessed assets
Total repossessed assets
9,848
3,078
689
36
16,261
1,321
-
1,321
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
Total nonperforming assets
$ 17,582
$ 30,311
$ 33,706
$ 36,375
$ 42,956
Restructured loans, accruing
$ 11,178
$ 24,686
$ 27,630
$ 28,203
$ 3,380
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
0.77%
1.39%
1.58%
1.78%
2.08%
0.90%
1.47%
1.76%
2.14% 2.64%
0.97%
1.83%
2.12%
2.38% 2.88%
144.36% 81.71% 74.02% 73.43% 77.41%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
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
- 13 -
- 13 -
homogenous loans in which the Company estimates the losses incurred in the portfolio based on
quantitative and qualitative factors.
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. See Management’s
Discussion and Analysis – Allowance for Loan Losses for further discussion on management’s
evaluation of the allowance for loan losses.
Loans 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 along with a static loan environment. To the extent
that the portfolio grows at a rapid rate or overall quality or the loan environment deteriorates, the
provision generally will exceed charge-offs. However, in certain circumstances 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 or the loan
environment 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, 2015, First Defiance’s allowance for loan losses totaled $25.4 million
compared to $24.8 million at December 31, 2014. The following table sets forth the activity in First
Defiance’s allowance for loan losses during the periods indicated.
2015
Years Ended December 31
2013
2012
2014
(Dollars in Thousands)
2011
$ 24,766
136
$ 24,950
1,117
$ 26,711
1,824
$ 33,254
10,924
$ 41,080
12,434
(282)
(468)
(68)
(53)
(350)
(1,221)
1,701
480
$ 25,382
(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
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) recoveries
Ending allowance
Allowance for loan losses to total non-
performing loans at end of year
156.09% 102.64%
89.60%
82.01%
84.56%
Allowance for loan losses to total loans at end
of year*
1.41%
1.50%
1.58%
1.75%
2.24%
Allowance for loan losses to net charge-offs
for the year
NM
1,903.61%
695.96%
152.92%
164.14%
Net charge-offs (recoveries) for the year to
average loans
0.23%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
-0.03%
0.08%
1.18%
1.41%
The provision for credit losses has decreased significantly in 2015 from previous years due to
improved credit quality of the loan portfolio. Management anticipates net charge-offs in 2016 to be more
consistent with 2014 than 2015 and feels that the level of the allowance for loan losses at December 31,
2015 is sufficient to cover the estimated losses incurred but not yet recognized in the loan portfolio.
- 14 -
- 14 -
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.”
2015
2014
December 31
2013
2012
2011
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)
$ 3,729
19.7% $ 2,715
18.9%
$ 2,981
17.5% $ 3,581
15.5% $ 4,158
15.7%
13,923
50.8
13,721
49.9
14,508
50.8
14,899
51.6
20,490
22.4
6,509
23.7
5,678
24.1
6,325
24.9
6,576
51.7
23.2
7.1
1,821
100.0% $ 24,766
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
100.0%
Single family
residential and
construction
Nonresidential and
Multi-family
residential real
estate
Other:
Commercial loans 5,255
Consumer and
home equity and
improvement loans 2,475
$ 25,382
Sources of Funds
General – Deposits are the primary source of First Defiance’s funds for lending and other
investment purposes. In addition to deposits, First Defiance derives funds from loan principal
repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows
are significantly influenced by general interest rates and money market conditions. Borrowings from the
FHLB may be used on a short-term basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer-term basis for general business purposes. 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, 2015 and 2014.
Average balances and average rates paid on deposits are as follows:
2015
Amount
Rate
Years Ended December 31
2014
Amount
(Dollars in Thousands)
Rate
2013
Amount
Rate
$ 388,257
-
$ 350,677
-
$ 308,591
-
742,856
215,253
441,510
$ 1,787,876
0.16%
0.04
0.92
0.30%
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%
Non-interest-bearing
demand deposits
Interest bearing
demand deposits
Savings deposits
Time deposits
Totals
- 15 -
- 15 -
The following table sets forth the maturities of First Defiance’s retail certificates of deposit
having principal amounts $100,000 or greater at December 31, 2015 (In Thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
After December 31, 2016
Total retail certificates of deposit with
balances $100,000 or greater
$
19,821
20,208
15,820
8,406
85,628
$ 149,883
The following table details the deposit accrued interest payable as of December 31:
Interest bearing demand deposits and
money market accounts
Certificates of deposit
2015
2014
(In Thousands)
$
$
18
25
43
$
$
15
23
38
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:
2015
Years Ended December 31
2014
(Dollars in Thousands)
2013
$ 59,902
1.62%
$ 21,544
2.38%
$ 22,520
2.36%
Securities sold under agreement to repurchase
Weighted average interest rate
$ 57,188
0.27%
$ 54,759
0.28%
$ 51,919
0.31%
- 16 -
- 16 -
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
2015
Years Ended December 31
2014
(Dollars in Thousands)
2013
$
59,902
38,185
1.62%
$
22,520
21,993
2.38%
$
22,765
16,569
2.62%
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
2015
Years Ended December 31
2014
(Dollars in Thousands)
2013
$
$
$
$
-
41
0.18%
60,272
54,632
0.28%
-
-
-
$
50,000
1,164
0.09%
61,154
54,541
0.29%
$
57,182
50,877
0.44%
First Defiance borrows funds under a variety of programs at the FHLB. As of December 31,
2015, there was $59.9 million outstanding under various long-term FHLB advance programs. First
Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term
investment purposes. At December 31, 2015 and 2014, no outstanding balances existed under First
Defiance’s short-term 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, 2015,
other than amounts available on the REPO and Cash Management line, First Federal had additional
borrowing capacity with the FHLB of $452.0 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 was in compliance with the minimum
requirement with an investment in stock of the FHLB of Cincinnati of $13.8 million at December 31,
2015 and 2014. First Federal holds stock of the FHLB of Indianapolis of $9,000 at December 31, 2015
and $10,000 at December 31, 2014.
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.
- 17 -
- 17 -
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 2.01% and 1.74% as of December 31, 2015 and 2014
respectively.
The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debentures. The Company 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 1.89% and 1.62% as of December 31, 2015 and 2014
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 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.
Employees
First Defiance had 586 employees at December 31, 2015. 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
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
- 18 -
- 18 -
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
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
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the Dodd-Frank Act (the “Basel III Capital Rules”).
provisions of
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 (“CET1”) capital ratio of at least 4.5%, (b)
a Tier 1 capital ratio of at least 6.0%, rather than the former 4.0%, (c) a minimum total capital ratio that
remains at 8.0%, and (d) a minimum leverage ratio of 4%.
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.
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% 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% at the beginning of the quarter. The capital conservation
buffer phases in starting on January 1, 2016, at .625%. The implementation of Basel III did not have a
material impact on First Defiance’s or First Federal’s capital ratios.
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The following table sets forth the amount and percentage level of regulatory capital of First
Federal at December 31, 2015, and the amount by which it exceeded the minimum capital requirements
in effect at that date. (Dollars in Thousands):
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (1)
Consolidated
First Federal
Tier 1 Capital (1)
Consolidated
First Federal
$218,297
$236,625
10.71%
11.61%
$91,710
$91,678
$253,297
$236,625
11.46%
10.72%
$88,424
$88,267
Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$253,297
$236,625
12.43%
11.61%
$122,280
$122,237
Total Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$278,679
$262,007
13.67%
12.86%
$163,040
$162,983
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$132,424
N/A
$110,334
N/A
$162,983
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$203,729
N/A
10.0%
(1) Core capital is computed as a percentage of adjusted total assets of $2.21 billion for consolidated and First
Federal. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.04 billion for
consolidated and the Bank.
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, 2015, 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.
Dividends - Dividends paid by First Federal to First Defiance are subject to various regulatory
restrictions. First Federal paid $29.0 million in dividends to First Defiance in 2015 and $21.0 million in
2014. First Federal can initiate dividend payments equal to its net profits (as defined by statute) for the
last two fiscal years, plus any year to date net profits. Because First Federal already paid out its 2014 and
2015 net profits in dividends to First Defiance, during 2016, First Federal can only declare dividends
from its 2016 net profits. First Insurance paid $900,000 in dividends to First Defiance in 2015 and $1.2
million in dividends in 2014. First Defiance Risk Management paid $1.0 million in dividends to First
Defiance in 2015 and none in 2014.
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First Defiance’s ability to pay dividends to its shareholders is primarily dependent on its receipt
of dividends from the Subsidiaries. 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 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
comply with Sections 23A and 23B of the Federal Reserve Act (“FRA”) and the Federal Reserve’s
Regulation W. An affiliate of a savings association is any company or entity that controls, is controlled
by, or is under common control with the savings association. First Defiance, First Defiance Risk
Management 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.
In addition, the FDIC has proposed changing the deposit insurance premium assessment method
for banks with less than $10 billion in assets that have been insured by the FDIC for at least five years.
The proposed changes would revise the financial ratios method so that it would be based on a statistical
model estimating the probability of failure of a bank over three years; update the financial measures used
in the financial ratios method consistent with the statistical model; and eliminate risk categories for
established small banks and using the financial ratios method to determine assessment rates for all such
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banks (subject to minimum or maximum initial assessment rates based upon a bank’s composite
examination rating).
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.
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 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 has
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.
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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.
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. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and
monetary policy and other factors beyond First Defiance’s control may adversely affect its deposit levels
and composition, demand for loans, the ability of its borrowers to repay their loans and the value of the
collateral securing the loans it makes. Economic turmoil in Europe and Asia and changes in oil
production in the Middle East affect the economy and stock prices in the United States, which can affect
First Defiance’s earnings and capital and the ability of its customers to repay loans. Because First
Defiance has a significant amount of real estate loans, decreases in real estate values could adversely
affect the value of property used as collateral and First Defiance’s ability to sell the collateral upon
foreclosure.
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, 2015, First Federal’s portfolio of commercial real estate loans totaled $948.4
million, or approximately 50.7% 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, 2015, First Federal’s portfolio of commercial loans totaled $419.3 million, or
approximately 22.4% of total loans. Commercial loans generally expose First Defiance to a greater risk
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
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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.
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
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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 of 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 Federal
Reserve, the OCC, and the FDIC in 2013. 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. 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.
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
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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.
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, 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
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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;
• 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;
- 28 -
- 28 -
• 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2015, First Federal conducted its business from its main office at 601 Clinton
Street, Defiance, Ohio, and thirty-three 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; 204 East High Street, Bryan, Ohio; 1755 Indian Wood Circle, Maumee, Ohio;
4350 Navarre Ave, Oregon, Ohio and 2600 Allentown Road, Lima, Ohio.
In August 2015, First Insurance moved from 926 East High Street, Bryan, Ohio to 204 East High
Street, Bryan, Ohio. This office is leased.
In September 2015, First Insurance opened its office at 2600 Allentown Road, Lima, Ohio.
In October 2015, First Federal sold its branch at 926 East High Street, Bryan, Ohio.
In December 2015, First Federal opened its branch at 2920 West Central Avenue, Toledo, Ohio.
This office is owned.
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.
- 29 -
- 29 -
The following table sets forth certain information with respect to the offices and other
properties of the Company at December 31, 2015. 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 E. Main St., Montpelier, 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
1694 N. Countyline St., Fostoria, OH
1226 W. Wooster St., 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. Dussel 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 W. Dupont Rd., Fort Wayne, IN
135 S. 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 Hwy., Hudson, MI
1449 W. Chicago Blvd., Tecumseh, MI
1200 N. Main St., Bowling Green OH
9909 Illinois Rd, Fort Wayne, IN
4501 Cemetery Rd, Hilliard, OH
2920 W. Central Ave., Toledo, OH
First Insurance Group
511 Fifth St., Defiance, OH
209 W. Poe Rd., Bowling Green, OH
204 E. High St., Bryan, OH
1755 Indian Wood Cir., Maumee, OH
4350 Navarre Ave., Oregon, OH
2600 Allentown Rd., Lima, OH
Leased/
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
Owned
Net Book Value
of Property
Deposits
(In Thousands)
$
3,295
$ 225,803
4,975
177
574
375
926
237
1,173
778
679
308
855
587
911
844
294
168
1,058
748
905
296
968
767
843
409
1,304
-
-
644
197
148
514
1,413
1,587
1,963
943
-
N/A
N/A
141,417
61,821
75,191
40,280
30,657
40,242
74,768
28,735
50,480
47,481
102,658
64,004
87,170
23,746
41,679
58,516
94,052
40,047
43,245
32,862
34,036
37,574
53,089
13,257
12,755
77,303
45,099
30,384
45,027
57,273
6,018
19,468
N/A
-
Leased
Leased
Leased
Leased
Leased
Leased
491
3
-
-
-
-
$ 32,357
N/A
N/A
N/A
N/A
N/A
N/A
$ 1,836,137
- 30 -
- 30 -
- 30 -
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 19, 2016, the Company had approximately 1,851 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 2015 and 2014.
Year Ending
December 31, 2015
Low
High
Dividend
High
December 31, 2014
Low
Dividend
Quarter ended:
March 31
June 30
September 30
December 31
$ 34.64
38.21
39.95
42.46
$ 29.05
32.42
35.03
35.01
$0.175
0.20
0.20
0.20
$ 28.23
29.00
29.00
35.70
$ 24.24
26.50
26.99
26.95
$0.15
0.15
0.15
0.175
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,
2010, 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.
- 31 -
- 31 -
Index
Index
First Defiance Financial Corp.
First Defiance Financial Corp.
NASDAQ Composite
NASDAQ Composite
SNL Bank NASDAQ
SNL Bank NASDAQ
SNL Midwest Thrift
SNL Midwest Thrift
12/31/10
100.00
100.00
100.00
100.00
12/31/10
100.00
100.00
100.00
100.00
12/31/11
123.04
99.21
88.73
88.20
12/31/11
123.04
99.21
88.73
88.20
Period Ending
Period Ending
12/31/13
225.36
163.75
152.00
140.64
12/31/12
163.77
116.82
105.75
114.05
12/31/13
225.36
163.75
152.00
140.64
12/31/12
163.77
116.82
105.75
114.05
12/31/14
302.16
188.03
157.42
160.74
12/31/14
302.16
188.03
157.42
160.74
12/31/15
342.33
201.40
169.94
196.82
12/31/15
342.33
201.40
169.94
196.82
The following table provides information regarding First Defiance’s purchases of its common
The following table provides information regarding First Defiance’s purchases of its common
shares during the fourth quarter period ended December 31, 2015:
shares during the fourth quarter period ended December 31, 2015:
Period
Period
October 1 – October 31, 2015
October 1 – October 31, 2015
November 1 – November 30, 2015
November 1 – November 30, 2015
December 1 – December 31, 2015
December 1 – December 31, 2015
Total
Total
Total Number
of Shares
Purchased
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
-
$
57,935
20,834
78,769
Average
Price Paid
Per Share
$ -
-
39.39
39.39
38.67
38.67
$39.20
$39.20
-
57,935
20,834
78,769
Total Number of
Total Number of
Shares
Shares
Purchased as
Purchased as
Part of Publicly
Part of Publicly
Announced Plans
Announced Plans
or Programs (1)
or Programs (1)
-
-
57,935
57,935
20,834
20,834
78,769
78,769
Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs
(2)
Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs
(2)
174,015
116,080
95,246
95,246
174,015
116,080
95,246
95,246
(1) The reported shares were repurchased pursuant to First Defiance’s publicly announced stock repurchase
(1) The reported shares were repurchased pursuant to First Defiance’s publicly announced stock repurchase
program, which became effective October 20, 2014. Up to 469,000 shares were authorized to be purchased
program, which became effective October 20, 2014. Up to 469,000 shares were authorized to be purchased
under the program. During January 2016, the Company completed all 469,000 share purchases that were
under the program. During January 2016, the Company completed all 469,000 share purchases that were
authorized under its previously announced repurchase program in the Company’s Form 8-K filed on
authorized under its previously announced repurchase program in the Company’s Form 8-K filed on
October 20, 2014.
October 20, 2014.
(2) The number of shares shown represents, as of the end of each period, the maximum number of shares of
(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
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. On January 29, 2016, First
may be purchased, from time to time, depending on market conditions. On January 29, 2016, First
- 32 -
- 32 -
- 32 -
- 32 -
Index
Index
12/31/10
12/31/10
12/31/11
12/31/11
12/31/12
12/31/12
12/31/13
12/31/13
12/31/14
12/31/14
12/31/15
12/31/15
First Defiance Financial Corp.
First Defiance Financial Corp.
100.00
100.00
123.04
123.04
163.77
163.77
225.36
225.36
302.16
302.16
342.33
342.33
NASDAQ Composite
NASDAQ Composite
SNL Bank NASDAQ
SNL Bank NASDAQ
SNL Midwest Thrift
SNL Midwest Thrift
100.00
100.00
99.21
99.21
116.82
116.82
163.75
163.75
188.03
188.03
201.40
201.40
100.00
100.00
88.73
88.73
105.75
105.75
152.00
152.00
157.42
157.42
169.94
169.94
100.00
100.00
88.20
88.20
114.05
114.05
140.64
140.64
160.74
160.74
196.82
196.82
Period Ending
Period Ending
The following table provides information regarding First Defiance’s purchases of its common
The following table provides information regarding First Defiance’s purchases of its common
shares during the fourth quarter period ended December 31, 2015:
shares during the fourth quarter period ended December 31, 2015:
Period
Period
October 1 – October 31, 2015
October 1 – October 31, 2015
November 1 – November 30, 2015
November 1 – November 30, 2015
December 1 – December 31, 2015
December 1 – December 31, 2015
Total
Total
Total Number of
Total Number of
Maximum Number of
Maximum Number of
Shares
Shares
Shares (or Approximate
Shares (or Approximate
Purchased as
Purchased as
Dollar Value) that May
Dollar Value) that May
Total Number
Total Number
Average
Average
Part of Publicly
Part of Publicly
Yet Be Purchased Under
Yet Be Purchased Under
of Shares
of Shares
Price Paid
Price Paid
Announced Plans
Announced Plans
the Plans or Programs
the Plans or Programs
Purchased
Purchased
Per Share
Per Share
or Programs (1)
or Programs (1)
(2)
(2)
-
-
$
$ -
-
57,935
57,935
20,834
20,834
39.39
39.39
38.67
38.67
78,769
78,769
$39.20
$39.20
-
-
57,935
57,935
20,834
20,834
78,769
78,769
174,015
174,015
116,080
116,080
95,246
95,246
95,246
95,246
(1) The reported shares were repurchased pursuant to First Defiance’s publicly announced stock repurchase
(1) The reported shares were repurchased pursuant to First Defiance’s publicly announced stock repurchase
program, which became effective October 20, 2014. Up to 469,000 shares were authorized to be purchased
program, which became effective October 20, 2014. Up to 469,000 shares were authorized to be purchased
under the program. During January 2016, the Company completed all 469,000 share purchases that were
authorized under its previously announced repurchase program in the Company’s Form 8-K filed on
October 20, 2014.
under the program. During January 2016, the Company completed all 469,000 share purchases that were
authorized under its previously announced repurchase program in the Company’s Form 8-K filed on
October 20, 2014.
(2) The number of shares shown represents, as of the end of each period, the maximum number of shares of
(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
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. On January 29, 2016, First
may be purchased, from time to time, depending on market conditions. On January 29, 2016, First
Defiance publicly announced that the Company’s Board of Directors has authorized the repurchase of up to
5% or 450,000 shares.
- 32 -
- 32 -
- 32 -
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.
- 33 -
- 33 -
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, 2015. 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 acquired companies are included with the Company’s results of operations
since their respective dates of acquisition.
2015
As of and For the Year Ended December 31
2013
(Dollars in Thousands, Except Per Share Data)
2012
2014
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:
$ 2,297,676
236,678
1,776,835
25,382
17,582
1,838,811
59,902
280,197
$ 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
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
2.87
2.82
30.78
23.79
0.775
2.55
2.44
30.17
23.25
0.625
2.28
2.19
27.91
21.22
0.40
27.00%
24.51%
17.45%
9,383
9,102
9,975
9,235
10,171
9,720
1.86
1.81
26.44
19.63
0.20
10.75%
9,998
9,729
2011
$2,068,190
233,580
1,453,822
33,254
42,956
1,597,643
81,841
278,127
1.44
1.42
24.74
17.78
0.05
3.47%
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 (recoveries) to average loans
$
$
80,836
6,781
74,055
136
31,803
67,889
37,833
11,410
26,423
1.19%
9.52%
3.71%
3.81%
$
$
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%
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%
3.05%
63.01%
3.09%
65.32%
3.16%
64.81%
3.19%
63.93%
3.05%
63.62%
12.19%
12.83%
12.73%
12.61%
13.45%
9.84%
12.49%
10.09%
12.79%
9.94%
12.92%
9.64%
12.95%
8.65%
12.82%
0.77%
1.41%
-0.03%
1.39%
1.50%
0.08%
1.58%
1.58%
0.23%
1.78%
1.75%
1.18%
2.08%
2.24%
1.41%
(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.
- 34 -
- 34 -
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.
•
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 the 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 34
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, Lima, Maumee and Oregon, Ohio areas. On September 1, 2015,
First Insurance acquired a group medical benefits business from Buckeye Insurance Consultants, Inc.
located in Lima, Ohio. See Note 3 of the Notes to Consolidated Financial Statements for further details
regarding the Buckeye Insurance Consultants, Inc. acquisition.
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.
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Financial Condition
Assets at December 31, 2015 totaled $2.30 billion compared to $2.18 billion at December 31,
2014, an increase of $118.7 million or 5.4%. Cash and cash equivalents decreased $33.2 million to $79.8
million at December 31, 2015 from $112.9 million at December 31, 2014. The increase in assets was due
to an increase in loans receivable, net of undisbursed loan funds and deferred fees and costs, of $155.4
million funded by increases in total deposits of $75.3 million and advances from the Federal Home Loan
Bank of $38.4 million as well as from cash and cash equivalents.
Securities
The securities portfolio decreased $3.0 million to $236.7 million at December 31, 2015. The
2015 activity in the portfolio included $30.4 million of purchases, $719,000 of amortization and
maturities, $31.3 million of principal pay-downs and $426,000 of securities being sold. There was a net
decrease of $1.0 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 $155.4
million to $1.80 billion at December 31, 2015. 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 $1.37 billion and $1.24 billion at December 31, 2015 and 2014,
respectively, and accounted for approximately 73.1% and 73.6% 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 $205.3 million at December 31, 2015,
compared with $206.4 million at the end of 2014. At the end of 2015, those loans comprised 11.0% of
the total loan portfolio, down from 12.2% at December 31, 2014.
Construction loans, which include one-to-four family and commercial real estate properties,
increased to $163.9 million at December 31, 2015 compared to $112.4 million at December 31, 2014.
These loans accounted for approximately 8.7% and 6.7% of the total loan portfolio at December 31, 2015
and 2014, respectively.
Home equity and home improvement loans increased to $117.0 million at December 31, 2015,
from $111.8 million at the end of 2014. At the end of 2015, those loans comprised 6.3% of the total loan
portfolio, down slightly from 6.6% at December 31, 2014.
Consumer finance and mobile home loans were $16.3 million at December 31, 2015 up from
$15.5 million at the end of 2014. These loans comprised just 0.9% of the total portfolio at both December
31, 2015 and 2014.
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
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the appraiser to insure that the appraiser is not influenced by the account officer in any way in making a
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 appropriate, based on First Federal’s assessment of the appraisal,
such as age, market, etc. First Federal will discount the appraisal 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 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.
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. 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.
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 TDRs, 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,
2015 and December 31, 2014, First Federal had $11.2 million and $24.7 million, respectively, of loans
that were still performing and which were classified as TDRs.
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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
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 commercial
loan and commercial real estate loan relationships. The goal is to have approximately 55% to 60% of the
portfolio reviewed annually. This includes all relationships over $5.0 million with new exposure greater
than $2.0 million and a sample of other relationships greater than $5.0 million; loan relationships
between $1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of other
relationships between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million.
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 allowance for loan loss is made up of two basic components. The first component of the
allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the
analysis of individual impaired credits. 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 impaired and 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 impaired and 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. The specific reserve was $437,000 at December 31,
2015.
The second component 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. For purposes of the general reserve analysis, the loan portfolio is
stratified into nine different loan pools based on loan type to allocate historic loss experience. The loss
experience factor is then applied to the non-impaired loan portfolio. Beginning June 30, 2015, the
Company refined the methodology to its allowance for loan loss calculation pertaining to the general
reserve component for non-impaired loans. There was no change to the calculation of the component for
reserves on impaired loans. Within the general reserve, the determination of the historical loss
component was modified from using a three-year average annual loss rate to a loss migration
measurement. The loss migration measurement implemented June 30, 2015, utilizes an average of four
(4) four-year loss migration periods for each loan portfolio segment with differentiation between loan
risk grades. This approach provides for a more precise reflection of probable incurred losses by risk
grade within each loan portfolio segment over an average loan life cycle. Management believes that
capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately
depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks
in the loan portfolio. Prior to June 30, 2015, the approach to this component quantified the historical loss
by calculating a rolling twelve quarter average annual loss rate for each portfolio segment, without
differentiation between loan risk grades. This modification resulted in a change in the general reserves
between the loan portfolio segments but did not have a material impact on the overall allowance for loan
losses.
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The stratification of the loan portfolio and the change to loss migration measurement described
above resulted in an increase to the quantitative general allowance to $9.8 million at December 31, 2015
from $7.8 million at December 31, 2014.
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)
5)
6)
7)
8)
RISK
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.
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.
9)
Changes in the political and regulatory environment.
The qualitative analysis at December 31, 2015 indicated a general reserve of $15.2 million
compared with $15.7 million at December 31, 2014. 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 commercial real estate and commercial loan segments were decreased
slightly in 2015 due to the continued stability of the regional and national economy. However the
economic factors for residential, home equity and construction loans, which had reflected lower
economic risks, were increased to reflect changes in current market conditions.
The environmental factors have increased in 2015, primarily in the commercial real estate,
commercial and construction loan segments due to the significant growth in balances achieved amidst
highly competitive conditions on pricing and terms and balances generated from the expansion into the
Columbus market through a new loan production office. There was also a continued increase in the
volume of loans greater than $10 million and an increase in loans to our most significant borrowers,
which was considered in our evaluation of concentrations and changes in the nature and volume of the
loan portfolio.
The risk factors in all loan segments were decreased in 2015. With the introduction of the new loss
migration model implemented in June 2015 to determine the quantitative loss component of the general
reserve, management felt that estimation risk in the allowance methodology is diminishing. In addition, during
2015, there was a significant decrease in the level of non-accrual loans, troubled debt restructurings and OREO
since December 31, 2014.
First Defiance’s general reserve percentages for main loan segments not otherwise classified
ranged from 0.53% for construction loans to 1.96% for home equity and improvement loans.
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As a result of the quantitative and qualitative analysis, along with the change in specific reserves,
the Company’s provision for loan losses for 2015 was $136,000 compared to $1.1 million for 2014. The
allowance for loan losses was $25.4 million at December 31, 2015 and $24.8 million at December 31,
2014 and represented 1.41% and 1.50% of loans, net of undisbursed loan funds and deferred fees and
costs, respectively. The decrease in specific reserves and the lower level of charge offs was offset by the
increase in the quantitative reserve. The provision was offset by charge offs of $1.2 million and
recoveries of $1.7 million resulting in an increase to the overall allowance for loan loss of $616,000. In
management’s opinion, the overall allowance for loan losses of $25.4 million as of December 31, 2015 is
adequate.
Management also assesses the value of OREO 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
2015, First Defiance recorded OREO write-downs that totaled $724,000. These amounts were included in
other non-interest expense. Management believes that the values recorded at December 31, 2015 for
OREO and repossessed assets represent the realizable value of such assets.
Total classified loans increased slightly to $49.1 million at December 31, 2015, compared to
$47.3 million at December 31, 2014.
First Defiance’s ratio of allowance for loan losses to non-performing loans was 156.1% at
December 31, 2015 compared with 102.6% at December 31, 2014. 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, 2015 are appropriate.
At December 31, 2015, First Defiance had total non-performing assets of $17.6 million,
compared to $30.3 million at December 31, 2014. 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 assets between December 31, 2014 and December 31, 2015 is in
commercial real estate loans, commercial loans and real estate owned. The balance of commercial real
estate non-performing loans was $5.3 million lower at December 31, 2015 compared to December 31,
2014. The balance of commercial non-performing loans was $1.9 million lower at December 31, 2015
compared to December 31, 2014. The balance of OREO was $4.9 million lower at December 31, 2015
compared to December 31, 2014.
Non-performing loans in the single-family residential, commercial real estate and commercial
loan categories represent 1.27%, 1.04% and 0.73% of the total loans in those categories respectively at
December 31, 2015 compared to 1.61%, 1.81% and 1.25% respectively for the same categories at
December 31, 2014. Management believes that the current allowance for loan losses is appropriate and
that the provision for loan losses recorded in 2015 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, 2015, commercial real estate, which
represented 50.71% of total loans, accounted for a net recovery of 93.33% and 60.56% of nonaccrual
loans, and commercial loans, which represented 22.42% of total loans, accounted for 54.79% of net
recoveries and 18.93% of nonaccrual loans. For the twelve months ended and as of December 31, 2014,
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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.
Table 1 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2015
As of December 31, 2015
Net
Charge-offs
(Recoveries)
(In Thousands)
$ 69
-
(448)
(263)
-
162
% of Total Net
Charge-offs
(Recoveries)
Nonaccrual
% of Total Non-
Loans
Accrual Loans
14.38%
0.00%
(93.33)%
(54.79)%
0.00%
33.74%
(In Thousands)
$ 2,610
-
9,848
3,078
36
689
16.05%
0.00%
60.56%
18.93%
0.22%
4.24%
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
$ (480)
(100.00)%
$ 16,261
100.00%
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%
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
$ 1,301
100.00%
$ 24,130
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, 2015 and 2014.
Table 2 – Allowance for Loan Loss Allocation by Loan Category
December 31, 2015
December 31, 2014
Percent of
total loans
Amount by category Amount
(Dollars in Thousands)
10.98% $ 2,494
$ 3,212
221
8.76%
517
13,923
5,255
171
50.71% 13,721
6,509
22.42%
117
0.87%
Percent of
total loans
by category
12.24%
6.66%
49.84%
23.70%
0.92%
2,304
$ 25,382
6.26%
1,704
100.00% $ 24,766
6.63%
100.00%
Residential
Construction
Commercial real
estate
Commercial
Consumer
Home equity and
improvement
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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.
Table 1 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2015
As of December 31, 2015
% of Total Net
Charge-offs
(Recoveries)
Nonaccrual
% of Total Non-
Loans
Accrual Loans
Net
Charge-offs
(Recoveries)
(In Thousands)
$ 69
(448)
(263)
-
-
162
Net
Charge-offs
(In Thousands)
$ 231
-
(1,652)
2,547
(24)
199
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
14.38%
0.00%
(93.33)%
(54.79)%
0.00%
33.74%
(In Thousands)
$ 2,610
-
9,848
3,078
36
689
17.76%
0.00%
(126.98)%
195.76%
(1.84)%
15.30%
(In Thousands)
$ 3,332
-
15,174
4,993
12
619
16.05%
0.00%
60.56%
18.93%
0.22%
4.24%
13.81%
0.00%
62.88%
20.69%
0.05%
2.57%
Total
$ (480)
(100.00)%
$ 16,261
100.00%
For the Twelve Months Ended December 31, 2014
As of December 31, 2014
% of Total Net
Nonaccrual
% of Total Non-
Charge-offs
Loans
Accrual Loans
Total
$ 1,301
100.00%
$ 24,130
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, 2015 and 2014.
Table 2 – Allowance for Loan Loss Allocation by Loan Category
December 31, 2015
December 31, 2014
Percent of
total loans
Percent of
total loans
Amount by category Amount
by category
(Dollars in Thousands)
$ 3,212
517
10.98% $ 2,494
8.76%
221
13,923
5,255
171
50.71% 13,721
22.42%
0.87%
6,509
117
12.24%
6.66%
49.84%
23.70%
0.92%
2,304
6.26%
1,704
$ 25,382
100.00% $ 24,766
6.63%
100.00%
Residential
Construction
Commercial real
estate
Commercial
Consumer
Home equity and
improvement
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, 2015, the total contractual receivable for those loans was $361,000 and the
recorded value was $169,000.
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, 2015 totaled $46.3 million, compared to
$50.0 million at December 31, 2014. 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 $61.8 million at December 31, 2015 and $61.5 million at December 31, 2014. The
increase in goodwill is due to recording $273,000 of goodwill from the Buckeye acquisition that was
completed in the third quarter of 2015. Core deposit intangibles and other intangible assets decreased to
$1.9 million at December 31, 2015 compared to $2.4 million at December 31, 2014. During 2015,
changes to the core deposit intangibles and other intangibles were due to the recognition of $699,000 of
amortization expense offset by an increase of $163,000 due to the Buckeye acquisition. For more details
on the Buckeye acquisition see Note 3 – Acquisitions. No impairment of goodwill was recorded in 2015
or 2014.
Deposits
Total deposits at December 31, 2015 were $1.84 billion compared to $1.76 billion at December
31, 2014, an increase of $75.3 million or 4.3%. Non-interest bearing checking accounts grew by $41.1
million, interest bearing checking accounts and money markets grew by $39.5 million, and savings grew
by $16.0 million while retail certificates of deposit declined by $21.3 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.
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Borrowings
FHLB advances totaled $59.9 million at December 31, 2015 compared to $21.5 million at
December 31, 2014. The balance at the end of 2015 includes $5.0 million of convertible advances with a
rate of 2.35%. This advance is callable by the FHLB, at which point it would convert to a three-month
LIBOR advance if not paid off. This advance has a final maturity date in 2018. In addition, First
Defiance has ten fixed-rate advances totaling $47.0 million with rates ranging from 1.10% to 2.16% and
one amortizing advance totaling $7.9 million with a rate of 1.78%.
At December 31, 2015, First Defiance also had $57.2 million of securities that were sold with
agreements to repurchase, compared to $54.8 million at December 31, 2014.
Equity
Total stockholders’ equity increased $692,000 to $280.2 million at December 31, 2015. This
increase is a result of net income of $26.4 million and capital of $1.5 million from the exercise of 73,800
net shares under stock option plans, which was mostly offset by the cost of $12.0 million to repurchase
the warrant issued to the U.S. Treasury under the TARP Capital Purchase Program, $8.4 million from
repurchasing 225,808 shares of common stock in 2015 and $7.2 million of common stock dividends
being paid in 2015. In 2014, 553,136 shares were repurchased, resulting in a $15.5 million decrease in
stockholders’ equity, and 52,258 net shares were exercised under stock option plans resulting in a
$921,000 increase in stockholder’s equity.
Results of Operations
Summary
First Defiance reported net income of $26.4 million for the year ended December 31, 2015
compared to $24.3 million and $22.2 million for the years ended December 31, 2014 and 2013,
respectively. On a diluted per common share basis, First Defiance earned $2.82 in 2015, $2.44 in 2014
and $2.19 in 2013.
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 $74.1 million for the year ended December 31, 2015 compared to $69.7
million and $67.6 million for the years ended December 31, 2014 and 2013, respectively. The tax-
equivalent net interest margin was 3.81%, 3.68% and 3.76% for the years ended December 31, 2015,
2014 and 2013, respectively. The margin increased 13 basis points between 2014 and 2015. Interest-
earning asset yields increased 14 basis points (to 4.15% in 2015 from 4.01% in 2014) and the cost of
interest bearing liabilities between the two periods increased 1basis point (to 0.44% in 2015 from 0.43%
in 2014).
Total interest income increased by $4.6 million or 6.0% to $80.8 million for the year ended
December 31, 2015 from $76.2 million for the year ended December 31, 2014. The increase in interest
income was due to the significant increase in loan volume and deploying lower yielding interest bearing
deposit balances into higher yielding loans. The average balance of interest bearing deposits decreased
to $59.4 million from $134.1 million at December 31, 2014. Interest income from loans increased to
$73.3 million for 2015 compared to $68.7 million in 2014, which represents an increase of 6.8%.
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During the same period, the average balance of investment securities increased to $239.9 million
for 2015 from $223.5 million for the year ended December 31, 2014. Interest income from investment
securities increased to $6.8 million in 2015 compared to $6.6 million in 2014, which represents an
increase of 3.0%. The overall duration of investments decreased to 4.2 years at December 31, 2015 from
4.9 years at December 31, 2014.
Interest expense increased by $222,000 in 2015 compared to 2014, to $6.8 million from $6.6
million. This increase was mainly due to a one basis point increase in the average cost of interest-bearing
liabilities in 2015. Interest expense related to interest-bearing deposits was $5.3 million in 2015 and
2014. Expenses on FHLB advances and other interest-bearing funding sources were $675,000 and
$152,000 respectively in 2015 and $528,000 and $161,000 respectively in 2014. Interest expense
recognized by the Company related to subordinated debentures was $613,000 in 2015 and $587,000 in
2014 due to rising rates.
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.
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.
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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, 2015, 2014 and 2013:
Table 3 – Net Interest Margin
Year Ended December 31
Average
Balance
2015
Interest
(1)
Yield/
Rate (2)
Average
Balance
(In Thousands)
2014
Interest
(1)
Yield/
Rate
Average
Balance
2013
Interest
(1)
Yield/
Rate
Interest-Earning Assets:
Loans receivable
$ 1,687,413
$73,544
4.36% $ 1,574,753
$68,828
4.37% $ 1,528,176
$68,147
4.46%
Securities
239,852
8,476
3.64%
223,534
8,227
3.79%
191,039
7,158
3.78%
Interest-earning deposits
59,410
169
0.27%
134,114
349
0.26%
106,742
13,802
552
4.00%
14,677
642
4.37%
19,505
2,000,477
82,741
4.15%
1,947,078
78,046
4.01%
1,845,462
76,413
4.14%
282
826
0.26%
4.23%
FHLB stock
Total interest-earning
assets
Non-interest-earning
assets
222,389
Total Assets
$2,222,866
215,390
$2,162,468
206,788
$2,052,250
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
$ 1,399,619 $5,341
675
613
152
38,134
36,129
54,619
0.38% $ 1,399,507 $5,283
528
1.77%
1.70%
587
161
0.28%
21,995
36,131
54,524
0.38% $ 1,353,304 $5,913
434
2.40%
601
1.62%
222
0.30%
17,733
36,133
50,877
0.44%
2.45%
1.66%
0.44%
1,528,501
6,781
0.44%
1,512,157
6,559
0.43%
1,458,047
7,170
0.49%
388,257
−
350,677
−
308,591
−
1,916,758
6,781
0.35%
1,862,834
6,559
0.35%
1,766,638
7,170
0.41%
28,463
1,945,221
277,645
23,097
1,885,931
276,537
20,547
1,787,185
265,065
$ 2,222,866
$ 2,162,468
$ 2,052,250
$75,960
3.71%
$71,487
3.57%
$69,243
3.65%
3.81%
130.9%
3.68%
128.8%
3.76%
126.6%
(1)
Interest on certain tax exempt loans (amounting to $368,000, $271,000 and $129,000 in 2015, 2014 and 2013 respectively) and tax-exempt
securities ($3.2 million, $3.1 million and $2.9 million in 2015, 2014, and 2013) is not taxable for Federal income tax purposes. The average
balance of such loans was $10.7 million, $7.8 million and $4.2 million in 2015, 2014, and 2013 while the average balance of such securities was
$86.0 million, $82.2 million and $76.0 million in 2015, 2014, and 2013, 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, 2015, the yields earned and rates paid were as follows: loans receivable, 4.18%; securities, 3.11%; FHLB stock,4.00%; total
interest-earning assets, 4.06%; deposits, 0.23%; FHLB advances, 1.62%; other borrowings, 0.27%, subordinated debentures,1.94%; total
including non- interest-bearing liabilities, 0.31%; and interest rate spread, 3.76%.
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
2015 vs. 2014
Increase
(decrease)
due to
volume
Total
increase
(decrease)
Increase
(decrease)
due to
rate
2014 vs. 2013
Increase
(decrease)
due to
volume
Total
increase
(decrease)
$
(195)
(336)
$ 4,911
585
$ 4,716
249
$ (1,371)
(129)
$ 2,052
1,198
$
681
1,069
30
(53)
(210)
(37)
(180)
(90)
(4)
26
71
(210)
67
(184)
$
(554)
$ 5,249
$ 4,695
$ (1,478)
$ 3,111
$ 1,633
$
$
58
(165)
26
(9)
$
-
312
-
-
58
147
26
(9)
$
(828)
(9)
(14)
(76)
$
198
103
-
15
$
(630)
94
(14)
(61)
$
(90)
$
312
$
222
$
(927)
$
316
$
(611)
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
$ 4,473
$ 2,244
Provision for Loan Losses – First Defiance’s provision for loan losses was $136,000 for the
year ended December 31, 2015 compared to $1.1 million for December 31, 2014 and $1.8 million for
December 31, 2013.
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 $162,000 or 0.5% in 2015 to $31.8
million from $31.6 million for the year ended December 31, 2014. That followed an increase of
$863,000 or 2.8% in 2014 from $30.8 million in 2013.
Service fees and other charges increased to $10.8 million for the year ended December 31, 2015
from $10.3 million for 2014 and increased from $10.0 million for 2013. The increase in noninterest
income in 2015 from 2014 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, 2015 and 2014 related to the overdraft privilege product, net of adjustments
to the allowance for uncollectible overdrafts, were $2.8 million and $3.1 million, respectively. Accounts
charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $18,000
at December 31, 2015 and $16,000 at December 31, 2014.
Noninterest income also includes gains, losses and impairment on investment securities. In 2015,
First Defiance realized a $22,000 gain on sale of securities. In 2014, a $932,000 net gain was recognized
compared to a $240,000 net loss in 2013. In 2013, First Defiance recognized other-than-temporary
impairment (“OTTI”) charges of $337,000 for certain impaired investment securities, where, in
management’s opinion, the value of the investment will not be recovered.
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 $6.7 million,
$5.6 million and $8.4 million in 2015, 2014 and 2013, respectively. The $1.1 million increase in 2015
from 2014 is attributable to a $1.2 million increase in the gain on sale of loans, along with a $150,000
positive change in the valuation adjustments on mortgage servicing rights. These were partially offset by
an increase of $219,000 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 $209.1 million of residential mortgages for sale into
the secondary market in 2015 compared with $153.8 million in 2014. The balance of the mortgage
servicing right valuation allowance stands at $645,000 at the end of 2015. The $2.8 million decrease in
mortgage banking income 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 secondary market in 2014 compared with $291.7 million in 2013. See Note 8
to the financial statements.
Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $824,000 in
2015 compared to $181,000 in 2014. The Company has built up its pipeline of eligible small business
administration loans since 2014 and increased its selling efforts in 2015.
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Insurance commission income increased $217,000 or 2.2% to $10.1 million in 2015 from $9.9
million in 2014 mainly due to an increase in general production in the property and casualty and group
employee benefits lines of business. Insurance commission income increased $232,000 or 2.4% to $9.9
million in 2014 from $9.6 million in 2013.
Income from bank owned life insurance decreased $907,000 or 50.3% to $895,000 in 2015 from
$1.8 million in 2014 but increased slightly from $883,000 in 2013. The decrease in 2015 from 2014 is
the result of a tax-free benefit from a bank-owned life insurance policy due to a death claim in 2014.
Other income decreased $708,000 to $1.1 million in 2015 compared to $1.8 million in 2014 and
$950,000 in 2013. The decrease in 2015 is mainly the result of a $498,000 tax-free gain realized in 2014
through the Company’s deferred compensation plan trust attributable to the aforementioned death claim.
Noninterest Expense – Total noninterest expense for 2015 was $67.9 million compared to $66.8
million for the year ended December 31, 2014 and $65.1 million for the year ended December 31, 2013.
Compensation and benefits increased $2.2 million or 6.3% in 2015 to $37.8 million from $35.5
million in 2014. The increase in compensation and benefits is due to merit increases, staff additions for
growth and an increase in incentive compensation as a direct reflection of the improved financial
performance of the Company. Occupancy expense increased $514,000 or 7.7% to $7.2 million in 2015,
from $6.7 million in 2014. The increase is attributable to projects relating to preventative maintenance
and upkeep of the Company’s branch network. Other non-interest expenses include the financial
institutions tax and amortization of intangibles, decreased $1.7 million or 10.1% to $15.5 million in 2015
from $17.3 million in 2014. The decrease is due to $786,000 of costs in 2014 associated with the
termination of First Federal’s merger agreement with First Community Bank (“FCB”).
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 FCB.
On February 18, 2014, the Company announced the signing of a definitive agreement to acquire 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. This was mostly offset by lower
OREO expenses in 2014.
Income Taxes – Income taxes totaled to $11.4 million in 2015 compared to $9.2 million in 2014
and $9.3 million in 2013. The effective tax rates for those years were 30.2%, 27.4%, and 29.4%,
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.
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.
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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 $564.1 million at December 31, 2015, which represents 30.2% 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 0.18% at December 31, 2015. 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 $30.4 million, $30.1 million and $39.4 million in
2015, 2014 and 2013, 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. There were no purchases in 2015.
In considering the more typical investing activities, during 2015, $31.2 million and $426,000 was
generated from the combination of maturity or pay-downs and the sale or call of available-for-sale
investment securities, respectively, and $177.0 million was used by an increase in loans while $30.5 million
was used to purchase available-for-sale investment securities. 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.
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.
For 2015, total deposits increased by $75.3 million. For 2014, total deposits increased by $25.8 million. In
2015, securities sold under repurchase arrangements increased by $2.4 million. Also in 2015, the Company
paid $7.2 million in common stock dividends coupled with paying $8.4 million in common stock
repurchases. 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. For additional information about cash flows from First Defiance’s operating,
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investing and financing activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
At December 31, 2015, First Defiance had the following commitments to fund deposit, advance,
borrowing obligations and post-retirement benefits:
Table 5 – Contractual Obligations
Maturity Dates by Period at December 31, 2015
Contractual Obligations
Total
Less than
1 year
$182,843
Certificates of deposit
1,935
FHLB fixed advances including interest (1)
-
Subordinated debentures
57,188
Securities sold under repurchase agreements
630
Lease obligations
164
Post-retirement benefits
Total contractual obligations
$242,760
(1) Includes principal payments of $59,902 and interest payments of $3,374.
$428,590
63,276
36,083
57,188
5,215
2,160
$592,512
1-3 years
(In Thousands)
$151,350
31,507
-
-
752
390
$183,999
4-5 years
After 5
years
$94,299
21,683
-
-
622
427
$117,031
$98
8,151
36,083
-
3,211
1,179
$48,722
At December 31, 2015, 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
$80,862
76,253
31,991
323,171
512,277
Amount of Commitment Expiration by Period
Less than
1 year
$74,587
60,575
23,738
202,733
361,633
1-3 years
(In Thousands)
4-5 years
$162
250
3,617
34,180
38,209
$3,668
885
4,635
7,528
16,716
After 5
years
$2,445
14,543
1
78,730
95,719
Standby letters of credit
19,632
19,192
440
-
-
Total Commitments
$531,909
$380,825
$38,649
$16,716
$95,719
In addition to the above commitments, at December 31, 2015, First Defiance had commitments to
sell $19.8 million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage.
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 , and brokered certificates
of deposit. At December 31, 2015, First Defiance had $452.0 million in capacity under its agreements with
the FHLB.
First Federal is subject to various capital requirements of the OCC. At December 31, 2015, 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, 2015 Financial Statements.
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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
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
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- 52 -
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, 2015, First Defiance had goodwill of $61.8 million, including $51.0 million in First
Federal, representing 83% of total goodwill and $10.8 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, 2015 and 2014.
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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, 2015, 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 2.04% 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 $948.4 million, which was split between
$142.0 million of fixed-rate loans and $806.4 million of adjustable-rate loans, at December 31, 2015. The
commercial loan portfolio increased to $419.3 million, which was split between $171.6 million of fixed-
rate loans and $247.7 million of adjustable-rate loans, at December 31, 2015. 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 ($117.0 million at December 31, 2015) of which $97.3 million fluctuate with
changes in the prime lending rate and $19.7 million of home equity and improvement loans have fixed
rates. First Federal also has consumer loans ($16.3 million at December 31, 2015) 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.
The table below presents, for the twelve months subsequent to December 31, 2015 and
December 31, 2014, an estimate of the change in net interest income that would result from a gradual
(ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield
curve, relative to the measured base case scenario. Based on our net interest income simulation as of
December 31, 2015, net interest income sensitivity to changes in interest rates for the twelve months
subsequent to December 31, 2015 was mainly neutral for the ramp and slightly less sensitive for the
shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2014. This
is due in part to our strategy to grow longer term loans and fund that growth out of existing liquidity.
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Table 7 – Net Interest Income Sensitivity Profile
(dollars in thousands)
Gradual Change in Interest Rates
+200
+100
-100
Immediate Change in Interest Rates
+200
+100
-100
Impact on Future Annual Net Interest Income
December 31, 2015
December 31, 2014
$ 563
215
(1,332)
0.71%
0.27%
-1.68%
$ 702
155
(667)
$ 1,660
719
(2,605)
2.09%
0.91%
-3.28%
$ 2,274
877
(1,713)
0.98%
0.22%
-0.93%
3.16%
1.22%
-2.38%
To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest
rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest
income may decrease from the base case scenario should the yield curve flatten or become inverted for a
period of time. Conversely, if the yield curve should steepen, net interest income may increase.
The results of all the simulation scenarios are within the board mandated guidelines as of
December 31, 2015.
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, 2015 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.
Table 8 – Economic Value of Equity Analysis
December 31, 2015
Economic Value of Equity
Change in Rates
$ Amount
$ Change
% Change
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
509,640
499,038
486,652
471,332
453,095
426,010
(Dollars in Thousands)
56,545
45,943
33,558
18,237
-
(27,085)
12.48%
10.14%
7.41%
4.03%
-
(5.98)%
December 31, 2014
Change in Rates
$ Amount
$ Change
% Change
Economic Value of Equity
+ 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)%
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
24.08%
23.15%
22.15%
21.05%
19.86%
18.39%
422 bp
329 bp
229 bp
119 bp
–
(147) bp
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
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of
December 31, 2015, First Federal would experience a 7.41% increase in its economic value of equity.
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- 55 -
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, 2015 was 1.84 years while the average
duration of its liabilities was 3.39 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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- 56 -
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,
2015.
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, 2015.
The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2015, is included below.
Donald P. Hileman Kevin T. Thompson
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
- 57 -
- 57 -
Report of Independent Registered Public Accounting Firm
Members of the Audit Committee
First Defiance Financial Corp.
Defiance, Ohio
We have audited the accompanying consolidated statements of financial condition of First Defiance
Financial Corp. (the “Company”) as of December 31, 2015 and 2014 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, 2015. We also have audited First Defiance Financial
Corp.’s internal control over financial reporting as of December 31, 2015, 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.
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- 58 -
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, 2015 and 2014, and
the results of its operations and its cash flows for each of the three years in the period ended December
31, 2015 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, 2015, based on criteria established in the 2013
Internal Control – Integrated Framework issued by the COSO.
Crowe Horwath LLP
South Bend, Indiana
February 29, 2016
- 59 -
- 59 -
- 59 -
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
Dollars in Thousands, except per share data
First Defiance Financial Corp
Consolidated Statements of Financial Condition (continued)
Dollars in Thousands, except per share data
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 $245 and
$308 at December 31, 2015 and 2014 respectively)
Loans held for sale
Loans receivable, net of allowance of $25,382 and
December 31
2015
2014
$ 38,769
$ 41,936
41,000
79,769
71,000
112,936
236,435
239,321
243
236,678
5,523
313
239,634
4,535
$24,766 at December 31, 2015 and 2014, respectively
1,776,835
1,622,020
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
Other assets
Total assets
9,248
6,171
13,801
51,908
9,012
6,037
13,802
47,013
38,166
40,496
1,321
6,181
61,798
61,525
1,871
2,395
14,587
13,366
$ 2,297,676
$ 2,178,952
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase
Subordinated debentures
Advance payments by borrowers
Deferred taxes
Other liabilities
Total liabilities
Stockholders’ equity:
no shares issued
Commitments and Contingent (Note 6)
Common stock warrant
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $1,950 and $2,214, respectively
Retained earnings
Treasury stock, at cost, 3,619,128 and 3,500,779
shares respectively
Total stockholders’ equity
See accompanying notes.
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; 12,721,959 and 12,735,313 shares issued
and 9,102,831 and 9,234,534 shares outstanding, respectively
December 31
2015
2014
$ 420,691
$ 379,552
1,415,446
1,381,261
1,836,137
1,760,813
59,902
57,188
36,083
877
24,618
21,544
54,759
36,083
1,176
22,763
2,674
2,309
2,017,479
1,899,447
–
–
–
–
127
-
127
878
125,734
136,266
3,622
219,737
4,114
200,600
(69,023)
280,197
(62,480)
279,505
Total liabilities and stockholders’ equity
$ 2,297,676
$ 2,178,952
- 60 -
- 60 -
- 61 -
First Defiance Financial Corp
Consolidated Statements of Financial Condition (continued)
Dollars in Thousands, except per share data
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total
Advances from the Federal Home Loan Bank
Securities sold under agreements to repurchase
Subordinated debentures
Advance payments by borrowers
Deferred taxes
Other liabilities
Total liabilities
Commitments and Contingent (Note 6)
Stockholders’ equity:
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; 12,721,959 and 12,735,313 shares issued
and 9,102,831 and 9,234,534 shares outstanding, respectively
Common stock warrant
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $1,950 and $2,214, respectively
Retained earnings
Treasury stock, at cost, 3,619,128 and 3,500,779
shares respectively
Total stockholders’ equity
December 31
2015
2014
$ 420,691
$ 379,552
1,415,446
1,381,261
1,836,137
1,760,813
59,902
57,188
36,083
21,544
54,759
36,083
2,674
2,309
877
24,618
1,176
22,763
2,017,479
1,899,447
–
–
–
–
127
-
127
878
125,734
136,266
3,622
219,737
4,114
200,600
(69,023)
280,197
(62,480)
279,505
Total liabilities and stockholders’ equity
$ 2,297,676
$ 2,178,952
See accompanying notes.
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FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
2013
2015
Years Ended December 31
2014
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31
2015
2014
2013
Net income
$26,432 $24,292
$22,235
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
(985)
(22)
-
(1,007)
352
(655)
204
47
251
(88)
163
6,763
(932)
-
5,831
(2,040)
3,791
(377)
35
120
(222)
(6,309)
(97)
337
(6,069)
2,124
(3,945)
287
46
(117)
216
(342)
333
Total other comprehensive income (loss)
Comprehensive income
(492)
3,569
(3,729)
$25,931
$27,861
$18,506
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
Earnings per common share:
Basic
Diluted
Dividends declared per common share
See accompanying notes
$
73,346
$
68,682
$
68,077
3,598
3,171
169
552
80,836
5,341
675
613
152
6,781
74,055
136
73,919
10,752
6,713
10,076
824
22
-
-
-
1,462
895
1,059
31,803
37,769
7,197
1,324
6,083
15,516
67,889
37,833
11,410
26,423
$
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
$
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
2.87
2.82
0.78
$
$
$
2.55
2.44
0.63
$
$
$
2.28
2.19
0.40
$
$
$
$
- 62 -
- 62 -
63
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
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
For the Years Ended December 31
2015
2014
2013
$26,432 $24,292
$22,235
(985)
(22)
-
(1,007)
352
(655)
6,763
(932)
-
5,831
(2,040)
3,791
(6,309)
(97)
337
(6,069)
2,124
(3,945)
204
47
251
(88)
163
(377)
35
(342)
120
(222)
287
46
333
(117)
216
Total other comprehensive income (loss)
Comprehensive income
(492)
$25,931
3,569
$27,861
(3,729)
$18,506
See accompanying notes
63
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FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
Preferred
Stock
Common
Stock
Common
Stock
Warrant
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
$ 36,641
$ 127
$
878
$ 135,825
$ 3,997
(3,729)
44
(34)
327
20
$
-
$ 127
$
878
$ 136,403
$ 545
3,569
78
88
(334)
31
$
-
$ 127
$
878
$ 136,266
$ 4,114
(878)
150
(11,101)
(492)
230
(58)
216
31
Balance at January 1, 2013
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
Net income
Other comprehensive loss
Stock option expense
Warrant repurchase
74,300 net shares issued under stock option plan,
with $160 in income tax benefit, net of 14,350
repurchased and/or retired
Restricted share activity under stock incentive
Plans including 18,006 shares issued
Excess tax benefit on stock compensation plans
1,799 shares issued direct purchases
225,808 shares repurchased
Common stock dividends declared
Balance at December 31, 2015
$
-
$ 127
$
-
$ 125,734
$ 3,622
See accompanying notes
Retained
Earnings
Treasury
Stock
$ 148,010
22,235
$ (47,351)
Total
Stockholder’s
Equity
$ 278,127
22,235
(3,729)
44
(97)
(44)
(3,907)
$ 182,290
24,292
481
350
500
44
(1,821)
$ (48,096)
783
64
(1,821)
(3,907)
$ 272,147
24,292
3,569
78
(45)
878
921
(5,937)
$ 200,600
26,423
(313)
186
212
45
(15,519)
$ (62,480)
1,552
308
33
(8,436)
(7,159)
$ 219,737
$ (69,023)
(122)
76
(15,519)
(5,937)
$ 279,505
26,423
(492)
150
(11,979)
1,469
436
216
64
(8,436)
(7,159)
$ 280,197
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 or write-downs 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)
Excess tax benefit on stock compensation plans
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
Proceeds from maturities, calls and paydowns of available-for-sale
securities
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
Net cash paid in Buckeye Insurance acquisition
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
2015
2014
2013
$ 26,423
$ 24,292
$ 22,235
215,402
(213,416)
159,305
(153,753)
308,260
(294,941)
136
3,267
1,148
1,620
(266)
699
(5,388)
428
150
-
(22)
(35)
150
436
216
(895)
(1,356)
1,955
30,652
1,117
2,952
1,020
1,401
(116)
1,102
(3,517)
-
(73)
-
(932)
(179)
78
(122)
-
(1,802)
(5,962)
5,254
30,065
31,240
426
3,407
212
(30,483)
(1,843)
(4,000)
1
-
-
(297)
24,027
(177,013)
(154,254)
20,400
14,913
2,108
84
(70,149)
(4,935)
(3,406)
5,548
910
-
(16,594)
20,592
(73,206)
(103,662)
1,824
3,110
1,235
2,098
(1,261)
1,241
(5,817)
1
883
337
(97)
1,518
44
783
-
(883)
1,328
(2,535)
39,363
35,072
4,027
2,899
-
(49,230)
(2,045)
1,305
-
-
-
(4,545)
13,369
(70,845)
(69,872)
69
73
121
64
- 64 -
65
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31
2014
2015
2013
$ 26,423
$ 24,292
$ 22,235
136
3,267
1,148
1,620
(266)
699
(5,388)
428
150
-
(22)
(35)
215,402
(213,416)
150
436
216
(895)
(1,356)
1,955
30,652
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)
1,518
308,260
(294,941)
44
783
-
(883)
1,328
(2,535)
39,363
69
73
121
31,240
20,400
35,072
426
3,407
212
(30,483)
(1,843)
(4,000)
1
-
(297)
-
24,027
(177,013)
(154,254)
14,913
2,108
84
(70,149)
(4,935)
(3,406)
5,548
910
-
(16,594)
20,592
(73,206)
(103,662)
4,027
2,899
-
(49,230)
(2,045)
-
1,305
-
-
(4,545)
13,369
(70,845)
(69,872)
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 or write-downs 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)
Excess tax benefit on stock compensation plans
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
Net cash paid in Buckeye Insurance acquisition
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
65
- 65 -
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 and advance payments by borrowers
Repayment of Federal Home Loan Bank long-term advances
Proceeds from Federal Home Loan Bank long-term advances
Increase (decrease) in securities sold under repurchase agreements
Cash dividends paid on common stock
Net cash paid for repurchase of common stock
Repayment of warrants
Proceeds from exercise of stock options
Proceeds from treasury stock sales
Net cash (used) provided by financing activities
Years Ended December 31
2014
2015
2013
75,689
(8,642)
47,000
2,429
(7,159)
(8,436)
(11,979)
1,469
64
90,435
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
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(33,167)
112,936
$ 79,769
(66,382)
179,318
$ 112,936
42,486
136,832
$ 179,318
Supplemental cash flow information:
Interest paid
Income taxes paid
Transfers from loans to other real estate owned and other
assets held for sale
$ 6,764
$ 10,000
$ 6,557
$ 8,950
$ 7,179
$ 10,500
$ 974
$ 2,357
$ 5,836
Transfer from real estate owned and other assets held for sale to
loans
$ 2,544
-
-
Transfer from property and equipment to real estate and other
assets held for sale
Transfer from loans held for sale to loans
$ 267
$ -
-
$ 1,178
-
$ 3,231
Securities traded but not yet settled
$ -
$ -
$ 742
Earnings Per Common Share
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, Lima, 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.
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 includes 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 Consolidated Statements of Comprehensive Income.
66
- 66 -
67
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, Lima, 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 includes 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 Consolidated Statements of Comprehensive Income.
67
- 67 -
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. Cash and amounts due from depository institutions include
required balances on hand or on deposit at the FHLB and Federal Reserve of approximately $1,606,000 and
$1,491,000, respectively, at December 31, 2015 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, 2015, the Company holds
$13.8 million at the FHLB of Cincinnati and $9,000 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 2015, the Company recouped previously accrued losses totaling ($95,000) pertaining to loans sold to
Fannie Mae and Freddie Mac but repurchased due to underwriting issues. During 2014 and 2013, the Company
had realized or accrued losses totaling $298,000 and $597,000. 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
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. 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 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.
68
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69
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 2015, the Company recouped previously accrued losses totaling ($95,000) pertaining to loans sold to
Fannie Mae and Freddie Mac but repurchased due to underwriting issues. During 2014 and 2013, the Company
had realized or accrued losses totaling $298,000 and $597,000. 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
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. 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 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.
69
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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.
Beginning June 30, 2015, the Company refined the methodology to its allowance for loan loss calculation
pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of
the component for reserves on impaired loans. Within the general reserve, the determination of the historical
loss component was modified from using a three-year average annual loss rate to a loss migration measurement.
The loss migration measurement implemented June 30, 2015, utilizes an average of four (4) four-year loss
migration periods for each loan portfolio segment with differentiation between loan risk grades. This approach
provides for a more precise reflection of probable incurred losses by risk grade within each loan portfolio
segment over an average loan life cycle than was previously being used. Management believes that capturing
the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s
estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio. Prior to
June 30, 2015, the approach to this component quantified the historical loss by calculating a rolling twelve
quarter average annual loss rate for each portfolio segment, without differentiation between loan risk grades.
This modification resulted in a change in the general reserves between the loan portfolio segments but did not
have a material impact on the overall allowance for loan losses.
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. An analysis of the net present value of estimated cash
flows 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 Chief Credit Officer 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 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.
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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 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.
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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.
Goodwill and Other Intangibles
Servicing Rights
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 $3.5 million, $3.6 million and $3.6 million for
the years ended December 31, 2015, 2014 and 2013. 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
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.
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:
Transfers of Financial Assets
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.
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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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, 2015, the
reported revenue for First Insurance was 9.5% 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, 2015 was 5.6% of consolidated net income. Total assets of First Insurance at
December 31, 2015 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.
Retirement Plans
Reclassifications
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.
Some items in the prior year financial statements were reclassified to conform to the current presentation.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities (ASU 2016-01). The main objective of ASU 2016-01 is to enhance
the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) Require equity
investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
2) Simplify the impairment assessment of equity investments without readily determinable fair values by
requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit
price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) Require an
entity to present separately in other comprehensive income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Company is currently evaluating the effects of ASU 2016-01 on its Consolidated Financial Statements and
disclosures.
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 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities (ASU 2016-01). The main objective of ASU 2016-01 is to enhance
the reporting model for financial instruments to provide users of financial statements with more decision-useful
information. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) Require equity
investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
2) Simplify the impairment assessment of equity investments without readily determinable fair values by
requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit
price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) Require an
entity to present separately in other comprehensive income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Company is currently evaluating the effects of ASU 2016-01 on its Consolidated Financial Statements and
disclosures.
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In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805), Simplifying the
Accounting for Measurement-Period Adjustments.” This Update simplifies the accounting for adjustments made
to provisional amounts recognized in a business combination, and eliminates the requirement to retrospectively
account for those adjustments. The amendments to this Update require that an acquirer recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which the
adjustment amounts are determined. The Updates require that the acquirer record, in the same period’s financial
statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a
result of the change to the provisional amounts, calculated as if the accounting had been completed at the
acquisition date. The amendments in this Update require an entity to present separately on the face of the
income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line
item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts
had been recognized as of the acquisition date. For public business entities, the amendments to this Update are
effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal
years. This Update should be applied prospectively to adjustments to provisional amounts that occur after the
effective date of this Update with earlier application permitted for financial statements that have not been
issued. Management will continue to monitor the applicability of this Update to the Consolidated Financial
Statements.
In August 2015, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU
2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core
principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
(i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii)
determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract,
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was
originally going to be effective for the Company on January 1, 2017; however, the FASB recently issued ASU
2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date" which
deferred the effective date of ASU 2014-09 by one year to January 1, 2018. The Company is currently
evaluating the potential impact of ASU 2014-09 on its Consolidated Financial Statements.
In June 2014, the FASB issued ASU No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase
Financings, and Disclosures." The new guidance aligns the accounting for repurchase-to-maturity transactions
and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase
agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance
eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a
transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined
basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The
amendments in the ASU require a new disclosure for transactions economically similar to repurchase
agreements in which the transferor retains substantially all of the exposure to the economic return on the
transferred financial assets throughout the term of the transaction. The amendments in the ASU also require
expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions
accounted for as secured borrowings. The Company adopted the amendments in this ASU effective January 1,
2015. In addition, the expanded disclosures about the nature of collateral pledged in repurchase agreements and
similar transactions accounted for as secured borrowings were effective for the Company’s reporting period
ending June 30, 2015. All of the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-
maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as
secured borrowings. As such, the adoption of ASU No. 2014-11 did not have a material impact on the
Company's Consolidated Financial Statements.
3. Acquisitions
On September 1, 2015, First Insurance acquired a group medical benefits business from Buckeye Insurance
Consultants, Inc. located in Lima, Ohio for a cash purchase price of $495,000 of which $198,000 is set aside for
contingent payments to be paid in cash in 2016, 2017 and 2018 if certain conditions regarding future revenue
are met. As of December 31, 2015, management had determined there was goodwill of $273,000 and
identifiable intangible assets of $163,000 consisting of a customer relationship intangible of $60,000 and a non-
compete intangible of $103,000 related to the acquisition. Disclosure of pro forma results of this acquisition is
not material to the Company’s consolidated financial statements.
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
2015
2014
2013
(In Thousands, Except Per Share Amounts)
$ 26,423
$ 24,292
$ 22,235
9,221
9,511
9,764
87
75
162
111
353
464
87
320
407
9,383
2.87
2.82
$
$
9,975
2.55
2.44
10,171
2.28
2.19
$
$
$
$
Shares subject to issue upon exercise of options of 8,750 in 2015, 10,500 in 2014 and 132,750 in 2013 were
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
76
- 76 -
77
3. Acquisitions
On September 1, 2015, First Insurance acquired a group medical benefits business from Buckeye Insurance
Consultants, Inc. located in Lima, Ohio for a cash purchase price of $495,000 of which $198,000 is set aside for
contingent payments to be paid in cash in 2016, 2017 and 2018 if certain conditions regarding future revenue
are met. As of December 31, 2015, management had determined there was goodwill of $273,000 and
identifiable intangible assets of $163,000 consisting of a customer relationship intangible of $60,000 and a non-
compete intangible of $103,000 related to the acquisition. Disclosure of pro forma results of this acquisition is
not material to the Company’s consolidated financial statements.
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
2013
2014
2015
(In Thousands, Except Per Share Amounts)
$ 26,423
$ 24,292
$ 22,235
9,221
9,511
9,764
87
75
162
111
353
464
87
320
407
9,383
2.87
2.82
$
$
9,975
2.55
2.44
10,171
2.28
2.19
$
$
$
$
Shares subject to issue upon exercise of options of 8,750 in 2015, 10,500 in 2014 and 132,750 in 2013 were
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
77
- 77 -
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, 2015 and 2014 and the corresponding amounts of gross
unrealized and unrecognized gains and losses:
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
(In Thousands)
2015
Available-for-sale
Obligations of U.S. government corporations
and agencies
$
Mortgage-backed securities - residential
REMICs
Collateralized mortgage obligations
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Total Available-for-Sale
$
$
3,000
63,815
1,592
71,176
-
4,955
1
898
28
976
1
39
85,680
$ 230,218
4,712
$ 6,655
$
(7)
(59)
-
(353)
-
(17)
(2)
(438)
$ 2,994
64,654
1,620
71,799
1
4,977
90,390
$ 236,435
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)
$
$
14
74
31
124
243
$
$
-
2
1
-
3
$
$
-
(1)
-
-
(1)
$ 14
75
32
124
$ 245
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
Gross
Gross
Amortized Unrecognized Unrecognized
Cost
Gains
Losses
Fair
Value
(In Thousands)
Held-to-Maturity
FHLMC certificates
FNMA certificates
GNMA certificates
Obligations of states and political
subdivisions
Total Held-to-Maturity
155
313
$
$
$
$
$
(8)
$ 18
26
93
39
-
2
1
-
3
-
-
-
95
40
155
$
(8)
$ 308
The amortized cost and fair value of the investment securities portfolio at December 31, 2015 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.
2015
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 one year through
five years
MBS/CMO
Total
Available-for-Sale
Amortized
Cost
Fair
Value
(In Thousands)
$
830
$
835
17,256
17,657
37,060
38,488
136,584
39,336
40,533
138,074
$ 230,218
$ 236,435
$
$
124
119
124
121
$ 243
$ 245
(In Thousands)
1,000
58,380
1,820
80,252
-
6,913
$
-
1,476
19
1,280
1
85
$
(20)
-
-
(411)
-
(6)
$ 980
59,856
1,839
81,121
1
6,992
Securities pledged at year-end 2015 and 2014 had a carrying amount of $134.8 million and $141.2 million and
were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
As of December 31, 2015, the Company’s investment portfolio consisted of 367 securities, 29 of which were in
an unrealized loss position. The Company did not hold any single security that was greater than 10% of the
Company’s equity at December 31, 2015.
2014
Available-for-sale
Obligations of U.S. government corporations
and agencies
$
Mortgage-backed securities - residential
REMICs
Collateralized mortgage obligations
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Total Available-for-Sale
83,732
$ 232,097
4,827
$ 7,688
(27)
(464)
88,532
$ 239,321
$
78
- 78 -
79
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
The amortized cost and fair value of the investment securities portfolio at December 31, 2015 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.
2015
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 one year through
five years
MBS/CMO
Total
Available-for-Sale
Fair
Value
Amortized
Cost
(In Thousands)
$
830
$
835
17,256
17,657
37,060
38,488
136,584
$ 230,218
39,336
40,533
138,074
$ 236,435
$
124
119
$ 243
$
124
121
$ 245
Securities pledged at year-end 2015 and 2014 had a carrying amount of $134.8 million and $141.2 million and
were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
As of December 31, 2015, the Company’s investment portfolio consisted of 367 securities, 29 of which were in
an unrealized loss position. The Company did not hold any single security that was greater than 10% of the
Company’s equity at December 31, 2015.
79
- 79 -
The following table summarizes First Defiance’s securities that were in an unrealized loss position at December
31, 2015 and December 31, 2014:
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
$
993
$
(7)
$
-
$
-
$
993
$
(7)
12,374
983
-
12,525
13
(150)
(17)
-
(59)
(1)
8,158
-
433
-
-
(203)
-
(2)
-
-
20,532
983
433
12,525
13
(353)
(17)
(2)
(59)
(1)
$ 26,888
$
(234)
$ 8,591
$
(205)
$
35,479
$ (439)
the years ended December 31, 2015, 2014 and 2013 (In Thousands):
At December 31, 2015
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Collateralized mortgage
obligations
Corporate bonds
Obligations of state and political
subdivisions
Mortgage-backed securities-
residential
Held to maturity securities:
FNMA certificates
Total temporarily impaired
securities
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
-
$
-
$
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)
Ending balance, December 31
$ -
$ - $ 3,513
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
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.
80
- 80 -
81
With the exception of corporate bonds, the 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.
In 2015 and 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.
There was no OTTI recognized in accumulated other comprehensive income (“AOCI”) relating to the CDOs at
December 31, 2015 and 2014.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for
Beginning balance, January 1
Additions for amounts related to credit loss for which an OTTI
was not previously recognized
Reductions for amounts realized for securities sold/redeemed during the
period
2015
2014
2013
$ - $ 3,513 $ 3,176
-
-
-
337
(3,513)
-
Realized gains from the sales and calls of investment securities totaled $22,000 ($15,000 after tax) in 2015
while there were realized gains of $932,000 ($652,000 after tax) and $97,000 ($68,000 after tax) in 2014 and
2013, respectively.
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
Proceeds
Gross realized gains
Gross realized losses
2015
2014
2013
(In Thousands)
$
$ 14,913
$
4,027
1,574
(642)
97
-
426
22
-
With the exception of corporate bonds, the 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.
In 2015 and 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.
There was no OTTI recognized in accumulated other comprehensive income (“AOCI”) relating to the CDOs at
December 31, 2015 and 2014.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for
the years ended December 31, 2015, 2014 and 2013 (In Thousands):
Beginning balance, January 1
Additions for amounts related to credit loss for which an OTTI
was not previously recognized
Reductions for amounts realized for securities sold/redeemed during the
period
2015
2014
$ - $ 3,513 $ 3,176
2013
-
-
-
337
(3,513)
-
Ending balance, December 31
$ -
$ - $ 3,513
Realized gains from the sales and calls of investment securities totaled $22,000 ($15,000 after tax) in 2015
while there were realized gains of $932,000 ($652,000 after tax) and $97,000 ($68,000 after tax) in 2014 and
2013, respectively.
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
Proceeds
Gross realized gains
Gross realized losses
2015
$
426
22
-
2014
(In Thousands)
$ 14,913
1,574
(642)
$
2013
4,027
97
-
81
- 81 -
6. Commitments and Contingent Liabilities
Loan Commitments
Loan commitments are made to accommodate the financial needs of First Federal’s customers. 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):
2015
2014
Commitments to make loans
Unused lines of credit
Standby letters of credit
Total
Fixed Rate
80,862
31,991
-
112,853
$
$
Variable Rate
$
$
76,253
323,171
19,632
419,056
Fixed Rate
37,546
20,385
-
57,931
$
$
$
Variable Rate
69,232
307,449
17,886
394,567
$
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan
commitments at December 31, 2015 have interest rates ranging from 2.85% to 18.00% and maturities ranging
from less than 1 year to 30 years.
In addition to the above commitments, at December 31, 2015, First Defiance had commitments to sell $19.9
million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage.
82
- 82 -
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,
2015
December 31,
2014
(In Thousands)
$
205,330
167,558
780,870
163,877
1,317,635
419,349
116,962
16,281
552,592
1,870,227
$
206,437
156,530
683,958
112,385
1,159,310
399,730
111,813
15,466
527,009
1,686,319
Undisbursed loan funds
Net deferred loan origination fees and costs
Allowance for loan loss
Totals
(66,902)
(1,108)
(25,382)
$ 1,776,835
(38,653)
(880)
(24,766)
$ 1,622,020
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
The following table discloses the year-to-date activity in the allowance for loan loss for the dates indicated by
portfolio segment (In Thousands):
Year to Date December 31,
2015
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
$ 2,494
$ 2,453
$ 11,268
$ 221
$ 6,509
$ 1,704
$ 117
$ 24,766
Charge-Offs
(283)
(114)
(353)
-
(68)
(350)
(53)
(1,221)
Recoveries
214
-
915
-
331
Provisions
787
(188)
(58)
296
(1,517)
188
762
53
1,701
54
136
Ending Allowance
$ 3,212
$ 2,151
$ 11,772
$ 517
$ 5,255
$ 2,304
$ 171
$ 25,382
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
83
- 83 -
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
84
- 84 -
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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 for the years ended December 31, 2015, 2015 and 2013 (In
Thousands):
Twelve Months Ended December 31,
2015
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
$
6,985
$
246
$
244
5,444
12,429
3,799
9,019
10,125
2,980
3,554
25,678
50
2,217
4,773
6,990
2,757
80
152
398
40
168
349
88
81
686
2
58
49
107
62
14
152
396
40
167
348
56
80
651
2
56
49
115
62
14
$ 51,783
$ 1,309
$1,270
- 87 -
- 87 -
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
- 88 -
- 88 -
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
- 89 -
- 89 -
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, 2015
December 31, 2014
Unpaid
Principal
Balance*
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Unpaid
Principal
Balance*
Allowance
for Loan
Losses
Allocated
Recorded
Investment
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
$ 1,383
2,147
3,530
$ 1,360
2,141
3,501
3,463
4,869
7,932
3,546
4,076
20,423
-
1,644
3,573
5,217
3,313
4,520
7,685
3,596
4,046
19,847
-
1,648
3,607
5,255
$ - $ 3,967
3,763
$ 3,859
3,670
7,529
$ -
-
-
2,482
6,481
3,759
208
2,378
12,826
150
1,157
3,663
4,820
-
-
-
-
-
-
-
-
-
-
7,730
2,627
7,109
4,106
213
2,923
14,351
150
1,155
3,966
5,121
-
-
-
-
-
-
-
-
-
-
-
-
Home Equity and Home Improvement
Consumer Finance
Total loans with no allowance recorded
817
60
$ 33,510
772
59
$ 32,747
-
-
$ -
2,192
35
$ 32,206
2,140
34
$ 29,981
-
-
$ -
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
$ 2,918
1,231
4,149
-
3,250
385
68
926
4,629
-
594
252
846
724
12
$ 10,360
$ 2,837
1,236
4,073
$ 188
13
201
$ 2,112
636
2,748
$ 2,114
638
2,752
$ 204
12
216
-
2,767
308
69
502
3,646
-
596
256
852
719
12
$ 9,302
-
132
2
2
3
139
-
62
1
63
34
-
$ 437
-
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
- 90 -
- 90 -
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,
2015
2014
(In Thousands)
$ 16,261
-
16,261
1,321
$ 17,582
$ 24,130
-
24,130
6,181
$ 30,311
Troubled debt restructuring, still accruing
$ 11,178
$ 24,686
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2015 by class of loans (In Thousands):
Current
30-59 days
60-89 days 90+ days
Past Due
Accrual
Total
Total Non
Residential Owner Occupied
Residential Non Owner Occupied
$ 138,974
64,577
$ 159
324
$ 673
$ 391 $ 1,223
$ 1,428
356
226
906
1,179
Total 1-4 Family Residential Real
Estate
203,551
483
1,029
617
2,129
2,607
Multi-Family Residential Real Estate
165,671
-
2,024
2,024
2,417
Total Commercial Real Estate
778,655
829
1,324
2,119
4,272
7,429
-
772
57
-
-
-
16
203
219
733
27
-
-
-
-
46
46
92
3
1,218
106
1,266
538
-
315
3,256
644
57
315
4,141
1,229
695
1,364
-
-
-
154
2,223
170
2,472
251
2,833
2,377
2,642
3,084
44
24
869
54
689
36
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
322,940
304,166
98,055
53,494
96,845
168,938
249,070
418,008
116,599
16,216
- 91 -
Total Loans
$ 1,795,545
$ 2,291
$ 2,494
$ 7,205
$ 11,990
$ 16,262
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,
2015
December 31,
2014
(In Thousands)
$ 16,261
-
16,261
1,321
$ 17,582
$ 24,130
-
24,130
6,181
$ 30,311
Troubled debt restructuring, still accruing
$ 11,178
$ 24,686
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2015 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
$ 138,974
64,577
$ 159
324
$ 673
356
$ 391 $ 1,223
906
226
$ 1,428
1,179
Total 1-4 Family Residential Real
Estate
203,551
483
1,029
617
2,129
2,607
Multi-Family Residential Real Estate
165,671
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
322,940
304,166
98,055
53,494
-
772
-
57
-
-
2,024
2,024
2,417
1,218
106
-
-
1,266
538
-
315
3,256
644
57
315
4,141
1,229
695
1,364
Total Commercial Real Estate
778,655
829
1,324
2,119
4,272
7,429
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
96,845
168,938
249,070
418,008
116,599
16,216
-
16
203
219
733
27
-
-
46
46
92
3
-
-
-
154
2,223
170
2,472
251
2,833
2,377
2,642
3,084
44
24
869
54
689
36
Total Loans
$ 1,795,545
$ 2,291
$ 2,494
$ 7,205
$ 11,990
$ 16,262
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- 91 -
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
Troubled Debt Restructurings
As of December 31, 2015 and 2014, the Company had a recorded investment in troubled debt
restructurings (“TDRs”) of $17.6 million and $33.0 million, respectively. The Company allocated
$335,000 and $1.1 million, of specific reserves to those loans at December 31, 2015 and 2014, and
committed to lend additional amounts totaling up to $48,000 and $69,000 at December 31, 2015 and
2014.
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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- 92 -
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, $6.4 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 indicated
(Dollars in Thousands):
Loans Modified as a TDR for the
Twelve Months Ended
December 31, 2015
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
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)
6
4
2
2
3
-
2
2
13
9
43
$ 454
59
645
244
1,443
-
62
70
324
62
$ 3,363
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
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 decreased the allowance for loan losses (“ALLL”) by $13,000 for the year
ended December 31, 2015, increased the ALLL by $234,000 for the year ended December 31, 2014, and
decreased the ALLL by $27,000 for the year ended December 31, 2013.
Of the 2015 modifications, 19 were made TDRs due to the fact that the borrower filed bankruptcy, one
was made a TDR due to an interest only period, one was made a TDR due to extending the amortization,
ten were made TDRs due to advancing or renewing funds to a watchlist credit, two were made TDRs to
term out lines of credit, and ten were made TDRs to refinance current debt for payment relief.
- 93 -
- 93 -
The following table presents loans by class modified as TDRs for which there was a payment default
within twelve months following the modification during the indicated:
Twelve Months Ended
December 31, 2015
($ in thousands)
Twelve Months Ended
December 31, 2014
($ in thousands)
Twelve Months Ended
December 31, 2013
($ 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
5
1
-
7
Recorded
Investment
(as of Period
End)
$ -
-
-
-
-
-
120
1,791
22
-
$ 1,933
Number of
Loans
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
-
$ 1,991
18
$ 2,438
The TDRs that subsequently defaulted described above had no effect on the ALLL for the year ended
December 31, 2015. They decreased the ALLL by $14,000 after $176,000 in charge-offs for the year
ended December 31, 2014, and increased the ALLL by $21,000 after $58,000 in charge-offs for the year
ended December 31, 2013.
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, 2015 and 2014
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 187 loans were
modified under this definition during the twelve month period ended December 31, 2015 and a total of
153 loans were modified under this definition during the twelve month period ended December 31, 2014.
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
deterioration of the repayment prospects for the loan or of the institution's credit position at some
future date.
- 94 -
- 94 -
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.
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, 2015, and based on the most recent analysis
performed, the risk category of loans by class of loans is as follows (In Thousands):
Class
Pass
Mention Substandard Doubtful
Special
Not
Graded
Total
Residential Owner Occupied
Residential Non Owner Occupied
$ 5,828
55,169
$ 123
1,420
$ 2,427
4,439
$ - $ 131,820
4,454
-
$ 140,198
65,482
Total 1-4 Family Real Estate
60,997
1,543
6,866
Multi-Family Residential Real Estate
163,405
498
3,675
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
297,856
293,057
92,262
47,109
17,896
2,143
1,947
469
9,730
9,595
3,903
5,739
Total Commercial Real Estate
730,284
22,455
28,967
Construction
76,152
2,159
-
Commercial Working Capital
Commercial Other
163,071
243,308
2,497
2,706
3,540
5,528
Total Commercial
406,379
5,203
9,068
Home Equity and Home Improvement
Consumer Finance
-
-
-
-
689
15
-
-
-
-
-
-
-
-
-
-
-
-
-
136,274
205,680
117
167,695
714
15
-
492
326,196
304,810
98,112
53,809
1,221
782,927
18,534
96,845
-
-
-
116,779
16,255
169,108
251,542
420,650
117,468
16,270
Total Loans
$ 1,437,217
$ 31,858
$ 49,280
$ - $ 289,180
$ 1,807,535
- 95 -
- 95 -
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
Pass
Mention Substandard Doubtful
Special
Not
Graded
Total
Residential Owner Occupied
Residential Non Owner Occupied
$ 4,230
51,327
$ 131
2,404
$ 3,048
4,872
$ 365 $ 135,306
5,174
7
$ 143,080
63,784
Total 1-4 Family Real Estate
55,557
2,535
7,920
372
140,480
206,864
Multi-Family Residential Real Estate
152,290
220
3,236
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
273,406
224,073
90,875
40,147
18,448
7,898
1,849
63
9,953
13,186
819
3,466
Total Commercial Real Estate
628,501
28,258
27,424
Construction
62,355
-
150
Commercial Working Capital
Commercial Other
128,229
253,576
6,287
6,504
1,444
4,991
Total Commercial
381,805
12,791
6,435
-
-
-
-
-
-
-
-
-
-
914
156,660
1,175
27
-
572
302,982
245,184
93,543
44,248
1,774
685,957
11,217
73,722
-
-
-
135,960
265,071
401,031
112,282
15,451
Home Equity and Home Improvement
Consumer Finance
-
-
-
-
1,647
125
106
-
110,529
15,326
Total Loans
$ 1,280,508
$ 43,804
$ 46,937 $ 478 $ 280,240
$ 1,651,967
- 96 -
- 96 -
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, 2013
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
Principal payments received
Loans charged off
Additional provision for loan loss
Loan accretion recorded
Balance at December 31, 2015
Contractual
Amount
Receivable
$
855
(108)
(41)
(203)
-
503
(90)
-
-
-
413
(51)
-
-
-
$ 362
Impairment
Discount
(In Thousands)
$
343
-
(41)
-
(29)
273
-
-
-
(46)
227
-
-
-
(34)
$ 193
Recorded
Loan
Receivable
$
$
512
(108)
-
(203)
29
230
(90)
-
-
46
186
(51)
-
-
34
169
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
2014
2015
(In Thousands)
$ 5,888
5,822
(54)
(4,307)
$ 7,349
$ 3,712
9,800
(6)
(7,618)
$ 5,888
- 97 -
- 97 -
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
Years Ended December 31
2014
(In Thousands)
$ 3,335
2013
$ 5,716
2015
$ 4,564
3,503
(1,620)
266
2,149
3,552
(1,401)
116
2,267
3,564
(2,098)
1,261
2,727
Net mortgage banking income
$ 6,713
$ 5,602
$ 8,443
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.34 billion at
December 31, 2015 and $1.35 billion at December 31, 2014.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows:
2015
Years Ended December 31
2014
(In Thousands)
2013
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
$ 9,923
1,590
(1,620)
$ 10,133
1,191
(1,401)
$ 10,121
2,110
(2,098)
9,893
9,923
10,133
(911)
266
(645)
$ 9,248
$ 9,802
(1,027)
116
(911)
$ 9,012
$ 9,304
(2,288)
1,261
(1,027)
$ 9,106
$ 9,686
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related
mortgage loans serviced.
The Company had no actual losses from secondary market buy-backs in 2015. Based on management’s
estimate of potential losses from secondary market buyback activity, a liability of $214,000 and $309,000
was accrued at December 31, 2015 and 2014, respectively, and is reflected in other liabilities in the
Consolidated Balance Sheets. Expense (credit) recognized related to the accrual was $(95,000), $298,000
and $597,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
- 98 -
- 98 -
The Company’s servicing portfolio is comprised of the following:
Investor
Fannie Mae
Freddie Mac
Federal Home Loan Bank
Other
Totals
December 31
2015
2014
Number of
Loans
Principal
Outstanding
Number of
Loans
Principal
Outstanding
(In Thousands)
5,104
9,015
118
21
14,258
$ 484,155
845,564
12,605
1,398
$ 1,343,722
5,215
8,911
118
23
14,267
$ 503,369
828,724
12,972
1,573
$ 1,346,638
Custodial escrow balances maintained in connection with serviced loans were $11.6 million and $10.9
million at December 31, 2015 and 2014, respectively.
Significant assumptions at December 31, 2015 used in determining the value of MSRs include a
weighted average prepayment speed assumption (“PSA”) of 181 and a weighted average discount rate of
10.02%. Significant assumptions at December 31, 2014 used in determining the value of MSRs include a
weighted average prepayment rate of 209 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, 2015 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
$ 281
321
$ 547
627
10% Adverse 20% Adverse
Change
Change
(In Thousands)
- 99 -
- 99 -
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
2015
2014
(In Thousands)
$
$
7,494
1,310
41,556
971
29,622
656
81,609
(43,443)
38,166
$
$
8,218
1,310
42,022
469
30,646
809
83,474
(42,978)
40,496
Depreciation expense was $3.3 million, $3.0 million and $3.1 million for the years ended December 31,
2015, 2014 and 2013, respectively.
Lease Agreements
The Company has entered into lease agreements covering six 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):
2016
2017
2018
2019
2020
Thereafter
Total
$
$
630
400
352
342
280
3,211
5,215
Rental expenses under operating leases amounted to $601,000, $653,000 and $723,000 in 2015, 2014,
and 2013, respectively.
- 100 -
- 100 -
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
Acquired Intangible Assets
December 31
2015
2014
(In Thousands)
$ 61,525
273
$ 61,798
$ 61,525
-
$ 61,525
Activity in intangible assets for the years ended December 31, 2015, 2014 and 2013 was as follows:
Balance as of January 1, 2013
Amortization of intangible assets
Balance as of December 31, 2013
Amortization of intangible assets
Balance as of December 31, 2014
Intangible assets acquired
Amortization of intangible assets
Balance as of December 31, 2015
Gross
Carrying
Amount
$ 14,302
-
14,302
-
14,302
175
-
$ 14,477
$
Accumulated
Amortization
(In Thousands)
(9,564)
(1,241)
(10,805)
(1,102)
(11,907)
-
(699)
$ (12,606)
Net
Value
$
$
4,738
(1,241)
3,497
(1,102)
2,395
175
(699)
1,871
Estimated amortization expense for each of the next five years and thereafter is as follows (In
Thousands):
2016
2017
2018
2019
2020
Thereafter
Total
11. Deposits
The following schedule sets forth interest expense by type of deposit:
$
$
535
404
332
225
149
226
1,871
2015
Years Ended December 31
2014
(In Thousands)
2013
Checking and money market accounts
Savings accounts
Certificates of deposit
Totals
$
$
1,186
89
4,066
5,341
$
$
1,236
90
3,957
5,283
$
$
1,125
90
4,698
5,913
- 101 -
- 101 -
Accrued interest payable on deposit accounts amounted to $43,000 and $38,000 at December 31, 2015
and 2014, respectively, which was comprised of $25,000 and $18,000 for certificates of deposit and
checking and money market accounts, respectively, at December 31, 2015 and $23,000 and $15,000 for
certificates of deposit and checking and money market accounts, respectively, at December 31, 2014.
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 $250,000
Retail certificates of deposit greater than $250,000
December 31
2015
2014
(In Thousands)
$
420,691
767,201
219,655
403,902
24,688
$ 1,836,137
$
379,552
727,729
203,673
422,907
26,952
$ 1,760,813
Scheduled maturities of certificates of deposit at December 31, 2015 are as follows (In Thousands):
2016
2017
2018
2019
2020
Thereafter
Total
$
$
182,843
86,549
64,801
59,381
34,918
98
428,590
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 commercial 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 commercial 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, 2015 and
December 31, 2014 were $692.2 million and $644.1 million, respectively. First Federal could obtain
advances of up to approximately $452.0 million from the FHLB at December 31, 2015.
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At year-end, advances from the FHLB were as follows:
Principal Terms
December 31, 2015
Putable advances
Single maturity fixed rate advances
Amortizable mortgage advances
December 31, 2014
Putable advances
Amortizable mortgage advances
Advance
Amount
(In Thousands)
Range of Maturities
$
5,000 March 2018
47,000 December 2017 to March 2022
7,902 December 2017 to October 2021
$ 59,902
$ 12,000
January 2015 to March 2018
9,544 December 2015
$ 21,544
Putable advances are callable at the option of the FHLB on a quarterly basis.
Weighted
Average
Interest
Rate
2.35%
1.51%
1.78%
2.72%
1.95%
Estimated future minimum payments by fiscal year based on maturity date and current interest rates are
as follows (In Thousands):
2016
2017
2018
2019
2020
Thereafter
Total minimum payments
Less amounts representing interest
Totals
$
1,935
11,932
19,575
5,477
16,206
8,151
63,276
(3,374)
$ 59,902
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, 2015 and 2014, 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, 2015 and 2014. 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
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the Trust Preferred Securities issued by Trust Affiliate II was 2.01% and 1.74% as of December 31, 2015
and 2014 respectively.
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 1.89% and 1.62% as of December 31, 2015
and 2014 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
2015
2014
(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.
14. Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings
Total securities sold under agreement to repurchase are 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
2015
2014
(In Thousands, Except Percentages)
$ 57,188
$ 54,759
0.27%
54,632
60,272
0.28%
0.28%
54,541
61,154
0.29%
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to
facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at
the amount of cash received in connection with the transaction. We monitor levels on a continuous basis.
We may be required to provide additional collateral based on the fair value of the underlying securities.
Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.
The remaining contractual maturity of the securities sold under agreements to repurchase in the
consolidated balance sheets as of December 31, 2015 and 2014 is presented in the following tables.
Overnight and
Up to 30
Continuous
Days
30-90 Days
Total
Greater
than 90
Days
(In Thousands)
At December 31, 2015
Repurchase agreements:
Mortgage-backed securities – residential
$ 23,998
Collateralized mortgage obligations
Total borrowings
33,190
$ 57,188
$ -
-
$ -
$ -
-
$ -
$
$
Gross amount of recognized liabilities for repurchase agreements
$ 23,998
33,190
$ 57,188
$ 57,188
Overnight and
Up to 30
Continuous
Days
30-90 Days
Total
Greater
than 90
Days
(In Thousands)
At December 31, 2014
Repurchase agreements:
Mortgage-backed securities – residential
$ 16,570
Collateralized mortgage obligations
Total borrowings
38,189
$ 54,759
$ -
-
$ -
$ -
-
$ -
$
$
Gross amount of recognized liabilities for repurchase agreements
$ 16,570
38,189
$ 54,759
$ 54,759
-
-
-
-
-
-
As of December 31, 2015 and 2014, First Federal had the following undrawn 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, 2015 was
0.50%.
A $20 million line of credit with MUFG Union Bank, N.A. The rate on this line of credit is
Union Bank’s fed funds rate, which floats daily.
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14. Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings
Total securities sold under agreement to repurchase are 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
2015
2014
(In Thousands, Except Percentages)
$ 57,188
$ 54,759
0.27%
54,632
60,272
0.28%
0.28%
54,541
61,154
0.29%
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to
facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at
the amount of cash received in connection with the transaction. We monitor levels on a continuous basis.
We may be required to provide additional collateral based on the fair value of the underlying securities.
Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.
The remaining contractual maturity of the securities sold under agreements to repurchase in the
consolidated balance sheets as of December 31, 2015 and 2014 is presented in the following tables.
Overnight and
Continuous
Up to 30
Days
30-90 Days
Greater
than 90
Days
Total
At December 31, 2015
Repurchase agreements:
Mortgage-backed securities – residential
Collateralized mortgage obligations
Total borrowings
Gross amount of recognized liabilities for repurchase agreements
$ 23,998
33,190
$ 57,188
(In Thousands)
$ -
-
$ -
$ -
-
$ -
$
$
-
-
-
$ 23,998
33,190
$ 57,188
$ 57,188
Overnight and
Continuous
Up to 30
Days
30-90 Days
Greater
than 90
Days
Total
At December 31, 2014
Repurchase agreements:
Mortgage-backed securities – residential
Collateralized mortgage obligations
Total borrowings
Gross amount of recognized liabilities for repurchase agreements
$ 16,570
38,189
$ 54,759
(In Thousands)
$ -
-
$ -
$ -
-
$ -
$
$
-
-
-
$ 16,570
38,189
$ 54,759
$ 54,759
As of December 31, 2015 and 2014, First Federal had the following undrawn 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, 2015 was
0.50%.
A $20 million line of credit with MUFG Union Bank, N.A. The rate on this line of credit is
Union Bank’s fed funds rate, which floats daily.
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15. Other Non-interest Expense
The following is a summary of other non-interest 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
2015
2013
Years Ended December 31
2014
(In Thousands)
$ 3,622
1,820
1,762
743
466
1,102
594
142
395
6,611(1)
$ 2,947
1,563
2,323
1,584
449
1,241
531
172
915
5,610
$ 17,335
$ 3,359
1,752
1,783
1,064
457
699
459
207
334
5,402
$ 15,516
$ 17,257
1)
Includes $786,000 of costs associated with the termination of First Federal’s merger agreement
with FCB.
16. Post-retirement Benefits
First Defiance sponsors a defined benefit post-retirement 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 and 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 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, 2015, 2014 and 2013 are the
following amounts that have not yet been recognized in net periodic benefit cost:
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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
$
2015
53
593
646
(226)
December 31
2014
(In Thousands)
$
65
832
897
(314)
$
2013
78
477
555
(194)
$
420
$
583
$
361
The prior service cost and actuarial loss included in other comprehensive income and expected to
be recognized in net post-retirement benefit cost during the fiscal year-ended December 31, 2016 is
$12,000 ($8,000 net of tax) and $22,000 ($14,000 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
2015
2014
(In Thousands)
$
$
3,263
65
130
27
(204)
(166)
3,115
-
139
27
(166)
-
(3,115)
$
$
2,878
63
136
28
377
(219)
3,263
-
191
28
(219)
-
(3,263)
Net periodic post-retirement 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
2015
$
65
Years Ended December 31
2014
(In Thousands)
$
63
2013
$
82
130
47
242
(204)
-
(47)
(251)
136
35
234
377
-
(35)
342
118
46
246
(347)
60
(46)
(333)
$
(9)
$
576
$
(87)
The following assumptions were used in determining the components of the post-retirement
benefit obligation:
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- 107 -
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
2015
2014
2013
4.25%
4.25%
4.75%
4.25%
4.75%
4.00%
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
6.50%
7.00%
7.50%
5.00%
2019
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.
2016
2017
2018
2019
2020
2021 through 2025
Expected to be Paid
(In Thousands)
$ 164
192
198
213
214
1,179
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
2014
2015
One-Percentage-Point
Decrease
Year Ended December 31
2014
2015
(In Thousands)
Effect on total of service and interest cost
Effect on postretirement benefit obligation
$
27
376
$
26
417
$ (22)
(320)
$ (22)
(352)
The Company expects to contribute $164,000 before reflecting expected Medicare retiree drug subsidy
payments in 2016.
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.
In July 2013, Federal Reserve and the FDIC approved the final rules implementing the Basel Committee
on Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). Under the
final rules, which began for the Company and the bank on January 1, 2015 and are subject to a phase-in
period through January 1, 2019, minimum requirements will increase for both quantity and quality of
capital held by the Company and the Bank. The rules include a new minimum common equity Tier 1
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capital to risk-weighted assets ratio (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-
weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%.
Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which,
with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when
fully phased-in), which effectively results in a minimum total capital to risk-weighted assets ratio of
10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of
4.0%. Basel III also makes changes to risk weights for certain assets and off-balance sheet exposures.
The following schedule presents First Defiance consolidated and First Federal’s regulatory capital ratios
as of December 31, 2015 and 2014 (Dollars in Thousands):
December 31, 2015
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (1)
Consolidated
First Federal
Tier 1 Capital (1)
Consolidated
First Federal
$218,297
$236,625
10.71%
11.61%
$91,710
$91,678
$253,297
$236,625
11.46%
10.72%
$88,424
$88,267
Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$253,297
$236,625
12.43%
11.61%
$122,280
$122,237
Total Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$278,679
$262,007
13.67%
12.86%
$163,040
$162,983
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$132,424
N/A
$110,334
N/A
$162,983
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$203,729
N/A
10.0%
(1) Core capital is computed as a percentage of adjusted total assets of $2.21 billion for consolidated and the Bank.
Risk-based capital is computed as a percentage of total risk-weighted assets of $2.04 billion for consolidated
and the Bank.
December 31, 2014
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Tier 1 Capital (1)
Consolidated
First Federal
$250,847
$238,221
11.89%
11.31%
$84,397
$84,278
Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$250,847
$238,221
13.89%
13.21%
$72,213
$72,136
Total Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$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 for consolidated and the Bank.
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.
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Management believes that, as of December, 31, 2015, 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, 2015, 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 did not have prompt corrective action capital requirements as of December 31, 2015.
Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various
regulatory restrictions. First Federal paid $29.0 million in dividends to First Defiance in 2015 and $21.0
million in 2014. First Federal can initiate dividend payments equal to its net profits (as defined by
statute) for 2014 and 2015 plus 2016 net profits. Because First Federal already paid out its 2014 and
2015 net profits in dividends to First Defiance, during 2016, First Federal can only declare dividends
from its 2016 net profits. First Insurance paid $900 thousand in dividends to First Defiance in 2015 and
$1.2 million in dividends in 2014. First Defiance Risk Management paid $1.0 million in dividends to
First Defiance in 2015 and none in 2014.
18. Income Taxes
The components of income tax expense are as follows:
Current:
Federal
State and local
Deferred
2015
Years Ended December 31
2014
(In Thousands)
2013
$
$
11,299
146
(35)
11,410
$
$
9,198
144
(179)
9,163
$
$
7,751
9
1,518
9,278
The provision for income taxes differs from that computed at the statutory corporate tax rate as follows:
2015
Years Ended December 31
2014
(In Thousands)
11,709
$
$
13,240
2013
95
(1,219)
(255)
(415)
(36)
11,410
$
94
(1,152)
(816)
(390)
(282)
9,163
$
11,030
4
(1,043)
(449)
(415)
151
9,278
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
$
$
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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
Accrued vacation
Allowance for real estate held for sale losses
Deferred loan origination fees and costs
Accrued bonus
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 liability
December 31
2015
2014
(In Thousands)
$
$
8,884
1,316
1,621
261
644
269
388
675
794
14,852
2,279
5,527
3,237
1,268
422
165
2,176
655
-
15,729
(877)
$
$
8,743
1,149
1,629
524
623
333
311
509
972
14,793
2,299
5,019
3,181
1,714
270
315
2,528
622
21
15,969
(1,176)
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, 2015.
Retained earnings at December 31, 2015 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, 2015 was approximately $3.85 million.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (In
Thousands):
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
$
$
65
-
-
-
(65)
-
-
In 2014 and 2015, there were no unrecognized tax benefits.
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, 2015 and 2014 was zero, and the amount accrued for interest
and penalties (net of the related federal tax effect) at December 31, 2015 and 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 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 2011.
The Company currently operates primarily in the states of Ohio and Michigan, which tax financial
institutions based on their equity rather than their income.
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.
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.
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 $892,000, $919,000
and $868,000 for the years ended December 31, 2015, 2014 and 2013, 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 $78,000, $167,000 and ($35,000) of expense
recorded for the years ended December 31, 2015, 2014 and 2013, respectively, with a liability of
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$970,000, $892,000 and $724,000 for future benefits recorded at December 31, 2015, 2014 and 2013,
respectively. The discount rate remained at 4.25% as of December 31, 2015.
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 are 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, 2015, 86,220 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 2013, the Company approved a 2013 Short-Term Equity Incentive plan (a “STIP”) and a 2013
Long-Term Equity Incentive Plan (a “LTIP”) for selected members of management. Under the 2013
STIP the participants could 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 and a total of 5,621 RSU’s were issued to the participants in the first quarter of 2015
for the year two performance period ended December 31, 2014. The remaining awards for the third and
final performance period ending December 31, 2015 will be distributed during the first quarter of 2016.
In March 2014, the Company approved a 2014 STIP and a 2014 LTIP for selected members of
management.
Under the 2014 STIP, the participants could 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
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- 113 -
amount of benefits under the 2014 STIP were determined as of December 31, 2014 and was paid out in
cash in the first quarter of 2015. The participants were 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
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 common shares
in the first quarter of 2017. The participants are required to be employed on the day of payout in order to
receive such payment.
In 2015, the Company approved a 2015 STIP and a 2015 LTIP for selected members of
management.
Under the 2015 STIP, the participants could 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 2015 STIP was determined as of December 31, 2015
and will be paid out in cash in the first quarter of 2016. The participants are required to be
employed on the day of payout in order to receive such payment.
Under the 2015 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 24,757 RSU’s to the participants in the
2015 LTIP effective January 1, 2015, which represents the maximum target award. The amount
of benefit under the 2015 LTIP will be determined individually at the end of the 36 month
performance period ending December 31, 2017. The awards will vest at the end of the
performance period ending December 31, 2017. The benefits earned under the 2015 LTIP will be
paid out in common shares in the first quarter of 2018. The participants are required to be
employed on the day of payout in order to receive such payment.
In 2015, the Company also granted 5,160 restricted shares to directors and employees. 2,160
shares were issued to directors and have a one-year vesting period. 3,000 shares were issued to
employees with a 3 year vesting period.
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, 2015 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, 2015
2.04%
10.00 years
42.00%
2.10%
Weighted
Average
Remaining
Contractual
Aggregate
Intrinsic
Value
Outstanding
Exercise Price
Term (in years)
(in 000’s)
Following is activity under the plans during 2015:
Stock options:
Options outstanding, January 1, 2015
Forfeited or cancelled
Exercised
Granted
Options outstanding, December 31, 2015
Vested or expected to vest at
December 31, 2015
Exercisable at December 31, 2015
Options
173,720
(5,100)
(88,650)
6,250
86,220
86,220
71,570
Weighted
Average
$
$
$
$
20.80
25.36
21.91
32.94
20.27
20.27
18.37
3.41
3.41
2.36
$
1,510
$ 1,510
$
1,389
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
$ 13.13
$ 10.79
Year Ended December 31
2015
2014
2013
(In Thousands, except per share amounts)
$ 1,069
$ 542
$ 310
1,469
160
963
103
350
54
-
As of December 31, 2015, there was $137,000 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 3.6 years.
At December 31, 2015, 74,545 RSU’s were outstanding. Compensation expense is recognized over the
performance period based on the achievement of established targets. Total expense of $1.1 million,
$541,000 and $1.0 million was recorded during the years ended December 31, 2015, 2014 and 2013,
respectively, and approximately $556,000 and $739,000 is included within other liabilities at December
31, 2015 and 2014, respectively, related to the STIPs and LTIPs.
Restricted Stock Units
Stock Grants
Weighted-Average
Grant Date
Fair Value
Unvested Shares
Shares
Unvested at January 1, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2015
91,812
24,757
(12,846)
(29,178)
74,545
$ 21.00
32.30
17.20
19.48
$ 25.86
Shares
5,767
18,006
(12,846)
-
10,927
Weighted-Average
Grant Date
Fair Value
$ 25.97
22.75
17.20
-
$ 30.98
- 114 -
- 114 -
- 115 -
Expected average risk-free rate
Expected average life
Expected volatility
Expected dividend yield
Twelve Months ended
December 31, 2015
2.04%
10.00 years
42.00%
2.10%
Following is activity under the plans during 2015:
Stock options:
Options outstanding, January 1, 2015
Forfeited or cancelled
Exercised
Granted
Options outstanding, December 31, 2015
Vested or expected to vest at
December 31, 2015
Exercisable at December 31, 2015
Options
Outstanding
173,720
(5,100)
(88,650)
6,250
86,220
$
Weighted
Average
Exercise Price
20.80
25.36
21.91
32.94
20.27
$
86,220
71,570
$
$
20.27
18.37
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in 000’s)
3.41
3.41
2.36
$
1,510
$ 1,510
1,389
$
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
2013
2014
2015
(In Thousands, except per share amounts)
$ 542
963
103
$ 10.79
$ 1,069
1,469
160
$ 13.13
$ 310
350
54
-
As of December 31, 2015, there was $137,000 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 3.6 years.
At December 31, 2015, 74,545 RSU’s were outstanding. Compensation expense is recognized over the
performance period based on the achievement of established targets. Total expense of $1.1 million,
$541,000 and $1.0 million was recorded during the years ended December 31, 2015, 2014 and 2013,
respectively, and approximately $556,000 and $739,000 is included within other liabilities at December
31, 2015 and 2014, respectively, related to the STIPs and LTIPs.
Restricted Stock Units
Stock Grants
Unvested Shares
Shares
Weighted-Average
Grant Date
Fair Value
Unvested at January 1, 2015
Granted
Vested
Forfeited
Unvested at December 31, 2015
91,812
24,757
(12,846)
(29,178)
74,545
$ 21.00
32.30
17.20
19.48
$ 25.86
Shares
5,767
18,006
(12,846)
-
10,927
Weighted-Average
Grant Date
Fair Value
$ 25.97
22.75
17.20
-
$ 30.98
- 115 -
- 115 -
The maximum amount of compensation expense that may be earned for the 2015 STIP and the 2013,
2014 and 2015 LTIPs at December 31, 2015 is approximately $2.7 million in the aggregate. However,
the estimated expense expected to be earned as of December 31, 2015 based on the performance
measures in the plans, is $1.9 million of which $571,000 was unrecognized at December 31, 2015 and
will be recognized over the remaining performance period.
As of December 31, 2015 and 2014, 186,079 and 193,067 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
Statements of Income
December 31
2015
2014
(In Thousands)
$
$
$
$
12,919
287,436
15,109
1,191
316,655
36,083
375
280,197
316,655
$
$
$
$
9,067
291,485
14,424
1,174
316,150
36,083
562
279,505
316,150
2015
Years Ended December 31
2014
(In Thousands)
2013
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
(Distributions in excess of) undistributed equity in earnings of
subsidiaries
Net income
Comprehensive income
$
30,900 $
1
(613)
1
(588)
29,701
(397)
30,098
22,200 $
-
(587)
2
(861)
20,754
(485)
21,239
4,500
18
(601)
1
(853)
3,065
(415)
3,480
(3,675)
26,423 $
25,931 $
3,053
24,292 $
27,861 $
18,755
22,235
18,506
$
$
- 116 -
- 116 -
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:
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
Purchase stock warrants
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
2015
Years Ended December 31
2014
(In Thousands)
2013
$ 26,423
$ 24,292
$ 22,235
3,675
(205)
29,893
-
-
(8,436)
(7,159)
1,469
64
(11,979)
(26,041)
3,852
9,067
(3,053)
(18,755)
59
21,298
-
-
(15,519)
(5,937)
921
76
-
(20,459)
839
8,228
176
3,656
1,002
1,002
(1,821)
(3,907)
350
64
-
(5,314)
(656)
8,884
Cash and cash equivalents at end of year
$ 12,919
$ 9,067
$ 8,228
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
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:
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- 117 -
• 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.
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.
- 118 -
- 118 -
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).
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, 2015
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
$ -
-
-
-
1
-
-
-
$
$
2,994
64,654
1,620
71,799
-
4,977
90,390
558
-
-
-
-
-
-
-
$
2,994
64,654
1,620
71,799
1
4,977
90,390
558
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- 119 -
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
Collateralized mortgage obligations
Trust preferred stock
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Mortgage banking derivative - asset
Mortgage banking derivative - liability
$ - $ 980 $ - $ 980
59,856
1,839
81,121
1
6,992
-
-
-
1
1,989
59,856
1,839
81,121
-
5,003
-
-
-
-
-
-
-
-
88,532
351
24
-
-
88,532
351
24
There was one corporate bond security that had recent documented trade activity resulting in that security
being transferred from Level 2 to Level 1 during the period ended December 31, 2014. This security was
then transferred back to Level 2 during the period ended December 31, 2015 due to no recent
documented trades on this security.
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, 2015 and 2014:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
(In Thousands)
2015
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
(329)
993
-
(1,246)
-
-
$
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
2015
$ -
2014
$ 24
2013
$ 83
Other changes in fair value
-
(24)
(420)
Total
$ -
$ -
$ (337)
- 120 -
- 120 -
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, 2015
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
$ -
-
-
-
-
-
-
-
-
$ -
-
-
$ 398
91
4,575
-
$ 398
91
4,575
-
-
-
872
-
-
-
82
5,146
-
-
280
280
82
5,146
872
-
280
280
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
- 121 -
- 121 -
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of
December 31, 2015, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair
Value
Valuation Technique
Unobservable Inputs
(Dollars in Thousands)
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Applies to all classes
$5,146 Appraisals which utilize
net
comparison,
sales
income and cost approach
$280 Appraisals which utilize
net
sales
income and cost approach
comparison,
Discounts for collection
issues and changes
in
market conditions
Discounts for changes in
market conditions
Range of
Inputs
Weighted
Average
10-30%
11%
30%
30%
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
Unobservable Inputs
(Dollars in Thousands)
Range of
Inputs
Weighted
Average
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
CRE
$7,791 Appraisals which utilize
net
comparison,
sales
income and cost approach
$739 Appraisals which utilize
net
sales
income and cost approach
comparison,
Discounts for collection
issues and changes
in
market conditions
10-30%
11%
Discounts for changes in
market conditions
20-40%
28%
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a fair value of $5.1 million, with an $8,000 valuation allowance and a fair value of
$7.8 million with a valuation allowance of $19,000 at December 31, 2015 and 2014, respectively. A
provision recovery of $580,000 and a provision expense of $3.0 million and $3.2 million for the years
ended December 31, 2015, 2014 and 2013, respectively, 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
$872,000 with a valuation allowance of $645,000 and a fair value of $1.0 million with a valuation
allowance of $911,000 at December 31, 2015 and 2014, respectively. A recovery of $266,000, $116,000
and $1.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, 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 $297,000,
$251,000 and $740,000 for the years ended December 31, 2015, 2014 and 2013, respectively, which was
recorded directly as an adjustment to current earnings through non-interest expense.
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- 122 -
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of
December 31, 2015, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair
Value
Valuation Technique
Unobservable Inputs
Inputs
(Dollars in Thousands)
Range of
Weighted
Average
Impaired Loans- Applies to
$5,146 Appraisals which utilize
Discounts for collection
10-30%
11%
sales
comparison,
net
issues and changes
in
income and cost approach
market conditions
all loan classes
Real estate held for sale –
Applies to all classes
$280 Appraisals which utilize
Discounts for changes in
30%
30%
sales
comparison,
net
market conditions
income and cost approach
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
Unobservable Inputs
Inputs
(Dollars in Thousands)
Range of
Weighted
Average
Impaired Loans- Applies to
$7,791 Appraisals which utilize
Discounts for collection
10-30%
11%
all loan classes
CRE
sales
comparison,
net
issues and changes
in
income and cost approach
market conditions
sales
comparison,
net
market conditions
income and cost approach
Real estate held for sale –
$739 Appraisals which utilize
Discounts for changes in
20-40%
28%
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a fair value of $5.1 million, with an $8,000 valuation allowance and a fair value of
$7.8 million with a valuation allowance of $19,000 at December 31, 2015 and 2014, respectively. A
provision recovery of $580,000 and a provision expense of $3.0 million and $3.2 million for the years
ended December 31, 2015, 2014 and 2013, respectively, related to these impaired loans was included in
Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of
$872,000 with a valuation allowance of $645,000 and a fair value of $1.0 million with a valuation
allowance of $911,000 at December 31, 2015 and 2014, respectively. A recovery of $266,000, $116,000
and $1.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, was included in
earnings.
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 $297,000,
$251,000 and $740,000 for the years ended December 31, 2015, 2014 and 2013, respectively, which was
recorded directly as an adjustment to current earnings through non-interest expense.
- 122 -
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, 2015 and December 31, 2014. 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 asset.
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, 2015.
- 123 -
- 123 -
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, 2015
(In Thousands)
Total
Level 1
Level 2
Level 3
Carrying
Value
$
79,769
236,678
13,801
$
79,769
236,680
N/A
$ 79,769 $ - $ -
-
236,679
N/A
N/A
1
N/A
1,782,358
6,171
1,784,998
6,171
-
7
5,899
846
1,779,099
5,318
$ 1,836,137
$ 1,840,464
$ 420,691 $ 1,419,773
$ -
59,902
59,653
57,188
36,083
57,188
35,305
-
-
-
59,653
57,188
-
-
-
35,305
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
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 $14.9 million and $7.4 million of interest rate lock commitments at December 31, 2015
and 2014, respectively. There were $19.9 million and $11.6 million of forward commitments for the
future delivery of residential mortgage loans at December 31, 2015 and 2014, respectively.
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- 124 -
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, 2015
(Liabilities)
December 31, 2014
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
$
558 $
- $
558 $
351 $
24 $
327
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,
2015
2014
2013
Derivatives not designated as hedging
instruments
(In Thousands)
Mortgage Banking Derivatives – Gain (Loss)
$ 231
$ 27
$ (526)
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 2015.
- 125 -
- 125 -
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
2015
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for
$
19,757
1,567
18,190
120
(In Thousands, Except Per Share Amounts)
$
$
$
20,037
1,672
18,365
-
20,266
1,733
18,533
(27)
loan losses
Gain on sale, call or write-down
of securities
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
18,070
18,365
-
8,281
16,897
9,454
2,853
6,601
$
-
7,809
16,796
9,378
2,815
6,563
18,560
-
7,982
16,848
9,694
2,998
6,696
$
$
$
20,776
1,809
18,967
43
18,924
22
7,709
17,348
9,307
2,744
6,563
Earnings per common share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
$ 0.71
$ 0.69
$ 0.71
$ 0.70
$ 0.72
$ 0.72
$ 0.72
$ 0.71
9,234
9,611
9,268
9,349
9,238
9,322
9,146
9,235
2014
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
Earnings per common share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Amounts)
$
$
18,474
1,678
16,796
103
18,774
1,645
17,129
446
$
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
$
$
19,286
1,623
17,663
406
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
$ 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
- 126 -
- 126 -
25. 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, 2015:
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
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized
during the period
Reclassification adjustment for net amortization and deferral on
defined benefit postretirement medical plan
in
compensation and benefits)
Total other comprehensive income
(included
Before Tax
Amount
Tax Expense
(Benefit)
(In Thousands)
Net of Tax
Amount
$
(22)
(985) $ (345)
(7)
$
204
72
47
$
16
(756) $ (264)
$
(640)
(15)
132
31
(492)
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 losses included in net income
Defined benefit postretirement medical plan:
Net loss on defined benefit postretirement medical plan realized
during the period
Reclassification adjustment for net amortization and deferral on
defined benefit postretirement medical plan
in
compensation and benefits)
Total other comprehensive loss
(included
Before Tax
Amount
Tax Expense
(Benefit)
(In Thousands)
Net of Tax
Amount
6,763
$
(932)
$ 2,320
(280)
$
4,443
(652)
(377)
(132)
(245)
35
5,610
$
12
$ 2,041
$
23
3,569
- 127 -
- 127 -
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Accumulated
Securities
Available
For Sale
Post-
Other
retirement Comprehensive
Benefit
Income
Balance January 1, 2015
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
$
4,697
$
(583 ) $
(In Thousands)
(640 )
132
(15 )
31
Net other comprehensive income during period
(655 )
163
Balance December 31, 2015
$
4,042
$
(420 ) $
Balance January 1, 2014
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated other
$
906
$
(361 ) $
4,443
(245 )
comprehensive income
(652 )
23
Net other comprehensive loss during period
3,791
(222 )
4,114
(508 )
16
(492 )
3,622
545
4,198
(629)
3,569
Balance December 31, 2014
$
4,697
$
(583 ) $
4,114
- 128 -
- 128 -
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, 2015. 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, 2015, 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, 2015 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 by this item relating to our directors, nominees for directorship and
executive officers is incorporated herein by reference from the section captioned “Composition of the
Board” under the heading “PROPOSAL 1 – Election of Directors” and the section immediately following
the heading “EXECUTIVE OFFICERS” in the definitive proxy statement to be filed on or about March
10, 2016 for the annual meeting of First Defiance shareholders to be held on April 19, 2016 (the “Proxy
Statement”). Information regarding compliance with Section 16(a) of the Securities Act of 1943 and our
Audit Committee required by this item is incorporated herein by reference from the sections respectively
captioned, “Board Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the
Proxy Statement. There have been no material changes to the procedures by which shareholders may
recommend nominees to the board of directors.
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 regarding director compensation is set forth under the section captioned
“Composition of the Board” under the heading “PROPOSAL 1 – Election of Directors” of the Proxy
Statement, and is incorporated herein by reference. Executive compensation information has been
- 129 -
- 129 -
provided under the headings “COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE
COMPENSATION” in the Proxy Statement, and is incorporated herein by reference.
The Compensation Committee Report and information related to compensation committee
interlocks and insider participation have been respectively set forth under the section captioned
“Compensation Committee Interlocks and Insider Participation” following the heading “PROPOSAL 1 –
Election of Directors” and under the section immediately following the heading “COMPENSATION
COMMITTEE REPORT” in the Proxy Statement, and are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information regarding security ownership of certain beneficial owners and management
and information relating thereto is set forth in the section under the heading “Beneficial Ownership” in
the Proxy Statement, and is incorporated herein by reference.
Equity Compensation Plans
The following table provides information as of December 31, 2015 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
(a)
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a)
(c)
86,220
$20.27
186,079
Plan Category
Equity Compensation Plans Approved by
Security Holders
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item, including related transactions and director independence,
is set forth in the section following the heading “RELATED PERSON TRANSACTIONS” and the
section captioned “Composition of the Board” following the heading “PROPOSAL 1 – Election of
Directors” in the Proxy Statement, and are both incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item is set forth under the section captioned “Audit Fees”
following the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” in the Proxy
Statement, and is incorporated herein by reference.
- 130 -
- 130 -
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, 2015
(B)
and 2014
Consolidated Statements of Income for the years ended December 31, 2015,
2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31,
2015, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the years ended
December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31,
2015, 2014 and 2013
(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 10.23.
- 131 -
- 131 -
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 29, 2016
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
29, 2016.
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
- 132 -
- 132 -
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
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
10.1
Form of Incentive Stock Option Award Agreement under 2001 Stock
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Option and Incentive Plan
2001 Stock Option and Incentive Plan
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 Stock Option and
Incentive Plan
First Federal Executive Group Life Plan – Post Separation
2010 Equity Incentive Plan
First Defiance Deferred Compensation Plan
Form of Restricted Stock Award Agreement (with TARP Limitations)
2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement
2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement
First Amendment to First Defiance Financial Corp. 2010 Equity Incentive
Plan
10.16
10.17
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)
10.18
First Defiance Financial Corp. Long-Term Restricted Stock Unit Award
Agreement (2012 Long Term Incentive)
10.19
10.20
10.21
10.22
10.23
21
23.1
31.1
Employment Agreement with Donald P. Hileman
Employment Agreement with Kevin T. Thompson
Form of Restricted Stock Award Agreement
Consulting Agreement with William J. Small
Change of Control and Non-Solicitation Agreement with John R. Reisner
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
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(1)
(1)
(7)
(27)
(11)
(2)
(4)
(5)
(6)
(8)
(9)
(10)
(3)
(13)
(14)
(22)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(23)
(24)
(25)
(26)
(12)
(12)
(12)
(12)
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
(12)
(12)
(12)
(12)
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.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
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 exhibit 10.2 in Registrant’s 2004 Form 10-K (Film No.
05685500)
Incorporated herein by reference to exhibit 10.16 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 10.4 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 10-Q filed November 2, 2010 (Film No.
101158262)
Incorporated herein by reference to Annex A to 2010 Proxy Statement (Film No. 10693151)
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed March 4, 2011 (Film No.
11664601)
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 10.1 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 10.1 in Form 8-K filed December 23, 2005 (Film No.
051284175)
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(23)
(24)
(25)
(26)
(27)
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
Incorporated herein by reference to like numbered exhibit in Registrant’s 2014 Form 10-K (Film
No. 15655545)
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to our shareholders
In 2015, we accomplished our fourth
consecutive year of record earnings, once
again placing First Defiance Financial
Corp. in a promising position for 2016. Our
focus on key areas to improve financial
performance and increase shareholder
value will continue as we build on this
momentum. These areas include core
balance sheet growth, particularly loan
and deposit growth, overall revenue
growth, expense control and improved
asset quality. We enter 2016 in a still
very challenging rate environment. The
continuation of lower rates in 2016 is a
broad indicator of weaker economic
growth. While we are seeing clear signs
of a strengthening economy, the pace
and level of improvement are less clear.
The Federal Reserve has taken action
by raising rates in 2015 for the first time
in seven years, and we expect that rates
will rise again in 2016 indicating more
confidence that we are in for a period of
sustainable economic growth. With the
strength, structure and risk profile of our
balance sheet, we believe that we are
prepared for the changes ahead. We will
continue to overcome challenges with
the expected rise in rates by the Federal
Reserve, as we have done in 2015.
It’s important to reflect on the excellent
progress made in 2015 toward achieving
our strategic goals. We were especially
pleased by the significant improvement
in credit quality reflected by lower charge
offs and overall lower non-performing
assets. With our encouraging recent
performance, balanced approach and
long-term focus on shareholder value, we
look to constantly drive our performance
through
initiatives that will help us
obtain our goal of being a consistently
high-performing community bank.
10K REPORT
This year, we accomplished many
important
including
initiatives
enhancements to electronic and mobile
capabilities, giving our customers more
choices on how they bank with us.
We are delighted with the increases in
both electronic and mobile transactions,
including online account opening,
mobile deposits, electronic payments
and use of mobile wallet features like
Apple Pay®. This gives us confidence that
we are dedicating the proper resources to
provide our clients with the technology
institution.
in a financial
they desire
The digital delivery environment
is
changing at an accelerated pace, and
we are committed to meeting customer
for quality products and
demands
services by being a technology leader
amongst community banks. We strive
to make banking with First Federal Bank
a hassle-free experience from anywhere
and at any time.
Donald P. Hileman
President & CEO
this
institution
is to be the premier
Our mission
financial services
in every
market we serve, while generating
a solid return on the investment of
shareholders. We believe we
our
through our
can accomplish
commitment not only
the
to
communities we serve but through
accuracy,
efficiency,
innovation,
consistency and friendliness. As an
organization, with $2.3 billion in assets
and a business philosophy
focused
on building relationships, we are in a
unique position to offer a complete
array of products and services, while
retaining flexibility to react to our
customers’ needs. Our current leadership
team has the experience and skills to
meet the opportunities and challenges
head on in the next year. We appreciate
in
and
your
First Defiance Financial Corp. We
believe that our partnership with our
shareholders, customers, employees
and communities makes us all stronger.
We truly are better together.
investment
interest
Donald P. Hileman
President & CEO
shareholders information
12/31/14
12/31/15
Defiance
company profile
Annual Meeting
In order to
increase shareholder attendance
the Annual Meeting of
and participation,
Shareholders will be conducted virtually at
2:00 p.m. on Tuesday, April 19, 2016. Shareholders
may access the Annual Meeting by going to
Financial
www.virtualshareholdermeeting.com/fdef2016
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.
Corp.,
First
headquartered in Defiance, Ohio, is the
holding company for First Federal Bank
of the Midwest and First Insurance Group.
First Federal Bank operates 34 full-service
branches and 41 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 six
offices throughout northwest Ohio.
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350
300
250
200
150
100
50
Total Return Performance
Total Return Performance
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
acquired
Since 2003, First Defiance has acquired
three banking offices, opened eight
de novo offices,
four
insurance agencies and completed
Inc. based
acquisitions of ComBanc,
in Delphos, Ohio; Genoa Savings and
Loan based in Genoa, Ohio; and Pavilion
12/31/12
12/31/13
Bancorp, based in Adrian, Michigan.
12/31/11
0
12/31/10
First
in 1993.
SNL Bank NASDAQ
SNL Midwest Thrift
First Defiance Financial Corp.
NASDAQ Composite
Price Range
Year Ended December 31, 2015
safe harbor statement
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
1-844-318-0128 or 1-720-358-3594
shareholder@broadridge.com
Stock Transfer Agent
Shareholders with questions concerning
the
transfer of shares,
lost certificates, dividend
Securities Listing
Statements contained in this Annual
receipt of
payments, dividend
reinvestment,
Report may not be based on
First Defiance Financial Corp. common stock trades on the
Founded in the 1920s as Northwest
multiple dividend checks, duplicate mailings or
historical facts and are “forward-looking
NASDAQ Global Select Market under the symbol FDEF. As of
Savings,
Federal Bank was
changes of address should contact:
February 22, 2016, there were approximately 1,851 stockholders of
statements” within the meaning of
chartered in 1935 as a federal mutual
record and 8,938,777 shares outstanding.
Section 27A of the Securities Act of
savings and loan company. First Federal
1933, as amended, and Section 21B of
Dividend Policy
Bank converted to a mutual holding
the Securities Act of 1934, as amended.
company and issued its first stock to the
The First Defiance Financial Corp. Board reviews and determines on a
results could vary materially
Actual
In
public and employees
quarterly basis whether to declare a dividend. Dividends declared in
depending on risks and uncertainties
September 1995, First Federal Bank
2015 totaled $0.775 per share.
inherent in general and local banking
converted to a full stock company,
Dividend Reinvestment Plan
and insurance conditions, competitive
trading stock on the NASDAQ national
factors specific to markets in which the
Shareholders may automatically reinvest dividends in additional
market under the ticker symbol FDEF. At
First Defiance Financial Corp. common stock
the
Company and its subsidiaries operate,
the same time, First Defiance Financial
Dividend Reinvestment Plan, which also provides for purchase by
future
legislative
levels,
Corp. was founded as the holding
voluntary cash contributions. For additional information, please
regulatory decisions or capital
and
company for First Federal Bank. In 1998,
contact: Broadridge Corporate Issuer Solutions at 1-844-318-0128
market
The Company
an additional business line was added
or 1-720-358-3594.
assumes no responsibility to update this
with the acquisition of an insurance
information. For more details, please
Auditors
agency, now known as First Insurance
refer to the Company’s SEC filings,
Group. The Bank’s name was changed to
Crowe Horwath LLP
including its most recent Annual Report
First Federal Bank of the Midwest in 1999,
330 East Jefferson Boulevard
on Form 10-K and quarterly reports on
to better reflect our community banking
South Bend, Indiana 46624
Form 10-Q.
business strategy.
General Counsel
Vorys, Sater, Seymour & Pease LLP
301 East Fourth Street, Suite 3500
Cincinnati, Ohio 45202
HIGH
$28.23
HIGH
$34.64
Year Ended December 31, 2014
Second Quarter
Second Quarter
Fourth Quarter
Fourth Quarter
Third Quarter
Third Quarter
interest rate
First Quarter
First Quarter
conditions.
$32.42
$26.50
$26.99
$26.95
$29.05
$35.03
$24.24
$35.01
through
$29.00
$29.00
$42.46
$38.21
$35.70
$39.95
LOW
LOW
Apple Pay® is a registered trademark of Apple Inc.
BACK COVER
First Defiance Financial Corp.
601 Clinton Street
Defiance, OH 43512
419-782-5104
Fdef.com
First Federal Bank of the Midwest
601 Clinton Street
Defiance, OH 43512
419-782-5015
First-Fed.com
First Insurance Group
511 Fifth Street
Defiance, OH 43512
419-784-5431
Firstinsurancegrp.com
For investor relations information, visit Fdef.com
FRONT COVER
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FIRST DEFIANCE
FINANCIAL CORP.
ANNUAL REPORT