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
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First Defiance Financial Corp.
2016 Annual Report
C
o
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p
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For investor relations information, visit Fdef.com
to our shareholders
shareholders information
After a strong performance for 2016,
I am proud to celebrate our fourth consecutive
year of record earnings. As we build upon the
momentum gained over the last several years,
we have aligned our strategic efforts through
identified core initiatives and key areas that
will drive improved financial performance and
greater shareholder value. We have opportunity
for core balance sheet growth and will focus
on loan and deposit growth, in addition to
overall revenue growth, expense control and
improved asset quality.
Continued improvement in asset quality over
the course of 2016 was encouraging, and we
look to carry that trend throughout 2017. We
experienced solid growth in both loans and
deposits in 2016 by concentrating on attracting
new relationships and strengthening current
ones. As for our outlook on 2017, the economy
continues to show signs of improvement,
with the likelihood of several rate increases
by the Federal Reserve; we are confident in
our position to implement our strategy in an
upward rate environment. We aim to carry our
success forward and target strategic objectives
long-term goals.
to help us achieve our
Our first objective is to continue to refine
our plan for growth as we address new
Donald P. Hileman
President & CEO
opportunities for branch expansion with a
concentration on our metro market areas. In
2016, we expanded our presence in Toledo,
Ohio with two offices in low-to-moderate
income areas near downtown. We have
also enhanced our Columbus, Ohio Loan
Production Office to a full-service branch
and are eager to serve our customers with a
broadened line of products and services. In
addition, we completed our acquisition of
Commercial Bancshares, Inc. headquartered
in Upper Sandusky, Ohio and look forward to
the opportunity to provide these communities
with smart banking solutions.
Another identified objective is to continue
talent development and retention of our
workforce. We remain confident in our people
working hard to adapt to overcome obstacles,
meet our customers’ expectations and execute
our strategic plans for continued success.
By recruiting and developing high-performing
innovation,
individuals, we expect greater
collaboration and efficiency
throughout
our organization.
In addition, we are focusing our efforts on
leveraging technology to strengthen our
organization’s productivity and utilize data
to customize solutions for our customers.
Additionally, we will explore banking
enhancements that will attract new customers
and improve the banking experience for our
existing customers in a way that matches
our overall risk profile. Our expansions in
digital banking offerings have been key to
differentiating ourselves
from competition
and positioning ourselves as a technology
leader amongst community banks. Recent
include a new, optimized
enhancements
website, tablet banking app for personal and
business accounts, expanded mobile wallet
capabilities with the addition of Samsung
Pay and Android PayTM, improvements made
in our online banking platform and biometric
security for our mobile app with Touch ID.
We will continue to invest in opportunities
that keep pace with a rapidly changing
digital environment.
of our customers. As FinTech and other financial
to arise, consumers
institutions continue
have more options than ever when it comes
to conducting their finances. We want to be
their financial institution of choice. Thus, it is
important for us to understand our customers’
needs, eliminate friction and build meaningful
relationships as a people-focused organization.
We believe that being a community bank
makes a difference to our customers and the
communities we serve. Last year, we hosted
our third annual Pay it Forward Day. We not
only supported our nearly 600 employees with
$10 to perform a random act of kindness, we
also funded 13 Pay It Forward ideas submitted
by our community members. First Federal
Bank and First Insurance Group will continue
to embrace our community-minded roots by
serving the community we live and work in and
supporting life-changing organizations.
Our Mission is to be a high performing
community bank and agency so that our
engaged and valued employees provide smart
solutions to our clients and communities. To do
so, we have refreshed our core values to reflect
this mission. We aim to develop our Trusted
Advisors to serve others by being: people
focused, performance driven, community
minded, innovative and trustworthy. These key
statements detail our purpose as a community-
based organization, which above all else is
to provide our clients and community with
solutions that fit their needs and add value to
their lives.
I thank you for your continued confidence in
First Defiance. We have grown to approximately
$2.8 billion in assets by building upon a
smart decisions, careful
foundation of
assessments and strong relationships. Our
experienced leadership team has positioned us
to meet opportunities and challenges that 2017
will bring. We believe the partnership with our
shareholders, customers, and employees make
us all stronger. We truly are better together.
Also in 2017, we have structured a team
dedicated to gaining a deeper understanding
Donald P. Hileman
President & CEO
Annual Meeting
In order to increase shareholder attendance and participation, the Annual Meeting of Shareholders will be conducted virtually at 1:00 p.m. on
Tuesday, May 9, 2017. Shareholders may access the Annual Meeting by going to www.virtualshareholdermeeting.com/fdef2017
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.
Stock Transfer Agent
Shareholders with questions concerning the transfer of shares, lost
certificates, dividend payments, dividend reinvestment, receipt of multiple
dividend checks, duplicate mailings or changes of address should contact:
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
1-844-318-0128 or 1-720-358-3594
shareholder@broadridge.com
Securities Listing
First Defiance Financial Corp. common stock trades on the
NASDAQ Global Select Market under the symbol FDEF. As
of March 13, 2017, there were approximately 2,813
stockholders of record and 10,138,581
shares outstanding.
Dividend Policy
The First Defiance Financial Corp. Board reviews and
determines on a quarterly basis whether to declare a
dividend. Dividends declared in 2016 totaled $0.880 per share.
Dividend Reinvestment Plan
Shareholders may automatically reinvest dividends in
additional First Defiance Financial Corp. common stock
through the Dividend Reinvestment Plan, which also provides
for purchase by voluntary cash contributions. For additional
information, please contact: Broadridge Corporate Issuer
Solutions at 1-844-318-0128 or 1-720-358-3594.
Auditors
Crowe Horwath LLP
330 East Jefferson Boulevard
South Bend, IN 46624
General Counsel
Vorys, Sater, Seymour & Pease LLP
301 East Fourth Street, Suite 3500
Cincinnati, OH 45202
Total Return Performance
Total Return Performance
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12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
Price Range
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended
December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$40.98
$41.21
$46.83
$52.31
LOW
$34.80
$37.53
$35.90
$36.91
HIGH
LOW
$34.64
$38.21
$39.95
$42.46
$29.05
$32.42
$35.03
$35.01
company profile
First Defiance Financial Corp., headquartered in Defiance, Ohio, is the holding company
for First Federal Bank of the Midwest and First Insurance Group. First Federal Bank operates
43 full-service branches and numerous ATMs in northwest and central Ohio, southeast
Michigan and northeast Indiana. First Insurance Group is a full-service insurance agency
with six offices throughout northwest Ohio.
Founded in the 1920s as Northwest Savings, First Federal Bank was chartered in 1935 as
a federal mutual savings and loan company. First Federal Bank converted to a mutual
holding company and issued its first stock to the public and employees in 1993.
In September 1995, First Federal Bank converted to a full stock company, trading stock
on the NASDAQ national market under the ticker symbol FDEF. At the same time,
First Defiance Financial Corp. was founded as the holding company for First Federal
Bank. In 1998, an additional business line was added with the acquisition of an insurance
agency, now known as First Insurance Group. The Bank’s name was changed to
First Federal Bank of the Midwest in 1999, to better reflect our community banking
business strategy.
Since 2003, First Defiance has acquired three banking offices, opened nine de novo
offices, acquired four insurance agencies and completed acquisitions of ComBanc,
Inc. based in Delphos, Ohio; Genoa Savings and Loan based in Genoa, Ohio; Pavilion
Bancorp, based in Adrian, Michigan; and Commercial Bancshares, Inc. based in
Upper Sandusky, Ohio.
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. Actual
results could vary materially depending on risks and uncertainties inherent in general
and local banking and insurance conditions, competitive factors specific to markets in
which the Company and its subsidiaries operate, future interest rate levels, legislative
and regulatory decisions or capital market conditions. The Company assumes no
responsibility to update this information. For more details, please refer to the Company’s
SEC filings, including its most recent Annual Report on Form 10-K and quarterly reports
on Form 10-Q.
financial highlights (In thousands, except per share amounts)
Summary of Operating Results
2016
2015 % Change
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
$78,943
$74,055
283
33,521
509
71,093
28,843
2016
136
31,781
6.6%
108.1%
5.5%
22
2,213.6%
67,889
26,423
4.7%
9.2%
2015 % Change
$2,477,597
$2,297,676
1,914,603
1,776,835
1,981,628
1,836,137
293,018
25,884
280,197
25,382
7.8%
7.8%
7.9%
4.6%
2.0%
2016
$3.21
3.19
0.880
25.59
8,983
2016
3.74%
1.20%
10.10%
62.20%
2015 % Change
$2.87
2.82
0.775
23.79
9,102
11.9%
13.1%
13.6%
7.6%
-1.3%
2015 % Change
3.81%
1.19%
9.52%
63.01%
-1.8%
0.8%
6.1%
-1.3%
financials at a glance
Diluted Earnings Per Share
Dividends Per Share
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
12
13
14
15 16
12
13
14
15 16
Loans (in millions)
Deposits (in millions)
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
12
13
14
15 16
12
13
14
15 16
Return on Average Assets (percent)
Return on Average Equity (percent)
18
16
14
12
10
8
6
4
2
12
13
14
15 16
12
13
14
15 16
3.6
3.2
2.8
2.4
2.0
1.6
1.2
.8
.4
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
Board of Directors
William J. Small
Chairman,
First Defiance Financial Corp.
1, 5, 6, 7 & 8
Donald P. Hileman
President &
Chief Executive Officer,
First Defiance Financial Corp.
1, 5, 6, 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
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
Robert E. Beach
Retired President & CEO,
Commercial Bancshares, Inc.
Upper Sandusky, Ohio
5, 6 & 8
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
2, 4 & 8
Thomas A. Reineke
President and CEO,
Reineke Family Dealerships
Findlay, Ohio
4, 6 & 8
Samuel S. Strausbaugh
President,
Chief Executive Officer &
Chief Financial Officer,
JB & Company, Inc.
Tiffin, Ohio
2, 3, 7 & 8
Key for Board of Directors:
1. Executive Committee
2. Audit Committee
3. Compensation Committee
4. Corporate Governance
5. Investment Committee
6. Trust Committee
7. First Insurance Group Board
8. Risk Committee
Committee
First Insurance Group, Inc.
Corporate Officers
Donald P. Hileman
Chief Executive Officer
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
John Payak, III
Executive Vice President,
Property & Casualty
Tim Whetstone
Executive Vice President,
Property & Casualty
Lawrence H. Woods
Executive Vice President,
Property & Casualty
First Federal Bank of the Midwest
Corporate Officers
Donald P. Hileman
President &
Chief Executive Officer
Brent L. Beard
Senior Vice President,
Controller
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
John R. Reisner
Executive Vice President,
Chief Risk Officer &
Legal Counsel
Craig A. Curtis
Senior Vice President,
Commercial Lending
Amy M. Daeger
Senior Vice President,
Director of Retail
Administration
Sharon L. Davis
Executive Vice President,
Director of Human Resources
Brian A. Eitniear
Senior Vice President,
Director of Corporate Services
Gregory R. Allen
Executive Vice President,
Community Banking
President
Dennis E. Rose, Jr.
Executive Vice President,
Director of Strategy
Management
Michael D. Mulford
Executive Vice President,
Chief Credit Officer
Amy L. Hackenberg
Executive Vice President,
Southern Market Area President
Timothy K. Harris
Executive Vice President,
Eastern Market Area President
Marybeth Shunck
Executive Vice President,
Northern Market Area President
James R. Williams, III
Executive Vice President,
Western Market Area President
David D. Dygert
Executive Vice President,
Columbus Market Executive
Charles V. Hoecherl
Senior Vice President,
Treasury Management Sales
David L. Kondas
Senior Vice President,
Director of Wealth
Management
Kathleen A. Miller
Senior Vice President,
Information Technology
Dirk VanHeyst
Senior Vice President,
City Executive
Ryan J. Miller
Senior Vice President,
Northern Market Area
Commercial Lending
Manager
Martha J. Woelke
Senior Vice President,
Retail Lending;
Business Banking
Danielle R. Figley
Corporate Secretary
First Defiance Financial Corp.
Corporate Officers
Donald P. Hileman
President &
Chief Executive Officer
John R. Reisner
Executive Vice President,
Chief Risk Officer &
Legal Counsel
Danielle R. Figley
Corporate Secretary
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
Sharon L. Davis
Executive Vice President,
Director of Human Resources
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, 2016
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, 2016 was approximately $338.8 million.
As of February 20, 2017, there were issued and outstanding 8,985,385 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 2017
Annual Shareholders’ Meeting.
- 1 -
Documents Incorporated by Reference
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
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57
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127
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128
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128
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130
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.
On August 23, 2016, First Defiance announced the execution of a definitive agreement (the
“Agreement”) to acquire Commercial Bancshares, Inc. (“Commercial Bancshares”) and its wholly-owned
subsidiary, the Commercial Savings Bank. Each Commercial Bancshares shareholder will receive
1.1808 shares of First Defiance common stock (“First Defiance Shares”) or $51.00 in cash, subject to
total consideration being paid 80% in First Defiance Shares and 20% in cash as provided in the
Agreement. Based on the twenty-day average closing price of First Defiance Shares of $43.19 ending
August 22, 2016, the transaction is valued at approximately $63.0 million in the aggregate, including a
cash payment of approximately $1.5 million to cancel outstanding options. On December 31, 2016,
Commercial Bancshares had $356 million in assets, $297 million in loans and $314 million in deposits at
its seven banking offices. The transaction closed on February 24, 2017.
At December 31, 2016, the Company had consolidated assets of $2.48 billion, consolidated
deposits of $1.98 billion, and consolidated stockholders’ equity of $293.0 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”).
- 3 -
- 3 -
The Subsidiaries
The Company’s core business operations are conducted through its 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 that was approved in August 2016 to become a
full-service branch. The Hilliard location is expected to open as a full-service branch late in the first
quarter of 2017.
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, commercial real estate loans, commercial loans, home improvement and
home equity loans and consumer loans. In addition, First Federal invests in U.S. Treasury and federal
government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-
backed securities that are issued by federal agencies, including real estate mortgage investment conduits
(“REMICs”) and residential 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.
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 Mission & Vision and
Core Values initiatives. 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-
- 4 -
- 4 -
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. Maintaining a diversified portfolio with an emphasis on monitoring industry
concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.
Consumer Banking - First Federal offers customers a full range of deposit and investment
products including demand, checking, money market, certificates of deposits, Certificate of Deposit
Account Registry Service (“CDARS”) and savings accounts. First Federal offers a full range of
investment products through the wealth management department and a wide variety of consumer loan
products, including residential mortgage loans, home equity loans, and installment loans. First Federal
also offers online banking services, which include mobile banking 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’s pricing strategy
considers the whole relationship of the customer. First Federal continues 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.
- 5 -
- 5 -
Securities
First Defiance’s securities portfolio is managed in accordance with a written policy adopted by
the Board of Directors and administered by the Investment Committee. The Chief Financial Officer of
First Federal, 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 61 CMO issues totaling $63.0 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, 2016.
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, 2016 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 and
unrecognized gain on
held to maturity
Total
$ 8,737
9,414
3.20% $32,915
30,164
2.97
3.14% $23,769
20,944
2.87
3.07% $14,639
3,429
2.78
3.03% $ 80,060
63,951
2.79
3.11%
2.85
(Dollars in Thousands)
-
-
2,000
578
-
$ 18,729
1.56
-
9,923
10,020
$ 85,022
1.50
3.69
1.79
2,000
36,202
2,899
$ 85,814
2.00
3.72
2.06
-
39,345
-
$ 57,413
-
-
3.43
4,000
1.75
86,048
12,919
$ 246,978
3.58
1.85
3,422
776
$ 251,176
(1) Tax exempt yield based on effective tax rate of 35%. Actual coupon rate is approximately equal to the weighted average rate
disclosed in the table times 65%.
- 6 -
- 6 -
The carrying value of investment securities is as follows:
Available-for-sale securities:
Obligations of U.S. government corporations and
agencies
Obligations of state and political subdivisions
CMOs, REMICS and mortgage-backed securities
Trust preferred stock and preferred stock
Corporate bonds
Total
Held-to-maturity securities:
Mortgage-backed securities
Obligations of state and political subdivisions
Total
$
$
$
$
2016
December 31
2015
(In Thousands)
2014
3,915
88,043
146,019
2
13,013
250,992
$ 2,994
90,389
138,074
1
4,977
$ 236,435
$ 980
88,532
142,816
1
6,992
$ 239,321
91
93
184
$ 119
124
$ 243
$ 158
155
313
$
For additional information regarding First Defiance’s investment portfolio, refer to Note 5 –
Investment Securities to the Consolidated Financial Statements.
Interest-Bearing Deposits
The Company had $46.0 million and $41.0 million in overnight investments at the Federal
Reserve at December 31, 2016 and 2015, 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 $1.8 million and $1.6 million at December 31, 2016 and 2015, 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, 2016, First Federal serviced
14,350 loans totaling $1.37 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, 2016, 64.82%, 34.31% and 0.81% 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 approximating 0.25% per annum of the loan balances serviced, plus any late charges collected
from delinquent borrowers and other fees incidental to the services provided. In the event of a default by
the borrower, the Company receives no servicing fees until the default is cured.
The following table sets forth certain information regarding the number and aggregate principal
balance of the mortgage loans serviced by the Company, including both fixed and adjustable rate loans,
at various interest rates:
- 7 -
- 7 -
2016
December 31
2015
Percentage
Percentage
2014
Number
of
Loans
Rate
Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate
Principal
Principal
Principal
Balance
Balance
Balance
Principal
Balance
Principal
Balance
of
Loans
of
Loans
Percentage
of Aggregate
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
2,191
6,279
3,551
1,405
749
175
14,350
$ 225,328
682,157
332,023
83,775
41,055
7,680
$ 1,372,018
16.42%
49.72
24.20
6.11
2.99
0.56
1,836
5,606
3,924
1,761
922
209
100.00% 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%
Loan servicing fees decrease as the principal balance on the outstanding loan decreases and as
the remaining time to maturity of the loan shortens.
The following table sets forth certain information regarding the remaining maturity of the
mortgage loans serviced by the Company as of the dates shown.
2016
December 31
2015
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
2014
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
529
1,784
3,671
1,526
1,846
4,994
14,350
3.69% $
12.43
25.58
10.63
12.86
7,432
102,132
343,750
135,540
169,496
0.54%
7.44
25.05
9.88
12.35
680
1,563
3,759
1,635
1,833
34.81
100.00% $1,372,018 100.00% 14,258
613,668
44.74
4,788
4.77% $
10.97
26.36
11.47
12.85
33.58
10,801
89,364
349,986
144,249
169,889
0.80%
6.65
26.05
10.74
12.64
810
1,204
4,082
1,720
1,575
5.67% $
8.44
28.61
12.06
11.04
15,932
64,979
385,409
155,783
143,062
1.18%
4.83
28.62
11.57
10.62
579,433
43.12
4,876
34.18
581,473
43.18
100.00% $1,343,722 100.00%
14,267
100.00% $1,346,638
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, 2016, First Federal’s limit on loans-to-one borrower was
$40.3 million and its five largest loans (including available lines of credit) or groups of loans to one
borrower, including related entities, were $23.6 million, $23.3 million, $23.1 million, $23.1 million and
$22.9 million. All of these loans or groups of loans were performing in accordance with their terms at
December 31, 2016.
Loan Portfolio Composition – The net increase in net loans receivable over the prior year was
$137.8 million, $154.8 million and $66.5 million at December 31, 2016, 2015, and 2014, respectively.
The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated
geographically in the northwest Ohio, northeast Indiana, central Ohio 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 $687.5 million at December 31, 2016,
which represents 33.8% 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.
2016
2015
December 31
2014
2013
2012
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
$
207,550
10.2% $
205,330
11.0% $
206,437
12.2% $
195,752
12.2% $
200,826
13.0%
196,983
843,579
182,886
1,430,998
9.7
41.5
9.0
70.4
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
9.2
41.6
5.3
68.3
122,275
675,110
37,788
1,035,999
7.9
43.7
2.5
67.1
469,055
118,429
16,680
604,164
2,035,162
23.0
5.8
0.8
29.6
419,349
116,962
16,281
552,592
100.0% 1,870,227
399,730
22.4
111,813
6.2
15,466
0.9
527,009
29.5
100.0% 1,686,319
23.7
6.6
0.9
31.2
100.0%
388,236
106,930
16,902
512,068
24.1
6.6
1.0
31.7
383,817
108,718
15,936
508,471
24.9
7.0
1.0
32.9
1,613,496 100.0%
1,544,470 100.0%
Real estate:
1-4 family residential
Multi-family
residential
Commercial real estate
Construction
Total real estate loans
Other:
Commercial
Home equity and improvement
Consumer finance
Total loans
Less:
Undisbursed loan funds
Net deferred loan origination
93,355
1,320
fees
Allowance for loan losses
Net loans
25,884
$ 1,914,603
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
In addition to the loans reported above, First Defiance had $9.6 million, $5.5 million, $4.5
million, $9.1 million, and $22.1 million in loans classified as held for sale at December 31, 2016, 2015,
2014, 2013 and 2012, 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, 2016 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, 2016
Due Less
than 1
Due 1-2
Due 3-5
Due 5-10
(In Thousands)
Due 10-15
Due 15+
Total
$ 471,363
$ 164,604
$ 608,344
$
88,086
$
31,425
$
67,176
$1,430,998
316,760
50,152
94,636
7,507
-
-
469,055
109,651
6,726
$ 904,500
2,410
3,531
$ 220,697
4,044
6,194
$ 713,218
1,452
223
97,268
$
425
6
31,856
$
447
-
67,623
118,429
16,680
$2,035,162
$
Real estate
Other loans:
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, 2016 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
$ 289,578
114,463
17,602
$ 421,643
$ 670,057
37,832
1,130
$ 709,019
$ 959,635
152,295
18,732
$ 1,130,662
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 10.8% of First Defiance’s total originations of one-to-four
family residential mortgage loans in 2016 compared to 10.3% and 11.9% during 2015 and 2014,
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:
2016
Years Ended December 31
2015
(In Thousands)
2014
Loan originations:
1-4 family residential
Multi-family residential
Commercial 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
$
294,307 $
59,957
166,437
138,553
389,037
56,816
10,426
1,115,533
822
241,658
44,352
241,969
116,224
465,543
54,676
10,235
1,174,657
-
232,302
282,589
432,445
947,336
169,019 $
265,311
231,067
493,383
989,761
184,896
$
$
173,301
46,181
159,959
66,264
524,073
45,934
10,632
1,026,344
16,594
219,446
176,381
578,873
974,700
68,238
Net increase in total loans and loans held for sale
$
Asset Quality
First Defiance’s credit policy establishes guidelines to manage credit risk and asset quality.
These guidelines include loan review and early identification of problem loans to ensure sound credit
decisions. First Defiance’s credit policies and review procedures are meant to minimize the risk and
uncertainties inherent in lending. In following the policies and procedures, management must rely on
estimates, appraisals and evaluations of loans and the possibility that changes in these could occur
because of changing economic conditions.
Delinquent Loans — The following table sets forth information concerning delinquent loans at
December 31, 2016, 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)
1-4 family residential real
estate
Multi- family residential
Commercial real estate
Construction
Commercial
Home Equity and
Improvement
Consumer Finance
Total
$
$
221
-
159
-
23
1,115
85
1,603
0.01%
0.00
0.01
0.00
0.00
0.05
0.01
0.08%
$ 1,142
-
16
-
10
174
69
$ 1,411
0.06% $
0.00
0.00
0.00
0.00
608
-
2,072
-
403
254
0.01
0.00
78
0.07% $ 3,415
0.03%
0.00
0.10
0.00
0.02
0.02
0.00
0.17%
$ 1,971
-
2,247
-
436
1,543
232
$ 6,429
0.10%
0.00
0.11
0.00
0.02
0.08
0.01
0.32%
Overall, the level of delinquencies at December 31, 2016 decreased from the levels at December
31, 2015, when First Defiance reported that 0.64% of its outstanding loans were at least 30 days
delinquent. The level of total loans 90 or more days delinquent has decreased to 0.17% at December 31,
2016 from 0.39% at December 31, 2015. The level of total loans 60-89 days delinquent decreased to
0.07% at December 31, 2016 from 0.13% at December 31, 2015. The level of loans that were 30 to 59
days past due decreased to 0.08% at December 31, 2016 from 0.12% at December 31, 2015.
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 $27.4 million, $41.9 million and
$48.9 million were considered impaired as of December 31, 2016, 2015 and 2014, respectively. The
decrease in impaired loans from 2014 to 2016 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, except for those
classified as troubled debt restructurings. There was $1.7 million of interest received and recorded in
income during 2016 related to impaired loans. There was $1.3 million and $1.6 million recorded in 2015
and 2014, respectively. Unrecorded interest income based on the loan’s contractual terms on these
impaired loans and all non-performing loans in 2016, 2015 and 2014 was $1.2 million, $1.5 million, and
$1.2 million, respectively. The average recorded investment in impaired loans during 2016, 2015 and
2014 (excluding loans accounted for under FASB ASC Topic 310 Subtopic 30) was $32.8 million, $51.8
million and $50.3 million, respectively. The total allowance for loan losses related to these loans was
$0.8 million, $0.4 million, and $1.3 million at December 31, 2016, 2015 and 2014, 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 2016, First Defiance recognized $74,000 of expense related to
write-downs in value of real estate acquired by foreclosure. The balance of real estate owned at
December 31, 2016 was $455,000.
As of December 31, 2016, First Defiance’s total non-performing loans amounted to $14.3 million
or 0.74% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $16.3
million or 0.90% of total loans, at December 31, 2015. Non-performing loans are loans which are more
than 90 days past due or on nonaccrual. The nonperforming loan balance for 2016 includes $11.3 million
of loans that were originated by First Federal and also considered impaired compared to $13.4 million for
2015.
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:
2016
2015
December 31
2014
(Dollars in Thousands)
2013
2012
1-4 family residential real estate
Multi-family residential real estate
Commercial real estate
Commercial
Home Equity and Improvement
Consumer finance
Total nonperforming loans
$ 2,928
2,639
6,953
1,007
730
91
14,348
$ 2,610
2,419
7,429
3,078
689
36
16,261
$ 3,332
2,539
12,635
4,993
619
12
24,130
$ 3,273
581
15,253
8,327
413
-
27,847
$ 3,602
1,177
21,913
5,661
217
-
32,570
Real estate owned
Total repossessed assets
455
455
1,321
1,321
6,181
6,181
5,859
5,859
3,805
3,805
Total nonperforming assets
$ 14,803
$ 17,582
$ 30,311
$ 33,706
$ 36,375
Restructured loans, accruing
$ 10,544
$ 11,178
$ 24,686
$ 27,630
$ 28,203
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
0.60%
0.77%
1.39%
1.58%
1.78%
0.74%
0.90%
1.47%
1.76%
2.14%
0.76%
0.97%
1.83%
2.12%
2.38%
of total nonperforming assets
174.86% 144.36% 81.71%
74.02%
73.43%
* 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
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- 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, 2016, First Defiance’s allowance for loan losses totaled $25.9 million
compared to $25.4 million at December 31, 2015. The following table sets forth the activity in First
Defiance’s allowance for loan losses during the periods indicated.
2016
Years Ended December 31
2013
2014
2015
(Dollars in Thousands)
2012
Allowance at beginning of year
Provision for credit losses
Charge-offs:
1-4 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
$ 25,382
283
$ 24,766
136
$ 24,950
1,117
$ 26,711
1,824
$ 33,254
10,924
(350)
(92)
(615)
(94)
(268)
(1,419)
1,638
219
$ 25,884
(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
Allowance for loan losses to total non-
performing loans at end of year
Allowance for loan losses to total loans at end
of year*
Net charge-offs (recoveries) for the year to
180.40% 156.09% 102.64%
89.60%
82.01%
1.33%
1.41%
1.50%
1.58%
1.75%
average loans
0.08%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
-0.01% -0.03%
0.23%
1.18%
The provision for credit losses decreased significantly in 2016 and 2015 from previous years due
to improved credit quality of the loan portfolio. Management does not anticipate a net recovery position
in 2017 and feels that the level of the allowance for loan losses at December 31, 2016 is sufficient to
cover the estimated losses incurred but not yet recognized in the loan portfolio.
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- 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.”
2016
2015
December 31
2014
2013
2012
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
1-4 family residential $ 2,627
Multi-family
10.2% $ 3,212
11.0%
(Dollars in Thousands)
12.2%
$ 2,494
$ 2,847
12.2%
$ 3,506
13.0%
residential real
estate
Commercial real
estate
Construction
Commercial loans
Home equity and
improvement
loans
Consumer loans
2,228
10,625
450
7,361
9.7
41.5
9.0
23.0
2,151
11,772
517
5,192
9.0
41.8
8.7
22.4
2,453
11,268
221
6,509
9.3
40.6
6.7
23.7
2,508
12,000
134
5,678
9.2
41.6
5.3
24.1
2,197
12,702
75
6,325
7.9
43.7
2.5
24.9
2,386
207
$25,884
5.8
0.8
2,270
171
100.0% $25,382
6.2
0.9
100.0%
1,704
117
$24,766
6.6
0.9
100.0%
1,635
148
$24,950
6.6
1.0
100.0%
1,759
147
$26,711
7.0
1.0
100.0%
Sources of Funds
General – Deposits are the primary source of First Defiance’s funds for lending and other
investment purposes. In addition to deposits, First Defiance derives funds from loan principal
repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows
are significantly influenced by general interest rates and money market conditions. Borrowings from the
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, 2016 and 2015.
Average balances and average rates paid on deposits are as follows:
2016
Amount
Rate
Years Ended December 31
2015
Amount
(Dollars in Thousands)
Rate
2014
Amount
Rate
$
441,731
-
$
388,257
-
$
350,677
-
798,266
235,137
430,487
$ 1,905,621
742,856
0.17%
215,253
0.04
441,510
1.12
0.33% $ 1,787,876
733,637
0.16%
198,919
0.04
0.92
466,951
0.30% $ 1,750,184
0.17%
0.05
0.85
0.30%
Non-interest-bearing
demand deposits
Interest bearing
demand deposits
Savings deposits
Time deposits
Totals
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- 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, 2016 (In Thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
After December 31, 2017
Total retail certificates of deposit with
balances $100,000 or greater
$
17,854
16,394
15,125
8,322
109,862
$ 167,557
The following table details the deposit accrued interest payable as of December 31:
Interest bearing demand deposits and
money market accounts
Certificates of deposit
2016
2015
(In Thousands)
$
$
23
19
42
$
$
18
25
43
For additional information regarding First Defiance’s deposits see Note 11 to the Consolidated
Financial Statements.
Borrowings— First Defiance may obtain advances from the FHLB of Cincinnati by pledging
certain of its residential mortgage loans, commercial real estate 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:
Securities sold under agreement to repurchase
Weighted average interest rate
2016
Years Ended December 31
2015
(Dollars in Thousands)
2014
103,943
1.42%
$ 59,902
1.62%
$ 21,544
2.38%
31,816
0.22%
$ 57,188
0.27%
$ 54,759
0.28%
$
$
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- 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
2016
Years Ended December 31
2015
(Dollars in Thousands)
2014
$ 103,943
84,944
1.42%
$
59,902
38,185
1.62%
$
22,520
21,993
2.38%
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
2016
Years Ended December 31
2015
(Dollars in Thousands)
2014
$
$
30,000
861
0.39%
57,984
52,821
0.26%
$
$
-
41
0.18%
60,272
54,632
0.28%
$
$
-
-
-
61,154
54,541
0.29%
First Defiance borrows funds under a variety of programs at the FHLB. As of December 31,
2016, there was $103.9 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, 2016 and 2015, no outstanding balances existed under First
Defiance’s short-term Cash Management Advance Line of Credit or REPO line of credit. The total
available under the Cash Management Advance 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, 2016, other than amounts available on the REPO
and Cash Management line, First Federal had additional borrowing capacity with the FHLB of $448.9
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,
2016 and 2015. First Federal holds stock of the FHLB of Indianapolis of $5,000 at December 31, 2016
and $9,000 at December 31, 2015.
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 Consolidated Financial Statements.
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- 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 2.46% and 2.01% as of December 31, 2016 and 2015
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 2.34% and 1.89% as of December 31, 2016 and 2015
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 581 employees at December 31, 2016. 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 commercial real estate 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, except for central Ohio.
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
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- 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.
In July 2013the United States banking regulators issued final new capital rules applicable to
smaller banking organizations which also implement certain provisions of the Dodd-Frank Act. 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 are being phased 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.
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- 19 -
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 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 following table sets forth the amount and percentage level of regulatory capital of First
Federal at December 31, 2016, 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(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (1)
Consolidated
First Federal
Tier 1 Capital (2)
Consolidated
First Federal
$234,809
$242,928
10.45%
10.81%
$101,108
$101,116
$269,809
$242,928
11.24%
10.14%
$95,975
$95,791
Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$269,809
$242,928
12.01%
10.81%
$134,811
$134,822
Total Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$295,693
$268,812
13.16%
11.96%
$179,748
$179,763
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$146,057
N/A
$119,739
N/A
$179,763
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$224,703
N/A
10.0%
(1) Excludes capital conservation buffer of 0.625% as of December 31, 2016.
(2) Core capital is computed as a percentage of adjusted total assets of $2.40 billion for consolidated and $2.39
billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.25
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
- 20 -
- 20 -
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, 2016, 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 $22.0 million in dividends to First Defiance in 2016 and $29.0 million in
2015. 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. First Insurance paid $1.2 million in dividends to
First Defiance in 2016 and $900,000 in dividends in 2015. First Defiance Risk Management paid $1.0
million in dividends to First Defiance in 2016 and 2015.
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.
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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 deposit insurance assessment base is average assets less average tangible equity. The FDIC
set a target size for the Deposit Insurance Fund at 2% of insured deposits and a lower assessment rate
schedule when the fund reaches 1.15% and, in lieu of dividends, the FDIC rule provides for a lower rate
schedule when the reserve ratio reaches 2% and 2.5%. On June 30, 2016, the Deposit Insurance Fund
surpassed its target of 1.15%, decreasing the assessment base based on the final rules approved by the
FDIC Board of Directors on February 7, 2011, and April 26, 2016. 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
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.
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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, 2016, First Federal’s portfolio of commercial real estate loans totaled $1.0
billion, or approximately 51.1% 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, 2016, First Federal’s portfolio of commercial loans totaled $469.1 million, or
approximately 23.1% 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 could 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 resulting in First Defiance’s ownership of 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;
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• 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.
If First Defiance’s growth involves the acquisition of companies through merger, the success of
the merger will depend on, among other things, First Defiance’s ability to combine the businesses in a
manner that permits growth opportunities and cost efficiencies, and does not cause inconsistencies in
standards, controls, procedures and policies that adversely affect the ability of First Defiance to maintain
relationships with customers and employees or to achieve the anticipated benefits of the merger.
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, 2016, 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. 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 2016, First Federal received approval to transition its loan production office at 4501
Cemetery Road, Hilliard, Ohio to a full-service branch. The transition will be completed late in the first
quarter of 2017. 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.
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The following table sets forth certain information with respect to the offices and other properties
of the Company at December 31, 2016. 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 Valu
of Property
Deposits
(In Thousands)
$
3,225
$
230,654
4,807
170
538
345
877
225
1,126
730
653
288
813
561
877
786
279
160
1,029
707
862
284
929
736
810
389
1,253
-
-
613
190
165
494
1,384
1,558
1,931
966
165
N/A
N/A
157,476
75,865
79,074
43,705
32,747
41,753
85,946
29,753
56,206
53,499
113,248
66,427
92,914
22,646
45,127
76,061
98,143
42,443
44,419
33,705
38,547
41,871
39,393
19,549
16,474
82,230
47,233
30,416
45,950
59,648
10,093
26,915
270
1,228
Leased
Leased
Leased
Leased
Leased
Leased
463
-
-
-
-
-
31,388
$
N/A
N/A
N/A
N/A
N/A
N/A
$ 1,981,628
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Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings that are incidental to and occur in the
ordinary course of business which, in the aggregate, are believed by management to be immaterial to the
financial condition of First Defiance.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol
“FDEF.” As of February 20, 2017, the Company had approximately 1,782 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 2016 and 2015.
Year Ending
December 31, 2016
Low
Dividend
High
December 31, 2015
Low
Dividend
High
Quarter ended:
March 31
June 30
September 30
December 31
$ 40.98
41.21
46.83
52.31
$ 34.80
37.53
35.90
36.91
$ 0.22
0.22
0.22
0.22
$ 34.64
38.21
39.95
42.46
$ 29.05
32.42
35.03
35.01
$0.175
0.20
0.20
0.20
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,
2011, 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.
- 30 -
- 30 -
Index
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
12/31/11
100.00
100.00
100.00
100.00
12/31/12
133.10
117.45
119.19
129.30
Period Ending
12/31/13
183.16
164.57
171.31
159.45
12/31/14
245.58
188.84
177.42
182.24
12/31/15
278.23
201.98
191.53
223.15
12/31/16
381.92
219.89
265.56
268.71
The following table provides information regarding First Defiance’s purchases of its common
shares during the fourth quarter period ended December 31, 2016:
Period
October 1 – October 31, 2016
November 1 – November 30, 2016
December 1 – December 31, 2016
Total
Total Number
of Shares
Purchased
-
-
122
122
Average
Price Paid
Per Share
$
-
-
50.74
$50.74
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs
(1)
-
-
-
-
377,500
377,500
377,500
377,500
(1) On January 29, 2016, the Company announced that its Board of Directors authorized another program for
the repurchase of up to 5% of the outstanding common shares or 450,000 shares. There is no expiration
date for the new repurchase program.
- 31 -
- 31 -
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.
- 32 -
- 32 -
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, 2016. 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.
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:
Basic earnings per share
Diluted earnings per share
Book value per common share
Tangible book value per common share (2)
Cash dividends per common share
Dividend payout ratio
Weighted average diluted shares outstanding
Shares outstanding end of period
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 (2)
Other Ratios:
Equity to total 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
2016
$ 2,477,597
251,176
1,914,603
25,884
14,803
1,984,278
103,943
293,018
$
3.21
3.19
32.62
25.59
0.88
27.41%
9,035
8,983
87,383
8,440
78,943
283
34,030
71,093
41,597
12,754
28,843
1.20%
10.10%
3.61%
3.74%
2.97%
62.20%
11.83%
11.91%
0.60%
1.33%
-0.01%
As of and For the Year Ended December 31
2014
(Dollars in Thousands, Except Per Share Data)
2013
2015
$ 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
$
2.87
2.82
30.78
23.79
0.775
27.00%
9,371
9,102
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%
3.05%
63.01%
12.19%
12.49%
0.77%
1.41%
-0.03%
$
2.55
2.44
30.17
23.25
0.625
24.51%
9,969
9,235
76,248
6,559
69,689
1,117
31,641
66,758
33,455
9,163
24,292
1.12%
8.78%
3.57%
3.68%
3.09%
65.32%
12.83%
12.79%
1.39%
1.50%
0.08%
$
2.28
2.19
27.91
21.22
0.40
17.45%
10,171
9,720
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%
3.16%
64.81%
12.73%
12.92%
1.58%
1.58%
0.23%
2012
$ 2,046,948
194,609
1,498,546
26,711
36,375
1,668,945
12,796
258,128
$
1.86
1.81
26.44
19.63
0.20
10.75%
9,998
9,729
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%
3.19%
63.93%
12.61%
12.95%
1.78%
1.75%
1.18%
(1)
Nonperforming assets include 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)
Refer to Non-GAAP Financial Measures in Item 7- Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
* Total loans are net of undisbursed loan funds and deferred fees and costs.
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- 33 -
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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- 34 -
• 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.
Non-GAAP Financial Measures
This document contains GAAP financial measures and certain non-GAAP financial measures
which are presented as management believes they are helpful in understanding the Company’s results of
operations or financial position. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income
to reflect tax-exempt income on an equivalent before-tax basis. The following tables present a
reconciliation of non-GAAP measures to their respective GAAP measures at December 31, 2016 and
2015.
Non-GAAP Financial Measures – Net Interest Income on an
FTE basis, Net Interest Margin and Efficiency Ratio
($ in Thousands)
Net interest income (GAAP)
Add: FTE adjustment
Net interest income on a FTE basis (1)
Noninterest income – less securities gains/losses (2)
Noninterest expense (3)
Average interest-earning assets less average unrealized gains/losses on securities(4)
Average interest-earning assets
Average unrealized gains/losses on securities
Ratios:
Net interest margin (1) / (4)
Efficiency ratio (3) / (1) + (2)
Non-GAAP Financial Measures – Tangible Book Value
($ in Thousands, except per share data)
Total Shareholders’ Equity (GAAP)
Less:
Goodwill
Intangible assets
Tangible common equity (1)
Common shares outstanding (2)
Tangible book value per share (1) / (2)
$
$
$
$
$
$
- 35 -
- 35 -
December 31,
2016
December 31,
2015
78,943
1,830
80,773
33,521
71,093
2,160,561
2,153,076
7,485
3.74%
62.20%
$
$
$
74,055
1,905
75,960
31,781
67,889
1,993,311
1,986,145
7,166
3.81%
63.01%
December 31,
2016
293,018
(61,798)
(1,336)
229,884
8,983
25.59
December 31,
2015
280,197
(61,798)
(1,871)
216,528
$
$
9,102
23.79
$
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,
which will become a full-service branch late in the first quarter of 2017.
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.
First Defiance Risk Management is a wholly owned insurance company subsidiary of the
Company to insure the Company and its subsidiaries against certain risks unique to the operations of the
Company and for which insurance may not be currently available or economically feasible in today’s
insurance marketplace. First Defiance Risk Management pools resources with several other similar
insurance company subsidiaries of financial institutions to spread a limited amount of risk among
themselves. First Defiance Risk Management was incorporated on December 20, 2012.
Financial Condition
Assets at December 31, 2016 totaled $2.48 billion compared to $2.30 billion at December 31,
2015, an increase of $179.9 million or 7.8%. Cash and cash equivalents increased $19.2 million to $99.0
million at December 31, 2016 from $79.8 million at December 31, 2015. The increase in assets was due
to an increase in loans receivable, net of undisbursed loan funds and deferred fees and costs, of $138.3
million and an increase in securities of $14.5 million. These increases were funded by increases in total
deposits of $145.5 million and advances from the Federal Home Loan Bank of $44.0 million as well as
from cash and cash equivalents.
Securities
The securities portfolio increased $14.5 million to $251.2 million at December 31, 2016. The
2016 activity in the portfolio included $71.3 million of purchases, $882,000 of amortization,, $36.4
million of principal pay-downs and maturities, and $14.9 million of securities being sold. There was a net
decrease of $5.4 million in the market value of available-for-sale securities. For additional information
regarding First Defiance’s investment securities see Note 5 to the Consolidated Financial Statements.
Loans
Loans receivable, net of undisbursed loan funds and deferred fees and costs, increased $138.3
million to $1.94 billion at December 31, 2016. For more details on the loan balances, see Note 7 – Loans
Receivable in the Notes to the Consolidated Financial Statements.
The majority of First Defiance’s commercial real estate and commercial loans are to small and
mid-sized businesses. The combined commercial, commercial real estate and multi-family real estate loan
portfolios totaled $1.51 billion and $1.37 billion at December 31, 2016 and 2015, respectively, and
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- 36 -
accounted for approximately 74.2% and 73.1% 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 1-4 family residential portfolio totaled $207.6 million at December 31, 2016, compared with
$205.3 million at the end of 2015. At the end of 2016, those loans comprised 10.2% of the total loan
portfolio, down from 11.0% at December 31, 2015.
Construction loans, which include one-to-four family and commercial real estate properties,
increased to $182.9 million at December 31, 2016 compared to $163.9 million at December 31, 2015.
These loans accounted for approximately 9.0% and 8.7% of the total loan portfolio at December 31, 2016
and 2015, respectively.
Home equity and home improvement loans increased to $118.4 million at December 31, 2016,
from $117.0 million at the end of 2015. At the end of 2016, those loans comprised 5.8% of the total loan
portfolio, down slightly from 6.3% at December 31, 2015.
Consumer finance and mobile home loans were $16.7 million at December 31, 2016 up slightly
from $16.3 million at the end of 2015. These loans accounted for approximately 0.8% and 0.9% of the
total loan portfolio at December 31, 2016 and 2015, respectively.
In order to properly assess the collateral dependent loans included in its loan portfolio, the
Company has established policies regarding the monitoring of the collateral underlying such loans. The
Company requires an appraisal that is less than one year old for all new collateral dependent real estate
loans, and all renewed collateral dependent real estate loans where significant new money is extended.
The appraisal process is handled by the Credit Department, which selects the appraiser and orders the
appraisal. First Defiance’s loan policy prohibits the account officer from talking or communicating with
the appraiser to insure that the appraiser is not influenced by the account officer in any way in making 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.
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- 37 -
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 specific 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, 2016 and December 31, 2015, First Federal had $10.5 million and $11.2 million,
respectively, of loans that were still performing and which were classified as TDRs.
Allowance for Loan Losses
The allowance for loan losses represents management’s assessment of the estimated probable
incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy
of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to
economic conditions, changes in interest rates and the effect of such changes on collateral values and
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
- 38 -
- 38 -
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 $809,000 at December 31,
2016 and $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, utilized an average of four
(4) four-year loss migration periods for each loan portfolio segment with differentiation between loan
risk grades. 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. Beginning December 31, 2016 the historical loss calculation
was changed from using a an average of four (4) four-year loss migration periods to using an average of all
four-year loss migration periods to the present beginning with data from the second quarter 2011.
Management believes this enhancement is consistent with the rationale of the previous measurement but
provides a more precise calculation of historical losses by incorporating more data points for the average loss
ratio and including periods that provide a more complete coverage of the full business 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. These modifications 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.
The stratification of the loan portfolio and the loss migration measurement described above
resulted in a decrease to the quantitative general allowance to $8.7 million at December 31, 2016 from
$9.8 million at December 31, 2015.
In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide
additional general reserves on the non-impaired loan portfolio for various factors. The overall qualitative
factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative
factors: economic, environment and risk.
ECONOMIC
1)
2)
Changes in international, national and local economic business conditions and
developments, including the condition of various market segments.
Changes in the value of underlying collateral for collateral dependent loans.
ENVIRONMENT
3)
4)
Changes in the nature and volume in the loan portfolio.
The existence and effect of any concentrations of credit and changes in the level
of such concentrations.
5)
6)
7)
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.
- 39 -
- 39 -
RISK
8)
9)
Changes in the trends of the volume and severity of delinquent and classified
loans, and changes in the volume of non-accrual loans, trouble debt
restructuring, and other loan modifications.
Changes in the political and regulatory environment.
The qualitative analysis at December 31, 2016 indicated a general reserve of $16.4 million
compared with $15.2 million at December 31, 2015. 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 all loan segments were increased in 2016 due to the uncertain global
economic conditions and related market volatility which presented higher than normal risks to the U.S.
economy.
The environmental factors have increased in 2016 in the commercial real estate and commercial
loan segments due to the significant growth in balances achieved amidst highly competitive conditions on
pricing and terms and balances generated in our metro markets. 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.
The environmental factors for residential, consumer, home equity and construction loans were decreased
during 2016 due to the stability and maturity of the lending staff.
The risk factors in all loan segments except consumer were decreased in 2016 due to the
continued decrease in the level of non-accrual loans, troubled debt restructurings and OREO since December
31, 2015.
First Defiance’s general reserve percentages for main loan segments not otherwise classified
ranged from 0.50% for construction loans to 1.71% for home equity and improvement loans.
As a result of the quantitative and qualitative analysis, along with the change in specific reserves,
the Company’s provision for loan losses for 2016 was $283,000 compared to $136,000 for 2015. The
allowance for loan losses was $25.9 million at December 31, 2016 and $25.4 million at December 31,
2015 and represented 1.33% and 1.41% of loans, net of undisbursed loan funds and deferred fees and
costs, respectively. The decrease in the quantitative reserves and the lower level of charge offs was offset
by the increase in the qualitative reserve and specific reserve. The provision was offset by charge offs of
$1.4 million and recoveries of $1.6 million resulting in an increase to the overall allowance for loan loss
of $502,000.
In management’s opinion, the overall allowance for loan losses of $25.9 million as of
December 31, 2016 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
2016, First Defiance recorded OREO write-downs that totaled $74,000. These amounts were included in
other non-interest expense. Management believes that the values recorded at December 31, 2016 for
OREO and repossessed assets represent the realizable value of such assets.
Total classified loans decreased significantly to $27.5 million at December 31, 2016, compared
to $49.1 million at December 31, 2015.
First Defiance’s ratio of allowance for loan losses to non-performing loans was 180.4% at
December 31, 2016 compared with 156.1% at December 31, 2015. 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, 2016 are appropriate.
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At December 31, 2016, First Defiance had total non-performing assets of $14.8 million,
compared to $17.6 million at December 31, 2015. 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, 2016 and December 31, 2015 is in
commercial loans and real estate owned. The balance of commercial non-performing loans was $2.1
million lower at December 31, 2016 compared to December 31, 2015. The balance of OREO was
$866,000 lower at December 31, 2016 compared to December 31, 2015.
Non-performing loans in the single-family residential, commercial real estate and commercial
loan categories represent 1.41%, 0.92% and 0.21% of the total loans in those categories respectively at
December 31, 2016 compared to 1.27%, 1.04% and 0.73% respectively for the same categories at
December 31, 2015. Management believes that the current allowance for loan losses is appropriate and
that the provision for loan losses recorded in 2016 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, 2016, commercial real estate, which
represented 51.15% of total loans, accounted for a net recovery of 379.45% and 66.85% of nonaccrual
loans, and commercial loans, which represented 23.01% of total loans, accounted for 127.85% of net
charge offs and 7.02% of nonaccrual loans. 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.
Table 1 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2016
As of December 31, 2016
Net
Charge-offs
(Recoveries)
(In Thousands)
$
184
-
(831)
280
30
118
% of Total Net
Charge-offs
(Recoveries)
84.02%
0.00%
(379.45)%
127.85%
13.70%
53.88%
Nonaccrual
% of Total Non-
Loans
Accrual Loans
(In Thousands)
$
2,928
-
9,592
1,007
91
730
20.41%
0.00%
66.85%
7.02%
0.63%
5.09%
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
$ (219)
(100.00)%
$ 14,348
100.00%
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For the Twelve Months Ended December 31, 2015
As of December 31, 2015
Net
Charge-offs
(In Thousands)
$ 69
-
(448)
(263)
-
162
% of Total Net
Charge-offs
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%
The following table sets forth information concerning the allocation of First Defiance’s
allowance for loan losses by loan categories at December 31, 2016 and 2015.
Table 2 – Allowance for Loan Loss Allocation by Loan Category
1-4 family residential
Multi-family residential real
estate
Commercial real estate
Construction
Commercial loans
Home equity and improvement loans
Consumer loans
December 31, 2016
December 31, 2015
Percent of
total loans
by category Amount
Percent of
total loans
by category
(Dollars in Thousands)
10.2% $ 3,212
9.7
41.5
9.0
23.0
5.8
0.8
2,151
11,772
517
5,192
2,270
171
100.0% $25,382
11.0%
9.0
41.8
8.7
22.4
6.2
0.9
100.0%
Amount
$ 2,627
2,228
10,625
450
7,361
2,386
207
$25,884
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, 2016, the total contractual receivable for those loans was $66,000 and the
recorded value was $11,000.
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
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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, 2016 totaled $42.8 million, compared to
$46.3 million at December 31, 2015. 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, 2016 and December 31, 2015. Core deposit
intangibles and other intangible assets decreased to $1.3 million at December 31, 2016 compared to $1.9
million at December 31, 2015. During 2016, changes to the core deposit intangibles and other
intangibles were due to the recognition of $535,000 of amortization expense. No impairment of goodwill
was recorded in 2016 or 2015.
Deposits
Total deposits at December 31, 2016 were $1.98 billion compared to $1.84 billion at December
31, 2015, an increase of $145.5 million or 7.9%. Non-interest bearing checking accounts grew by $67.0
million, interest bearing checking accounts and money markets grew by $49.5 million, savings grew by
$23.7 million and retail certificates of deposit grew by $5.3 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 in the Notes to the Consolidated Financial Statements.
Borrowings
FHLB advances totaled $103.9 million at December 31, 2016 compared to $59.9 million at
December 31, 2015. The balance at the end of 2016 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 $92.0 million with rates ranging from 0.99% to 2.16% and
one amortizing advance totaling $6.9 million with a rate of 1.78%.
At December 31, 2016, First Defiance also had $31.8 million of securities that were sold with
agreements to repurchase, compared to $57.2 million at December 31, 2015.
Equity
Total stockholders’ equity increased $12.8 million to $293.0 million at December 31, 2016. This
increase is a result of net income of $28.8 million and capital of $714,000 from the exercise of 37,970 net
shares under stock option plans, which was partially offset by repurchasing 167,868 shares of common
stock totaling $6.3 million and $7.9 million of common stock dividends being paid in 2016. In 2015,
225,808 shares were repurchased, resulting in an $8.4 million decrease in stockholders’ equity, and
73,800 net shares were exercised under stock option plans resulting in a $1.5 million increase in
stockholder’s equity.
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Results of Operations
Summary
First Defiance reported net income of $28.8 million for the year ended December 31, 2016
compared to $26.4 million and $24.3 million for the years ended December 31, 2015 and 2014,
respectively. On a diluted per common share basis, First Defiance earned $3.19 in 2016, $2.82 in 2015
and $2.44 in 2014.
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 $78.9 million for the year ended December 31, 2016 compared to $74.1
million and $69.7 million for the years ended December 31, 2015 and 2014, respectively. The tax-
equivalent net interest margin was 3.74%, 3.81% and 3.68% for the years ended December 31, 2016,
2015 and 2014, respectively. The margin decreased 7 basis points between 2015 and 2016. Interest-
earning asset yields decreased 2 basis points (to 4.13% in 2016 from 4.15% in 2015) and the cost of
interest bearing liabilities between the two periods increased 8 basis points (to 0.52% in 2016 from
0.44% in 2015).
Total interest income increased by $6.6 million or 8.1% to $87.4 million for the year ended
December 31, 2016 from $80.8 million for the year ended December 31, 2015. The increase in interest
income was due to the significant increase in loan volume. The average balance of loans receivable
increased $166.0 million to $1.85 billion at December 31, 2016 from $1.69 billion at December 31, 2015.
Interest income from loans increased to $80.2 million for 2016 compared to $73.3 million in 2015, which
represents an increase of 9.4%.
During the same period, the average balance of investment securities decreased to $233.4 million
for 2016 from $239.9 million for the year ended December 31, 2015. Interest income from investment
securities decreased to $6.2 million in 2016 compared to $6.8 million in 2015, which represents a
decrease of 7.7%. The overall duration of investments decreased to 3.6 years at December 31, 2016 from
4.2 years at December 31, 2015.
Interest expense increased by $1.6 million in 2016 compared to 2015, to $8.4 million from $6.8
million. This increase was mainly due to an eight basis point increase in the average cost of interest-
bearing liabilities in 2016 and a $110.2 million increase in the average balance of interest-bearing
liabilities. The average balance of interest bearing deposits increased $64.3 million to $1.46 billion at
December 31, 2016 from $1.40 billion at December 31, 2015. Interest expense related to interest-bearing
deposits was $6.3 million in 2016 compared to $5.3 million in 2015. Interest expenses on FHLB
advances and other interest-bearing funding sources were $1.3 million and $138,000 respectively, in
2016 and $675,000 and $152,000 respectively in 2015. The increase in FHLB advance expense was due
to a $47.7 million increase in the average balance of FHLB advances to $85.9 million at December 31,
2016 compared to $38.1 million at December 31, 2015. Interest expense recognized by the Company
related to subordinated debentures was $753,000 in 2016 and $613,000 in 2015 due to rising rates.
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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- 44 -
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.
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- 45 -
The following table shows an analysis of net interest margin on a tax equivalent basis for the years
ended December 31, 2016, 2015 and 2014:
Table 3 – Net Interest Margin
Year Ended December 31
Average
Balance
2016
Interest
(1)
Yield/
Rate (2)
Average
Balance
(In Thousands)
2015
Interest
(1)
Yield/
Rate
Average
Balance
2014
Interest
(1)
Yield/
Rate
$ 1,853,419
233,407
67,420
13,800
$80,423
7,871
367
552
4.34% $ 1,687,413
239,852
3.48%
59,410
0.54%
13,802
4.00%
$73,544
8,476
169
552
4.36% $ 1,574,753
223,534
3.64%
134,114
0.27%
14,677
4.00%
$68,828
8,227
349
642
4.37%
3.79%
0.26%
4.37%
2,168,046
89,213
4.13%
2,000,477
82,741
4.15%
1,947,078
78,046
4.01%
Interest-Earning Assets:
Loans receivable (5)
Securities (6)
Interest-earning deposits
FHLB stock
Total interest-earning
assets
Non-interest-earning
assets
229,393
Total Assets
$2,397,439
222,389
$2,222,866
215,390
$2,162,468
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;
$ 1,463,890
85,856
36,141
52,826
$6,261
1,288
753
138
0.43% $ 1,399,619
38,134
1.50%
36,129
2.09%
54,619
0.26%
$5,341
675
613
152
0.38% $ 1,399,507
21,995
1.77%
36,131
1.70%
54,524
0.28%
$5,283
528
587
161
0.38%
2.40%
1.62%
0.30%
1,638,713
8,440
0.52%
1,528,501
6,781
0.44%
1,512,157
6,559
0.43%
441,731
−
388,257
−
350,677
−
2,080,444
8,440
0.41%
1,916,758
6,781
0.35%
1,862,834
6,559
0.35%
31,361
2,111,805
285,634
28,463
1,945,221
277,645
23,097
1,885,931
276,537
$ 2,397,439
$ 2,222,866
$ 2,162,468
interest rate spread (3)
$80,773
3.61%
$75,960
3.71%
$71,487
3.57%
Net interest margin (4)
Average interest-earning
assets to average interest-
bearing liabilities
3.74%
132.3%
3.81%
130.9%
3.68%
128.8%
(1)
(2)
(3)
(4)
(5)
(6)
Interest on certain tax exempt loans (amounting to $383,000, $368,000 and $271,000 in 2016, 2015 and 2014 respectively) and tax-exempt
securities ($3.0 million, $3.2 million and $3.1 million in 2016, 2015, and 2014) is not taxable for Federal income tax purposes. The average
balance of such loans was $11.8 million, $10.7 million and $7.8 million in 2016, 2015, and 2014 while the average balance of such securities was
$83.4 million, $86.0 million and $82.2 million in 2016, 2015, and 2014, 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%.
At December 31, 2016, the yields earned and rates paid were as follows: loans receivable, 4.20%; securities, 3.08%; FHLB stock,4.00%; total
interest-earning assets, 4.07%; deposits, 0.26%; FHLB advances, 1.42%; other borrowings, 0.22%, subordinated debentures, 2.39%; total
including non- interest-bearing liabilities, 0.35%; and interest rate spread, 3.72%.
Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.
Net interest margin is net interest income divided by average interest-earning assets excluding average unrealized gains/losses.
For the purpose of the computation for loans, nonaccrual loans are included in the average loans outstanding.
Securities yield = annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.
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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
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
2016 vs. 2015
Increase
(decrease)
due to
volume
Total
increase
(decrease)
Increase
(decrease)
due to
rate
2015 vs. 2014
Increase
(decrease)
due to
volume
Total
increase
(decrease)
$
(326)
(381)
$
7,205
(224)
$
6,879
(605)
$
(195)
(336)
$
4,911
585
$
4,716
249
173
-
25
-
198
-
30
(53)
(210)
(37)
(180)
(90)
$
(534)
$
7,006
$
6,472
$
(554)
$
5,249
$
4,695
$
667
(117)
140
(9)
$
253
730
-
(5)
$
$
$
920
613
140
(14)
$
58
(165)
26
(9)
$
-
312
-
-
1,659
$
(90)
$
312
4,813
$
$
$
58
147
26
(9)
222
4,473
liabilities
$
681
$
978
Increase (decrease) in net interest income
Provision for Loan Losses – First Defiance’s provision for loan losses was $283,000 for the
year ended December 31, 2016 compared to $136,000 for December 31, 2015 and $1.1 million for
December 31, 2014.
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 Consolidated Financial Statements.
Noninterest Income – Noninterest income increased by $2.2 million or 7.0% in 2016 to $34.0
million from $31.8 million for the year ended December 31, 2015. That followed an increase of
$162,000 or 0.5% in 2015 from $31.6 million in 2014.
Service fees and other charges increased to $10.9 million for the year ended December 31, 2016
from $10.8 million for 2015 and increased from $10.3 million for 2014. The increase in noninterest
income in 2016 and 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, 2016 and 2015 related to the overdraft privilege product, net of adjustments
to the allowance for uncollectible overdrafts, were $2.4 million and $2.8 million, respectively. Accounts
charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $14,000
at December 31, 2016 and $18,000 at December 31, 2015.
Noninterest income also includes gains, losses and impairment on investment securities. In 2016,
First Defiance realized a $509,000 gain on sale of securities. In 2015, a $22,000 gain was recognized
compared to a $932,000 net gain in 2014.
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 $7.3 million,
$6.7 million and $5.6 million in 2016, 2015 and 2014, respectively. The $557,000 increase in 2016 from
2015 is attributable to a $747,000 increase in the gain on sale of loans, along with a $57,000 positive
change in servicing revenue. These were partially offset by an increase of $104,000 in mortgage
servicing rights amortization expense along with a $143,000 negative change in the valuation
adjustments on mortgage servicing rights. First Defiance originated $263.7 million of residential
mortgages for sale into the secondary market in 2016 compared with $213.4 million in 2015. The
balance of the mortgage servicing right valuation allowance stands at $522,000 at the end of 2016. 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 $213.4 million of residential
mortgages for sale into the secondary market in 2015 compared with $153.8 million in 2014. See Note 8
to the Consolidated Financial Statements.
Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $753,000 in
2016 compared to $824,000 in 2015 and $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 and 2016.
Insurance commission income increased $365,000 or 3.6% to $10.4 million in 2016 from $10.1
million in 2015 mainly due to an increase in general production in the property and casualty and group
employee benefits lines of business. Insurance commission income increased $217,000 or 2.2% to $10.1
million in 2015 from $9.9 million in 2014.
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Income from bank owned life insurance increased slightly to $909,000 in 2016 from $895,000 in
2015, but decreased from $1.8 million in 2014. 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 increased $479,000 to $1.5 million in 2016 compared to $1.1 million in 2015 and
$1.8 million in 2014. The $479,000 increase in 2016 from 2015 is due to a $231,000 increase in the
value of the assets of the Company’s deferred compensation plan as well as a $139,000 increase in the
gain on sale of other real estate owned. The $708,000 decrease in 2015 from 2014 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 2016 was $71.1 million compared to $67.9
million for the year ended December 31, 2015 and $66.8 million for the year ended December 31, 2014.
Compensation and benefits increased $2.4 million or 6.4% to $40.2 million from $37.8 million in
2015. The increase is mainly related to merit increases and new staff for growth strategies, higher
incentive compensation accruals and higher medical insurance costs. Other non-interest expenses
increased $436,000 or 2.8% to $16.0 million in 2016 from $15.5 million in 2015 mainly due to
acquisition related costs for the pending acquisition of Commercial Bancshares, Inc. and $300,000 for a
termination of a lease partially offset by a decrease in the amortization of intangibles of $164,000.
Occupancy expense increased $221,000, to $7.4 million in 2016 compared to $7.2 million in 2015 and
data processing expense increased $284,000 to $6.4 million in 2016 from $6.1 million in 2015. These
increases were partially offset by decreases in FDIC insurance premiums of $155,000.
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 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.
Income Taxes – Income taxes totaled $12.8 million in 2016 compared to $11.4 million in 2015
and $9.2 million in 2014. The effective tax rates for those years were 30.7%, 30.2%, and 27.4%,
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 Consolidated 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.
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, central Ohio and southeast Michigan market areas. Management has also
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identified lending for income-generating rental properties as an industry concentration. Total loans for
income- generating property totaled $687.5 million at December 31, 2016, which represents 33.8% 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 0.04% at December 31, 2016. 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 $27.0 million, $30.7 million and $30.1 million in
2016, 2015 and 2014, 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 2016 and 2014, the Company purchased $822,000 and $16.6
million, respectively, in portfolio residential home loans. There were no purchases in 2015.
In considering the more typical investing activities, during 2016, $36.4 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 $163.0 million was used by an increase in loans while $71.3 million
was used to purchase available-for-sale investment securities. 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.
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.
In 2016, total deposits increased by $145.5 million. Securities sold under repurchase arrangements
decreased by $25.4 million in 2016. Also in 2016, the Company paid $7.9 million in common stock
dividends coupled with paying $6.3 million in common stock repurchases. In 2015, total deposits increased
by $75.7 million. Securities sold under repurchase arrangements increased by $2.4 million in 2015. Also
in 2015, the Company paid $7.2 million in common stock dividends coupled with paying $8.4 million in
In 2014, total deposits increased by $25.8 million. Securities sold under
common stock repurchases.
repurchase arrangements increased by $2.8 million in 2014. 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, investing and financing activities,
see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
At December 31, 2016, First Defiance had the following commitments to fund deposit, advance,
borrowing obligations and post-retirement benefits:
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Table 5 – Contractual Obligations
Maturity Dates by Period at December 31, 2016
Contractual Obligations
Total
Less than
1 year
$156,767
Certificates of deposit
32,306
FHLB fixed advances including interest (1)
-
Subordinated debentures
31,816
Securities sold under repurchase agreements
584
Lease obligations
160
Post-retirement benefits
Total contractual obligations
$221,633
(1) Includes principal payments of $103,943 and interest payments of $3,441.
$433,931
107,384
36,083
31,816
4,462
1,927
$615,603
1-3 years
(In Thousands)
$196,377
40,490
-
-
737
355
$237,959
4-5 years
After 5
years
$80,787
31,426
-
-
487
377
$113,077
-
3,162
36,083
-
2,654
1,035
$42,934
At December 31, 2016, 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
$34,432
106,356
14,384
400,542
555,714
Amount of Commitment Expiration by Period
Less than
1 year
$29,593
91,788
8,638
270,099
400,118
1-3 years
(In Thousands)
4-5 years
$38
1,331
1,265
27,686
30,320
$3,892
277
82
5,838
10,089
After 5
years
$909
12,960
4,399
96,919
115,187
Standby letters of credit
9,668
5,636
4,017
15
-
Total Commitments
$565,382
$405,754
$34,337
$10,104
$115,187
In addition to the above commitments, at December 31, 2016, First Defiance had commitments to
sell $22.5 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, 2016, First Defiance had $448.9 million in capacity under its agreements with
the FHLB.
First Federal is subject to various capital requirements of the OCC. At December 31, 2016, 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 Financial Statements.
Critical Accounting Policies
First Defiance has established various accounting policies that govern the application of accounting
principles generally accepted in the United States in the preparation of its Consolidated 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
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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
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, 2016, First Defiance had goodwill of $61.8 million, including $51.0 million in First
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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, 2016 and 2015.
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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, 2016, 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 3.08% 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 commercial real estate and commercial
loan areas. In addition to carrying higher credit risk than residential mortgage lending, such loans tend to
be more rate sensitive than residential mortgage loans. The balance of First Federal’s commercial real
estate and multi-family real estate loan portfolio was $1.04 billion, which was split between $142.5
million of fixed-rate loans and $898.1million of adjustable-rate loans, at December 31, 2016. The
commercial loan portfolio increased to $469.1 million, which was split between $173.1 million of fixed-
rate loans and $296.0 million of adjustable-rate loans, at December 31, 2016. 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 ($118.4 million at December 31, 2016) of which $104.8 million fluctuate with
changes in the prime lending rate and $13.7 million of home equity and improvement loans have fixed
rates. First Federal also has consumer loans ($16.7 million at December 31, 2016) 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, 2016 and
December 31, 2015, 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, 2016, net interest income sensitivity to changes in interest rates for the twelve months
subsequent to December 31, 2016 was more asset sensitive for the ramp and shock compared to the
sensitivity profile for the twelve months subsequent to December 31, 2015. This is due in part to our
strategy to grow longer term loans and funding 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, 2016
December 31, 2015
$
1,970
972
(2,201)
2.32%
1.14%
-2.59%
$ 563
215
(1,332)
$
4,236
2,131
(4,132)
4.99% $
2.51%
-4.87%
1,660
719
(2,605)
0.71%
0.27%
-1.68%
2.09%
0.91%
-3.28%
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. Conversely, if the yield
curve should steepen or become inverted, net interest income may increase.
The results of all the simulation scenarios are within the board mandated guidelines as of
December 31, 2016.
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, 2016 was
considered to be unlikely 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, 2016
Economic Value of Equity
Change in Rates
$ Amount
$ Change
% Change
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
569,397
553,285
534,478
512,132
483,606
429,266
(Dollars in Thousands)
85,791
69,679
50,873
28,526
-
(34,339)
17.74%
14.41%
10.52%
5.90%
-
(7.10)%
December 31, 2015
Change in Rates
$ Amount
$ Change
% Change
Economic Value of Equity
+ 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)%
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
24.99%
23.86%
22.63%
21.30%
19.77%
17.29%
522 bp
408 bp
286 bp
153 bp
–
(249) bp
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
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of
December 31, 2016, First Federal would experience a 10.52% 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, 2016 was 1.70 years while the average
duration of its liabilities was 3.63 years.
In evaluating First Federal’s exposure to interest rate risk, certain shortcomings inherent in each
of the methods of analysis presented must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates while interest rates on other types of financial instruments
may lag behind current changes in market rates. Furthermore, in the event of changes in rates,
prepayments and early withdrawal levels could differ significantly from the assumptions in calculating
the table and the results therefore may differ from those presented.
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Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
The management of First Defiance Financial Corp. is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-
15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of; our principal executive and principal financial officers and effected by the board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our 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 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,
2016.
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, 2016.
The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2016, is herein.
Donald P. Hileman
President and
Chief Executive Officer
Kevin T. Thompson
Executive Vice President and
Chief Financial Officer
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- 57 -
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onable
fective
ancial
in the
de by
control
orting,
erating
g such
vide a
A compa
assurance
external p
control ov
of records
assets of
permit pre
and that
authorizat
regarding
assets tha
ny's internal
e regarding t
purposes in a
ver financial re
s that, in reas
the company
eparation of f
receipts an
tions of man
prevention o
at could have
control ove
the reliability
accordance w
eporting inclu
sonable detai
y; (2) provide
financial state
nd expenditu
agement and
or timely dete
a material ef
r financial re
of financial r
with generally
udes those po
il, accurately
reasonable a
ements in ac
ures of the
d directors o
ction of unau
ffect on the fin
eporting is a
reporting and
y accepted a
olicies and pro
and fairly ref
assurance tha
ccordance wit
company ar
of the compa
thorized acqu
nancial statem
a process de
d the prepara
accounting pr
ocedures that
flect the trans
at transaction
th generally a
re being ma
any; and (3)
uisition, use,
ments.
esigned to p
ation of financ
rinciples. A c
t (1) pertain t
sactions and
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accepted acc
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provide reas
or disposition
provide reaso
cial statemen
company's in
to the mainten
dispositions
ed as necess
counting princ
accordance
sonable assu
n of the comp
onable
nts for
nternal
nance
of the
ary to
ciples,
e with
urance
pany's
Continued)
(C
- 58 -
1.
Because
misstatem
that contro
with the p
of its inhere
ments. Also, p
ols may beco
policies or pro
nt limitations
projections of
ome inadequa
cedures may
, internal con
any evaluatio
ate because o
deteriorate.
ntrol over fin
on of effective
of changes in
ancial report
eness to futur
conditions, o
ting may not
re periods are
or that the deg
prevent or d
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detect
he risk
liance
In our op
respects,
the result
Decembe
America.
internal c
2013 Inte
pinion, the co
the financial
ts of its oper
er 31, 2016 in
Also in our o
ontrol over fi
rnal Control –
onsolidated f
position of Fi
rations and it
n conformity w
pinion, First D
nancial repo
– Integrated F
financial state
irst Defiance
ts cash flows
with accounti
Defiance Fina
rting as of D
Framework iss
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Financial Co
s for each of
ing principles
ancial Corp. m
December 31,
sued by the C
red to above
rp. as of Dec
f the years i
s generally ac
maintained, in
, 2016, based
COSO.
e present fai
cember 31, 20
n the three-y
ccepted in th
n all material
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rly, in all ma
016 and 2015
year period e
e United Sta
respects, eff
established
aterial
5, and
ended
tes of
fective
in the
Crow
we Horwath L
LLP
South Ben
February
nd, Indiana
28, 2017
- 59 -
2.
First Defiance Financial Corp.
Consolidated Statements of Financial Condition
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 $187 and
$245 at December 31, 2016 and 2015 respectively)
Loans held for sale
Loans receivable, net of allowance of $25,884 and
December 31
2016
2015
53,003
46,000
99,003
250,992
184
251,176
9,607
$ 38,769
41,000
79,769
236,435
243
236,678
5,523
$25,382 at December 31, 2016 and 2015, respectively
1,914,603
1,776,835
Mortgage servicing rights
Accrued interest receivable
Federal Home Loan Bank (FHLB) stock
Bank owned life insurance
Premises and equipment
Real estate and other assets held for sale (REO)
Goodwill
Core deposit and other intangibles
Deferred taxes
Other assets
Total assets
9,595
6,760
13,798
52,817
36,958
455
61,798
1,336
2,212
17,479
9,248
6,171
13,801
51,908
38,166
1,321
61,798
1,871
-
14,587
$
2,477,597
$ 2,297,676
- 60 -
- 60 -
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 Liabilities (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; 12,720,347 and 12,721,959 shares issued
and 8,983,206 and 9,102,831 shares outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $117 and $1,950, respectively
Retained earnings
Treasury stock, at cost, 3,737,141 and 3,619,128
shares respectively
Total stockholders’ equity
December 31
2016
2015
$
487,663
$
420,691
1,493,965
1,981,628
103,943
31,816
36,083
2,650
-
28,459
1,415,446
1,836,137
59,902
57,188
36,083
2,674
877
24,618
2,184,579
2,017,479
–
–
127
126,390
215
240,592
(74,306)
293,018
–
–
127
125,734
3,622
219,737
(69,023)
280,197
Total liabilities and stockholders’ equity
$
2,477,597
$
2,297,676
See accompanying notes.
- 61 -
- 61 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31
2015
2014
2016
$
80,217
$
73,346
$
68,682
3,231
3,016
367
552
87,383
6,261
1,288
753
138
8,440
78,943
283
78,660
10,909
7,270
10,441
753
509
1,701
909
1,538
34,030
40,187
7,418
1,169
6,367
15,952
71,093
41,597
12,754
28,843
3.21
3.19
0.880
$
$
$
$
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
2.87
2.82
0.775
$
$
$
$
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
2.55
2.44
0.625
$
$
$
$
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
Trust income
Income from bank owned life insurance
Other noninterest income (Note 15)
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 (Note 4)
Basic
Diluted
Dividends declared per common share
See accompanying notes
- 62 -
- 62 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31
2016
2015
2014
$28,843
$26,423
$24,292
6,763
(932)
5,831
(2,040)
3,791
(377)
35
(342)
120
(222)
3,569
$27,861
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
Net unrealized gains (losses)
Income tax effect
Net of tax amount
Change in unrealized gain/(loss) 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
(4,933)
(985)
(509)
(5,442)
1,904
(3,538)
(22)
(1,007)
352
(655)
172
30
202
(71)
131
204
47
251
(88)
163
Total other comprehensive income (loss)
Comprehensive income
(3,407)
$25,436
(492)
$25,931
See accompanying notes
63
- 63 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
Balance at January 1, 2014
Net income
Other comprehensive income
Stock based compensation expenses
Shares issued under stock option plan
Restricted share activity under stock incentive
plans
Shares issued from direct stock sales
Shares repurchased
Common stock dividends declared
Preferred
Stock
$
-
Common
Stock
Shares
9,719,521
Common
Stock
$ 127
Common
Stock
Warrant
$
878
Additional
Paid-In
Capital
$ 136,403
52,258
13,087
2,804
(553,136)
78
88
(334)
31
Balance at December 31, 2014
$
-
9,234,534
$ 127
$
878
$ 136,266
$
4,114
Net income
Other comprehensive loss
Stock based compensation expenses
Warrant repurchase
Shares issued under stock option plan,
net of 14,350 repurchased and retired
Restricted share activity under stock incentive
plans
Excess tax benefit on stock compensation plans
Shares issued from direct stock sales
Shares repurchased
Common stock dividends declared
74,300
18,006
1,799
(225,808)
(878)
150
(11,101)
(492)
230
(58)
216
31
Balance at December 31, 2015
$
-
9,102,831
$ 127
$
-
$ 125,734
$
3,622
Accumulated
Other
Comprehensive
Income
$ 545
3,569
Retained
Earnings
$ 182,290
24,292
Treasury
Stock
$ (48,096)
(45)
878
Total
Stockholder’s
Equity
$ 272,147
24,292
3,569
78
921
(5,937)
$ 200,600
26,423
(313)
186
(7,159)
$ 219,737
28,843
(26)
(72)
212
45
(15,519)
$ (62,480)
1,552
308
33
(8,436)
$ (69,023)
761
219
30
(6,293)
(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
28,843
(3,407)
274
714
517
63
(6,293)
(7,890)
$ 293,018
Net income
Other comprehensive loss
Stock based compensation expenses
Shares issued under stock option plan,
net of 1,612 repurchased and retired
Restricted share activity under stock incentive
plans
Shares issued from direct stock sales
Shares repurchased
Common stock dividends declared
Balance at December 31, 2016
See accompanying notes
36,358
10,405
1,480
(167,868)
(3,407)
274
(21)
370
33
$
-
8,983,206
$ 127
$
-
$ 126,390
$
215
(7,890)
$ 240,592
$ (74,306)
64
- 64 -
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 impairment (recovery) 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
(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 based compensation expenses
Restricted stock unit expense (credit)
Excess tax benefit (expense)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 used in investing activities
Years Ended December 31
2015
2016
2014
$ 28,843
$ 26,423
$ 24,292
283
3,356
1,128
1,724
(123)
535
(6,064)
-
(300)
(509)
(615)
262,958
(263,679)
274
517
(192)
(909)
(4,121)
3,878
26,984
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
59
69
73
36,390
14,871
1,705
1
(71,276)
(2,106)
-
3
-
-
(822)
20,816
(158,121)
(158,480)
31,240
20,400
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)
65
- 65 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows (continued)
(Dollar Amounts in Thousands)
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 direct treasury stock sales
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Interest paid
Income taxes paid
Transfers from loans to other real estate owned and other
assets held for sale
Transfer from real estate owned and other assets held for sale to
loans
Transfer from (to) property and equipment to real estate and other
assets held for sale
Transfer from loans held for sale to loans
Securities traded but not yet settled
See accompanying notes.
Years Ended December 31
2015
2016
2014
145,467
(959)
45,000
(25,372)
(7,890)
(6,293)
-
714
63
150,730
19,234
79,769
$ 99,003
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
(33,167)
112,936
$ 79,769
(66,382)
179,318
$ 112,936
$
8,370
12,700
$
6,764
10,000
$
583
-
(44)
-
357
974
2,544
267
-
-
6,557
8,950
2,357
-
-
1,178
-
66
- 66 -
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, 16 and 25 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 $1,809,000 and
$1,896,000, respectively, at December 31, 2016 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, 2016, the Company held
$13.8 million at the FHLB of Cincinnati and $5,000 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,
68
- 68 -
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.
The Company may incur losses pertaining to loans sold to Fannie Mae and Freddie Mac but repurchased due to
underwriting issues. Repurchase losses are recognized when the Company determines they are probable and
estimable.
Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90
days delinquent or impaired is discontinued when, in management’s opinion, the borrower may be unable to
meet payments as they become due. For these loans, interest accrual is only to the extent cash payments are
received. The accrual of interest on these loans is generally resumed after a pattern of repayment has been
established and the collection of principal and interest is reasonably assured.
Acquired Loans
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.
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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, utilized an average of four (4) four-year loss
migration periods for each loan portfolio segment with differentiation between loan risk grades. 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.
Beginning December 31, 2016 the historical loss calculation was changed from using an average of four (4) four-
year loss migration periods to using an average of all four-year loss migration periods to the present beginning with
data from the second quarter 2011. Management believes this enhancement is consistent with the rationale of the
previous measurement but provides a more precise calculation of historical losses by incorporating more data points
for the average loss ratio and including periods that provide a more complete coverage of the full business 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. These modifications 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
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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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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.
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 $3.6 million, $3.5 million and $3.6 million for
the years ended December 31, 2016, 2015 and 2014. Late fees and ancillary fees related to loan servicing are
not material. See Note 8.
Bank Owned Life Insurance
The Company has purchased life insurance policies for certain key employees. Bank owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the
cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment and Long Lived Assets
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method over the following estimated useful lives:
Buildings and improvements
Furniture, fixtures and equipment
20 to 50 years
3 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles are periodically evaluated for
impairment. See Note 9.
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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
Real estate and other assets held for sale are comprised of properties or other assets 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
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, 2016, the
reported revenue for First Insurance was 9.2% 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, 2016 was 4.9% of consolidated net income. Total assets of First Insurance at
December 31, 2016 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
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 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.
See Note 16 and 19.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
Accounting Standards Updates
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update
(“ASU”) No. 2016-05 — Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in this update provide
guidance on eight specific cash flow issues. The new guidance is intended to reduce diversity in practice in how
certain transactions are classified in the statement of cash flows. The amendments in this update are effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. The Company does not believe this standard will have a material impact on its
consolidated statements of cash flows.
In June 2016, the FASB issued new accounting guidance in ASU No. 2016-13, Measurement of Credit Losses
on Financial Instruments (Topic 326). The main objective of the update is to provide financial statement users
with more decision-useful information about the expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the
amendments in this update replace the incurred loss impairment methodology in current Generally Accepted
Accounting Principles with a methodology that reflects expected credit losses and requires consideration of a
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broader range of reasonable and supportable information to form credit loss estimates. The amendments in this
update become effective for fiscal years and interim periods within those fiscal years beginning after December
15, 2019. The Company is currently evaluating the impact of this new accounting standard on the Company's
consolidated financial statements. Management’s initial review indicates it has maintained sufficient historical
loan data to support the requirement of this pronouncement and is currently evaluating the various loss
methodologies to determine their correlations to the Company’s loan segments historical performance.
In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update
are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on
its financial position and results of operations, though the Company expects that its real estate leases will be
recognized on the consolidated balance sheet.
In January 2016, the FASB issued ASU No. 2016-01 — Financial Instruments — Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update
address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The
ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and
requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
Early adoption is not permitted. The Company is currently evaluating the impact of adopting the new guidance
on the consolidated financial statements. Management’s preliminary finding is that the new pronouncement will
not have a significant impact on its results of operations. The pronouncement will require some revision to the
Company’s disclosures within the consolidated financial statements and is currently evaluating the impact.
In May 2014, the FASB issued ASU No. 2014-09 — Revenue from Contracts with Customers, and
subsequently has issued five related accounting standard updates clarifying several aspects of ASU 2014-09,
including technical corrections and improvements. The overall objective of the new standards updates is to
provide a single, comprehensive revenue recognition model for all contracts with customers to improve
comparability within industries, across industries, and across capital markets. The revenue standard contains
principles that will be applied to determine the measurement of revenue and timing of when it is recognized.
The Company anticipates adopting the new standard on its effective date, January 1, 2018, though the Company
has not yet selected whether it would adopt using the retrospective approach with adjustments to each prior
period or the retrospective method with the cumulative effect of initial application recognized at the date of
initial application. While the Company is continuing to assess all potential impacts this standard will have on its
financial position and results of operations, early conclusions indicate that these standards will not have a
material impact. The implementation efforts include the identification of revenue within the scope of the
guidance, as well as the evaluation of revenue contracts.
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3. Acquisitions/Subsequent Event
On August 23, 2016, First Defiance announced the execution of a definitive agreement (the “Agreement”) to
acquire Commercial Bancshares, Inc. (“Commercial Bancshares”) and its wholly-owned subsidiary, the
Commercial Savings Bank (“CSB”). The transaction closed on February 24, 2017. The total purchase price for
Commercial Bancshares was $70.3 million, consisting of $13.8 million of cash and cash payment to cancel
outstanding options and the issuance of 1.1 million shares of First Defiance Common Stock valued at $56.5
million. The Company expects to record goodwill arising from the acquisition consisting largely of synergies
and cost savings resulting from combining the operations of the companies. The amount of goodwill is not
expected to be deductible for tax purposes. The fair value of intangible assets and acquired assets and liabilities
will be determined as of the acquisition date but are still being evaluated as of the date of these financial
statements. The purpose of the acquisition is to extend the Company’s growing market area into central Ohio
supporting the Company’s overall strategic plan.
4. Earnings Per Common Share
Basic earnings per share is calculated using the two-class method. The two-class method is an earnings
allocation formula under which earnings per share is calculated from common stock and participating securities
according to dividends declared and participation rights in undistributed earnings. Under this method, all
earnings distributed and undistributed, are allocated to participating securities and common shares based on
their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable
rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to
performance based measures.
The following table sets forth the computation of basic and diluted earnings per common share:
Basic Earnings Per Share:
Net income available to common shareholders
Less: Income allocated to participating securities
Net income allocated to common shareholders
Weighted average common shares outstanding
Including participating securities
Less: Participating securities
Average common shares
2016
2014
2015
(In Thousands, Except Per Share Amounts)
$
28,843
39
28,804
$
26,423
8
26,415
$
24,292
4
24,288
8,980
11
8,969
9,221
11
9,210
9,511
6
9,505
Basic earnings per common share
$
3.21
$
2.87
$
2.55
Diluted Earnings Per Share:
Net income allocated to common shareholders
Weighted average common shares outstanding
for basic earnings per common share
Add: Dilutive effects of stock options
Add: Dilutive effects of warrants
Average shares and dilutive potential common
shares
$
28,804
$
26,415
$
24,288
8,969
66
-
9,035
9,210
87
75
9,371
9,505
111
353
9,969
Diluted earnings per common share
$
3.19
$
2.82
$
2.44
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Shares subject to issue upon exercise of options of 12,550 in 2016, 8,750 in 2015 and 10,500 in 2014 were
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
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, 2016 and 2015 and the corresponding amounts of gross
unrealized and unrecognized gains and losses:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
$
3,915
81,707
1,307
63,005
2
13,013
88,043
$ 250,992
Fair
Value
$ 12
58
24
93
187
$
2016
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
$
4,000
82,619
1,309
63,204
-
12,919
$
-
390
-
422
2
97
86,165
$ 250,216
2,491
$ 3,402
$
(85)
(1,302)
(2)
(621)
-
(3)
(613)
$ (2,626)
Gross
Amortized Unrecognized Unrecognized
Gains
Losses
Gross
Cost
Held-to-Maturity
FHLMC certificates
FNMA certificates
GNMA certificates
Obligations of states and political
subdivisions
Total Held-to-Maturity
(In Thousands)
$
$
12
56
23
93
184
$
$
-
2
1
-
3
$
$
-
-
-
-
-
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Gross
Gross
Amortized
Cost
Unrealized Unrealized
Gains
Losses
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
$
(7)
(59)
-
(353)
-
(17)
$ 2,994
64,654
1,620
71,799
1
4,977
85,680
$ 230,218
4,712
$ 6,655
(2)
(438)
$
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
The amortized cost and fair value of the investment securities portfolio at December 31, 2016 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.
2016
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
Available-for-Sale
Fair
Value
Amortized
Cost
(In Thousands)
$
577
$
586
21,850
22,136
41,311
39,346
147,132
$ 250,216
42,784
39,467
146,019
$ 250,992
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Held-to-maturity
Due after one year through
five years
MBS
Total
$
$
93
91
184
$
$
93
94
187
Securities pledged at year-end 2016 and 2015 had a carrying amount of $142.6 million and $134.8 million and
were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
As of December 31, 2016, the Company’s investment portfolio consisted of 383 securities, 117 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, 2016.
The following table summarizes First Defiance’s securities that were in an unrealized loss position at December
31, 2016 and December 31, 2015:
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
$
3,915
$
(85)
$
63,736
1,308
28,882
-
19,172
(1,302)
(2)
(566)
-
(613)
$
-
-
-
1,227
997
-
-
-
-
(55)
(3)
-
$
3,915
$
(85)
63,736
1,308
30,110
997
19,172
(1,302)
(2)
(621)
(3)
(613)
$ 117,013
$ (2,568)
$
2,224
$
(58)
$
119,238
$ (2,626)
$
993
$
(7)
$
12,525
12,374
983
-
13
(59)
(150)
(17)
-
(1)
$
-
-
8,158
-
433
-
-
-
(203)
-
(2)
-
$
993
$
(7)
12,525
20,532
983
433
13
(59)
(353)
(17)
(2)
(1)
$
26,888
$
(234)
$
8,591
$
(205)
$
35,479
$ (439)
At December 31, 2016
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Mortgage-backed securities-
residential
REMICs
Collateralized mortgage
obligations
Corporate bonds
Obligations of state and political
subdivisions
Total temporarily impaired
securities
At December 31, 2015
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Mortgage-backed securities-
residential
Collateralized mortgage
obligations
Corporate bonds
Obligations of state and political
subdivisions
Held to maturity securities:
FNMA certificates
Total temporarily impaired
securities
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.
80
- 80 -
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.
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 2016, 2015 and 2014, management determined there was no OTTI. In 2013, management determined that
two CDOs had OTTI because they were disallowed under the Final Interim Volcker Rule of the Dodd-Frank
Act released on January 14, 2014. The Company 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, 2016 and 2015.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for
the years ended December 31, 2016, 2015 and 2014 (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
2016
$
Ending balance, December 31
$
2015
$
$
2014
$ 3,513
-
(3,513)
$
-
-
-
-
-
-
-
-
-
Realized gains from the sales and calls of investment securities totaled $509,000 ($331,000 after tax) in 2016
while there were realized gains of $22,000 ($15,000 after tax) and $932,000 ($652,000 after tax) in 2015 and
2014, 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
2016
2015
(In Thousands)
2014
$
$ 14,871
509
-
426
22
-
$ 14,913
1,574
(642)
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):
2016
2015
Commitments to make loans
Unused lines of credit
Standby letters of credit
Total
Fixed Rate
34,432
14,384
-
48,816
$
$
Variable Rate
$
106,356
400,542
9,668
516,566
$
Fixed Rate
80,862
31,991
-
112,853
$
$
Variable Rate
76,253
$
323,171
19,632
419,056
$
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan
commitments at December 31, 2016 had interest rates ranging from 2.63% to 18.00% and maturities ranging
from less than 1 year to 30 years.
In addition to the above commitments, at December 31, 2016, First Defiance had commitments to sell $22.5
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,
2016
December 31,
2015
(In Thousands)
$
207,550
196,983
843,579
182,886
1,430,998
469,055
118,429
16,680
604,164
2,035,162
$
205,330
167,558
780,870
163,877
1,317,635
419,349
116,962
16,281
552,592
1,870,227
Undisbursed loan funds
Net deferred loan origination fees and costs
Allowance for loan loss
Totals
(93,355)
(1,320)
(25,884)
$ 1,914,603
(66,902)
(1,108)
(25,382)
$ 1,776,835
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,
2016
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
$ 3,212
$ 2,151
$ 11,772
$ 517
$ 5,255
$ 2,304
$ 171
$ 25,382
Charge-Offs
Recoveries
Provisions
(350)
166
(401)
-
-
(92)
923
-
-
77
(1,978)
(67)
(615)
(268)
(94)
(1,419)
335
2,386
150
200
64
66
1,638
283
Ending Allowance
$ 2,627
$ 2,228
$ 10,625
$ 450
$ 7,361
$ 2,386
$ 207
$ 25,884
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)
Recoveries
Provisions
214
787
-
(188)
915
(58)
-
-
(68)
331
296
(1,517)
(350)
(53)
(1,221)
188
762
53
54
1,701
136
Ending Allowance
$ 3,212
$ 2,151
$ 11,772
$ 517
$ 5,255
$ 2,304
$ 171
$ 25,382
83
- 83 -
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
Recoveries
Provisions
(426)
188
(115)
-
7
(1,018)
2,670
-
-
(62)
(2,384)
87
3,378
435
193
268
65
3,558
(55)
1,117
(2,982)
(392)
(41)
(4,859)
Ending Allowance
$ 2,494
$ 2,453
$ 11,268
$ 221
$ 6,509
$ 1,704
$ 117
$ 24,766
84
- 84 -
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- 86 -
The following tables 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, 2016, 2015 and 2014
(In Thousands):
Twelve Months Ended December 31,
2016
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
$
3,954
$
244
$
237
3,133
7,087
3,946
6,925
5,351
2,283
1,632
16,191
-
1,606
2,393
3,999
1,543
67
211
455
124
203
411
128
71
813
-
109
81
190
85
8
210
447
123
183
407
68
70
728
-
90
79
169
83
8
$ 32,833
$ 1,675
$1,558
- 87 -
- 87 -
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
- 88 -
- 88 -
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
143
456
4
4
145
807
14
20
986
12
29
14
43
95
3
142
809
14
22
987
15
29
12
41
94
3
$ 50,254
$ 1,603
$ 1,600
- 89 -
- 89 -
The following table presents loans individually evaluated for impairment by class of loans (In
Thousands):
December 31, 2016
December 31, 2015
Unpaid
Principal
Balance*
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Unpaid
Principal
Balance*
Allowance
for Loan
Losses
Allocated
Recorded
Investment
$ 1,383
2,147
3,530
$ 1,360
2,141
3,501
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,313
4,520
7,685
3,596
4,046
19,847
-
1,648
3,607
5,255
772
59
$ 32,747
$
$ 2,837
1,236
4,073
$ 188
13
201
-
2,767
308
69
502
3,646
-
596
256
852
719
12
$ 9,302
-
132
2
2
3
139
-
62
1
63
34
-
$ 437
3,463
4,869
7,932
3,546
4,076
20,423
-
1,644
3,573
5,217
817
60
$ 33,510
$ 2,918
1,231
4,149
-
3,250
385
68
926
4,629
-
594
252
846
724
12
$ 10,360
With no allowance recorded:
Residential Owner Occupied
Residential Non Owner Occupied
Total 1-4 Family Residential Real
Estate
Multi-Family Residential Real Estate
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Total Commercial Real Estate
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
Total loans with no allowance recorded
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
$
1,912
1,691
3,603
$
1,765
1,683
3,448
$
3,578
2,652
4,372
1,695
1,225
9,944
-
838
1,179
2,017
631
55
$ 19,828
3,430
2,353
4,240
1,722
1,115
9,430
-
786
967
1,753
585
55
$ 18,701
$ 2,348
1,137
3,485
$ 2,319
1,131
3,450
53
2,362
1,618
45
1,144
5,169
-
230
167
397
688
4
$ 9,796
53
1,894
1,479
45
722
4,140
-
231
170
401
684
4
$ 8,732
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
157
45
202
4
102
108
3
42
255
-
24
11
35
313
-
809
- 90 -
- 90 -
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,
2016
December 31,
2015
(In Thousands)
$ 14,348
-
14,348
455
$ 14,803
$ 16,261
-
16,261
1,321
$ 17,582
Troubled debt restructuring, still accruing
$ 10,544
$ 11,178
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2016 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
$ 139,015
66,811
$ 56
166
$
842
308
$
544
63
$ 1,442
537
$ 1,931
992
Total 1-4 Family Residential Real
Estate
205,826
222
1,150
607
1,979
2,923
Multi-Family Residential Real Estate
197,197
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
340,233
338,724
102,397
62,415
-
79
81
-
-
Total Commercial Real Estate
843,769
160
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
89,244
202,786
267,189
469,975
117,458
16,452
-
-
23
23
1,125
85
176
69
-
-
16
-
-
16
-
10
-
10
-
-
2,637
1,396
426
-
249
1,475
523
-
249
3,098
1,808
755
1,292
2,071
2,247
6,953
-
38
365
403
254
78
-
48
388
436
1,555
232
-
435
577
1,012
730
91
Total Loans
$ 1,939,921
$ 1,615
$ 1,421
$ 3,413
$ 6,449
$ 14,346
- 91 -
- 91 -
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
226
$ 1,223
906
$ 1,428
1,179
Total 1-4 Family Residential Real
Estate
203,551
Multi-Family Residential Real Estate
165,671
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
Total 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
778,655
96,845
168,938
249,070
418,008
116,599
16,216
483
-
772
-
57
-
829
-
16
203
219
733
27
1,029
617
2,129
2,607
-
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
1,324
2,119
4,272
7,429
-
-
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
Troubled Debt Restructurings
As of December 31, 2016 and 2015, the Company had a recorded investment in troubled debt
restructurings (“TDRs”) of $16.8 million and $17.6 million, respectively. The Company allocated
$809,000 and $335,000, of specific reserves to those loans at December 31, 2016 and 2015, and
committed to lend additional amounts totaling up to $20,000 and $48,000 at December 31, 2016 and
2015.
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
- 92 -
- 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, $6.2 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, 2016
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
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)
TDRs
Residential Owner Occupied
17
Residential Non Owner Occupied
Multi Family
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Commercial Working Capital
Commercial Other
Home Equity and Home
Improvement
Consumer Finance
Total
5
2
-
5
1
1
1
1
9
2
$ 778
494
1,885
-
974
45
348
226
587
281
14
6
4
-
2
2
3
-
2
2
13
9
43
$ 454
18
$ 1,726
59
-
645
244
1,443
-
62
70
324
62
$ 3,363
3
-
2
3
-
-
4
16
17
4
67
517
-
27
403
-
-
1,353
2,020
471
15
$ 6,532
44
$ 5,632
The loans described above increased the allowance for loan losses (“ALLL”) by $413,000 for the year
ended December 31, 2016, decreased the ALLL by $13,000 for the year ended December 31, 2015, and
increased the ALLL by $234,000 for the year ended December 31, 2014.
Of the 2016 modifications, fifteen were made TDRs due to the fact that the borrower filed bankruptcy,
one was made a TDR due to an interest only period, six were made a TDR due to extending the maturity,
five were made TDRs due to advancing or renewing funds to a watchlist credit, two were made TDRs to
term out lines of credit, and fifteen were made TDRs to refinance current debt for payment relief.
- 93 -
- 93 -
The following table presents loans by class modified as TDRs for which there was a payment default
within twelve months following the modification during the indicated:
Twelve Months Ended
December 31, 2016
($ in thousands)
Twelve Months Ended
December 31, 2015
($ in thousands)
Twelve Months Ended
December 31, 2014
($ in thousands)
TDRs
That Subsequently Defaulted:
Number of
Loans
Recorded
Investment
(as of Period
End)
Number of
Loans
Residential Owner Occupied
Residential Non Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Commercial Working Capital
Commercial Other
Home Equity and Home
Improvement
Consumer
Total
-
-
-
1
-
-
-
-
-
-
1
$ -
-
-
205
-
-
-
-
-
-
$ 205
-
-
-
-
-
-
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
-
-
$ 1,991
The TDRs that subsequently defaulted described above had no effect on the ALLL for the year ended
December 31, 2016 and 2015. They decreased the ALLL by $14,000 after $176,000 in charge-offs for
the year ended December 31, 2014.
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, 2016 and 2015
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 373 loans were
modified under this definition during the twelve month period ended December 31, 2016 and a total of
187 loans were modified under this definition during the twelve month period ended December 31, 2015.
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, 2016, and based on the most recent analysis
performed, the risk category of loans by class of loans is as follows (In Thousands):
Class
Special
Pass
Mention Substandard Doubtful
Residential Owner Occupied
Residential Non Owner Occupied
Total 1-4 Family Real Estate
$
$
5,980
58,041
64,021
Multi-Family Residential Real Estate
192,369
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
316,335
332,196
98,039
59,561
$
402
1,394
1,796
862
20,559
1,617
2,355
60
$
1,824
3,480
5,304
3,852
4,430
5,435
2,002
2,297
Total Commercial Real Estate
806,131
24,591
14,164
Construction
67,751
706
-
Commercial Working Capital
Commercial Other
193,043
262,076
8,301
3,749
1,490
1,752
Total Commercial
455,119
12,050
3,242
Home Equity and Home Improvement
Consumer Finance
-
-
-
-
696
90
Total Loans
$ 1,585,391
$ 40,005
$ 27,348
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Not
Graded
Total
$ 132,250
4,434
$ 140,456
67,349
136,684
207,805
114
384
-
-
746
197,197
341,708
339,248
102,396
62,664
1,130
846,016
20,787
89,244
-
-
-
118,317
16,594
202,834
267,577
470,411
119,013
16,684
$ 293,626
$ 1,946,370
- 95 -
- 95 -
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
Special
Pass
Mention Substandard Doubtful
Residential Owner Occupied
Residential Non Owner Occupied
$
5,828
55,169
$ 123
1,420
$
Total 1-4 Family Real Estate
60,997
1,543
Multi-Family Residential Real Estate
163,405
498
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
$
2,427
4,439
6,866
3,675
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
Total Loans
$ 1,437,217
$ 31,858
$ 49,280
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Not
Graded
Total
$ 131,820
4,454
$ 140,198
65,482
136,274
205,680
117
714
15
-
492
167,695
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
$ 289,180
$ 1,807,535
- 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, 2014
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
Principal payments received
Loans charged off
Additional provision for loan loss
Loan accretion recorded
Balance at December 31, 2016
Contractual
Amount
Receivable
$
503
(90)
-
-
-
413
(51)
-
-
-
362
(261)
(35)
-
-
66
$
$
Impairment
Discount
(In Thousands)
273
-
-
-
(46)
227
-
-
-
(34)
193
-
(35)
-
(103)
55
$
Recorded
Loan
Receivable
$
$
230
(90)
-
-
46
186
(51)
-
-
34
169
(261)
-
-
103
11
Loans to executive officers, directors, and their affiliates are as follows:
Years Ended December 31
2015
2016
(In Thousands)
7,349
4,783
12,320
(8,253)
16,199
$ 5,888
5,822
(54)
(4,307)
$ 7,349
Beginning balance
New loans
Effect of changes in composition of related parties
Repayments
Ending Balance
$
$
- 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
$
2016
Years Ended December 31
2015
(In Thousands)
$ 4,564
5,311
2014
$ 3,335
3,560
(1,724)
123
1,959
3,503
(1,620)
266
2,149
3,552
(1,401)
116
2,267
Net mortgage banking income
$ 7,270
$ 6,713
$ 5,602
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.37 billion at
December 31, 2016 and $1.34 billion at December 31, 2015.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows:
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
2016
Years Ended December 31
2015
(In Thousands)
2014
$ 9,893
1,948
(1,724)
$ 9,923
1,590
(1,620)
$ 10,133
1,191
(1,401)
10,117
9,893
9,923
(645)
123
(522)
$ 9,595
$ 9,770
(911)
266
(645)
$ 9,248
$ 9,802
(1,027)
116
(911)
$ 9,012
$ 9,304
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 2016. Based on management’s
estimate of potential losses from secondary market buyback activity, a liability of $79,000 and $214,000
was accrued at December 31, 2016 and 2015, respectively, and is reflected in other liabilities in the
Consolidated Statements of Financial Condition. Expense (credit) recognized related to the accrual was
$(135,000), $(95,000) and $298,000 for the years ended December 31, 2016, 2015 and 2014, 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
2016
2015
Number of
Loans
Principal
Outstanding
Number of
Loans
Principal
Outstanding
(In Thousands)
5,004
9,229
101
16
14,350
$
470,692
889,280
11,081
965
$ 1,372,018
5,104
9,015
118
21
14,258
$ 484,155
845,564
12,605
1,398
$ 1,343,722
Custodial escrow balances maintained in connection with serviced loans were $12.6 million and $11.6
million at December 31, 2016 and 2015, respectively.
Significant assumptions at December 31, 2016 used in determining the value of MSRs include a
weighted average prepayment speed assumption (“PSA”) of 152 and a weighted average discount rate of
12.01%. Significant assumptions at December 31, 2015 used in determining the value of MSRs include a
weighted average prepayment rate of 181 PSA and a weighted average discount rate of 10.02%.
A sensitivity analysis of the current fair value to immediate 10% and 20% adverse changes in those
assumptions as of December 31, 2016 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
Decline in fair value from increase in discount rate
$ 243
311
$ 475
612
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
2016
2015
(In Thousands)
$
$
7,534
1,310
41,895
971
31,253
787
83,750
(46,792)
36,958
$
$
7,494
1,310
41,556
971
29,622
656
81,609
(43,443)
38,166
Depreciation expense was $3.4 million, $3.3 million and $3.0 million for the years ended December 31,
2016, 2015 and 2014, 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 that is to be terminated in the first quarter of 2017 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):
2017
2018
2019
2020
2021
Thereafter
Total
$
$
584
400
337
265
222
2,654
4,462
Rental expenses under operating leases amounted to $571,000, $601,000 and $653,000 in 2016, 2015,
and 2014, 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
2016
2015
(In Thousands)
$
$
61,798
-
61,798
$
$
61,525
273
61,798
Activity in intangible assets for the years ended December 31, 2016, 2015 and 2014 was as follows:
Balance as of January 1, 2014
Amortization of intangible assets
Balance as of December 31, 2014
Intangible assets acquired
Amortization of intangible assets
Balance as of December 31, 2015
Amortization of intangible assets
Balance as of December 31, 2016
Gross
Carrying
Amount
$ 14,302
-
14,302
175
-
14,477
-
$ 14,477
Accumulated
Amortization
(In Thousands)
$ (10,805)
(1,102)
(11,907)
-
(699)
(12,606)
(535)
$ (13,141)
Net
Value
$
$
3,497
(1,102)
2,395
175
(699)
1,871
(535)
1,336
Estimated amortization expense for each of the next five years and thereafter is as follows (In
Thousands):
2017
2018
2019
2020
2021
Thereafter
Total
11. Deposits
The following schedule sets forth interest expense by type of deposit:
$
$
404
332
225
149
87
139
1,336
2016
Years Ended December 31
2015
(In Thousands)
$
$
1,463
88
4,710
6,261
1,186
89
4,066
5,341
$
$
2014
1,236
90
3,957
5,283
Checking and money market accounts
Savings accounts
Certificates of deposit
Totals
$
$
- 101 -
- 101 -
Accrued interest payable on deposit accounts amounted to $42,000 and $43,000 at December 31, 2016
and 2015, respectively, which was comprised of $19,000 and $23,000 for certificates of deposit and
checking and money market accounts, respectively, at December 31, 2016 and $25,000 and $18,000 for
certificates of deposit and checking and money market accounts, respectively, at December 31, 2015.
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
2016
2015
(In Thousands)
$
487,663
816,665
243,369
400,080
33,851
$ 1,981,628
$
420,691
767,201
219,655
403,902
24,688
$ 1,836,137
Scheduled maturities of certificates of deposit at December 31, 2016 are as follows (In Thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$
$
156,767
117,627
78,750
35,298
45,489
-
433,931
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, 2016 and
December 31, 2015 were $843.8 million and $692.2 million, respectively. First Federal could obtain
advances of up to approximately $448.9 million from the FHLB at December 31, 2016.
- 102 -
- 102 -
At year-end, advances from the FHLB were as follows:
Principal Terms
December 31, 2016
Putable advances
Single maturity fixed rate advances
Amortizable mortgage advances
December 31, 2015
Putable advances
Single maturity fixed rate advances
Amortizable mortgage advances
Advance
Amount
(In Thousands)
Range of Maturities
$
5,000 March 2018
92,000 November 2017 to March 2022
6,943
$ 103,943
September 2018
$
5,000 March 2018
47,000 December 2017 to March 2022
7,902 December 2017 to October 2021
$
59,902
Putable advances are callable at the option of the FHLB on a quarterly basis.
Weighted
Average
Interest
Rate
2.35%
1.34%
1.78%
2.35%
1.51%
1.78%
Estimated future minimum payments by fiscal year based on maturity date and current interest rates are
as follows (In Thousands):
2017
2018
2019
2020
2021
Thereafter
Total minimum payments
Less amounts representing interest
Totals
$
$
32,306
24,853
15,637
21,283
10,143
3,162
107,384
(3,441)
103,943
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, 2016 and 2015, 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, 2016 and 2015. 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
- 103 -
- 103 -
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 2.46% and 2.01% as of December 31, 2016
and 2015 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 2.34% and 1.89% as of December 31, 2016
and 2015 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
2016
2015
(In Thousands)
$
$
20,619
15,464
36,083
$
$
20,619
15,464
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.
- 104 -
- 104 -
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
2016
2015
(In Thousands, Except Percentages)
$
31,816
$
57,188
0.22%
52,821
57,984
0.26%
0.27%
54,632
60,272
0.28%
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, 2016 and 2015 is presented in the following tables.
Overnight and
Continuous
Up to 30
Days
30-90 Days
Greater
than 90
Days
At December 31, 2016
Repurchase agreements:
Mortgage-backed securities – residential
Collateralized mortgage obligations
Total borrowings
Gross amount of recognized liabilities for repurchase agreements
21,222
10,594
31,816
$
$
(In Thousands)
$
$
-
-
-
$
$
-
-
-
$
$
-
-
-
Overnight and
Continuous
Up to 30
Days
30-90 Days
Greater
than 90
Days
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)
$
$
-
-
-
$
$
-
-
-
$
$
-
-
-
Total
21,222
10,594
31,816
31,816
Total
23,998
33,190
57,188
57,188
$
$
$
$
$
$
On December 29, 2016, First Defiance entered into a loan agreement with First Tennessee Bank for a
$20 million line of credit. The rate on the line of credit is at three- month LIBOR and was undrawn on as
of December 31, 2016.
As of December 31, 2016 and 2015, First Federal had the following undrawn lines of credit facilities
available for short-term borrowing purposes:
A $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, 2016 was
0.75%. This line was undrawn upon as of December 31, 2016 and 2015.
- 105 -
- 105 -
A $20.0 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. This line was undrawn upon as of December
31, 2016 and 2015.
15. Other Noninterest Expense
The following is a summary of other noninterest expense:
Legal and other professional fees
Marketing
State financial institutions tax
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
2016
2014
Years Ended December 31
2015
(In Thousands)
$ 3,359
1,752
1,783
1,064
457
699
459
207
334
5,402
$ 15,516
$ 2,902
1,835
1,781
244
512
535
456
266
303
7,118(1)
$ 3,622
1,820
1,762
743
466
1,102
594
142
395
6,611(2)
$ 17,257
$ 15,952
1)
2)
Includes $443,000 of acquisition related expenses and $300,000 of costs associated with
termination of a lease agreement.
Includes $786,000 of costs associated with the termination of First Federal’s merger agreement
with FCB.
16. Postretirement Benefits
First Defiance sponsors a defined benefit postretirement plan that is intended to supplement Medicare
coverage for certain retirees who meet minimum age requirements. First Federal employees who retired
prior to April 1, 1997 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, 2016, 2015 and 2014 are the
following amounts that have not yet been recognized in net periodic benefit cost:
- 106 -
- 106 -
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
2016
52
392
444
(155)
December 31
2015
(In Thousands)
$
53
593
646
(226)
289
$
420
$
$
2014
65
832
897
(314)
583
$
$
The prior service cost and actuarial loss included in other comprehensive income and expected to be
recognized in net postretirement benefit cost during the fiscal year-ended December 31, 2017 is $12,000
($8,000 net of tax) and $10,000 ($7,000 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
Plan amendments for acquisitions
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
2016
2015
(In Thousands)
$
$
3,115
53
128
29
12
(184)
(168)
2,985
-
139
29
(168)
-
(2,985)
$
$
3,263
65
130
27
-
(204)
(166)
3,115
-
139
27
(166)
-
(3,115)
Net periodic postretirement benefit cost includes the following components:
Service cost-benefits attributable to service during the period
Interest cost on accumulated postretirement benefit
obligation
Net amortization and deferral
Net periodic postretirement benefit cost
Net (gain) / loss during the year
Plan amendment for 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
2016
$
53
Years Ended December 31
2015
(In Thousands)
$
65
$
128
30
211
(184)
12
(30)
(202)
130
47
242
(204)
-
(47)
(251)
2014
63
136
35
234
377
-
(35)
342
$
9
$
(9)
$
576
The following assumptions were used in determining the components of the postretirement benefit
obligation:
- 107 -
- 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
2016
2015
2014
4.00%
4.25%
4.25%
4.25%
4.25%
4.75%
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
7.50%
6.50%
7.00%
5.00%
2022
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.
2017
2018
2019
2020
2021
2022 through 2026
Expected to be Paid
(In Thousands)
$
160
173
182
197
180
1,035
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:
Effect on total of service and interest cost
Effect on postretirement benefit obligation
One-Percentage-Point
Increase
Year Ended December 31
2015
(In Thousands)
$
2016
$
$
27
369
27
376
One-Percentage-Point
Decrease
Year Ended December 31
2015
2016
(22)
(314)
$ (22)
(320)
The Company expects to contribute $160,000 before reflecting expected Medicare retiree drug subsidy
payments in 2017.
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, 2016 and 2015 (Dollars in Thousands):
December 31, 2016
Actual
Minimum Required for
Adequately Capitalized
Minimum Required for Well
Capitalized
Amount
Ratio
Amount
Ratio(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated
First Federal
Tier 1 Capital (1)
Consolidated
First Federal
$234,809
$242,928
10.45%
10.81%
$101,108
$101,116
$269,809
$242,928
11.24%
10.14%
$95,975
$95,791
Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$269,809
$242,928
12.01%
10.81%
$134,811
$134,822
Total Capital (to Risk Weighted Assets) (1)
Consolidated
First Federal
$295,693
$268,812
13.16%
11.96%
$179,748
$179,763
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$146,057
N/A
$119,739
N/A
$179,763
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$224,703
N/A
10.0%
(1) Excludes capital conservation buffer of 0.625% as of December 31, 2016.
(2) Core capital is computed as a percentage of adjusted total assets of $2.40 billion for consolidated and $2.39
billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.25
billion for consolidated and the Bank.
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%
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(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.
Management believes that, as of December, 31, 2016, 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, 2016, 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, 2016.
Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various
regulatory restrictions. First Federal paid $22.0 million in dividends to First Defiance in 2016 and $29.0
million in 2015. 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. First Insurance paid $1.2 million in
dividends to First Defiance in 2016 and $900,000 in dividends in 2015. First Defiance Risk Management
paid $1.0 million in dividends to First Defiance in 2016 and 2015.
18. Income Taxes
The components of income tax expense are as follows:
Current:
Federal
State and local
Deferred
2016
Years Ended December 31
2015
(In Thousands)
2014
$
$
13,125
244
(615)
12,754
$
$
11,299
146
(35)
11,410
$
$
9,198
144
(179)
9,163
The effective tax rates differ from federal statutory rate applied to income before income taxes due to the
following:
2016
Years Ended December 31
2015
(In Thousands)
13,240
$
$
14,559
159
(1,168)
(341)
(414)
(41)
12,754
$
95
(1,219)
(255)
(415)
(36)
11,410
$
2014
11,709
94
(1,152)
(816)
(390)
(282)
9,163
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
Total deferred federal income tax liabilities
Net deferred federal income tax asset/ (liability)
December 31
2016
2015
(In Thousands)
$
$
9,059
1,044
1,847
1,087
454
226
462
626
1,554
16,359
2,279
5,967
3,358
1,217
301
59
272
694
14,147
2,212
$
$
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)
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, 2016.
Retained earnings at December 31, 2016 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, 2016 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, 2014
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions due to the statute of limitations
Settlements
Balance at December 31, 2014
Balance at January 1, 2015
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, 2015
Balance at January 1, 2016
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, 2016
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
398
-
-
-
398
The Company does not expect the unrecognized tax benefits to have an effect on its effective tax rate.
The Company expects the entire amount of unrecognized tax benefits to settle within the next twelve
months. 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 was $40,000 for the year
ended December 31, 2016, and zero for 2015 and 2014, and the amount accrued for interest and penalties
was $40,000 at December 31, 2016, and zero for 2015 and 2014.
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 2012.
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 $979,000, $892,000
and $919,000 for the years ended December 31, 2016, 2015 and 2014, respectively. There were no
discretionary contributions in any of those years.
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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 $71,000, $78,000 and $167,000 of expense recorded
for the years ended December 31, 2016, 2015 and 2014, respectively, with a liability of $1.04 million,
$970,000 and $892,000 for future benefits recorded at December 31, 2016, 2015 and 2014, respectively.
The discount rate was reduced to 4.00% as of December 31, 2016, resulting in an increase to the
Company’s liability.
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, 2016, 54,750 options had 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 each of the years 2014-2016, the Company approved a Short-Term (“STIP”) Equity Incentive Plan and
a Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.
Under the 2014 and 2015 STIPs, 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 2016 STIP allows participants to earn up to 10% 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 STIPs is determined as of December 31 of the same year and paid out in
cash in the first quarter of the following year. The participants are required to be employed on the day of
payout in order to receive such payment.
Under each 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; 24,757; and 24,526 RSU’s to the participants in the 2014,
2015 and 2016 LTIPs, respectively, effective January 1 in the year the award was made, which represents
the maximum target award. The amount of benefit under each LTIP will be determined individually at
the end of the 36 month performance period ending December 31. The benefits earned under each LTIP
will be paid out in equity in the first quarter following the end of the performance period. The
participants are required to be employed on the day of payout in order to receive such payment.
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In 2016, the Company also granted 3,894 restricted shares to directors and employees. 1,872 shares were
issued to directors, 1,000 shares were issued to employees that have a one-year vesting period and 1,022
shares were issued to an employee with a four 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 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,
2016
2.05%
8.96 years
41.00%
2.33%
December 31,
2015
2.04%
10.00 years
42.00%
2.10%
Following is activity under the plans during 2016:
Stock options:
Options outstanding, January 1, 2016
Forfeited or cancelled
Exercised
Granted
Options outstanding, December 31, 2016
Vested or expected to vest at
December 31, 2016
Exercisable at December 31, 2016
Options
Outstanding
86,220
-
(37,970)
6,500
54,750
$
Weighted
Average
Exercise Price
20.27
-
20.47
37.78
22.21
$
54,750
38,300
$
$
22.21
17.86
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in 000’s)
3.51
3.51
1.57
$
$
$
1,562
1,562
1,259
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
2014
2015
2016
(In Thousands, except per share amounts)
$ 1,069
$
1,469
160
13.13
752
714
165
$ 13.95
$ 542
963
103
$ 10.79
$
As of December 31, 2016, there was $156,000 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 3.2 years.
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At December 31, 2016, 75,468 RSU’s were outstanding. Compensation expense is recognized over the
performance period based on the achievement of established targets. Total expense of $1.3 million, $1.1
million and $541,000 was recorded during the years ended December 31, 2016, 2015 and 2014,
respectively, and approximately $773,000 and $556,000 is included within other liabilities at December
31, 2016 and 2015, 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, 2016
Granted
Vested
Forfeited
Unvested at December 31, 2016
74,545
24,526
(7,011)
(16,592)
75,468
$
$
25.86
39.30
19.19
19.19
32.31
Shares
10,927
10,905
(10,171)
(500)
11,161
Weighted-Average
Grant Date
Fair Value
$
$
30.98
23.39
24.02
32.00
32.30
The maximum amount of compensation expense that may be earned for the 2016 STIP and the 2014,
2015 and 2016 LTIPs at December 31, 2016 is approximately $3.6 million in the aggregate. However,
the estimated expense expected to be earned as of December 31, 2016 based on the performance
measures in the plans, is $2.4 million of which $584,000 was unrecognized at December 31, 2016 and
will be recognized over the remaining performance period.
As of December 31, 2016 and 2015, 168,251 and 186,079 shares, respectively, were available for grant
under the 2010 Equity Plan. Options forfeited or cancelled under all plans except the 2010 Equity Plan
are no longer available for grant to other participants.
21. Parent Company Statements
Condensed parent company financial statements, which include transactions with subsidiaries, follow:
Statements of Financial Condition
Assets
Cash and cash equivalents
Investment in banking subsidiary
Investment in non-bank subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Accrued liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31
2016
2015
(In Thousands)
$
$
$
$
23,017
290,053
15,456
1,155
329,681
36,083
580
293,018
329,681
$
$
$
$
12,919
287,436
15,109
1,191
316,655
36,083
375
280,197
316,655
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Statements of Income
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
Statements of Cash Flows
Operating activities:
2016
Years Ended December 31
2015
(In Thousands)
2014
$
$
$
$
24,200
-
(753)
-
(644)
22,803
(466)
23,269
$
30,900
1
(613)
1
(588)
29,701
(397)
30,098
5,574
28,843
25,436
$
$
(3,675)
26,423
25,931
$
$
22,200
-
(587)
2
(861)
20,754
(485)
21,239
3,053
24,292
27,861
2016
Years Ended December 31
2015
(In Thousands)
2014
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
Financing activities:
Repurchase of common stock
Cash dividends paid
Stock Options Exercised
Direct stock sales
Repayment of stock warrants
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
$ 28,843
$ 26,423
$ 24,292
(5,574)
235
23,504
(6,293)
(7,890)
714
63
-
(13,406)
10,098
12,919
3,675
(205)
29,893
(8,436)
(7,159)
1,469
64
(11,979)
(26,041)
3,852
9,067
(3,053)
59
21,298
(15,519)
(5,937)
921
76
-
(20,459)
839
8,228
Cash and cash equivalents at end of year
$ 23,017
$ 12,919
$ 9,067
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
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relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows
or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount
that currently would be required to replace the service capacity of an asset (replacement cost). Valuation
techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or liability. Inputs may be observable, meaning those
that reflect the assumptions market participants would use in pricing the asset or liability developed
based on the best information available. In that regard, FASB ASC Topic 820 established a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
•
•
•
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. These might include quoted prices for similar
assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted prices that are observable
for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or
inputs that are derived principally from or corroborated by market data by a correlation or
other means.
Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect
an entity’s own assumptions about the assumptions that market participants would use in
pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Available for sale securities - Securities classified as available for sale are generally reported at fair
value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent
pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair
value measurements consider observable data that may include dealer quotes, market spreads, cash flows
and the bonds’ terms and conditions, among other things. Securities in Level 1 include federal agency
preferred stock securities. Securities in Level 2 include U.S. Government agencies, mortgage-backed
securities, corporate bonds and municipal securities.
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
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market to sell. Such adjustments made in the appraisal process are typically significant and result in a
Level 3 classification of the inputs for determining fair value.
Real Estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded
at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then
reviewed monthly by members of the asset review committee for valuation changes and are accounted for
at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real
estate appraisals which may utilize a single valuation approach or a combination of approaches including
cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments may be significant and typically result in a Level 3 classification of the
inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by
certified general appraisers (for commercial properties) or certified residential appraisers (for residential
properties) whose qualifications and licenses have been reviewed and verified by the Company. Once
received, a member of the Company’s asset quality or collections department reviews the assumptions
and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 20% to account for
other factors that may impact the value of collateral. In determining the value of impaired collateral
dependent loans and other real estate owned, significant unobservable inputs may be used, which
include: physical condition of comparable properties sold, net operating income generated by the
property and investor rates of return.
Mortgage servicing rights – On a quarterly basis, mortgage servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying
amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the
servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that
calculates the present value of estimated future net servicing income. The valuation model utilizes
assumptions that market participants would use in estimating future net servicing income and are
validated against available market data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly
based on derivative valuation models using quoted prices for similar assets adjusted for specific
attributes of the commitments and other observable market data at the valuation date (Level 2).
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:
- 118 -
- 118 -
Assets and Liabilities Measured on a Recurring Basis
December 31, 2016
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
$
$
-
-
-
-
2
-
-
-
$
3,915
81,707
1,307
63,005
-
13,013
88,043
491
$
-
-
-
-
-
-
-
3,915
81,707
1,307
63,005
2
13,013
88,043
491
December 31, 2015
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
(In Thousands)
Total Fair
Value
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
There were no assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended December 31, 2016 and 2015.
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:
- 119 -
- 119 -
Assets and Liabilities Measured on a Non-Recurring Basis
December 31, 2016
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
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
$ -
-
-
-
-
-
-
-
-
$ -
-
-
-
-
657
-
-
-
$ 316
-
848
332
-
1,496
-
-
377
377
December 31, 2015
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
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
$ -
-
-
-
-
-
-
-
-
$ -
-
-
-
-
872
-
-
-
$ 398
91
4,575
-
82
5,146
-
-
280
280
Total Fair
Value
$ 316
-
848
332
-
1,496
657
-
377
377
Total Fair
Value
$ 398
91
4,575
-
82
5,146
872
-
280
280
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of
December 31, 2016, the significant unobservable inputs used in the fair value measurements were as
follows:
- 120 -
- 120 -
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 –
Applies to all classes
$1,496 Appraisals which utilize
net
comparison,
sales
income and cost approach
$377 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
0-20%
7%
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 –
CRE
$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%
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a fair value of $1.5 million, with a $1,000 valuation allowance and a fair value of
$5.1 million with a valuation allowance of $8,000 at December 31, 2016 and 2015, respectively. A
provision expense of $1.0 million, a provision recovery of $580,000 and a provision expense of $3.0
million for the years ended December 31, 2016, 2015 and 2014, 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
$657,000 with a valuation allowance of $522,000 and a fair value of $872,000 with a valuation
allowance of $645,000 at December 31, 2016 and 2015, respectively. A recovery of $123,000, $266,000
and $116,000 for the years ended December 31, 2016, 2015 and 2014, 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 $74,000, $297,000
and $251,000 for the years ended December 31, 2016, 2015 and 2014, respectively, which was recorded
directly as an adjustment to current earnings through non-interest expense.
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, 2016 and December 31, 2015. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of First Defiance.
- 121 -
- 121 -
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, 2016.
- 122 -
- 122 -
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, 2016
(In Thousands)
Total
Level 1
Level 2
Level 3
Carrying
Value
$
99,003
251,176
13,798
$
99,003
251,179
N/A
1,924,210
6,760
1,911,280
6,760
$ 99,003 $
2
N/A
-
9
$
-
251,177
N/A
-
-
N/A
9,917
867
1,901,363
5,884
$ 1,981,628
$ 1,987,723
$ 487,663 $ 1,500,060
$
103,943
103,019
31,816
36,083
31,816
34,718
-
-
-
103,019
31,816
-
-
-
-
34,718
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
1,782,358
6,171
1,784,998
6,171
$ 79,769 $
1
N/A
-
7
$
-
236,679
N/A
-
-
N/A
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
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 $14.1 million and $14.9 million of interest rate lock commitments at December 31, 2016
and 2015, respectively. There were $22.5 million and $19.9 million of forward commitments for the
future delivery of residential mortgage loans at December 31, 2016 and 2015, respectively.
- 123 -
- 123 -
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, 2016
(Liabilities)
December 31, 2015
Assets (Liabilities)
Carrying
Value
Carrying
Value
Derivative
Net Carrying
Value
Carrying
Carrying
Value
Value
Derivative
Net Carrying
Value
(In Thousands)
$
491 $
- $
491 $
558 $
- $
558
Derivatives not designated as
hedging instruments
Mortgage Banking
Derivatives
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,
2016
2015
2014
Derivatives not designated as hedging
instruments
(In Thousands)
Mortgage Banking Derivatives – Gain (Loss)
$
(67)
$
231
$
27
The above amounts are included in mortgage banking income with gain on sale of mortgage loans.
During 2014, 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 loss related to a fair
value adjustment on those loans was recorded in. No such adjustments were made in 2016 or 2015.
24. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
2016
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)
$
$
21,130
1,942
19,188
364
18,824
131
8,505
17,274
10,186
3,017
7,169
$ 0.80
0.80
$
8,994
9,064
$
$
$
$
21,480
2,084
19,396
53
19,343
227
8,348
17,347
10,571
3,307
7,264
0.81
0.80
8,968
9,036
- 124 -
- 124 -
$
$
$
$
22,003
2,183
19,820
15
19,805
151
8,375
18,292
10,039
2,994
7,045
0.78
0.78
8,976
9,050
$
$
$
$
22,770
2,231
20,539
(149)
20,688
-
8,293
18,180
10,801
3,436
7,365
0.82
0.81
8,969
9,035
2015
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)
$
$
19,757
1,567
18,190
120
18,070
-
8,281
16,897
9,454
2,853
6,601
$ 0.71
0.69
$
9,234
9,611
$
$
$
$
20,037
1,672
18,365
-
18,365
-
7,809
16,796
9,378
2,815
6,563
0.71
0.70
9,268
9,349
$
$
$
$
20,266
1,733
18,533
(27)
18,560
-
7,982
16,848
9,694
2,998
6,696
0.72
0.72
9,238
9,322
$
$
$
$
20,776
1,809
18,967
43
18,924
22
7,709
17,348
9,307
2,744
6,563
0.72
0.71
9,146
9,235
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 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, 2016:
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 (included
in
compensation and benefits)
Total other comprehensive income
$
$
Before Tax
Amount
Tax Expense
(Benefit)
(In Thousands)
Net of Tax
Amount
(4,933)
(509)
$
(1,726)
(178)
172
60
30
(5,240)
$
11
(1,833)
$
$
(3,207)
(331)
112
19
(3,407)
- 125 -
- 125 -
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 (included
in
compensation and benefits)
Total other comprehensive income
$
$
Before Tax
Amount
Tax Expense
(Benefit)
(In Thousands)
Net of Tax
Amount
(985)
(22)
$
204
47
(756)
$
(345)
(7)
72
16
(264)
$
$
(640)
(15)
132
31
(492)
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Securities
Available
For Sale
$
4,042
Post-
retirement
Benefit
(In Thousands)
(420)
$
Accumulated
Other
Comprehensive
Income
$
3,622
(3,095)
(312)
(3,407)
215
4,114
(508)
16
(492)
3,622
Balance January 1, 2016
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net other comprehensive income during period
Balance December 31, 2016
Balance January 1, 2015
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net other comprehensive income during period
(3,207)
(331)
(3,538)
$
504
$
4,697
$
$
(640)
(15)
(655)
112
19
131
(289)
(583)
132
31
163
$
$
Balance December 31, 2015
$
4,042
$
(420)
$
- 126 -
- 126 -
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, 2016. 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, 2016, 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, 2016 that have materially affected, or are reasonably likely to materially affect First
Defiance’s internal control over financial reporting.
Item 9B. Other Information
On February 23, 2017, the Compensation Committee of First Defiance approved a new form of
restricted stock unit (“RSU”) award agreement that may be used to grant RSUs pursuant to First
Defiance’s 2010 Equity Plan. The form agreement provides for a grant of RSUs that vest on the third
anniversary of the grant date and are settled in common shares of First Defiance. Vesting is accelerated
in the event of death, disability or retirement (as defined under the 2010 Equity Plan). Vesting also is
accelerated in the event of termination of employment without cause after a change in control (as defined
under the 2010 Equity Plan). The form of award agreement contains a non-solicitation covenant. The
form of RSU award agreement is attached as Exhibit 10.24 and incorporated herein by reference.
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
29, 2017 for the annual meeting of First Defiance shareholders to be held on May 9, 2017 (the “Proxy
Statement”). Information regarding our Audit Committee and compliance with Section 16(a) of the
Securities Act of 1943 required by this item is incorporated herein by reference from the sections
respectively captioned, “Board Committees” under the “Proposal 1 – Election of Directors” and the
section immediately following the heading “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.
- 127 -
- 127 -
Item 11. Executive Compensation
Information regarding director compensation is set forth under the section captioned “Director
Compensation” under the heading “PROPOSAL 1 – Election of Directors” of the Proxy Statement, and is
incorporated herein by reference. Executive compensation information has been provided under the
headings
“EXECUTIVE
COMPENSATION” in the Proxy Statement, and is incorporated herein by reference.
“COMPENSATION DISCUSSION AND ANALYSIS”
and
The Compensation Committee Report and information related to compensation committee
interlocks and insider participation have been respectively set forth under the section immediately
following the heading “COMPENSATION COMMITTEE REPORT” and under the section captioned
“Compensation Committee Interlocks and Insider Participation” following the heading “PROPOSAL 1 –
Election of Directors” 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, 2016 with respect to the shares of
First Defiance common stock that are reserved for issuance 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)
54,750
$22.21
168,251
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 respectively in the section following the heading “RELATED PERSON TRANSACTIONS”
and in the section captioned “Composition of the Board” following the heading “PROPOSAL 1 –
Election of Directors” in the Proxy Statement, which 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.
- 128 -
- 128 -
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.
(A) Report of Independent Registered Public Accounting Firm (Crowe Horwath LLP)
(B) Consolidated Statements of Financial Condition as of December 31, 2016
and 2015
(C) Consolidated Statements of Income for the years ended December 31, 2016,
2015 and 2014
(D) Consolidated Statements of Comprehensive Income for the years ended December 31,
2016, 2015 and 2014
(E) Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2016, 2015 and 2014
(F) Consolidated Statements of Cash Flows for the years ended December 31,
2016, 2015 and 2014
(G) Notes to Consolidated Financial Statements
(2)
(3)
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.
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 10.24.
- 129 -
- 129 -
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 28, 2017
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
28, 2017.
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/ Thomas A. Reineke
Thomas A. Reineke
/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
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- 130 -
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
2.1
2.2
3.1
3.2
3.3
4.1
4.2
Description
Amendment to Agreement and Plan of Merger, dated August 23, 2016 by
and between First Defiance and Commercial Bancshares, Inc.
Amendment to Agreement and Plan of Merger, dated October 31, 2016 by
and between First Defiance and Commercial Bancshares, Inc.
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 Stock Option Award Agreement under 2001 Stock Option and
Incentive Plan
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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
10.9
First Federal Amended and Restated Executive Group Life Plan – Post
Separation
10.10
10.11
10.12
10.13
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 Performance-Based
Award Agreement
10.14
2010 Equity Plan Form of Short-Term Incentive Performance-Based
Award Agreement
10.15
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
Employment Agreement with Donald P. Hileman
Employment Agreement with Kevin T. Thompson
(29)
(12)
(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)
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10.21
10.22
10.23
10.24
21
23.1
31.1
Form of Restricted Stock Award Agreement
Consulting Agreement with William J. Small
Change of Control and Non-Solicitation Agreement with John R. Reisner
Form of Restricted Stock Unit Award Agreement
List of Subsidiaries of the Company
Consent of Crowe Horwath LLP
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Statements of Financial Condition, (ii) the Consolidated
Statements of Income, (iii) the Consolidated Statements of
Comprehensive Income, (iv) the Consolidated Statements of Changes in
Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows,
and (vi) the Notes to the Consolidated Financial Statements tagged as
blocks of text and in detail.
(25)
(26)
(28)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
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)
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- 132 -
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
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)
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)
Incorporated herein by reference to exhibit 10.23 in Registrant’s 2015 Form 10-K (Film No.
161468309)
Incorporated herein by reference to the like numbered exhibit in Form 8-K filed August 24, 2016
(Film No. 161848221)
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to our shareholders
shareholders information
After a strong performance for 2016,
I am proud to celebrate our fourth consecutive
year of record earnings. As we build upon the
momentum gained over the last several years,
we have aligned our strategic efforts through
identified core initiatives and key areas that
will drive improved financial performance and
greater shareholder value. We have opportunity
for core balance sheet growth and will focus
on loan and deposit growth, in addition to
overall revenue growth, expense control and
improved asset quality.
Continued improvement in asset quality over
the course of 2016 was encouraging, and we
look to carry that trend throughout 2017. We
experienced solid growth in both loans and
deposits in 2016 by concentrating on attracting
new relationships and strengthening current
ones. As for our outlook on 2017, the economy
continues to show signs of improvement,
with the likelihood of several rate increases
by the Federal Reserve; we are confident in
our position to implement our strategy in an
upward rate environment. We aim to carry our
success forward and target strategic objectives
long-term goals.
to help us achieve our
Our first objective is to continue to refine
our plan for growth as we address new
Donald P. Hileman
President & CEO
opportunities for branch expansion with a
concentration on our metro market areas. In
2016, we expanded our presence in Toledo,
Ohio with two offices in low-to-moderate
income areas near downtown. We have
also enhanced our Columbus, Ohio Loan
Production Office to a full-service branch
and are eager to serve our customers with a
broadened line of products and services. In
addition, we completed our acquisition of
Commercial Bancshares, Inc. headquartered
in Upper Sandusky, Ohio and look forward to
the opportunity to provide these communities
with smart banking solutions.
Another identified objective is to continue
talent development and retention of our
workforce. We remain confident in our people
working hard to adapt to overcome obstacles,
meet our customers’ expectations and execute
our strategic plans for continued success.
By recruiting and developing high-performing
innovation,
individuals, we expect greater
collaboration and efficiency
throughout
our organization.
In addition, we are focusing our efforts on
leveraging technology to strengthen our
organization’s productivity and utilize data
to customize solutions for our customers.
Additionally, we will explore banking
enhancements that will attract new customers
and improve the banking experience for our
existing customers in a way that matches
our overall risk profile. Our expansions in
digital banking offerings have been key to
differentiating ourselves
from competition
and positioning ourselves as a technology
leader amongst community banks. Recent
include a new, optimized
enhancements
website, tablet banking app for personal and
business accounts, expanded mobile wallet
capabilities with the addition of Samsung
Pay and Android PayTM, improvements made
in our online banking platform and biometric
security for our mobile app with Touch ID.
We will continue to invest in opportunities
that keep pace with a rapidly changing
digital environment.
of our customers. As FinTech and other financial
to arise, consumers
institutions continue
have more options than ever when it comes
to conducting their finances. We want to be
their financial institution of choice. Thus, it is
important for us to understand our customers’
needs, eliminate friction and build meaningful
relationships as a people-focused organization.
We believe that being a community bank
makes a difference to our customers and the
communities we serve. Last year, we hosted
our third annual Pay it Forward Day. We not
only supported our nearly 600 employees with
$10 to perform a random act of kindness, we
also funded 13 Pay It Forward ideas submitted
by our community members. First Federal
Bank and First Insurance Group will continue
to embrace our community-minded roots by
serving the community we live and work in and
supporting life-changing organizations.
Our Mission is to be a high performing
community bank and agency so that our
engaged and valued employees provide smart
solutions to our clients and communities. To do
so, we have refreshed our core values to reflect
this mission. We aim to develop our Trusted
Advisors to serve others by being: people
focused, performance driven, community
minded, innovative and trustworthy. These key
statements detail our purpose as a community-
based organization, which above all else is
to provide our clients and community with
solutions that fit their needs and add value to
their lives.
I thank you for your continued confidence in
First Defiance. We have grown to approximately
$2.8 billion in assets by building upon a
smart decisions, careful
foundation of
assessments and strong relationships. Our
experienced leadership team has positioned us
to meet opportunities and challenges that 2017
will bring. We believe the partnership with our
shareholders, customers, and employees make
us all stronger. We truly are better together.
Also in 2017, we have structured a team
dedicated to gaining a deeper understanding
Donald P. Hileman
President & CEO
Annual Meeting
In order to increase shareholder attendance and participation, the Annual Meeting of Shareholders will be conducted virtually at 1:00 p.m. on
Tuesday, May 9, 2017. Shareholders may access the Annual Meeting by going to www.virtualshareholdermeeting.com/fdef2017
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.
Stock Transfer Agent
Shareholders with questions concerning the transfer of shares, lost
certificates, dividend payments, dividend reinvestment, receipt of multiple
dividend checks, duplicate mailings or changes of address should contact:
Broadridge Corporate Issuer Solutions
PO Box 1342
Brentwood, NY 11717
1-844-318-0128 or 1-720-358-3594
shareholder@broadridge.com
Securities Listing
First Defiance Financial Corp. common stock trades on the
NASDAQ Global Select Market under the symbol FDEF. As
of March 13, 2017, there were approximately 2,813
stockholders of record and 10,138,581
shares outstanding.
Dividend Policy
The First Defiance Financial Corp. Board reviews and
determines on a quarterly basis whether to declare a
dividend. Dividends declared in 2016 totaled $0.880 per share.
Dividend Reinvestment Plan
Shareholders may automatically reinvest dividends in
additional First Defiance Financial Corp. common stock
through the Dividend Reinvestment Plan, which also provides
for purchase by voluntary cash contributions. For additional
information, please contact: Broadridge Corporate Issuer
Solutions at 1-844-318-0128 or 1-720-358-3594.
Auditors
Crowe Horwath LLP
330 East Jefferson Boulevard
South Bend, IN 46624
General Counsel
Vorys, Sater, Seymour & Pease LLP
301 East Fourth Street, Suite 3500
Cincinnati, OH 45202
Total Return Performance
Total Return Performance
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12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
Price Range
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended
December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$40.98
$41.21
$46.83
$52.31
LOW
$34.80
$37.53
$35.90
$36.91
HIGH
LOW
$34.64
$38.21
$39.95
$42.46
$29.05
$32.42
$35.03
$35.01
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
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First Defiance Financial Corp.
2016 Annual Report
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For investor relations information, visit Fdef.com