First Defiance Financial Corp.
2017 Annual Report
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
419-782-5130
First-Fed.com
First Insurance Group
511 Fifth Street
Defiance, OH 43512
419-784-5431
Firstinsurancegrp.com
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People Focused | Community Minded | Trustworthy
For investor relations information, visit Fdef.com
People Focused | Community Minded | Trustworthy
SUCCESS THROUGH FOCUS
Cover photo courtesy of: www.123rf.com/alptraum
SUCCESS THROUGH FOCUS
SHAREHOLDER INFORMATION
As the fifth consecutive
year with record earnings,
2017 was a year filled
with both financial and
strategic
achievements
for First Defiance Financial
Corp. by balancing high
performance with strong
principles,
shareholder
value with client needs,
and clear focus on the
details with a vision of
the future. We served our
customers as a high-performing community bank and witnessed
continued improvement of our key metrics and strategic initiatives.
Donald P. Hileman
President & CEO
GROWTH
Our strong sales and service model allowed us to achieve balance
sheet growth in the face of competitive market pressures,
particularly in pricing. We successfully integrated Commercial
Savings Bank in the first quarter of 2017 and Corporate One
in the second quarter of 2017, marking our first
Benefits
in nine years. We continued to expand
bank acquisition
our commitment
the opening
of a
in Ann Arbor, Michigan,
and a new office that houses both our bank and insurance
agency in Sylvania, Ohio. Our successful growth strategy, defined
as deepening client relationships, expanding our branch and
insurance agency network and aligning leadership to support
accelerated growth within our metro markets, contributed to our
accomplishments and will carry into 2018 and beyond.
to metro markets with
loan production office
CLIENTS
Our people-focused mentality leads us to continually look for
ways to enhance our client experience in person and through
digital channels. A dedicated team of employees that concentrates
on client experience has allowed us to introduce our clients to
People Pay, a person to person digital payment solution, additional
Smart ATM locations, an improved, personalized online mortgage
experience and a new First Insurance Group app. In addition, we
realigned our Treasury Management team to improve processes and
provide in-depth customer service. We will continue to provide smart
solutions as more and more people choose to bank beyond our doors.
TECHNOLOGY
A focus on technology allowed us to gain efficiencies and
transform our customer service model. We view technology as
a means to offer clients additional choices and more personalized
solutions. Progress
initiatives
brought our first in-lobby automated teller unit into a branch
to provide clients a means to define their banking experience.
A foundation was established for an enhanced data strategy
with new data management software. This data-driven
approach will deepen our understanding of our clients and
assist in making client-focused decisions.
in our branch transformation
EMPLOYEES
We re-energized our teams; and now, more than ever, have a
synergy when working to accomplish our goals. Employee and
client feedback helped us bring new mission, vision and values
to life, and these values are being personified and recognized
throughout our company on a daily basis. This enthusiasm is
echoed in our employee engagement scores and has resulted in
significant progress within initiatives to attract and retain top talent.
We have great confidence in those working hard to achieve our
goals now and in the future.
COMMUNITIES
Our philosophy of building strong communities comes to life each
time we donate dollars or volunteer hours to the communities
we call home. By offering every employee paid time off to volunteer
for life-changing organizations, we are truly living our motto of
being Better Together. This pay-it-forward philosophy supports
our annual Pay it Forward events which have now contributed to
over $40,000 in funding for community-generated ideas to make
the places we call home even stronger. That’s a mission that will
always be in our sight.
As we move into 2018, we look to build on this momentum. We will
look closely to discover every opportunity to balance shareholder
value with smart solutions for our clients and our communities.
After all, it’s that focus that makes us better together.
Donald P. Hileman | President & CEO
ANNUAL MEETING
The Annual Meeting of Shareholders will be conducted virtually at 1:00 p.m. on Tuesday, April 24, 2018. Shareholders may access the Annual
Meeting by going to www.virtualshareholdermeeting.com/fdef2018
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 February 23, 2018, there were approximately 2,407
stockholders of record and 10,182,308 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 2017 totaled $1.00 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.
TOTAL RETURN PERFORMANCE
350
300
250
200
150
100
50
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12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
First Defiance Financial Corp.
SNL Bank NASDAQ
NASDAQ Composite
SNL Midwest Thrift
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
PRICE RANGE
Year Ended December 31, 2017
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$51.15
LOW
$46.27
First Quarter
$56.90
$48.78
Second Quarter
$53.99
$47.01
$56.91
$50.28
Third Quarter
Fourth Quarter
HIGH
LOW
$40.98
$34.80
$41.21
$37.53
$46.83
$35.90
$52.31
$36.91
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 ATM locations in northwest
and central Ohio, southeast Michigan and northeast
in Ann Arbor, Michigan.
First Insurance Group, including its division Corporate One Benefits, is a full-service insurance agency with nine offices throughout
northwest Ohio.
loan production office
Indiana, and a
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 completed five bank acquisitions and five insurance agency acquisitions. Most recently, 2017
marked the successful completion of acquisitions of Commercial Bancshares, Inc. based in Upper Sandusky, Ohio, and Corporate
One Benefits Agency, Inc. based in Fostoria, Ohio. Both acquisitions expanded our community-based financial service offerings
through office locations in new communities.
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.
Coming together to achieve great things.
FINANCIAL HIGHLIGHTS
((In thousands, except per share amounts)
Summary of Operating Results
Net interest income
Provision for loan losses
Non-interest income (excluding securities gains)
Securities gains
Non-interest expense
Net income
2017
2016
% Change
$96,671
$78,943
2,949
39,497
584
85,351
32,268
283
33,521
509
71,093
28,843
22.5%
942.1%
17.8%
14.7%
20.1%
11.9%
Balance Sheet Data
2017
2016
% Change
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
$2,993,403
$2,477,597
2,322,030
1,914,603
2,437,656
1,981,628
373,286
26,683
293,018
25,884
20.8%
21.3%
23.0%
27.4%
3.1%
2017
$3.23
3.22
1.00
26.49
10,156
2017
3.88%
1.13%
9.19%
61.81%
2016
% Change
$3.21
3.19
0.88
25.59
8,983
2016
3.74%
1.20%
10.10%
62.20%
0.6%
0.9%
13.6%
3.5%
13.1%
% Change
3.7%
-5.8%
-9.0%
-0.6%
Building shareholder value while earning trust.
Diluted Earnings Per Share
Deposits (in millions)
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
13
14
15
16 17
13
14
15
16 17
Return on Average Assets (percent)
2.20
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0
13
14
15
16 17
Dividends Per Share
Loans (in millions)
Return on Average Equity (percent)
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
13
14
15
16 17
22
20
18
16
14
12
10
8
6
4
2
0
13
14
15
16 17
13
14
15
16 17
4.4
4.0
3.6
3.2
2.8
2.4
2.0
1.6
1.2
0.8
0.4
0
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
BOARD OF DIRECTORS AND CORPORATE OFFICERS
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
John L. Bookmyer
Vice Chairman & Lead Director,
First Defiance Financial Corp.,
Chief Executive Officer,
Pain Management Group
Findlay, Ohio
1, 2, 3 & 5
Robert E. Beach
Retired President & CEO,
Commercial Bancshares, Inc.
Upper Sandusky, Ohio
5, 6 & 8
Terri A. Bettinger
Former Chief Information Officer,
Franklin Data Center
Columbus, Ohio
2, 3 & 8
Douglas A. Burgei, D.V.M.
Veterinarian,
Napoleon, Ohio
3, 4, 5 & 7
Thomas K. Herman
Co-Founder & President,
Aptera
Fort Wayne, Indiana
4, 5 & 8
Jean A. Hubbard
Business Manager &
Corporate Treasurer,
The Hubbard Company
Defiance, Ohio
2, 3 & 8
Barbara A. Mitzel
Retired 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
Mark A. Robison
Chairman & President,
Brotherhood Mutual
Insurance Company
Fort Wayne, Indiana
2, 4 & 7
Samuel S. Strausbaugh
President, Chief
Executive Officer &
Chief Financial Officer,
JB & Company, Inc.
Tiffin, Ohio
2, 3 & 8
KEY FOR BOARD
OF DIRECTORS:
1. Executive Committee
2. Audit Committee
3. Compensation Committee
4. Corporate Governance
Committee
5. Investment Committee
6. Trust Committee
7. First Insurance Group Board
8. Risk Committee
FIRST FEDERAL BANK OF THE MIDWEST CORPORATE OFFICERS
Donald P. Hileman
President &
Chief Executive Officer
David D. Dygert
Executive Vice President,
Columbus Market Area Executive
Timothy K. Harris
Executive Vice President,
Chief Credit Officer
Kevin T. Thompson
Executive Vice President,
Chief Financial Officer
John R. Reisner
Executive Vice President,
Chief Risk Officer &
Legal Counsel
Sharon L. Davis
Executive Vice President,
Director of Human Resources
Dennis E. Rose, Jr.
Executive Vice President,
Director of Strategy
Management
Marybeth Shunck
Executive Vice President,
Director of Sales
Amy L. Hackenberg
Executive Vice President,
Southern Market Area Executive
James R. Williams, III
Executive Vice President,
Northern Market
Area Executive
Gregory R. Allen
Executive Vice President,
Fort Wayne Market Area
Executive
Michael D. Mulford
Executive Vice President,
Chief Credit Administration Officer
Joel P. Jerger
Executive Vice President,
Toledo Market Area Executive
Brent L. Beard
Senior Vice President, Controller
Amy M. Daeger
Senior Vice President,
Director of Retail Administration
Brian A. Eitniear
Senior Vice President,
Director of Corporate Services
Charles V. Hoecherl
Senior Vice President,
Treasury Management Sales
David L. Kondas
Senior Vice President,
Director of Wealth Management
Kathleen A. Miller
Senior Vice President,
Information Technology
Justin R. Rodemich
Senior Vice President,
Bank Operations
Martha J. Woelke
Senior Vice President,
Retail Lending
Ryan J. Miller
Senior Vice President,
Northern Market Area
Commercial Lending Manager
John W. Schuld
Senior Vice President,
Southern Market Area
Commercial Lending Manager
Dirk VanHeyst
Senior Vice President,
Senior Commercial Lender
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
FIRST INSURANCE GROUP, INC.
CORPORATE OFFICERS
Donald P. Hileman
Chief Executive Officer
Steven R. Dandurand
Executive Vice President,
Group Health & Life
John Payak, III
Executive Vice President,
Property & Casualty
Michael R. Klein
President &
Chief Operating Officer
Ronald R. Burns
Executive Vice President,
Group Health & Life
Marvin K. Dubbs, Jr.
Executive Vice President,
Property & Casualty
Timothy S. Whetstone
Executive Vice President,
Property & Casualty
Kenneth G. Keller
Executive Vice President,
Group Health & Life
Lawrence H. Woods
Executive Vice President,
Property & Casualty
Leadership rooted in our communities.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
(Mark One)
[ X ]
REPORT
ANNUAL
EXCHANGE ACT OF 1934
For the fiscal year Ended
December 31, 2017
or
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
0-26850
_____________
FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
_____________
OHIO
(State or other jurisdiction of incorporation or organization)
601 Clinton Street, Defiance, Ohio
(Address of principal executive offices)
34-1803915
(I.R.S. Employer Identification Number)
43512
(Zip code)
Registrant’s telephone number, including area code: (419) 782-5015
_______________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of Class)
The NASDAQ Stock Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
______________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. []
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2017, was approximately $517.0 million.
As of February 23, 2018, there were issued and outstanding 10,182,308 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 2018
Annual Meeting of the Registrant’s shareholders.
Documents Incorporated by Reference
- 1 -
First Defiance Financial Corp.
Annual Report on Form 10-K
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
10-K Summary
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.
Item 16.
SIGNATURES
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- 2 -
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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, 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.
Effective February 24, 2017, the Company acquired Commercial Bancshares, Inc. (“Commercial
Bancshares”) and its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and
Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the
merger of Commercial Bancshares into First Defiance, immediately followed by the merger of CSB into
First Defiance’s banking subsidiary, First Federal. Prior to the consummation of the mergers, CSB
operated 7 full-service banking offices in northwest and north central Ohio and 1 commercial loan
production office in central Ohio. Commercial Bancshares’ consolidated assets and equity (unaudited) as
of February 24, 2017 totaled $348.4 million and $37.5 million, respectively. The Company accounted for
the transaction under the acquisition method of accounting which means that the acquired assets and
liabilities were recorded at fair value at the date of acquisition.
On April 13, 2017, First Defiance and Corporate One Benefits Agency, Inc. (“Corporate One”)
jointly announced the acquisition of Corporate One’s business by First Defiance. The total purchase price
paid in cash was made up of the following: $6.5 million was paid at closing, $500,000 will be due in July
2018, and approximately $2.3 million will be due at the end of a three-year earn-out based on the
compound annual growth rate of net revenue over the performance period of Corporate One, for a total
purchase price of $9.3 million. The recorded fair value of the $2.3 million earn-out was $1.8 million at
December 31, 2017. As of December 31, 2017, total Company recorded goodwill of $7.9 million,
identifiable intangible assets of $756,000 (consisting of customer relationship intangible of $564,000 and
a non-compete intangible of $192,000) from the acquisition of Corporate Ones business. Corporate One
was a full-service employee benefits consulting organization founded in 1996 with offices located in
Archbold, Findlay, Fostoria and Tiffin, Ohio. Corporate One provided consulting services to employers
regarding management and modernization of their employee benefit program. It is anticipated that the
- 3 -
- 3 -
transaction will enhance employee benefit products offered by First Insurance and expand First
Insurance’s presence into adjacent markets in northwest Ohio.
At December 31, 2017, the Company had consolidated assets of $3.0 billion, consolidated
deposits of $2.4 billion, and consolidated stockholders’ equity of $373.3 million. The Company was
incorporated in Ohio in June of 1995. Its principal executive offices are located at 601 Clinton Street,
Defiance, Ohio 43512, and its telephone number is (419) 782-5015.
First Defiance's website, www.fdef.com, contains a hyperlink under the Investor Relations
section to EDGAR, where the annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably
practicable after First Defiance has filed the report with the United State Securities and Exchange
Commission (“SEC”).
The Subsidiaries
The Company’s core business operations are conducted through 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 thirty-six full-service banking center
offices in Allen, Defiance, Fulton, Hancock, Henry, Lucas, Marion, Ottawa, Paulding, Putnam, Seneca,
Williams, Wood, and Wyandot counties in northwest and central 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 Ann Arbor, Michigan that was
opened late in the fourth 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
Archbold, Bowling Green, Bryan, Defiance, Findlay, Fostoria, Lima, Maumee, Oregon, and Tiffin, Ohio
areas. The Maumee and Oregon offices were consolidated into a new office in Sylvania, Ohio in January
2018. 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 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 help minimize the risk allocable to each participating insurer.
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
- 4 -
- 4 -
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. In the later part of 2017, the Company
recognized the need to adapt its organization structure to meet certain future strategic objectives and to
continue its past success. The Company believes that fully utilizing the strengths of its leadership team
and a structure that supports strategic initiatives will enhance its ability to achieve even more milestones
in the future. With that being said, the Company redefined its market areas to support strategies to
enhance processes and efficiencies to support overall growth. The new structure includes three metro
markets; Toledo, Ohio, Fort Wayne, Indiana, and Columbus, Ohio and two legacy markets; Southern
Market Area and Northern Market Area.
Commercial and Commercial Real Estate Lending - Commercial and commercial real estate
lending have been an ongoing focus and a major component of First Federal’s success. First Federal
provides primarily commercial real estate and commercial business loans with an emphasis on owner-
occupied commercial real estate and commercial business lending, including a focus on the deposit
balances that accompany these relationships. First Federal’s client base tends to be small to middle market
customers with annual gross revenues generally between $1 million and $50 million. First Federal’s focus
is also on securing multiple guarantors in addition to collateral where possible. These customers require
First Federal to have a high degree of knowledge and understanding of their business in order to provide
them with solutions to their financial needs. First Federal’s “Customer First” philosophy and culture
complements this need of its clients. First Federal believes this personal service model differentiates First
Federal from its competitors, particularly the larger regional institutions. First Federal offers a wide
variety of products to support commercial clients including remote deposit capture and other cash
management services. First Federal also believes that the small business customer is a strong market for
First Federal. First Federal participates in many of the Small Business Administration lending programs.
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 and mobile banking services.
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
- 5 -
- 5 -
has directed its attention to loan types and markets that it knows well and in which it has historically been
successful. First Federal strives to have loan relationships that are well diversified in both size and
industry, and monitors the overall trends in the portfolio to maintain its industry and loan type
concentration targets. First Federal maintains a problem loan remediation process that focuses on
detection and resolution. First Federal maintains a strong process of internal control that subjects the loan
portfolio to periodic internal reviews as well as independent third-party loan review.
Expansion Opportunities - First Defiance believes it is well positioned to take advantage of
acquisitions or other business opportunities in its market areas. First Defiance believes it has a track
record of successfully accomplishing both acquisitions and de novo branching in its market area. This
track record puts the Company in a solid position to enter or expand its business. First Defiance will
continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo
branching with a focus on its primary geographic market area, which it knows well, and has been
competing in for a long period of time, as well as surrounding market areas.
Securities
First Defiance’s securities portfolio is managed in accordance with a written policy adopted by
the Board of Directors and administered by the Investment Committee. The Chief Financial Officer,
Controller, and the Chief Administration Officer 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 76 CMO issues totaling $93.9 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, 2017.
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, 2017, 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.
- 6 -
- 6 -
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
$ 6,334
12,751
3.12%
3.11
$ 22,269
43,744
3.08%
3.10
$17,149
3.02%
31,600 3.12
$ 11,817
6,250
3.33%
3.31
$ 57,569 3.12%
94,345 3.12
(Dollars in Thousands)
-
-
519 2.00
-
-
-
1,423 4.37
-
-
$ 20,508
9,425 3.39
10,017 2.29
$ 85,974
36,965
2,897
$ 88,611
3.76
2.58
42,911
-
$ 60,978
-
-
3.37
519 2.00
90,724 3.55
12,914 2.36
$ 256,071
4,303
924
$ 261,298
(1) Tax exempt yield based on effective tax rate of 35%. Actual coupon rate is approximately equal to the weighted average rate disclosed
in the table times 65%.
The carrying value of investment securities is as follows:
Available-for-sale securities:
Obligations of U.S. government corporations and
agencies
Obligations of state and political subdivisions
CMOs, REMICS and mortgage-backed securities
Trust preferred stock and preferred stock
Corporate bonds
Total
Held-to-maturity securities:
Mortgage-backed securities
Obligations of state and political subdivisions
Total
2017
December 31
2016
(In Thousands)
2015
$ 508
92,828
154,210
1
13,103
$ 260,650
$ 3,915
88,043
146,019
2
13,013
$ 250,992
$ 2,994
90,389
138,074
1
4,977
$ 236,435
$
68
580
$ 648
$
91
93
$ 184
$ 119
124
$ 243
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 $55.0 million and $46.0 million in overnight investments at the Federal
Reserve at December 31, 2017 and 2016, 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 $2.0 million and $1.8 million at December 31, 2017 and 2016, 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, 2017, First Federal serviced
- 7 -
- 7 -
14,447 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, 2017, 65.92%, 33.32% and 0.70% 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:
2017
December 31
2016
Percentage
Percentage
Number
of
Loans
Aggregate
Principal
Balance
Rate
of Aggregate Number Aggregate of Aggregate Number
Principal
Balance
Principal
Balance
Principal
Balance
of
Loans
of
Loans
2015
Aggregate
Principal
Balance
Percentage
of Aggregate
Principal
Balance
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
2,024
$ 189,700
13.69%
2,191
$ 225,328
16.42%
1,836
$ 188,916
14.06%
(Dollars in Thousands)
6,598
3,919
1,122
626
158
14,447
710,084
377,821
68,423
33,658
6,382
$ 1,386,068
51.22
27.26
4.94
2.43
0.46
6,279 682,157
3,551
332,023
1,405 83,775
41,055
7,680
100.00% 14,350 $ 1,372,018
749
175
49.72
24.20
6.11
2.99
0.56
100.00%
5,606
3,924
1,761
922
209
14,258
603,875
379,917
110,616
50,937
9,461
$1,343,722
44.94
28.28
8.23
3.79
0.70
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.
2017
December 31
2016
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
2015
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
444
2,557
3,012
1,258
2,460
4,716
14,447
3.07% $ 8,346
162,190
17.70
278,655
20.85
109,300
8.71
248,919
17.03
0.60%
11.70
20.10
7.89
17.96
529
1,784
3,671
1,526
1,846
3.69% $ 7,432
102,132
12.43
343,750
25.58
135,540
10.63
169,496
12.86
0.54%
7.44
25.05
9.88
12.35
680
1,563
3,759
1,635
1,833
4.77% $ 10,801
89,364
10.97
349,986
26.36
144,249
11.47
169,889
12.85
0.80%
6.65
26.05
10.74
12.64
32.64
578,658
4,994
100.00% $1,386,068 100.00% 14,350
41.75
34.81
613,668
100.00% $1,372,018 100.00%
44.74
4,788
14,258
33.58
579,433
100.00% $1,343,722
43.12
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, 2017, First Federal’s limit on loans-to-one borrower was
- 8 -
- 8 -
$48.8 million and its five largest loans (including available lines of credit) or groups of loans to one
borrower, including related entities, were $25.0 million, $24.8 million, $24.4 million, $23.2 million and
$22.3 million. All of these loans or groups of loans were performing in accordance with their terms at
December 31, 2017.
Loan Portfolio Composition – The net increase in net loans receivable over the prior year was
$407.4 million (including $285.4 million acquired from CSB), $137.8 million and $154.8 million at
December 31, 2017, 2016, and 2015, respectively. The loan portfolio contains no foreign loans. The
Company’s loan portfolio is concentrated geographically in the northwest and central Ohio, northeast
Indiana, and southeast Michigan market areas. Management has identified lending for income generating
rental properties as an industry concentration. Total loans for income generating property totaled $838.1
million at December 31, 2017, which represents 34.9% of the Company’s loan portfolio.
The following table sets forth the composition of the Company’s loan portfolio by type of loan at
the dates indicated.
2017
2016
December 31
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
$
274,862
11.1% $
207,550
10.2%
$
205,330
11.0% $
206,437
12.2% $
195,752
12.2%
248,092
987,129
265,476
1,775,559
10.1
40.0
10.8
72.0
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
526,142
135,457
29,109
690,708
21.3
5.5
1.2
28.0
469,055
118,429
16,680
604,164
23.0
5.8
0.8
29.6
419,349
116,962
16,281
552,592
22.4
6.2
0.9
29.5
399,730
111,813
15,466
527,009
23.7
6.6
0.9
31.2
388,236
106,930
16,902
512,068
24.1
6.6
1.0
31.7
2,466,267 100.0%
2,035,162 100.0%
1,870,227 100.0%
1,686,319 100.0%
1,613,496 100.0%
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
115,972
1,582
fees
Allowance for loan losses
Net loans
26,683
$ 2,322,030
93,355
1,320
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
In addition to the loans reported above, First Defiance had $10.4 million, $9.6 million, $5.5
million, $4.5 million, and $9.1 million in loans classified as held for sale at December 31, 2017, 2016,
2015, 2014 and 2013, 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, 2017, 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, 2017
Due Less
than 1
Due 1-2
Due 3-5
Due 5-10
Due 10-15
Due 15+
Total
$ 502,526
$ 203,035
$ 769,909
(In Thousands)
$ 146,336
$
65,905
$
87,848
$1,775,559
361,561
59,542
96,673
8,243
123
-
526,142
121,475
13,710
$ 999,272
3,108
6,176
$ 271,861
7,768
8,216
$ 882,566
1,678
970
$ 157,227
840
37
66,905
$
588
-
88,436
$
135,457
29,109
$2,466,267
Real estate
Other loans:
Commercial
Home equity and
improvement
Consumer finance
Total
- 9 -
- 9 -
The schedule above does not reflect the actual life of the Company’s loan portfolio. The average
life of loans is substantially less than their contractual terms because of prepayments and due-on-sale
clauses, which give First Defiance the right to declare a conventional loan immediately due and payable
in the event, among other things, that the borrower sells the real property subject to the mortgage and the
loan is not repaid.
The following table sets forth the dollar amount of gross loans due after one year from
December 31, 2017, which has fixed interest rates or which have floating or adjustable interest rates.
Real estate
Commercial
Other
Fixed
Rates
Floating or
Adjustable
Rates
(In Thousands)
Total
$ 475,443
120,148
27,893
$ 623,484
$ 797,590
44,433
1,488
$ 843,511
$1,273,033
164,581
29,381
$ 1,466,995
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,
internet 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 by a commercial lender and underwritten by a
commercial credit analyst. The commercial lender may approve credits within their lending limit, and
another loan officer with limits sufficient to cover the exposure must approve credits exceeding an
individual’s lending limit. All credits which exceed $250,000 in aggregate exposure must be presented for
review or approval to the Senior Loan Committee comprised of senior lending personnel. Credits which
exceed $5,000,000 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.
First Federal 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 Federal’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
- 10 -
- 10 -
residential loans that can be originated at any time is largely determined by the demand for each in a
competitive environment.
Adjustable-rate loans represented 9.9% of First Federal’s total originations of one-to-four family
residential mortgage loans in 2017 compared to 10.8% and 10.3% during 2016 and 2015, 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
Federal’s total loans and loans held for sale during the periods indicated:
2017
Years Ended December 31
2016
(In Thousands)
2015
$
Loan originations:
1-4 family residential
Multi-family residential
Commercial real estate
Construction
Commercial
Home equity and improvement
Consumer finance
Total loans originated
Loans acquired in acquisitions:
Loans purchased:
Loan reductions:
Loan pay-offs
Loans sold
Periodic principal repayments
Net increase in total loans and loans held for sale
$
Asset Quality
240,921
74,342
181,289
205,088
219,588
68,856
15,185
1,005,269
285,448
11,476
350,971
231,073
288,215
870,259
431,934
$
$
294,307
59,957
166,437
138,553
389,037
56,816
10,426
1,115,533
-
822
232,302
282,589
432,445
947,336
169,019
$
$
241,658
44,352
241,969
116,224
465,543
54,676
10,235
1,174,657
-
-
265,311
231,067
493,383
989,761
184,896
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, 2017, 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
1,305
418
616
-
179
2,465
292
5,275
$
0.05%
0.02
0.02
0.00
0.01
0.10
0.01
0.21%
$ 1,031
-
277
-
1,248
428
79
$ 3,063
0.04%
0.00
0.01
0.00
0.05
0.02
0.00
0.12%
$
1,463
-
1,964
-
1,393
206
2
$ 5,028
0.06%
0.00
0.07
0.00
0.06
0.01
0.00
0.20%
$ 3,799
418
2,857
-
2,820
3,099
373
$ 13,366
0.15%
0.02
0.10
0.00
0.12
0.13
0.01
0.53%
Overall, the level of delinquencies at December 31, 2017, increased from the levels at December
31, 2016, when First Defiance reported that 0.32% of its outstanding loans were at least 30 days
delinquent. The level of total loans 90 or more days delinquent has increased to 0.20% at December 31,
2017, from 0.17% at December 31, 2016. The level of total loans 60-89 days delinquent increased to
0.12% at December 31, 2017, from 0.07% at December 31, 2016. The level of loans that were 30 to 59
days past due increased to 0.21% at December 31, 2017, from 0.08% at December 31, 2016.
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 status 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 $56.3 million, $27.4 million and
$41.9 million were considered impaired as of December 31, 2017, 2016 and 2015, respectively. The
increase in impaired loans from 2016 to 2017 is due to an increase in two loan relationships totaling $11.0
million that became impaired during 2017 as well as $10.4 million of newly impaired loans from the CSB
acquisition due to new financial information received. 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 $1.4 million of interest received and recorded in income during 2017
related to impaired loans. There was $1.7 million and $1.3 million recorded in 2016 and 2015,
respectively. Unrecorded interest income based on the loan’s contractual terms on these impaired loans
and all non-performing loans in 2017, 2016 and 2015 was $1.1 million, $1.2 million, and $1.5 million,
respectively. The average recorded investment in impaired loans during 2017, 2016 and 2015 (excluding
loans accounted for under FASB ASC Topic 310 Subtopic 30) was $47.1 million, $32.8 million and
$51.8 million, respectively. The total allowance for loan losses related to these loans was $0.8 million,
$0.8 million, and $0.4 million at December 31, 2017, 2016 and 2015, 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 2017, First Defiance recognized $20,000 of expense related to
write-downs in value of real estate acquired by foreclosure. The balance of real estate owned at December
31, 2017 was $1.5 million.
As of December 31, 2017, First Defiance’s total non-performing loans amounted to $30.7 million
or 1.31% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $14.3
million or 0.74% of total loans, at December 31, 2016. Non-performing loans are loans which are more
than 90 days past due or on nonaccrual. The nonperforming loan balance for 2017 includes $25.5 million
of loans that were originated by First Federal and also considered impaired, compared to $11.3 million for
2016.
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:
1-4 family residential real estate
Multi-family residential real estate
Commercial real estate
Commercial
Home equity and improvement
Consumer finance
Total nonperforming loans
Real estate owned
Total repossessed assets
2017
$ 3,037
128
18,091
8,841
590
28
30,715
1,532
1,532
2016
December 31
2015
(Dollars in Thousands)
2014
2013
$ 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
455
455
1,321
1,321
6,181
6,181
5,859
5,859
Total nonperforming assets
$ 32,247
$ 14,803
$ 17,582
$ 30,311
$ 33,706
Restructured loans, accruing
$ 13,770
$ 10,544
$ 11,178
$ 24,686
$ 27,630
Total nonperforming assets as a
percentage of total assets
Total nonperforming loans as a
percentage of total loans*
Total nonperforming assets as a
percentage of total loans plus REO*
Allowance for loan losses as a percent
of total nonperforming assets
1.08%
0.60%
0.77%
1.39%
1.58%
1.31%
0.74%
0.90%
1.47%
1.76%
1.37%
0.76%
0.97%
1.83%
2.12%
82.75% 174.86% 144.36%
81.71%
74.02%
* 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
homogenous loans in which the Company estimates the losses incurred in the portfolio based on
quantitative and qualitative factors.
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- 13 -
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 “Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations –
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, 2017, First Defiance’s allowance for loan losses totaled $26.7 million compared
to $25.9 million at December 31, 2016. The following table sets forth the activity in First Defiance’s
allowance for loan losses during the periods indicated.
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
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
Years Ended December 31
2017
2016
(Dollars in Thousands)
2015
2014
2013
$ 25,884
2,949
$ 25,382
283
$ 24,766
136
$ 24,950
1,117
$ 26,711
1,824
(279)
(429)
(2,301)
(139)
(301)
(3,449)
1,299
(2,150)
$ 26,683
(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
86.87% 180.40% 156.09% 102.64%
89.60%
1.14%
1.33%
1.41%
1.50%
1.58%
average loans
-0.03%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
0.10% -0.01%
0.08%
0.23%
The provision for credit losses increased significantly in 2017 from previous years due to growth
of the loan portfolio as well as an increase in net charge offs. The decrease in the allowance for loan loss
as a percentage of total loans at December 31, 2017 vs December 31, 2016 is primarily attributable to the
CSB acquisition. The CSB loans acquired were recorded at fair value with purchase accounting
adjustments discounting the loan balance instead of an allowance for loan losses. For the CSB loans
acquired, the discount recorded totaled $3.9 million, or 1.9% of acquired CSB loans at December 31,
2017. Management feels that the level of the allowance for loan losses at December 31, 2017, is
sufficient to cover the estimated losses incurred but not yet recognized in the loan portfolio.
- 14 -
- 14 -
The following table sets forth information concerning the allocation of First Defiance’s allowance
for loan losses by loan categories at the dates indicated. For information about the percent of total loans in
each category to total loans, see “Lending Activities-Loan Portfolio Composition” Below.
2017
2016
December 31
2015
2014
2013
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
$
2,532
11.1%
$
2,627
10.2%
(Dollars in Thousands)
11.0%
$
3,212
$
2,494
12.2%
$ 2,847
12.2%
2,702
10.1
2,228
9.7
2,151
9.0
2,453
9.3
2,508
9.2
10,354
647
7,965
40.0
10.8
21.3
10,625
450
7,361
41.5
9.0
23.0
11,772
517
5,192
41.8
8.7
22.4
11,268
221
6,509
40.6
6.7
23.7
12,000
134
5,678
41.6
5.3
24.1
2,255
228
$ 26,683
5.5
1.2
100.0%
2,386
207
$ 25,884
5.8
0.8
100.0%
2,270
171
$ 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%
1-4 family residential
Multi-family
residential real
estate
Commercial real
estate
Construction
Commercial loans
Home equity and
improvement
loans
Consumer loans
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.
Average balances and average rates paid on deposits are as follows:
2017
Amount
Rate
Years Ended December 31
2016
Amount
(Dollars in Thousands)
Rate
2015
Amount
Rate
$
528,926
-
$
441,731
-
$
388,257
-
955,248
284,814
530,414
$ 2,299,402
798,266
0.18%
235,137
0.04
430,487
1.33
0.38% $ 1,905,621
0.17%
0.04
1.12
0.33%
742,856
215,253
441,510
$ 1,787,876
0.16%
0.04
0.92
0.30%
Non-interest-bearing
demand deposits
Interest bearing
demand deposits
Savings deposits
Time deposits
Totals
The following table sets forth the maturities of First Defiance’s retail certificates of deposit
having principal amounts $250,000 or greater at December 31, 2017 (In Thousands):
- 15 -
- 15 -
Retail certificates of deposit maturing in quarter ending:
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
After December 31, 2018
Total retail certificates of deposit with
balances $250,000 or greater
$
4,813
9,358
8,172
3,428
28,072
$
53,843
The following table details the deposit accrued interest payable as of December 31:
Interest bearing demand deposits and
money market accounts
Certificates of deposit
2017
2016
(In Thousands)
$
$
29
68
97
$
$
23
19
42
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
2017
Years Ended December 31
2016
(Dollars in Thousands)
2015
84,279
1.55%
$ 103,943
1.42%
$ 59,902
1.62%
26,019
0.20%
$
31,816
0.22%
$ 57,188
0.27%
$
$
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
2017
Years Ended December 31
2016
(Dollars in Thousands)
2015
$ 105,214
102,115
1.44%
$ 103,943
84,944
1.42%
$ 59,902
38,185
1.62%
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- 16 -
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
2017
Years Ended December 31
2016
(Dollars in Thousands)
2015
$
$
-
44
0.80%
26,019
23,337
0.23%
$
$
30,000
861
0.39%
57,984
52,821
0.26%
$
-
41
0.18%
$ 60,272
54,632
0.28%
First Defiance borrows funds under a variety of programs at the FHLB. As of December 31,
2017, there was $84.3 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, 2017 and 2016, 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, 2017, other than amounts available on the REPO and Cash
Management line, First Federal had additional borrowing capacity with the FHLB of $567.4 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 $16.0 million at December 31,
2017, and $13.8 million at December 31, 2016. First Federal holds stock of the FHLB of Indianapolis of
$5,000 at December 31, 2017, and December 31, 2016.
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.
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 3.09% and 2.46% as of December 31, 2017 and 2016
respectively.
- 17 -
- 17 -
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 2.97% and 2.34% as of December 31, 2017 and 2016
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 674 employees at December 31, 2017. 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
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 is subject to regulation examination and oversight by the Federal
Reserve Board (“Federal Reserve”). First Federal is subject to regulation, examination and oversight by
the Office of the Comptroller of the Currency (“OCC”). 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 regulations of the Consumer Financial Protection Bureau (the “CFPB”) which was
established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank
Act”) and has broad powers to adopt and enforce consumer protection regulations. First Defiance and
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- 18 -
First Federal must file periodic reports with the Federal Reserve and the OCC and examinations are
conducted periodically by the Federal Reserve, the 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 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.
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.
Regulatory Capital Requirements and Prompt Corrective Action – 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 2013, the 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 rules include (a) a minimum common equity tier 1 (“CET1”) capital ratio of 4.5%, (b) a
minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum
leverage ratio of 4%.
Common equity for the common equity tier 1 capital ratio includes common stock (plus related
surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock,
less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus
certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus
and trust preferred securities that have been grandfathered (but which are not permitted going forward),
and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain
deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments
(such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new
eligibility criteria, less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain
deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a
securitization, investments in a banking organization’s own capital instruments and investments in the
capital of unconsolidated financial institutions (above certain levels).
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
- 19 -
- 19 -
capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
The 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 through January 1, 2019 and is currently 1.875%.
The federal banking agencies have established a system of “prompt corrective action” to resolve
certain problems of undercapitalized banks. This system is based on five capital level categories for
insured depository
institutions: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The federal banking agencies may (or
in some cases must) take certain supervisory actions depending upon a bank's capital level. For example,
the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes
"critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the
FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be
significantly affected depending on a bank's capital category. For example, a bank that is not "well
capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on
deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized
depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be
acceptable.
Effective January 1, 2015, in order to be "well-capitalized," a financial institution must have a
common equity tier 1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a Tier 1 risk-
based capital of at least 8% and a leverage ratio of at least 5%, and the institution must not be subject to
any written agreement, order, capital directive or prompt corrective action directive to meet and maintain
a specific capital level for any capital measure. As of December 31, 2017, First Federal met the ratio
requirements in effect at that date to be deemed "well-capitalized." See Note 17 of the Notes to the
Consolidated Financial Statements which is incorporated herein by reference.
The following table sets forth the amounts and percentage levels of regulatory capital of First
Defiance and First Federal, the minimum amounts required for each of First Defiance and First Federal,
and the amounts required for First Federal to be deemed well capitalized under the prompt corrective
action system, all as of December 21, 2017. (Dollars in Thousands):
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Actual
Minimum Required for
Adequately Capitalized
Minimum Required to be Well
Capitalized for Prompt
Corrective Action
Amount
Ratio
Amount
Ratio(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated
First Federal
Tier 1 Capital (2)
Consolidated
First Federal
$274,832
$298,571
10.43%
11.33%
$118,596
$118,534
$309,832
$298,571
10.80%
10.43%
$114,773
$114,539
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$309,832
$298,571
11.76%
11.33%
$158,128
$158,046
Total Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$336,515
$332,254
12.77%
12.35%
$210,838
$210,728
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$171,216
N/A
$143,173
N/A
$220,728
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$263,410
N/A
10.0%
(1) Excludes capital conservation buffer of 1.25% as of December 31, 2017.
(2) Core capital is computed as a percentage of adjusted total assets of $2.87 billion for consolidated and $2.86
billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.64
billion for consolidated and $2.63 billion for the Bank.
In September 2017, the Federal Reserve Board, along with other bank regulatory agencies,
proposed amendments to its capital requirements to simplify various aspects of the capital rules and
thereby reduce regulatory burden for “non-advanced approaches” banking organizations. The Bank is a
non-advanced approach bank because it has total consolidated assets of less than $250 billion and balance
sheet foreign exposures of less than the maximum amount for a non-advanced approach bank. Because
the amendments were proposed with a request for comments and have not been finalized, we do not yet
know what effect the final rules will have on the Bank’s capital calculations. In November 2017, the
federal banking agencies extended, for such non-advanced approaches banks, the existing capital
requirements for certain items that were scheduled to change effective January 1, 2018, in light of the
simplification amendments being considered.
Dividends - Dividends paid by First Federal to First Defiance are subject to various regulatory
restrictions. First Federal paid $13.0 million in dividends to First Defiance in 2017 and $22.0 million in
2016. Generally, First Federal may not pay dividends to First Defiance in excess of its net profits (as
defined by statute) for the last two fiscal years, plus any year-to-date net profits without the approval of
the OCC. First Insurance paid $1.8 million in dividends to First Defiance in 2017 and $1.2 million in
dividends in 2016. First Defiance Risk Management paid $1.0 million in dividends to First Defiance in
each of 2017 and 2016.
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 Defiance
or 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 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
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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.
Deposit Insurance - The FDIC maintains the DIF, which insures the deposit accounts of First
Federal to the maximum amount provided by law. The general insurance limit is $250,000 per separately
insured depositor. This insurance is backed by the full faith and credit of the United States government.
The FDIC assesses deposit insurance premiums on each insured institution quarterly based on
risk characteristics of the institution. The FDIC may also impose a special assessment in an emergency
situation.
Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio
(DRR), which is the ratio of the DIF to insured deposits of the total industry. In March 2016, the FDIC
adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the
deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on
institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35%
from the former statutory minimum of 1.15%. The FDIC’s rules reduced assessment rates on all banks
but imposed a surcharge on banks with assets of $10 billion or more until the DRR reaches 1.35% and
provide assessment credits to banks with assets of less than $10 billion for the portion of their
assessments that contribute to the increase of the DRR to 1.35%. The rules also changed the method to
determine risk-based assessment rates for established banks with less than $10 billion in assets to better
ensure that banks taking on greater risks pay more for deposit insurance than less risky banks.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to
fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government
corporation established to recapitalize a predecessor to the DIF. These assessments will continue until the
Financing Corporation bonds mature in 2019.
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.
Consumer Protection Laws and Regulations - Banks are subject to regular examination to
ensure compliance with federal statutes and regulations applicable to their business, including consumer
protection statutes and implementing regulations. Potential penalties under these laws include, but are not
limited to, fines. The Dodd-Frank Act established the CFPB, which has extensive regulatory and
enforcement powers over consumer financial products and services. The CFPB has adopted numerous
rules with respect to consumer protection laws, amending some existing regulations and adopting new
ones, and has commenced enforcement actions. The following are just some of the consumer protection
laws applicable to First Federal:
•
Community Reinvestment Act of 1977: imposes a continuing and affirmative obligation
to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.
•
Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the
basis of any of various criteria.
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•
Truth in Lending Act: requires that credit terms are disclosed in a manner that permits a
consumer to understand and compare credit terms more readily and knowledgeably.
•
Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related
lending activities against any person on the basis of any of certain criteria.
•
Home Mortgage Disclosure Act: requires financial institutions to collect data that
enables regulatory agencies to determine whether the financial institutions are serving the housing credit
needs of the communities in which they are located.
•
Real Estate Settlement Procedures Act: requires that lenders provide borrowers with
disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that
increase borrowers’ costs.
•
Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to
establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated
parties and to protect customer information from unauthorized access.
The banking regulators also use their authority under the Federal Trade Commission Act to take
supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may
not necessarily fall within the scope of specific banking or consumer finance law.
Community Reinvestment Act - Under the Community Reinvestment Act (“CRA”), every FDIC-
insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit
needs of its entire community, including low and moderate income neighborhoods. The CRA requires the
appropriate federal banking regulator, in connection with the examination of an insured institution, to
assess the institution’s record of meeting the credit needs of its community and to consider this record in
its evaluation of certain applications to banking regulators, such as an application for approval of a
merger or the establishment of a branch. An unsatisfactory rating may be used as the basis for the denial
of an application to acquire another financial institution or open a new branch. As of its last examination,
First Federal received a CRA rating of “satisfactory.”
Executive and Incentive Compensation - In June 2010, the Federal Reserve Board, the OCC and
the FDIC issued joint interagency guidance on incentive compensation policies (the Joint Guidance)
intended to ensure that the incentive compensation policies of banking organizations do not undermine
the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-
based guidance, which covers all employees that have the ability to materially affect the risk profile of an
organization, either individually or as part of a group, is based upon the key principles that a banking
organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage
risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible
with effective internal controls and risk management; and (iii) be supported by strong corporate
governance, including active and effective oversight by the organization’s board of directors. The Joint
Guidance made incentive compensation part of the regulatory agencies’ examination process, with the
findings of the supervisory initiatives included in reports of examination and enforcement actions
possible.
In May 2016, the federal bank regulatory agencies approved a joint notice of proposed rules (the
Proposed Joint Rules) designed to prohibit incentive-based compensation arrangements that encourage
inappropriate risks at financial institutions. The Proposed Joint Rules would apply to covered financial
institutions with total assets of $1 billion or more. For all covered institutions, including Level 3
institutions like us, the proposed rule would:
•
prohibit incentive-based compensation arrangements that are “excessive” or “could lead
to material financial loss;”
•
require incentive based compensation that is consistent with a balance of risk and reward,
effective management and control of risk, and effective governance; and
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•
agency.
require board oversight, recordkeeping and disclosure to the appropriate regulatory
Further, as stock exchanges impose additional listing requirements under the Dodd-Frank Act,
public companies will be required to implement “clawback” procedures for incentive compensation
payments and to disclose the details of the procedures, which allow recovery of incentive compensation
that was paid on the basis of erroneous financial information necessitating a restatement due to material
noncompliance with financial reporting requirements. This clawback policy is intended to apply to
compensation paid within a three-year look-back window of the restatement and would cover all
executives who received incentive awards.
Patriot Act - In response to the terrorist events of September 11, 2001, the Uniting and
Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the Patriot Act) was signed into law in October 2001. The Patriot Act gives the United
States government powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened anti-money laundering
requirements. Title III of the Patriot Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions. Among other requirements,
Title III and related regulations require regulated financial institutions to establish a program specifying
procedures for obtaining identifying information from customers seeking to open new accounts and
establish enhanced due diligence policies, procedures and controls designed to detect and report
suspicious activity. First Federal has established policies and procedures that it considers to be in
compliance with the requirements of the Patriot Act.
Volcker Rule – The Volcker Rule under the Dodd-Frank Act prohibits banks and their affiliates
from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity
funds. The Volcker Rule, which became effective in July 2015, does not significantly impact the
operations of First Defiance or its subsidiaries, as the Company does not engage in the businesses
prohibited by the Volcker Rule.
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. 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
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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, 2017, First Federal’s portfolio of commercial real estate loans totaled $1.2
billion, or approximately 50.1% 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, 2017, First Federal’s portfolio of commercial loans totaled $526.1 million, or
approximately 21.3% 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 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
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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
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
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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
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 or confidential
trade secrets, 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. First Defiance also depends upon third-party vendors who have access to funds and
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personal information about customers. Cybersecurity breaches of other companies, such as the breach of
the systems of a credit bureau, may result in criminals using personal information obtained from such
other source to impersonate a customer of First Defiance and obtain funds from customer accounts.
Further, First Defiance may be affected by data breaches at retailers and other third parties who
participate in data interchanges with First Defiance’s customers that involve the theft of customer credit
and debit card data, which may include the theft of debit card PIN numbers and commercial card
information used to make purchases at such retailers and other third parties. Such data breaches could
result in First Defiance incurring significant expenses to reissue debit cards and cover losses, which could
result in a material adverse effect on First Defiance’s results of operations.
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 and
investing in additional equipment or contracts 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, and insurance premiums may rise substantially if First
Defiance suffers such an event. 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, or result in a loss of investor confidence, hurting First Defiance’s stock price and
ability to acquire capital in the future. First Defiance could also lose revenue by the wrongful
appropriation of confidential information about its business operations by competitors who use the
information to compete with First Defiance.
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 its own information systems and those of vendors 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. Other businesses have been victims of a
ransomware attack in which a business becomes unable to access its own information and is presented
with a demand to pay a ransom in order to once again have access to its information. First Defiance is
also at risk for the impact of natural disasters, terrorism and international hostilities on its systems or for
the effects of outages or other failures involving power or communications systems operated by others.
These risks also arise from the same types of threats to businesses with which First Defiance deals.
Potential adverse consequences of attacks on First Defiance’s computer systems or other threats
include damage to First Defiance’s reputation, loss of customer business, costs of incentives to customers
or business partners in order to maintain their relationships, loss of investor confidence and a reduction in
First Defiance’s stock price, litigation, increased regulatory scrutiny and potential enforcement actions,
repairs of system damage, increased investments in cybersecurity (such as obtaining additional
technology, making organizational changes, deploying additional personnel, training personnel and
engaging consultants), and increased insurance premiums, all of which could result in financial loss and
material adverse effects on First Defiance’s results of operations and financial condition.
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.
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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, with a focus on strategic acquisitions.
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 mergers and other
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;
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 mergers or other
acquisitions, the success of such acquisitions 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 acquisitions.
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.
- 29 -
- 29 -
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.
Failure to integrate or adopt new technology may undermine First Defiance’s ability to meet
customer demands, leading to adverse effects on First Defiance’s financial condition and results of
operations.
The financial services industry is continually undergoing rapid technological change with
frequent introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce costs. First
Defiance’s future success depends, in part, upon its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands, as well as to create
additional efficiencies it is operations. First Defiance may not be able to effectively implement or have
the resources to implement new technology-driven products and services or be successful in marketing
these products and services to its customers. Failure to successfully keep pace with technological change
affecting the financial services industry could adversely affect First Defiance’s business, financial
condition, or results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2017, First Federal conducted its business from its main office at 601 Clinton
Street, Defiance, Ohio, and forty-two other full-service banking centers in northwest and central Ohio,
northeast Indiana and southeast Michigan as well as a loan production office in southeast Michigan. First
Insurance conducted its business from nine offices in northwest Ohio.
In January 2017, First Federal opened a branch located at 1707 Cherry St., Toledo, Ohio. This
office is leased.
In February 2017, First Federal acquired seven branches in the Commercial Savings Bank
acquisition: 118 S. Sandusky Ave., Upper Sandusky, Ohio; 112 E. Liberty St., Arlington, Ohio; 128 S.
Vance St., Carey, Ohio; 1660 Tiffin Ave., Findlay, Ohio; 17480 Cherokee St., Harpster, Ohio; 279
Jamesway Dr., Marion, Ohio; 195 Barks Rd. West, Marion, Ohio. These offices are owned. The branch
located at 1660 Tiffin Ave., Findlay, Ohio was closed on June 30, 2017.
In April 2017, First Insurance acquired four insurance offices in the Corporate One acquisition:
107 Ditto St., Suite 400, Archbold, Ohio; 101 W. Sandusky St., Suite 306, Findlay, Ohio; 1650 N.
Countyline St., Suite 200, Fostoria, Ohio and 643 Miami St., Suite 5, Tiffin, Ohio. These offices are
leased.
- 30 -
- 30 -
In November 2017, First Defiance entered into a lease agreement for the office located at 5520
Monroe St., Sylvania, Ohio. This office opened as a branch for First Federal and an insurance office for
First Insurance in January 2018. Two First Insurance offices moved into this location: 1755 Indian
Wood Cir., Maumee, Ohio and 4350 Navarre Ave., Oregon, Ohio. These leases were terminated in
January 2018.
In December 2017, First Federal entered into a lease agreement for the office located at 1995
Highland Dr., Ann Arbor, Michigan. This office opened in December as a loan production office.
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 Rd., Defiance, Ohio.
The following table sets forth certain information with respect to the offices and other properties
of the Company at December 31, 2017. See Note 9 to the Consolidated Financial Statements.
Description/address
First Federal
Main Office
601 Clinton St., Defiance, OH
Operations Center
25600 Elliott Rd., Defiance, OH
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
118 S. Sandusky Ave., Upper Sandusky, OH
Leased/
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
Owned
- 31 -
- 31 -
Net Book Value
of Property
Deposits
(In Thousands)
$
3,120
$
223,102
4,641
531
315
828
229
1,078
682
623
269
772
536
843
728
265
151
1,000
665
819
289
906
705
777
498
1,202
-
-
583
184
157
473
1,355
1,529
1,895
947
161
1,144
N/A
161,290
80,641
80,346
47,772
35,850
43,910
85,825
35,894
60,326
68,386
123,336
104,224
96,342
20,127
47,873
84,692
104,705
42,760
48,769
37,096
41,017
44,634
37,592
25,008
16,970
83,999
48,827
34,582
49,149
65,506
10,903
47,819
6,558
1,288
121,402
112 E. Liberty St., Arlington, OH
128 S. Vance St., Carey, OH
17480 Cherokee St., Harpster, OH
279 Jamesway Dr., Marion, OH
195 Barks Rd. West, Marion, OH
1707 Cherry St., Toledo, OH
1995 Highland Dr., Suite A, Ann Arbor, MI
5520 Monroe St., Sylvania, 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
107 Ditto St., Suite 400, Archbold, OH
101 W. Sandusky St., Suite 306, Findlay, OH
1650 N. Countyline St., Suite 200, Fostoria, OH
643 Miami St., Suite 5, Tiffin, OH
5520 Monroe St., Suite A, Sylvania, OH
Item 3. Legal Proceedings
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
85
171
136
705
633
72
-
-
436
-
-
-
-
-
-
-
-
-
-
33,138
$
21,849
54,650
12,517
33,678
43,745
2,447
-
250
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 2,437,656
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.
- 32 -
- 32 -
PART II
PART II
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Purchases of Equity Securities
Purchases of Equity Securities
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol
“FDEF.” As of February 23, 2018, the Company had approximately 2,407 shareholders of record.
“FDEF.” As of February 23, 2018, the Company had approximately 2,407 shareholders of record.
“FDEF.” As of February 23, 2018, the Company had approximately 2,407 shareholders of record.
The Company’s ability to pay dividends to its shareholders is subject to regulatory limitations due
The Company’s ability to pay dividends to its shareholders is subject to regulatory limitations due
to the Company’s dependence on First Federal as a source of capital for the payment of the dividends.
to the Company’s dependence on First Federal as a source of capital for the payment of the dividends.
The Company’s ability to pay dividends to its shareholders is subject to regulatory limitations due
The Federal Reserve expects First Defiance to serve as a source of strength for First Federal and may
The Federal Reserve expects First Defiance to serve as a source of strength for First Federal and may
to the Company’s dependence on First Federal as a source of capital for the payment of the dividends.
require First Defiance to retain capital for further investment in First Federal, rather than pay dividends to
require First Defiance to retain capital for further investment in First Federal, rather than pay dividends to
The Federal Reserve expects First Defiance to serve as a source of strength for First Federal and may
First Defiance shareholders. If federal banking regulators deem the payment of dividends to be an unsafe
First Defiance shareholders. If federal banking regulators deem the payment of dividends to be an unsafe
require First Defiance to retain capital for further investment in First Federal, rather than pay dividends to
or unsound banking practice, the regulators, within their discretion, may restrict the Company’s payment
or unsound banking practice, the regulators, within their discretion, may restrict the Company’s payment
First Defiance shareholders. If federal banking regulators deem the payment of dividends to be an unsafe
of dividends to its shareholders. The table below shows the reported high and low sales prices of the
of dividends to its shareholders. The table below shows the reported high and low sales prices of the
or unsound banking practice, the regulators, within their discretion, may restrict the Company’s payment
common shares and cash dividends declared per common share during the periods indicated in 2017 and
common shares and cash dividends declared per common share during the periods indicated in 2017 and
of dividends to its shareholders. The table below shows the reported high and low sales prices of the
2016.
2016.
common shares and cash dividends declared per common share during the periods indicated in 2017 and
2016.
Year Ending
Year Ending
Year Ending
December 31, 2017
December 31, 2017
December 31, 2017
Low
Low
Low
Dividend
Dividend
Dividend
High
High
High
December 31, 2016
December 31, 2016
December 31, 2016
Low
Low
Low
Dividend
Dividend
Dividend
High
High
High
Quarter ended:
Quarter ended:
March 31
March 31
Quarter ended:
March 31
June 30
June 30
September 30
September 30
June 30
December 31
December 31
September 30
December 31
$ 51.15
$ 51.15
$ 51.15
56.90
56.90
53.99
53.99
56.90
56.91
56.91
53.99
56.91
$ 46.27
$ 46.27
$ 46.27
48.78
48.78
47.01
47.01
48.78
50.28
50.28
47.01
50.28
$ 0.25
$ 0.25
$ 0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
$ 40.98
$ 40.98
$ 40.98
41.21
41.21
46.83
46.83
41.21
52.31
52.31
46.83
52.31
$ 34.80
$ 34.80
$ 34.80
37.53
37.53
35.90
35.90
37.53
36.91
36.91
35.90
36.91
$ 0.22
$ 0.22
$ 0.22
0.22
0.22
0.22
0.22
0.22
0.22
0.22
0.22
0.22
The line graph below compares the yearly percentage change in cumulative total shareholder return
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
on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the
The line graph below compares the yearly percentage change in cumulative total shareholder return
SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31,
SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31,
on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the
2012, and the reinvestment of all dividends are assumed. The performance graph represents past
2012, and the reinvestment of all dividends are assumed. The performance graph represents past
SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31,
performance and should not be considered to be an indication of future performance.
performance and should not be considered to be an indication of future performance.
2012, 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.
Period Ending
Period Ending
Period Ending
12/31/14
12/31/14
12/31/14
184.50
184.50
160.78
160.78
184.50
148.86
148.86
160.78
140.94
140.94
148.86
140.94
12/31/15
12/31/15
12/31/15
209.03
209.03
171.97
171.97
209.03
160.70
160.70
171.97
172.58
172.58
160.70
172.58
12/31/16
12/31/16
12/31/16
286.93
286.93
187.22
187.22
286.93
222.81
222.81
187.22
207.82
207.82
222.81
207.82
12/31/17
12/31/17
12/31/17
299.75
299.75
242.71
242.71
299.75
234.58
234.58
242.71
197.64
197.64
234.58
197.64
Index
Index
Index
First Defiance Financial Corp.
First Defiance Financial Corp.
NASDAQ Composite
NASDAQ Composite
First Defiance Financial Corp.
SNL Bank NASDAQ
SNL Bank NASDAQ
NASDAQ Composite
SNL Midwest Thrift
SNL Midwest Thrift
SNL Bank NASDAQ
SNL Midwest Thrift
12/31/12
12/31/12
12/31/12
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
12/31/13
12/31/13
12/31/13
137.61
137.61
140.12
140.12
137.61
143.73
143.73
140.12
123.32
123.32
143.73
123.32
- 33 -
- 33 -
- 33 -
- 33 -
The following table provides information regarding First Defiance’s purchases of its common
shares during the fourth quarter period ended December 31, 2017:
Period
October 1 – October 31, 2017
November 1 – November 30, 2017
December 1 – December 31, 2017
Total
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
-
-
-
-
$ -
-
-
$ -
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.
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.
- 34 -
- 34 -
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, 2017. 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
2017
$ 2,993,403
261,298
2,322,030
26,683
32,247
2,440,581
84,279
373,286
3.23
3.22
36.76
26.49
1.00
30.96%
10,034
10,156
$
108,102
11,431
96,671
2,949
40,081
85,351
48,452
16,184
32,268
1.13%
9.19%
3.74%
3.88%
2.99%
61.81%
12.47%
12.32%
1.08%
1.14%
0.10%
As of and For the Year Ended December 31
2015
(Dollars in Thousands, Except Per Share Data)
2016
2014
$ 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
$ 2,297,676
236,678
1,776,835
25,382
17,582
1,838,811
59,902
280,197
2.87
2.82
30.78
23.79
0.775
27.00%
9,371
9,102
$ 2,178,952
239,634
1,622,020
24,766
30,311
1,763,122
21,544
279,505
2.55
2.44
30.17
23.25
0.625
24.51%
9,969
9,235
$
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%
$
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%
$
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%
2013
$ 2,137,148
198,557
1,555,498
24,950
33,706
1,737,311
22,520
272,147
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%
(1) Nonperforming assets include non-accrual loans that are contractually past due 90 days or more and real estate, mobile homes and
(2)
other assets acquired by foreclosure or deed-in-lieu thereof.
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.
- 35 -
- 35 -
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 its subsidiaries must comply.
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- 36 -
• 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.
This Item 7 presents information to assess the financial condition and results of operations of First
Defiance. This item 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 Annual Report on Form 10-K contains GAAP financial measures and certain non-GAAP
financial measures. Management believes that these measures 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, 2017 and 2016.
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)
December 31,
2017
96,671
1,914
98,585
39,497
85,351
2,542,129
2,545,261
3,132
3.88%
61.81%
December 31,
2016
$ 78,943
1,830
$ 80,773
$ 33,521
71,093
2,160,561
2,168,046
7,485
3.74%
62.20%
December 31,
2017
373,286
(98,569)
(5,703)
269,014
December 31,
2016
$ 293,018
(61,798)
(1,336)
$ 229,884
10,156
8,983
26.49
$ 25.59
$
$
$
$
$
$
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- 37 -
Overview
First Defiance is a unitary thrift holding company that conducts business through its wholly-owned
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 43 full
service banking centers in fourteen northwest and central Ohio counties, one northeast Indiana county, and
one southeastern Michigan county. First Federal operates one loan production office in Ann Arbor, Michigan
which is located in Washtenaw County.
First Federal provides a broad range of financial services including checking accounts, savings
accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity
loans and trust and wealth management services through its extensive branch network.
First Insurance sells a variety of property and casualty, group health and life and individual health
and life insurance products. First Insurance is an insurance agency that does business in the Archbold,
Bowling Green, Bryan, Defiance, Findlay, Fostoria, Lima, Maumee, Oregon, and Tiffin, Ohio areas. The
Maumee and Oregon offices were consolidated into a new office in Sylvania, Ohio in January 2018.
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, 2017, totaled $2.99 billion compared to $2.48 billion at December 31,
2016, an increase of $515.8 million or 20.8%. Cash and cash equivalents increased $14.7 million to
$113.7 million at December 31, 2017 from $99.0 million at December 31, 2016. The increase in assets
was due to an increase in loans receivable, net of undisbursed loan funds and deferred fees and costs, of
$407.4 million, an increase in goodwill of $36.8 million and an increase in securities of $10.1 million.
These increases were funded by increases in total deposits of $456.0 million. These increases were
primarily due to the acquisition of CSB, which increased total assets by $367.1 million, loans by $285.4
million, goodwill and intangible assets by $33.8 million and deposits by $308.0 million. See Note 3 –
Business Combinations to the Consolidated Financial Statements for further details regarding the CSB
acquisition and the impact to the individual categories.
Securities
The securities portfolio increased $10.1 million to $261.3 million at December 31, 2017. The
2017 activity in the portfolio included $73.5 million of purchases, $4.3 million acquired from CSB, $1.4
million of amortization, $32.8 million of principal pay-downs and maturities, and $33.7 million of
securities being sold. There was a net increase of $148,000 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 $408.2
million to $2.35 billion at December 31, 2017. For more details on the loan balances, see Note 7 – Loans
Receivable to the Consolidated Financial Statements.
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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 $1.76 billion and $1.51 billion at December 31, 2017 and 2016, respectively, and
accounted for approximately 71.4% and 74.2% of First Defiance’s loan portfolio at the end of those
respective periods. The net commercial and commercial real estate loan amounts acquired from CSB at
the acquisition date were $194.6 million. 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 $274.9 million at December 31, 2017, compared with
$207.6 million at the end of 2016. At the end of 2017, those loans comprised 11.1% of the total loan
portfolio, up from 10.2% at December 31, 2016. The net 1-4 family residential loans acquired from CSB
at the acquisition date were $58.6 million.
Construction loans, which include one-to-four family and commercial real estate properties,
increased to $265.5 million at December 31, 2017, compared to $182.9 million at December 31, 2016.
These loans accounted for approximately 10.8% and 9.0% of the total loan portfolio at December 31,
2017 and 2016, respectively. The net construction loans acquired from CSB at the acquisition date were
$5.6 million.
Home equity and home improvement loans increased to $135.5 million at December 31, 2017,
from $118.4 million at the end of 2016. At the end of 2017, those loans comprised 5.5% of the total loan
portfolio, down slightly from 5.8% at December 31, 2016. The net home equity and home improvement
loans acquired from CSB at the acquisition date was $15.7 million.
Consumer finance and mobile home loans were $29.1 million at December 31, 2017 up from
$16.7 million at the end of 2016. These loans accounted for approximately 1.2% and 0.8% of the total
loan portfolio at December 31, 2017 and 2016, respectively. The net consumer loans acquired from CSB
at the acquisition date were $10.9 million.
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”)
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category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value,
which is determined based on appraised value less First Federal’s estimate of the liquidation costs.
First Federal does not adjust any appraisals upward without written documentation of this
valuation change from the appraiser. When setting reserves and charge offs on classified loans, appraisal
values may be discounted downward based upon First Federal’s experience with liquidating similar
properties.
Appraisals are received within approximately 60 days after they are requested. The First Federal
Loan Loss Reserve Committee reviews the amount of each new appraisal and makes any necessary
charge off decisions at its meeting prior to the end of each quarter.
Any partially charged-off collateral dependent loans are considered non-performing, and as such,
would need to show an extended period of time with satisfactory payment performance as well as cash
flow coverage capability supported by current financial statements before First Federal will consider an
upgrade to performing status. First Federal may consider moving the loan to accruing status after
approximately six months of satisfactory payment performance.
For loans where First Federal determines that an updated appraisal is not necessary, other means
are used to verify the value of the real estate, such as recent sales of similar properties on which First
Federal had loans as well as calls to appraisers, brokers, realtors and investors. First Federal monitors and
tracks its loan to value quarterly to determine accuracy and any necessary charge offs. Based on these
results, changes may occur in the processes used.
Loan modifications constitute a troubled debt restructuring (“TDR”) if First Federal, for
economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the
borrower that it would not otherwise consider. For loans that are considered TDRs, First Federal either
computes the present value of expected future cash flows discounted at the original loan’s effective
interest rate or it may measure impairment based on the fair value of the collateral. For those loans
measured for impairment utilizing the present value of future cash flows method, any discount is carried
as a 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, 2017 and
December 31, 2016, First Federal had $13.8 million and $10.5 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
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analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all
substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based
on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors.
If the loan is impaired and cash flow dependent, then a specific reserve is established for the discount on
the net present value of expected future cash flows. If the loan is impaired and collateral dependent, then
any shortfall is usually charged off. The Company also considers the impacts of any Small Business
Association or Farm Service Agency guarantees. The specific reserve was $758,000 at December 31,
2017, and $809,000 at December 31, 2016.
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. The Company utilizes loss migration
measurement for each loan portfolio segment with differentiation between loan risk grades in calculating
the general reserve component for non-impaired loans. 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.
The quantitative general allowance decreased $2.7 million to $6.0 million at December 31, 2017 from
$8.7 million at December 31, 2016 primarily due to a decrease in the historical loss rates from the migration
analysis.
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) Changes in international, national and local economic business conditions and
developments, including the condition of various market segments.
2) Changes in the value of underlying collateral for collateral dependent loans.
ENVIRONMENT
3) Changes in the nature and volume in the loan portfolio.
4) The existence and effect of any concentrations of credit and changes in the level
of such concentrations.
5) Changes in lending policies and procedures, including underwriting standards
and collection, charge-off and recovery practices.
6) Changes in the quality and breadth of the loan review process.
7) Changes in the experience, ability and depth of lending management and staff.
RISK
8) Changes in the trends of the volume and severity of delinquent and classified
loans, and changes in the volume of non-accrual loans, trouble debt
restructuring, and other loan modifications.
9) Changes in the political and regulatory environment.
The qualitative analysis at December 31, 2017, indicated a general reserve of $20.0 million
compared with $16.4 million at December 31, 2016, an increase of $3.6 million. Management reviews
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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 decreased in 2017 due to economic conditions
showing continued strength and sustainability, as well as strong employment data.
The environmental factors decreased slightly in 2017 in all loan segments. This is due to there
being no major changes to loan policy or underwriting guidelines, the stability of the characteristics and
terms of the loan portfolio and the continued favorable results of loan review, audits and examinations.
The decrease in the economic and environmental facts was offset by an increase in risk factors in
all loan segments, but primarily in commercial and commercial real estate. This is due to unfavorable
trends in the levels of non-performing loans and classified assets.
First Defiance’s general reserve percentages for main loan segments not otherwise classified
ranged from 0.44% for construction loans to 1.59% 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 2017 was $2.9 million compared to $283,000 for 2016. The
allowance for loan losses was $26.7 million at December 31, 2017, and $25.9 million at December 31,
2016, and represented 1.14% and 1.33% of loans, net of undisbursed loan funds and deferred fees and
costs, respectively. The decrease in the allowance for loan loss as a percentage of total loans versus a year
ago was primarily attributable to the CSB acquisition. The CSB loans acquired were recorded at fair
value with purchase accounting adjustments discounting the loan balance instead of an allowance for loan
losses. The recorded investment and purchase accounting adjustment of loans acquired from CSB totaled
$208.4 million and $3.9 million, respectively, at December 31, 2017. The provision was offset by charge
offs of $3.4 million and recoveries of $1.3 million resulting in an increase to the overall allowance for
loan loss of $800,000. In management’s opinion, the overall allowance for loan losses of $26.7 million as of
December 31, 2017, 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
2017, First Defiance recorded OREO write-downs that totaled $20,000. These amounts were included in
other non-interest expense. Management believes that the values recorded at December 31, 2017, for
OREO and repossessed assets represent the realizable value of such assets.
Total classified loans increased to $59.4 million at December 31, 2017, compared to $27.5
million at December 31, 2016, an increase of $31.9 million. There were two loan relationships totaling
$11.0 million that were downgraded and resulted in an increase in net charge offs in the second quarter of
2017. In addition, there were $17.4 million of newly classified loans from the CSB acquisition due to
new financial information received.
First Defiance’s ratio of allowance for loan losses to non-performing loans was 86.9% at
December 31, 2017, compared with 180.4% at December 31, 2016. 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, 2017, are appropriate.
At December 31, 2017, First Defiance had total non-performing assets of $32.2 million,
compared to $14.8 million at December 31, 2016. 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, 2017, and December 31, 2016, is
in commercial loans and commercial real estate loans. The balance of commercial non-performing loans
was $7.8 million higher at December 31, 2017, compared to December 31, 2016. The balance of
commercial real estate loans was $8.6 million higher at December 31, 2017, compared to December 31,
2016.
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Non-performing loans in the single-family residential, commercial real estate and commercial
loan categories represent 1.10%, 1.47% and 1.68% of the total loans in those categories respectively at
December 31, 2017, compared to 1.41%, 0.92% and 0.21% respectively for the same categories at
December 31, 2016. Management believes that the current allowance for loan losses is appropriate and
that the provision for loan losses recorded in 2017 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.
The net charge-offs and nonaccrual loan balances as a percentage of total are presented in the
table below at December 31, 2017 and 2016.
Table 1 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2017
As of December 31, 2017
Net
Charge-offs
(Recoveries)
(In Thousands)
$ 164
-
(260)
2,058
54
134
% of Total Net
Charge-offs
(Recoveries)
Nonaccrual
% of Total Non-
Loans
Accrual Loans
7.63%
0.00%
(12.09)%
95.77%
2.46%
6.23%
(In Thousands)
$ 3,037
-
18,219
8,841
28
590
9.89%
0.00%
59.32%
28.78%
0.09%
1.92%
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
$ 2,150
100.00%
$ 30,715
100.00%
For the Twelve Months Ended December 31, 2016
As of December 31, 2016
Net
Charge-offs
(In Thousands)
$ 184
-
(831)
280
30
118
% of Total Net
Charge-offs
Nonaccrual
% of Total Non-
Loans
Accrual Loans
84.02%
0.00%
(379.45)%
127.85%
13.70%
53.88%
(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%
The following table sets forth information concerning the allocation of First Defiance’s allowance
for loan losses by loan categories at December 31, 2017 and 2016.
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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, 2017
December 31, 2016
Percent of
total loans
by category Amount
Percent of
total loans
by category
(Dollars in Thousands)
$ 2,627
11.1%
10.1
40.0
10.8
21.3
5.5
1.2
100.0%
2,228
10,625
450
7,361
2,386
207
$ 25,884
10.2%
9.7
41.5
9.0
23.0
5.8
0.8
100.0%
Amount
$
2,532
2,702
10,354
647
7,965
2,255
228
$ 26,683
Loans Acquired with Impairment
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration
of credit quality since origination and it was probable, at acquisition, that all contractually required
payments would not be collected.
As of December 31, 2017, the total contractual receivable for those loans was $4.8 million and
the recorded value was $3.8 million.
High Loan-to-Value Mortgage Loans
The majority of First Defiance’s mortgage loans are collateralized by one-to-four-family
residential real estate, have loan-to-value ratios of 80% or less, and are made to borrowers in good credit
standing. First Federal usually requires residential mortgage loan borrowers whose loan-to-value is
greater than 80% to purchase private mortgage insurance (“PMI”). Management also periodically reviews
and monitors the financial viability of its PMI providers.
First Federal originates and retains a limited number of residential mortgage loans with loan-to-
value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable
strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be
approved by First Federal’s senior loan committee. Management monitors the balance of one-to-four
family residential loans, including home equity loans and committed lines of credit that exceed certain
loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences and
one-to-four family construction loans, 75% for developed land and 65% for raw land). Total loans that
exceed those standards described above at December 31, 2017, totaled $50.8 million, compared to $42.8
million at December 31, 2016. 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 $98.6 million at December 31, 2017, compared to $61.8 million at December 31, 2016.
The acquisition of CSB increased goodwill by $28.9 million and the acquisition of Corporate One
increased goodwill by $7.9 million. Core deposit intangibles and other intangible assets increased $4.4
million to $5.7 million at December 31, 2017, compared to $1.3 million at December 31, 2016. The
acquisition of CSB and Corporate One increased core deposit and other intangibles by $4.9 million and
$756,000, respectively. In addition there was $1.3 million of amortization expense for core deposit and
other intangibles in 2017. No impairment of goodwill was recorded in 2017 or 2016.
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Deposits
Total deposits at December 31, 2017 were $2.44 billion compared to $1.98 billion at December
31, 2016, an increase of $456.0 million or 23.0%. Non-interest bearing checking accounts grew by $83.7
million, interest bearing checking accounts and money markets grew by $188.9 million, savings grew by
$58.7 million and retail certificates of deposit grew by $124.8 million. The net deposit amounts acquired
from CSB at the acquisition date resulted in a $56.1 million increase in non-interest bearing demand deposits,
$122.0 million increase in interest bearing demand and money market deposits, $31.6 million increase in
savings deposits and $98.2 million increase in retail time deposits. 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 to the Consolidated Financial Statements.
Borrowings
FHLB advances totaled $84.3 million at December 31, 2017 compared to $103.9 million at
December 31, 2016. The balance at the end of 2017 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 March 2018. In addition, First
Defiance has fifteen fixed-rate advances totaling $72.0 million with rates ranging from 1.09% to 2.16%
and two amortizing advances totaling $7.3 million with rates ranging from 1.78% to 2.14%.
At December 31, 2017, First Defiance also had $26.0 million of securities that were sold with
agreements to repurchase, compared to $31.8 million at December 31, 2016.
Equity
Total stockholders’ equity increased $80.3 million to $373.3 million at December 31, 2017,
compared to $293.0 million at December 31, 2016. The increase in stockholders’ equity was the result of
recording net income of $32.3 million and an increase of $56.5 million due to the acquisition of CSB as a
result of issuing 1.1 million shares of common stock. These amounts were partially offset by $9.9 million of
common stock dividends paid in 2017.
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Results of Operations
Summary
First Defiance reported net income of $32.3 million for the year ended December 31, 2017,
compared to $28.8 million and $26.4 million for the years ended December 31, 2016 and 2015,
respectively. On a diluted per common share basis, First Defiance earned $3.22 in 2017, $3.19 in 2016
and $2.82 in 2015.
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 $96.7 million for the year ended December 31, 2017, compared to $78.9
million and $74.1 million for the years ended December 31, 2016 and 2015, respectively. The tax-
equivalent net interest margin was 3.88%, 3.74% and 3.81% for the years ended December 31, 2017,
2016 and 2015, respectively. The margin increased 14 basis points between 2016 and 2017. The increase
in margin in 2017 was primarily due to CSB’s earning asset mix as well an increase in interest rates.
Interest-earning asset yields increased 20 basis points (to 4.33% in 2017 from 4.13% in 2016) and the cost
of interest bearing liabilities between the two periods increased 7 basis points (to 0.59% in 2017 from
0.52% in 2016).
Total interest income increased by $20.7 million or 23.7% to $108.1 million for the year ended
December 31, 2017, from $87.4 million for the year ended December 31, 2016. This is due to continued
loan growth, the CSB acquisition, the increase in interest rates and a more profitable earning asset mix.
Interest income from loans increased to $99.5 million for 2017 compared to $80.2 million in 2016, which
represents an increase of 24.1%. The average balance of loans receivable increased $345.2 million to
$2.2 billion at December 31, 2017, from $1.9 billion at December 31, 2016, due primarily to the CSB
acquisition.
During the same period, the average balance of investment securities increased to $258.8 million
in 2017 from $233.4 million for the year ended December 31, 2016. Interest income from investment
securities increased to $6.9 million in 2017 compared to $6.2 million in 2016, which represents an
increase of 11.1%. The overall duration of investments increased to 3.40 years at December 31, 2017,
from 3.38 years at December 31, 2016.
Interest expense increased by $3.0 million in 2017 compared to 2016, to $11.4 million from $8.4
million. This increase was mainly due to a seven basis point increase in the average cost of interest-
bearing liabilities in 2017 and a $297.3 million increase in the average balance of interest-bearing
liabilities. The average balance of interest bearing deposits increased $305.9 million to $1.77 billion at
December 31, 2017, from $1.46 billion at December 31, 2016, primarily due to the CSB acquisition.
Interest expense related to interest-bearing deposits was $8.8 million in 2017 compared to $6.3 million in
2016.
Interest expenses on FHLB advances and other interest-bearing funding sources were $1.5
million and $208,000 respectively, in 2017 and $1.3 million and $138,000 respectively in 2016. The
increase in FHLB advance expense was due to rising interest rates and a $16.3 million increase in the
average balance of FHLB advances to $102.2 million at December 31, 2017, compared to $85.9 million at
December 31, 2016. Interest expense recognized by the Company related to subordinated debentures was
$935,000 in 2017 and $753,000 in 2016 due to rising rates.
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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.
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The following table shows an analysis of net interest margin on a tax equivalent basis for the years
ended December 31, 2017, 2016 and 2015:
Table 3 – Net Interest Margin
Year Ended December 31
Average
Balance
2017
Interest
(1)
Yield/
Rate (2)
Average
Balance
(In Thousands)
2016
Interest
(1)
Yield/
Rate
Average
Balance
2015
Interest
(1)
Yield/
Rate
$ 2,198,639
258,775
72,215
15,632
$ 99,742
8,654
836
784
4.54% $ 1,853,419
3.39% 233,407
67,420
1.16%
13,800
5.02%
$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%
3.64%
0.27%
4.00%
2,545,261
110,016
4.33%
2,168,046
89,213
4.13%
2,000,477
82,741
4.15%
Interest-Earning Assets:
Loans receivable (5)
Securities (6)
Interest-earning deposits
FHLB stock
Total interest-earning
assets
Non-interest-earning
assets
306,270
Total Assets
$2,851,531
229,393
$2,397,439
222,389
$2,222,866
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;
$ 1,769,786
102,155
36,156
27,929
$8,818
1,470
935
208
0.50% $ 1,463,890
85,856
1.44%
36,141
2.58%
52,826
0.74%
$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%
1.77%
1.70%
0.28%
1,936,026
11,431
0.59%
1,638,713
8,440
0.52%
1,528,501
6,781
0.44%
528,926
−
441,731
388,257
−
−
2,464,952
11,431
0.46%
2,080,444
8,440
0.41%
1,916,758
6,781
0.35%
35,343
2,500,295
351,236
31,361
2,111,805
285,634
28,463
1,945,221
277,645
$ 2,851,531
$ 2,397,439
$ 2,222,866
interest rate spread (3)
$98,585
3.74%
$80,773
3.61%
$75,960
3.71%
Net interest margin (4)
Average interest-earning
assets to average interest-
bearing liabilities
3.88%
131.5%
3.74%
132.3%
3.81%
130.9%
(1) Interest on certain tax exempt loans (amounting to $375,000, $383,000 and $368,000 in 2017, 2016 and 2015 respectively) and tax-exempt
securities ($3.2 million, $3.0 million and $3.2 million in 2017, 2016, and 2015) is not taxable for Federal income tax purposes. The average balance
of such loans was $11.5 million, $11.8 million and $10.7 million in 2017, 2016, and 2015 while the average balance of such securities was $91.2
million, $83.4 million and $86.0 million in 2017, 2016, and 2015, respectively. In order to compare the tax-exempt yields on these assets to taxable
yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 35%.
(2) At December 31, 2017, the yields earned and rates paid were as follows: loans receivable, 4.45%; securities, 3.12%; FHLB stock, 5.50%; total
interest-earning assets, 4.32%; deposits, 0.30%; FHLB advances, 1.51%; other borrowings, 0.19%, subordinated debentures, 3.02%; total including
non- interest-bearing liabilities, 0.39%; and interest rate spread, 3.93%.
(3) Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-earning assets excluding average unrealized gains/losses. See Non-
GAAP Financial Measure discussion for further details.
(5) For the purpose of the computation for loans, non-accrual loans are included in the average loans outstanding.
(6) Securities yield = annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.
See Non-GAAP Financial Measure discussion for further details.
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The following table describes the extent to which changes in interest rates and changes in volume of interest-
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
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,
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
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
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
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.
to the change due to rate and the change due to volume.
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 (1)
Table 4 – Changes in Interest Rates and Volumes (1)
Table 4 – Changes in Interest Rates and Volumes (1)
Year Ended December 31
Year Ended December 31
(In Thousands)
(In Thousands)
Year Ended December 31
(In Thousands)
Increase
Increase
(decrease)
(decrease)
due to
due to
rate
rate
$ 3,792
$ 3,792
(66)
(66)
441
152
441
152
$ 4,319
$ 4,319
$ 1,128
$ 1,128
(54)
(54)
182
182
159
159
$ 1,415
$ 1,415
Interest-Earning Assets
Interest-Earning Assets
Loans
Loans
Securities
Securities
Interest-earning
Interest-earning
deposits
deposits
FHLB stock
FHLB stock
Total interest-earning
Total interest-earning
assets
assets
Interest-Bearing Liabilities
Interest-Bearing Liabilities
Deposits
Deposits
FHLB advances
FHLB advances
Subordinated Debentures
Subordinated Debentures
Notes Payable
Notes Payable
Total interest- bearing
Total interest- bearing
liabilities
liabilities
2017 vs. 2016
2017 vs. 2016
Increase
Increase
Total
Total
(decrease)
(decrease)
increase
increase
due to
due to
(decrease)
volume
(decrease)
volume
Interest-Earning Assets
Loans
$ 15,527
$ 19,319
$ 15,527
$ 19,319
Securities
849
783
849
783
Interest-earning
deposits
28
28
FHLB stock
80
80
Total interest-earning
assets
$ 16,484
$ 16,484
$ 20,803
$ 20,803
469
232
469
232
Interest-Bearing Liabilities
Deposits
$ 1,429
$ 1,429
$ 2,557
$ 2,557
FHLB advances
236
236
182
182
Subordinated Debentures
-
-
182
182
Notes Payable
(89)
(89)
70
70
Total interest- bearing
liabilities
$ 1,576
$ 1,576
$ 2,991
$ 2,991
Increase
Increase
Increase
(decrease)
(decrease)
(decrease)
due to
due to
due to
rate
rate
rate
2016 vs. 2015
2017 vs. 2016
2016 vs. 2015
Increase
Increase
Increase
(decrease)
(decrease)
(decrease)
due to
due to
due to
volume
volume
volume
Total
Total
Total
increase
increase
increase
(decrease)
(decrease)
(decrease)
Increase
(decrease)
due to
rate
2016 vs. 2015
Increase
(decrease)
due to
volume
Total
increase
(decrease)
$
(326)
(326)
$
$ 3,792
(381)
(381)
(66)
$ 7,205
$ 7,205
$ 15,527
(224)
(224)
849
$ 6,879
$ 6,879
$ 19,319
(605)
(605)
783
$
(326)
(381)
$ 7,205
(224)
$ 6,879
(605)
173
173
441
-
-
152
25
25
28
-
-
80
198
198
469
-
-
232
173
-
$
(534)
(534)
$
$ 4,319
$ 7,006
$ 7,006
$ 16,484
$ 6,472
$ 6,472
$ 20,803
$
(534)
$ 7,006
$ 6,472
$
667
667
$
$ 1,128
(117)
(117)
(54)
140
140
182
(9)
(9)
159
$
253
253
$
$ 1,429
730
730
236
-
-
-
(5)
(5)
(89)
$
920
920
$
$ 2,557
613
613
182
140
140
182
(14)
(14)
70
$
667
(117)
140
(9)
$
$
$
681
681
$
$ 1,415
$
978
978
$
$ 1,576
$ 1,659
$ 1,659
$ 2,991
$
681
$
978
$ 1,659
25
-
253
730
-
(5)
198
-
920
613
140
(14)
$
4,813
$
Increase (decrease) in net interest income
Increase (decrease) in net interest income
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the
$ 17,812
4,813
4,813
$
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the
Increase (decrease) in net interest income
$ 17,812
$ 17,812
relationship of the absolute dollar amounts of the change in each.
relationship of the absolute dollar amounts of the change in each.
relationship of the absolute dollar amounts of the change in each.
Provision for Loan Losses – First Defiance’s provision for loan losses was $2.9 million for the
year ended December 31, 2017, compared to $283,000 for December 31, 2016, and $136,000 for
December 31, 2015.
Provision for Loan Losses – First Defiance’s provision for loan losses was $2.9 million for the
year ended December 31, 2017, compared to $283,000 for December 31, 2016, and $136,000 for
December 31, 2015.
Provision for Loan Losses – First Defiance’s provision for loan losses was $2.9 million for the
year ended December 31, 2017, compared to $283,000 for December 31, 2016, and $136,000 for
December 31, 2015.
Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a
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
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
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
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
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
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
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 this Management’s Discussion and Analysis and Note 7
portfolio. See also Allowance for Loan Losses in this Management’s Discussion and Analysis and Note 7
to the Consolidated Financial Statements.
to the Consolidated Financial Statements.
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 this Management’s Discussion and Analysis and Note 7
to the Consolidated Financial Statements.
Noninterest Income – Noninterest income increased by $6.1 million or 17.8% in 2017 to $40.1
million from $34.0 million for the year ended December 31, 2016. That followed an increase of $2.2
million or 7.0% in 2016 from $31.8 million in 2015.
Noninterest Income – Noninterest income increased by $6.1 million or 17.8% in 2017 to $40.1
million from $34.0 million for the year ended December 31, 2016. That followed an increase of $2.2
million or 7.0% in 2016 from $31.8 million in 2015.
Noninterest Income – Noninterest income increased by $6.1 million or 17.8% in 2017 to $40.1
million from $34.0 million for the year ended December 31, 2016. That followed an increase of $2.2
million or 7.0% in 2016 from $31.8 million in 2015.
Service fees and other charges increased to $12.1 million for the year ended December 31, 2017,
Service fees and other charges increased to $12.1 million for the year ended December 31, 2017,
from $10.9 million for 2016 and increased from $10.8 million for 2015. The increase in noninterest
from $10.9 million for 2016 and increased from $10.8 million for 2015. The increase in noninterest
income in 2017 from 2016 and 2015 is due to increased number of deposit accounts primarily from the
income in 2017 from 2016 and 2015 is due to increased number of deposit accounts primarily from the
CSB acquisition.
CSB acquisition.
Service fees and other charges increased to $12.1 million for the year ended December 31, 2017,
from $10.9 million for 2016 and increased from $10.8 million for 2015. The increase in noninterest
income in 2017 from 2016 and 2015 is due to increased number of deposit accounts primarily from the
CSB acquisition.
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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, 2017 and 2016 related to the overdraft privilege product, net of adjustments to the
allowance for uncollectible overdrafts, were $2.8 million and $2.4 million, respectively. Accounts
charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $24,000
at December 31, 2017, and $14,000 at December 31, 2016.
Noninterest income also includes gains, losses and impairment on investment securities. In 2017,
First Defiance realized a $584,000 gain on sale of securities. In 2016, a $509,000 gain was recognized
compared to a $22,000 gain in 2015.
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 $7.0 million, $7.3
million and $6.7 million in 2017, 2016 and 2015, respectively. The $266,000 decrease in 2017 from 2016
is attributable to a $647,000 decrease in the gain on sale of loans, along with a $33,000 negative change in
the valuation adjustments on mortgage servicing rights. These were partially offset by a decrease of
$260,000 in mortgage servicing rights amortization expense along with a $154,000 increase in servicing
revenue. First Defiance originated $213.5 million of residential mortgages for sale into the secondary
market in 2017 compared with $263.7 million in 2016. The balance of the mortgage servicing right
valuation allowance stands at $432,000 at the end of 2017. 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. See Note 8 to the Consolidated Financial
Statements.
Gains on the sale of non-mortgage loans, which include SBA and FSA loans, totaled $217,000 in
2017 compared to $753,000 in 2016 and $824,000 in 2015. The volume of eligible small business
administration loans has decreased in 2017 from levels in 2016 and 2015.
Insurance commission income increased $2.4 million or 23.2% to $12.9 million in 2017 from
$10.4 million in 2016 mainly due to the acquisition of Corporate One and an increase in general
production in the property and casualty and group employee benefits lines of business. Insurance
commission income increased $365,000 or 3.6% to $10.4 million in 2016 from $10.1 million in 2015.
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Income from bank owned life insurance increased $2.1 million in 2017 to $3.1 million from
$909,000 in 2016. In 2017, the Company surrendered an underperforming BOLI policy and recorded a tax
penalty of $1.7 million (recorded in income tax expense) and purchased a new BOLI policy receiving a $1.5
million enhancement value gain. There was a slight increase in income in 2016 to $909,000 from
$895,000 in 2015.
Trust income increased $631,000 to $2.3 million in 2017 from $1.7 million in 2016 and $1.5
million. The increase in 2017 included a $428,000 positive adjustment to accrual basis accounting.
Other income increased $316,000 to $1.9 million in 2017 compared to $1.5 million in 2016 and
$1.1 million in 2015. The $316,000 increase in 2017 is due mainly to group benefit referral fees. 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.
Noninterest Expense – Total noninterest expense for 2017 was $85.4 million compared to $71.1
million for the year ended December 31, 2016, and $67.9 million for the year ended December 31, 2015.
Compensation and benefits increased $9.7 million or 24.0% to $49.8 million from $40.2 million
in 2016. The increase is mainly related to personnel expenses both from certain benefit payouts
associated with the CSB merger as well as operating the new CSB and Corporate One locations, merit
increases and other new staff for growth strategies. Other non-interest expenses increased $2.8 million or
17.5% to $18.8 million in 2017 from $16.0 million in 2016. This is due mainly to $2.1 million increase in
expenses associated with the acquisition of CSB and Corporate One, as well as an increase in the
amortization of intangibles of $754,000. Occupancy expense increased $289,000, to $7.7 million in 2017
compared to $7.4 million in 2016 and data processing expense increased $1.4 million to $7.7 million in
2017 from $6.4 million in 2016.
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 CSB 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 by $221,000 to $7.4 million in 2016 compared to $7.2 million in 2015 and data processing
expense increased by $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.
Income Taxes – Income taxes totaled $16.2 million in 2017 compared to $12.8 million in 2016
and $11.4 million in 2015. The effective tax rates for those years were 33.4%, 30.7%, and 30.2%,
respectively. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of
investments in tax-exempt securities. The increase in the effective tax rate in 2017 primarily relates to the
surrender of a bank-owned life insurance policy which added $1.7 million to income tax expense. The
earnings on tax-exempt securities are not subject to federal income tax. See Note 18 – Income Taxes 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
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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 identified lending
for income-generating rental properties as an industry concentration. Total loans for income-generating
property totaled $838.1 million at December 31, 2017, which represents 34.9% 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 0.19% at
December 31, 2017. 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 $36.0 million, $27.0 million and $30.7 million in 2017,
2016 and 2015, 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 2017 and 2016, the Company purchased $11.5 million and $822,000,
respectively, in portfolio residential home loans. There were no purchases in 2015.
In considering the more typical investing activities, during 2017, $32.7 million and $34.2 million was
generated from the combination of maturity or pay-downs and the sale or call of available-for-sale investment
securities, respectively, and $133.4 million was used by an increase in loans while $73.0 million was used to
purchase available-for-sale investment securities. 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 $158.1 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.
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
2017, total deposits increased by $148.1 million. Securities sold under repurchase arrangements decreased by
$5.8 million in 2017. Also in 2017, the Company paid $9.9 million in common stock dividends. 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 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.
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At December 31, 2017, First Defiance had the following commitments to fund deposit, advance,
borrowing obligations and post-retirement benefits:
Table 5 – Contractual Obligations
Maturity Dates by Period at December 31, 2017
Contractual Obligations
Total
Less than
1 year
$252,895
Certificates of deposit
35,018
FHLB fixed advances including interest (1)
-
Subordinated debentures
26,019
Securities sold under repurchase agreements
826
Lease obligations
174
Post-retirement benefits
Total contractual obligations
$314,932
(1) Includes principal payments of $84,306 and interest payments of $2,268.
$558,755
86,574
36,083
26,019
11,025
2,023
$720,479
1-3 years
(In Thousands)
$233,192
37,227
-
-
1,360
375
$272,154
4-5 years
After 5
years
$72,532
10,451
-
-
1,149
401
$84,533
136
3,878
36,083
-
7,690
1,073
$48,860
At December 31, 2017, 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
$42,458
161,778
6,245
408,831
619,312
Amount of Commitment Expiration by Period
Less than
1 year
$19,434
14,029
2,405
264,025
299,893
1-3 years
(In Thousands)
(In Thousands)
4-5 years
$969
1,308
1,940
14,923
19,140
$1,791
10,306
1,900
6,152
20,149
After 5
years
$20,264
136,135
-
123,731
280,130
Standby letters of credit
7,605
7,170
420
15
-
Total Commitments
$626,917
$307,063
$19,560
$20,164
$280,130
In addition to the above commitments, at December 31, 2017, First Defiance had commitments to
sell $14.9 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, 2017, First Defiance had $567.4 million in capacity under its agreements with the
FHLB.
First Federal is subject to various capital requirements of the OCC. At December 31, 2017, 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.
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The significant accounting policies of First Defiance are described in the footnotes to the Consolidated
Financial Statements. Certain accounting policies involve significant judgments and assumptions by
management, which have a material impact on the carrying value of certain assets and liabilities;
Management considers such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other factors, which are believed to
be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by
management, actual results could differ from these judgments and estimates, which could have a material
impact on the carrying value of assets and liabilities and the results of operations of First Defiance.
Allowance for Loan Losses - First Defiance believes the allowance for loan losses is a critical
accounting policy that requires the most significant judgments and estimates used in preparation of its
Consolidated Financial Statements. In determining the appropriate estimate for the allowance for loan losses,
management considers a number of factors relative to both specific credits in the loan portfolio and macro-
economic factors relative to the economy of the United States as a whole and the economy of the northwest
Ohio, northeast Indiana and southeast Michigan regions in which the Company does business.
Factors relative to specific credits that are considered include a customer’s payment history, a
customer’s recent financial performance, an assessment of the value of collateral held, knowledge of the
customer’s character, the financial strength and commitment of any guarantors, the existence of any customer
or industry concentrations, changes in a customer’s competitive environment and any other issues that may
impact a customer’s ability to meet his obligations.
Economic factors that are considered include levels of unemployment and inflation, specific plant or
business closings in the Company’s market area, the impact of strikes or other work stoppages, the impact of
weather or environmental conditions, especially relative to agricultural borrowers, and other matters that may
have an impact on the economy as a whole.
In addition to the identification of specific customers who may be potential credit problems,
management considers its historical losses, the results of independent loan reviews, an assessment of the
adherence to underwriting standards, and other factors in providing for loan losses that have not been
specifically classified. Management believes that the level of its allowance for loan loss is sufficient to cover
the estimates loss incurred but not yet recognized on the loan portfolio. Refer Allowance for Loan Losses in
this Management’s Discussion and Analysis 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 in this Management’s
Discussion and Analysis and Note 2 - Statement of Accounting Policies and Note 8 - Mortgage Banking to
the Consolidated Financial Statements, for a further description of First Defiance’s valuation process,
methodology and assumptions along with sensitivity analyses.
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Goodwill - First Defiance has two reporting units: First Federal and First Insurance. At
December 31, 2017, First Defiance had goodwill of $98.6 million, including $80.0 million in First
Federal, representing 81% of total goodwill and $18.6 million in First Insurance, representing 19% 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, 2017 and 2016.
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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, 2017, the results of the simulation
indicate that in an environment where interest rates rise 100 basis points over a 24 month period, First
Defiance’s net interest income would increase by 2.62% 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 $1.24 billion, which was split between $156.7
million of fixed-rate loans and $1.08 billion of adjustable-rate loans, at December 31, 2017. The
commercial loan portfolio increased to $526.1 million, which was split between $176.9 million of fixed-
rate loans and $349.2 million of adjustable-rate loans, at December 31, 2017. 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 ($135.5 million at December 31, 2017) of which $118.4 million fluctuate with
changes in the prime lending rate and $17.1 million of home equity and improvement loans have fixed
rates. First Federal also has consumer loans ($29.1 million at December 31, 2017) 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, 2017, and
December 31, 2016, 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, 2017, net interest income sensitivity to changes in interest rates for the twelve months
subsequent to December 31, 2017 was slightly more liability sensitive for the ramp and shock compared
to the sensitivity profile for the twelve months subsequent to December 31, 2016.
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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, 2017
December 31, 2016
$ 2,354
1,200
(3,033)
2.18%
1.11%
-2.81%
$ 1,970
972
(2,201)
$ 4,821
2,463
(6,223)
4.47% $ 4,236
2,131
2.28%
(4,132)
-5.77%
2.32%
1.14%
-2.59%
4.99%
2.51%
-4.87%
To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest
rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest
income may decrease from the base case scenario should the yield curve flatten or become inverted.
Conversely, if the yield curve should steepen, net interest income may increase.
The results of all the simulation scenarios are within the Board mandated guidelines as of
December 31, 2017, except for the down 100 basis points over the first twelve months in a static and
dynamic-shock balance sheet as well as in the down 100 basis points for a cumulative twenty-four months
in a static and dynamic ramp balance sheet. Management is reviewing the Board policy limits in all
scenarios to determine if they are adequate and if so, any measures to be taken to bring the current results
back into alignment with Board mandated guidelines.
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, 2017, 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, 2017
Change in Rates
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
Change in Rates
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
$ Amount
Economic Value of Equity
$ Change
(Dollars in Thousands)
% Change
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
700,563
685,883
668,127
647,439
620,019
585,967
80,544
65,864
48,108
27,420
-
(34,052)
12.99%
10.62%
7.76%
4.42%
-
(5.49)%
25.63%
24.63%
23.53%
22.36%
21.01%
19.52%
462 bp
362 bp
252 bp
135 bp
–
(149) bp
December 31, 2016
$ Amount
Economic Value of Equity
$ Change
(Dollars in Thousands)
% Change
569,397
553,285
534,478
512,132
483,606
429,266
85,791
69,679
50,873
28,526
-
(34,339)
17.74%
14.41%
10.52%
5.90%
-
(7.10)%
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Economic Value of Equity as % of
Present Value of Assets
Ratio
24.99%
23.86%
22.63%
21.30%
19.77%
17.29%
Change
522 bp
408 bp
286 bp
153 bp
–
(249) bp
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of
December 31, 2017, First Federal would experience a 7.76% increase in its economic value of equity. During
periods of rising rates, the value of monetary assets declines. Conversely, during periods of falling rates, the
value of monetary assets increases. It should be noted that the amount of change in value of specific assets
and liabilities due to changes in rates is not the same in a rising rate environment as in a falling rate
environment. Based on the EVE analysis, the change in the economic value of equity in both rising and
falling rate environments is relatively low because both its assets and liabilities have relatively short
durations. The average duration of its assets at December 31, 2017, was 1.86 years while the average duration
of its liabilities was 3.65 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(f)
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:
1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
2. 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
3. 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,
2017.
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, 2017. The
report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2017, is included in this Item 8.
Donald P. Hileman Kevin T. Thompson
President and
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
Stockholders and the Board of Directors of
First Defiance Financial Corp.
Defiance, Ohio
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of First Defiance
Financial Corp. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements
of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the
"financial statements"). We also have audited the Company’s internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)”.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for each of the years in the three-year period ended December 31, 2017 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013)
issued by COSO.”
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements
and an opinion on the Company’s internal control over financial reporting based on our audits. We are a
public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud, and whether effective internal control over
financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
- 60 -
- 60 -
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external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
external purposes in accordance with generally accepted accounting principles. A company’s internal
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
permit preparation of financial statements in accordance with generally accepted accounting principles,
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
and that receipts and expenditures of the company are being made only in accordance with authorizations
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
permit preparation of financial statements in accordance with generally accepted accounting principles,
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
and that receipts and expenditures of the company are being made only in accordance with authorizations
have a material effect on the financial statements.
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could
aterial
e present fai
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
have a material effect on the financial statements.
5, and
cember 31, 20
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
ended
n the three-y
risk that controls may become inadequate because of changes in conditions, or that the degree of
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
ccepted in th
tes of
compliance with the policies or procedures may deteriorate.
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
fective
n all material
risk that controls may become inadequate because of changes in conditions, or that the degree of
d on criteria
in the
compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2005.
red to above
rp. as of Dec
f the years i
s generally ac
maintained, in
, 2016, based
COSO.
rly, in all ma
016 and 2015
year period e
e United Sta
respects, eff
established
detect
he risk
liance
, internal con
any evaluatio
ate because o
deteriorate.
ntrol over fin
on of effective
of changes in
financial state
irst Defiance
ts cash flows
with accounti
Defiance Fina
rting as of D
Framework iss
ements refer
Financial Co
s for each of
ing principles
ancial Corp. m
December 31,
sued by the C
We have served as the Company’s auditor since 2005.
/s/ Crowe Horwath LLP
Crowe Horwath LLP
South Bend, Indiana
/s/ Crowe Horwath LLP
LLP
we Horwath L
Crow
February 28, 2018
Crowe Horwath LLP
South Bend, Indiana
February 28, 2018
- 61 -
- 61 -
2.
- 61 -
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
$ 58,693
$ 53,003
December 31
2017
2016
Federal funds sold
Securities available-for-sale, carried at fair value
Securities held-to-maturity, carried at amortized cost (fair value $649 and
$187 at December 31, 2017 and 2016 respectively)
Loans held for sale
Loans receivable, net of allowance of $26,683 and
55,000
113,693
260,650
648
261,298
10,435
46,000
99,003
250,992
184
251,176
9,607
$25,884 at December 31, 2017 and 2016, respectively
2,322,030
1,914,603
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
9,808
8,706
15,992
66,230
9,595
6,760
13,798
52,817
40,217
36,958
1,532
455
98,569
61,798
5,703
231
1,336
2,212
38,959
17,479
$ 2,993,403
$ 2,477,597
continued
- 62 -
- 62 -
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
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; 12,712,841 and 12,720,347 shares issued
and 10,156,041 and 8,983,206 shares outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $117 and $117, respectively
Retained earnings
Treasury stock, at cost, 2,556,800 and 3,737,141
shares respectively
Total stockholders’ equity
December 31
2017
2016
$
571,360
$ 487,663
1,866,296
2,437,656
84,279
26,019
36,083
1,493,965
1,981,628
103,943
31,816
36,083
2,925
2,650
33,155
2,620,117
28,459
2,184,579
–
–
–
–
127
160,940
217
262,900
(50,898)
373,286
127
126,390
215
240,592
(74,306)
293,018
Total liabilities and stockholders’ equity
$ 2,993,403
$ 2,477,597
See accompanying notes
- 63 -
- 63 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31
2016
2015
2017
$
99,540
$
80,217
$
73,346
3,762
3,180
836
784
108,102
8,818
1,470
935
208
11,431
96,671
2,949
93,722
12,139
7,004
12,866
217
584
2,332
3,085
1,854
40,081
49,847
7,707
1,250
7,737
18,810
85,351
48,452
16,184
32,268
3.23
3.22
1.000
$
$
$
$
$
$
$
$
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
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 on sale or call of securities
Trust income
Income from bank owned life insurance
Other noninterest income
Total noninterest income
Noninterest Expense
Compensation and benefits
Occupancy
FDIC insurance
Data processing
Other noninterest expense
Total noninterest expense
Income before income taxes
Federal income taxes
Net Income
Earnings per common share (Note 4)
Basic
Diluted
Dividends declared per common share
See accompanying notes
- 64 -
- 64 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31
2016
2017
2015
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
$32,268
$28,843
$26,423
732
(584)
148
(51)
97
(166)
20
(146)
51
(95)
(4,933)
(509)
(5,442)
1,904
(3,538)
172
30
202
(71)
131
(985)
(22)
(1,007)
352
(655)
204
47
251
(88)
163
Total other comprehensive income (loss)
Comprehensive income
2
$32,270
(3,407)
$25,436
(492)
$25,931
See accompanying notes
65
- 65 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
Preferred
Stock
Preferred
Stock
$
-
$
Common
Stock
Shares
-
9,234,534
Common
Stock
Shares
9,234,534
Common
Stock
$ 127
Common
Stock
$ 127
Common
Common
Stock
Stock
Warrant
Warrant
878
$
878
$
Additional
Paid-In
Capital
$ 136,266
Additional
Paid-In
Capital
$ 136,266
Accumulated
Other
Comprehensive
Income
$
Accumulated
Other
Comprehensive
Income
$
4,114
4,114
74,300
74,300
18,006
18,006
1,799
(225,808)
1,799
(225,808)
$
-
-
9,102,831
9,102,831
$ 127
$ 127
$
(878)
(878)
150
(11,101)
150
(11,101)
(492)
230
(58)
216
31
230
(58)
216
31
$
-
-
$ 125,734
$ 125,734
$
$
3,622
36,358
36,358
10,405
1,480
(167,868)
10,405
1,480
(167,868)
-
8,983,206
8,983,206
$ 127
$ 127
$
(3,407)
274
274
(21)
(21)
370
33
370
33
$
-
-
$ 126,390
$ 126,390
$
$
215
4,044
1,139,502
4,044
1,139,502
27,877
1,412
27,877
1,412
2
2
215
215
51
33,792
51
33,792
447
45
447
45
10,156,041
-
10,156,041
$ 127
$ 127
$
$
-
$ 160,940
-
$ 160,940
$
217
$
Retained
Earnings
$ 200,600
26,423
Retained
Earnings
$ 200,600
26,423
Treasury
Stock
$ (62,480)
Treasury
Stock
$ (62,480)
(492)
Total
Stockholder’s
Equity
$ 279,505
26,423
(492)
150
(11,979)
Total
Stockholder’s
Equity
$ 279,505
26,423
(492)
150
(11,979)
(313)
(313)
1,552
1,552
1,469
1,469
186
186
308
308
33
(8,436)
33
(8,436)
$ (69,023)
$ (69,023)
3,622
(7,159)
$ 219,737
28,843
(7,159)
$ 219,737
28,843
(3,407)
436
216
64
(8,436)
(7,159)
$ 280,197
28,843
(3,407)
274
436
216
64
(8,436)
(7,159)
$ 280,197
28,843
(3,407)
274
(26)
(72)
(26)
761
761
714
714
(72)
219
30
(6,293)
219
30
(6,293)
$ (74,306)
$ (74,306)
517
63
(6,293)
(7,890)
$ 293,018
32,268
2
215
517
63
(6,293)
(7,890)
$ 293,018
32,268
2
215
215
(7,890)
$ 240,592
32,268
(7,890)
$ 240,592
32,268
(83)
(83)
231
22,740
231
22,740
199
56,532
199
56,532
(18)
(18)
409
28
(9,859)
$ 262,900
(9,859)
$ 262,900
217
$ (50,898)
$ (50,898)
409
28
838
73
(9,859)
$ 373,286
838
73
(9,859)
$ 373,286
Balance at January 1, 2015
Balance at January 1, 2015
Net income
Other comprehensive loss
Stock based compensation expenses
Warrant repurchase
Shares issued under stock option plan,
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
net of 14,350 repurchased and retired
Restricted share activity under stock incentive
plans
plans
Excess tax benefit on stock compensation plans
Excess tax benefit on stock compensation plans
Shares issued from direct stock sales
Shares issued from direct stock sales
Shares repurchased
Shares repurchased
Common stock dividends declared
Common stock dividends declared
Balance at December 31, 2015
Balance at December 31, 2015
$
Net income
Net income
Other comprehensive loss
Other comprehensive loss
Stock based compensation expenses
Stock based compensation expenses
Shares issued under stock option plan,
Shares issued under stock option plan,
net of 1,612 repurchased and retired
net of 1,612 repurchased and retired
Restricted share activity under stock incentive
Restricted share activity under stock incentive
plans
plans
Shares issued from direct stock sales
Shares issued from direct stock sales
Shares repurchased
Shares repurchased
Common stock dividends declared
Common stock dividends declared
Balance at December 31, 2016
Balance at December 31, 2016
Net income
Net income
Other comprehensive income
Other comprehensive income
Stock based compensation expenses
Stock based compensation expenses
Shares issued under stock option plan,
Shares issued under stock option plan,
net of 7,507 repurchased and retired
net of 7,507 repurchased and retired
$
$
-
Capital stock issuance
Restricted share activity under stock incentive
Capital stock issuance
Restricted share activity under stock incentive
plans
plans
Shares issued from direct stock sales
Common stock dividends declared
Shares issued from direct stock sales
Common stock dividends declared
Balance at December 31, 2017
Balance at December 31, 2017
$
$
-
See accompanying notes
See accompanying notes
66
66
- 66 -
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31
2016
2017
2015
$ 32,268
$ 28,843
$ 26,423
2,949
3,567
740
1,464
(89)
1,289
(4,881)
48
(56)
(584)
1,261
215,727
(213,479)
215
838
(171)
(3,085)
(3,591)
1,527
35,957
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
128
59
69
32,687
34,248
554
849
(73,007)
(3,263)
(20,000)
-
19,359
(11,476)
20,227
(133,184)
(132,878)
36,390
14,871
1,705
1
(71,276)
(2,106)
-
3
-
(822)
20,816
(158,121)
(158,480)
31,240
426
3,407
212
(30,483)
(1,843)
(4,000)
1
(297)
-
24,027
(177,013)
(154,254)
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
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
Net cash received (paid) in acquisitions
Purchase of portfolio mortgage loans
Proceeds from sale of non-mortgage loans
Net increase in loans receivable
Net cash used in investing activities
Continued
67
- 67 -
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
Years Ended December 31
2016
2017
2015
148,065
(31,070)
10,000
(5,797)
(9,859)
-
-
199
73
111,611
14,690
99,003
$ 113,693
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
(33,167)
112,936
$ 79,769
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
Sale of bank owned life insurance not yet settled
Securities traded but not yet settled
$ 11,382
14,350
$ 8,370
12,700
$ 6,764
10,000
705
583
974
-
-
2,544
(130)
17,840
548
(44)
-
357
267
-
-
See accompanying notes.
68
- 68 -
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 Archbold, Bowling Green, Bryan, Defiance, Findlay,
Fostoria, Lima, Maumee, Oregon, and Tiffin, Ohio areas, offering property and casualty, and group health and
life insurance products. The Maumee and Oregon offices were consolidated into a new office in Sylvania, Ohio
in January 2018. 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.
69
- 69 -
Cash Flows
Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home
Loan Bank (“FHLB”) and the Federal Reserve. Cash and amounts due from depository institutions include
required balances on hand or on deposit at the FHLB and Federal Reserve of approximately $1,322,000 and
$1,325,000, respectively, at December 31, 2017, 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, 2017, the Company held
$16.0 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, are
amortized to interest income generally over the contractual life of the loan using the interest method without
70
- 70 -
anticipating prepayments. The recorded investment in loans includes accrued interest receivable, unamortized
premiums and discounts, 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.
Purchased Credit Impaired 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.
Loan losses are charged off against the allowance when in management’s estimation it is unlikely that the loan
will be collected, while recoveries of amounts previously charged off are credited to the allowance. A provision
for loan loss is charged to operations based on management’s periodic evaluation of the factors previously
mentioned, as well as other pertinent factors in order to maintain the allowance for loan losses at the level
deemed adequate by management. The determination of whether a loan is considered past due or delinquent is
based on the contractual payment terms. Loans are considered past due when the contractual amounts due with
respect to principal and interest are not received within 30 days of the contractual due date. All loans are placed
on nonaccrual status at 90 days past due unless the loan is adequately secured and is in process of collection.
Any loan in the portfolio may be placed on nonaccrual status prior to becoming 90 days past due when
collection of principal or interest is in doubt.
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. Impaired loans have been recognized in conformity with FASB ASC Topic
310.
A loan is impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loans agreement. Loans, for which
terms have been modified and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings and classified as impaired. An analysis of the net present value of estimated cash
flows is performed and an allowance may be established based on the outcome of that analysis, or if the loan is
deemed to be collateral dependent an allowance is established based on the fair value of collateral. All
modifications are reviewed by the First Federal’s Chief Credit Officer to determine whether or not the
modification constitutes a troubled debt restructure. Commercial and commercial real estate loans are
individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the
loan is reported net of the allowance allocation which is determined based on the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely
from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real
estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for
impairment disclosures.
The following portfolio segments have been identified:
Commercial Real Estate Loans (consisting of multi-family residential and non-residential): Commercial real
estate loans are subject to underwriting standards and processes similar to commercial and industrial loans.
These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on
the successful operation of the property. Loan performance may be adversely affected by factors impacting the
general economy or conditions specific to the real estate market such as geographic location and/or property
type.
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Commercial Loans: Commercial credit is extended primarily to middle market customers. Such credits are
typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and
other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful
amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and
projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The
cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in
value due to economic or individual performance factors. Minimum standards and underwriting guidelines have
been established for all commercial loan types.
Consumer Finance Loans: Consumer finance loans are generally made to borrowers for a specific consumer
purchase and are made based on their ability to repay with their current debt to income as well as the underlying
collateral value of the item being purchased. Credit scores are part of the decision process of whether or not
credit is extended. Minimum standards and underwriting guidelines have been established for all consumer loan
types.
1-4 Family Residential Real Estate Loans: 1-4 family residential real estate loans can be categorized two
different ways. One part of this portfolio is owner occupied and are made based primarily on the ability of the
individual borrower to support the payments as well as the payments of any other debt the borrower may have
outstanding at the time the loan is made. The other part of this portfolio is non-owner occupied income
producing property and is made primarily based on the cash flow stream from rental income as well as the cash
flow support from the borrower’s unrelated cash flow. Both types of loans have a secondary repayment source
of the underlying collateral and generally the loans are not extended at higher than an 80% LTV. Minimum
standards and underwriting guidelines have been established for all 1-4 family residential real estate loan types.
Construction Loans: The Company defines construction loans as loans where the loan proceeds are controlled
by the Company and used exclusively for the improvement of real estate in which the Company holds a
mortgage.
Home Equity and Improvement Loans: Home Equity and Improvement loans are made to borrowers based on
their ability to repay with their current debt to income as well as the underlying collateral value of the real estate
taken as security. Minimum standards and underwriting guidelines have been established for all 1-4 family
residential real estate loan types.
Consumer finance, 1-4 family residential real estate (including construction) and home equity and improvement
loans are subject to adverse employment conditions in the local economy which could increase default rate on
loans.
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.
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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 $3.7 million, $3.6 million and $3.5 million for
the years ended December 31, 2017, 2016 and 2015. Late fees and ancillary fees related to loan servicing are not
material. See Note 8.
Bank Owned Life Insurance
The Company has purchased life insurance policies for certain key employees. Bank owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the
cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment and Long Lived Assets
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and
amortization computed principally by the straight-line method over the following estimated useful lives:
Buildings and improvements
Furniture, fixtures and equipment
20 to 50 years
3 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles are periodically evaluated for
impairment. See Note 9.
Goodwill 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 non-controlling 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.
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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.
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
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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, 2017, the
reported revenue for First Insurance was 8.7% of total revenue for First Defiance. Total revenue includes
interest income plus non-interest income. Net income for First Insurance for the year ended December 31, 2017
was 6.6% of consolidated net income. Total assets of First Insurance at December 31, 2017 were 0.8% 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.
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.
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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 February 2018, the FASB issued Accounting Standard Update (“ASU”) No. 2018-02, “Income Statement –
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income.” The ASU required a reclassification from accumulated other comprehensive income
to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate
as a result of the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the
historical corporate income tax rate and the newly enacted twenty-one percent corporate income tax rate. The
new guidance will be effective for the Company’s year ending December 31, 2018 and early adoption is
permitted. The Company chose not to early adopt the new standard for the year ending December 31, 2017, as
allowed under the new standard.
In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt
Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt
securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the
security. The new guidance does not change the accounting for purchased callable debt securities held at a
discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and
annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for
a modified retrospective transition approach under which a cumulative-effect adjustment will be made to
retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The
Company adopted the provisions of ASU No. 2017-08 on January 1, 2018 and there was no material impact on
the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The
guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price
allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain
largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after
December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after
January 1, 2017. The Company early adopted ASU No. 2017-04 with its goodwill impairment test completed in
2017. ASU No. 2017-04 did not have a material impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.”
This ASU significantly changes how entities will measure credit losses for most financial assets and certain
other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is
responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace
today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current
expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at
amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans,
leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not
apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will
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measure credit losses in a manner similar to what they do today, except that the losses will be recognized as
allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize
improvements to estimated credit losses immediately in earnings rather than as interest income over time, as
they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and
loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and
methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the
amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of
origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December
15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15,
2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of
the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective
approach). The Company has begun its implementation efforts by establishing a Company-wide implementation
committee. The committee’s initial review indicates the Company 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. Early adoption is
permitted, however, the Company does not currently plan to early adopt this ASU.
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. ASU No. 2016-02 will be
effective for fiscal years beginning after December 15, 2018 and will require transition using a modified
retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements. In January 2018, FASB issued a proposal to provide an additional
transition method that would allow entities to not apply the guidance in ASU No. 2016-02 in the comparative
periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the period of adoption. The Company has not yet selected a transition
method as it is in the process of determining the effect of the ASU on its consolidated financial statements and
disclosures. The Company has several lease agreements, such as branch locations, which are currently
considered operating leases, and therefore, not recognized on the Company’s consolidated condensed statements
of financial condition. The Company expects the new guidance will require these lease agreements to now be
recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a
corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU
No. 2016-02 are expected to impact the Company’s consolidated condensed statements of financial condition,
along with our regulatory capital ratios. However, the Company continues to evaluate the extent of potential
impact the new guidance will have on the Company’s Consolidated Financial Statements. At December 31,
2017, the Company had contractual operating lease commitments of approximately $11.0 million, before
considering renewal options that are generally present.
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 and the International Accounting Standards Board (the “IASB”) jointly issued a
comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition
guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue
requirements for particular industries or transactions, which sometimes resulted in different accounting for
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economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and,
consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated
a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for
U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2)
provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful
information to users of financial statements through improved disclosure requirements; and (5) simplify the
preparation of financial statements by reducing the number of requirements to which an entity must refer. To
meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The
standard’s core principle is that a company will recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. In doing so, companies generally will be required to use more judgment
and make more estimates than under current guidance. These may include identifying performance obligations
in the contract, estimating the amount of variable consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The standard was initially effective for public
entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not
permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with
Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and
annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard
allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or
modified retrospective adoption, meaning the standard is applied only to the most current period presented in the
financial statements with the cumulative effect of initially applying the standard recognized at the date of initial
application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues
of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting
Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU
No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The Company does not
expect the new guidance to have a material impact on its financial statements as approximately 71% of the
Company’s revenue comes from net interest income and is explicitly out of scope of the guidance. Other out of
scope revenue streams total approximately 10% of additional revenue. The primary contracts subject to the
guidance include services charges and deposit related account fees, trust and asset management fees, insurance
commissions, brokerage commissions, and interchange fees. The Company has concluded the adoption of the
ASU will not have a material impact on the Company’s revenue recognition patterns or financial presentation
and disclosures. The new ASU is largely consistent with the existing guidance and current practices applied to
the Company’s revenue streams. The Company will adopt ASU No. 2014-09 in the first quarter of 2018
utilizing the modified retrospective approach and no adjustment was necessary to retained earnings.
3. Business Combinations
Effective February 24, 2017, the Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and
its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and Plan of Merger (“merger
agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares
into First Defiance, immediately followed by the merger of CSB into First Defiance’s banking subsidiary, First
Federal. CSB operated 7 full-service banking offices in northwest and north central, Ohio and 1 commercial loan
production office in central Ohio. Commercial Bancshares’ consolidated assets and equity (unaudited) as of
February 24, 2017 totaled $348.4 million and $37.5 million, respectively. The Company accounted for the
transaction under the acquisition method of accounting which means that the acquired assets and liabilities were
recorded at fair value at the date of acquisition. The fair value included in these financial statements is based on
final valuations.
In accordance with ASC 805, the Company expensed approximately $3.7 million of direct acquisition costs, of
which $2.8 million was to settle employment and benefit agreements and for personnel expenses related to operating
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the new Commercial Bancshares locations. The Company recorded $28.9 million of goodwill and $4.9 million of
intangible assets. Goodwill represents the future economic benefits arising from net assets acquired that are not
individually identified and separately recognized and is attributable to synergies expected to be derived from the
combination of the two entities. The acquisition was consistent with the Company’s strategy to enhance and expand
its presence in northwestern and north central Ohio. The acquisition offers the Company the opportunity to increase
profitability by introducing existing products and services to the acquired customer base as well as add new
customers in the expanded market area. The intangible assets are related to core deposits and are being amortized
over 10 years on an accelerated basis. For tax purposes, goodwill totaling $28.9 million is non-deductible.
Goodwill is evaluated annually for impairment. The following table summarizes the fair value of the total
consideration transferred as part of the Commercial Bancshares acquisition as well as the fair value of identifiable
assets and liabilities assumed as of the effective date of the transaction.
February 24, 2017
(In Thousands)
Cash Consideration
Equity – Dollar Value of Issued Shares
Fair Value of Total Consideration Transferred
Recognized Amounts of Identifiable Assets Acquired and Liabilities
Assumed:
Cash and Cash Equivalents
Federal Funds Sold
Securities
Loans
FHLB Stock of Cincinnati and Other Stock
Office Properties and Equipment
Intangible Assets
Bank-Owned Life Insurance
Accrued Interest Receivable and Other Assets
Deposits – Non-Interest Bearing
Deposits – Interest Bearing
Advances from FHLB
Accrued Interest Payable and Other Liabilities
Total Identifiable Net Assets
Goodwill
$
12,340
56,532
68,872
35,411
2,769
4,338
285,448
2,194
5,256
4,900
8,168
3,606
(56,061)
(251,931)
(1,403)
(2,717)
39,978
$
28,894
Under the terms of the merger agreement, Commercial Bancshares common shareholders had the opportunity to
elect to receive 1.1808 shares of common stock of the Company or cash in the amount of $51.00 for each share of
Commercial Bancshares common stock, subject to adjustment as provided for in the merger agreement. Total
consideration for Commercial Bancshares common shares outstanding was paid 80% in Company stock and 20% in
cash. The Company issued 1,139,502 shares of its common stock and paid $12.3 million in cash to the former
shareholders of Commercial Bancshares.
The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2016
after giving effect to certain adjustments. The unaudited pro forma information for the twelve months ended
December 31, 2017 and December 31, 2016 includes adjustments for interest income on loans and securities
acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings
acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily
indicative of the results of operations that would have occurred had the transaction been effected on the assumed
date.
80
- 80 -
Net Interest Income
Provision for loan losses
Non-Interest Income
Non-Interest Expense
Income Before Income Taxes
Income Tax Expense
Net Income
Diluted Earnings Per Share
Pro Forma Twelve
Months Ended
December 31, 2017
Pro Forma Twelve
Months Ended
December 31, 2016
(In Thousands)
$
98,856
2,949
40,338
82,597
53,648
17,780
$
35,868
$ 3.51
$
90,452
753
35,496
76,393
48,802
15,276
$
33,526
$ 3.29
The above pro forma financial information includes approximately $4.6 million of net income related to the
operations of Commercial Bancshares during the twelve months of 2017. The above pro forma financial
information related to 2017 excludes merger related costs that totaled $3.7 million on a pre-tax basis.
On April 13, 2017, First Defiance and Corporate One Benefits Agency, Inc. (“Corporate One”) jointly announced
the acquisition of Corporate One’s business by First Defiance. The total purchase price paid in cash was made up of
the following: $6.5 million was paid at closing, $500,000 is due in July 2018, and $2.3 million at the end of a three-
year earn-out based on the compound annual growth rate of net revenue over the performance period of Corporate
One, for a total purchase price of $9.3 million. The recorded fair value of the $2.3 million earn-out was $1.8 million
at December 31, 2017. As of December 31, 2017, total Company recorded goodwill of $7.9 million and identifiable
intangible assets of $756,000 consisting of customer relationship intangible of $564,000 and a non-compete
intangible of $192,000. The fair value included in these financial statements is based on final valuation. Corporate
One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold,
Findlay, Fostoria and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit
programs to effectively lead them into the future. It is anticipated that the transaction will enhance employee benefit
offerings and expand First Insurance’s presence into adjacent markets in northwest Ohio.
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.
81
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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
2017
2015
2016
(In Thousands, Except Per Share Amounts)
$
32,268
5
32,263
$
28,843
39
28,804
$
26,423
8
26,415
9,975
9
9,966
8,980
11
8,969
9,221
11
9,210
Basic earnings per common share
$
3.23 $
3.21 $
2.87
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
$
32,263
$
28,804
$
26,415
9,966
62
-
10,028
8,969
66
-
9,035
9,210
87
75
9,371
Diluted earnings per common share
$3.22 $
3.19 $
2.82
Shares subject to issue upon exercise of options of zero in 2017, 12,550 in 2016 and 8,750 in 2015 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, 2017 and 2016 and the corresponding amounts of gross
unrealized and unrecognized gains and losses:
2017
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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
$
518
59,942
1,072
94,588
-
12,914
$
-
90
-
180
1
189
$
(10)
(763)
(7)
(892)
-
-
$
508
59,269
1,065
93,876
1
13,103
90,692
$ 259,726
2,426
2,886
$
(290)
$ (1,962)
92,828
$ 260,650
82
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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)
$
$
10
41
17
580
648
$
$
-
1
-
-
1
$
$
-
-
-
-
-
$ 10
42
17
580
$ 649
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
Gross
Gross
Amortized
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
(In Thousands)
$
4,000
82,619
1,309
63,204
-
12,919
$
-
390
-
422
2
97
$
(85)
(1,302)
(2)
(621)
-
(3)
$
3,915
81,707
1,307
63,005
2
13,013
86,165
$ 250,216
2,491
$ 3,402
(613)
$ (2,626)
88,043
$ 250,992
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)
$
$
12
56
23
93
184
$
$
-
2
1
-
3
$
$
-
-
-
-
-
$
12
58
24
93
$ 187
The amortized cost and fair value of the investment securities portfolio at December 31, 2017, 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.
83
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2017
Available-for-sale
Due in one year or less
Due after one year through
five years
Due after five years through
ten years
Due after ten years
MBS/CMO/REMIC
Total
Held-to-maturity
Due after one year through
five years
Due after five years through
ten years
MBS
Total
Available-for-Sale
Fair
Value
Amortized
Cost
(In Thousands)
$
1,423
$
1,440
19,898
20,303
39,344
43,459
155,602
$ 259,726
40,710
43,987
154,210
$ 260,650
$
62
$
62
518
68
$ 648
518
69
$ 649
Securities pledged at year-end 2017 and 2016 had a carrying amount of $135.4 million and $143.6 million and
were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
As of December 31, 2017, the Company’s investment portfolio consisted of 413 securities, 121 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, 2017.
The following table summarizes First Defiance’s securities that were in an unrealized loss position at December
31, 2017, and December 31, 2016:
84
- 84 -
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
$
-
$
-
$
508
$
(10)
$
508
$
(10)
27,881
1,065
49,107
14,249
12
(215)
(7)
(320)
(163)
-
19,038
-
20,804
3,370
9
(548)
-
(572)
(127)
-
46,919
1,065
69,911
17,619
21
(763)
(7)
(892)
(290)
-
$
92,314
$
(705)
$
43,729
$
(1,257)
$ 136,043
$ (1,962)
$
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)
At December 31, 2017
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Mortgage-backed securities-
residential
REMIC’s
Collateralized mortgage
obligations
Obligations of state and political
subdivisions
Held to maturity securities:
Total temporarily impaired
securities
At December 31, 2016
Available-for-sale securities:
Obligations of U.S. government
corporations and agencies
Mortgage-backed securities-
residential
REMIC’s
Collateralized mortgage
obligations
Corporate bonds
Obligations of state and political
subdivisions
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.
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
85
- 85 -
liquidity position and it is not more than likely that the Company will be required to sell the investments before
anticipated recovery.
In 2017, 2016 and 2015, management determined there was no OTTI.
There were no credit losses relating to debt securities recognized in earnings for the years ended December 31,
2017, 2016 and 2015.
Realized gains from the sales and calls of investment securities totaled $584,000 ($380,000 after tax) in 2017
while there were realized gains of $509,000 ($331,000 after tax) and $22,000 ($15,000 after tax) in 2016 and
2015, 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
6. Commitments and Contingent Liabilities
2017
$ 34,248
665
(81)
2016
(In Thousands)
$ 14,871
509
-
2015
$
426
22
-
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):
2017
2016
Commitments to make loans
Unused lines of credit
Standby letters of credit
Total
$
$
$
Fixed Rate Variable Rate
161,778
408,831
7,605
578,214
42,458
6,245
-
48,703
$
Fixed Rate
34,432
14,384
-
48,816
$
$
Variable Rate
106,356
$
400,542
9,668
516,566
$
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan
commitments at December 31, 2017, had interest rates ranging from 1.99% to 18.00% and maturities ranging
from less than 1 year to 30 years.
In addition to the above commitments, at December 31, 2017, First Defiance had commitments to sell $14.9
million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage.
86
- 86 -
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:
Undisbursed loan funds
Net deferred loan origination fees and costs
Allowance for loan loss
Totals
December 31,
2017
December 31,
2016
(In Thousands)
$
$
274,862
248,092
987,129
265,476
1,775,559
526,142
135,457
29,109
690,708
2,466,267
(115,972)
(1,582)
(26,683)
2,322,030
$
$
207,550
196,983
843,579
182,886
1,430,998
469,055
118,429
16,680
604,164
2,035,162
(93,355)
(1,320)
(25,884)
1,914,603
The table above includes loans acquired during 2017 totaling $285.4 million as of February 24, 2017, which
is net of purchase discount on the acquired loans of $5.4 million. The recorded investment of these loans as of
December 31, 2017 was $208.4 million, net of the purchase discount of $3.9 million.
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
87
- 87 -
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,
2017
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
$ 2,627
$ 2,228
$ 10,625
$ 450
$ 7,361
$ 2,386
$ 207
$ 25,884
Charge-Offs
Recoveries
Provisions
(279)
-
(429)
-
(2,301)
115
32
657
-
243
(301)
167
69
442
(499)
197
2,662
3
(139)
(3,449)
85
75
1,299
2,949
Ending Allowance
$ 2,532
$ 2,702
$ 10,354
$ 647
$ 7,965
$ 2,255
$ 228
$ 26,683
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
-
(92)
923
-
335
-
(615)
(268)
(94)
(1,419)
150
200
64
66
1,638
283
(401)
77
(1,978)
(67)
2,386
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
Recoveries
(283)
(114)
(353)
-
214
-
-
915
(58)
(68)
331
(350)
(53)
(1,221)
188
762
53
54
1,701
136
Provisions
787
(188)
296
(1,517)
Ending Allowance
$ 3,212
$ 2,151
$ 11,772
$ 517
$ 5,255
$ 2,304
$ 171
$ 25,382
88
- 88 -
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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, 2017, 2016 and 2015
(In Thousands):
Twelve Months Ended December 31, 2017
Average
Balance
Interest
Income
Recognized
Cash Basis
Income
Recognized
$
3,811
$
138
$
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3,038
6,849
2,471
10,592
3,768
9,667
1,603
25,630
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5,235
5,940
11,175
1,217
59
138
276
58
110
140
472
76
798
-
129
109
238
43
4
138
276
58
109
133
229
70
541
-
123
79
202
43
4
$ 47,401
$ 1,417
$1,124
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
- 91 -
- 91 -
Twelve Months Ended December 31, 2016
Average
Balance
Interest
Income
Recognized
Cash Basis
Income
Recognized
$
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
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
- 92 -
- 92 -
Twelve Months Ended December 31, 2015
Average
Balance
Interest
Income
Recognized
Cash Basis
Income
Recognized
$
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
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
- 93 -
- 93 -
The following table presents loans individually evaluated for impairment by class of loans (In
Thousands):
December 31, 2017
December 31, 2016
Unpaid
Principal
Balance*
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Unpaid
Principal
Balance*
Allowance
for Loan
Losses
Allocated
Recorded
Investment
$ 2,507
1,711
4,218
2,095
12,273
3,085
13,029
981
29,368
-
5,462
9,916
15,378
630
42
$ 51,731
$ 2,364
1,708
4,072
2,102
11,804
2,925
13,185
768
28,682
-
5,422
7,644
13,066
584
42
$ 48,548
$ -
-
-
$ 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
$ -
-
-
-
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$ -
$
1,841
1,031
2,872
$
1,814
1,024
2,838
$ 137
30
167
$ 2,348
1,137
3,485
$ 2,319
1,131
3,450
$
157
45
202
175
2,007
651
293
909
3,860
-
447
854
1,301
596
8
$ 8,812
176
1,546
593
292
708
3,139
-
449
858
1,307
592
8
$ 8,060
7
44
28
14
32
118
-
77
110
187
279
-
758
$
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
4
102
108
3
42
255
-
24
11
35
313
-
$ 809
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
- 94 -
- 94 -
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,
2017
December 31,
2016
(In Thousands)
$ 30,715
-
30,715
1,532
$ 32,247
$ 14,348
-
14,348
455
$ 14,803
Troubled debt restructuring, still accruing
$ 13,770
$ 10,544
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2017, 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
$ 175,139
96,400
$ 821
495
$
1,033
8
$
1,227
233
$
3,081
736
$
2,510
520
Total 1-4 Family Residential Real
Estate
271,539
1,316
1,041
1,460
3,817
3,030
Multi-Family Residential Real Estate
247,980
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
393,125
403,656
131,753
58,784
987,318
149,174
233,632
291,455
525,087
133,144
28,800
422
195
1
412
13
621
-
102
82
184
-
188
91
-
-
-
422
128
1,268
424
66
204
1,651
516
478
217
10,775
2,431
4,144
734
279
1,962
2,862
18,084
-
1,264
-
-
876
517
-
-
2,242
599
2,369
6,474
1,264
1,393
2,841
8,843
2,490
293
434
80
206
2
3,130
375
591
27
Total Loans
$ 2,343,042
$ 5,326
$ 3,098
$ 5,023
$ 13,447
$ 30,703
- 95 -
- 95 -
Loans acquired with deteriorated credit
quality (included in the totals above)
Loans acquired in current year (included
in totals above)
$3,662
$15
$40
$111
$166
$1,904
$203,562
$1,881
$1,357
$1,569
$4,807
$5,309
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
Troubled Debt Restructurings
As of December 31, 2017 and 2016, the Company had a recorded investment in troubled debt
restructurings (“TDRs”) of $21.7 million and $16.8 million, respectively. The Company allocated
$751,000 and $809,000, of specific reserves to those loans at December 31, 2017 and 2016, and
committed to lend additional amounts totaling up to $242,000 and $20,000 at December 31, 2017 and
2016.
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
- 96 -
- 96 -
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 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, $7.8 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, 2017
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
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
24
$ 982
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
1
5
2
7
7
6
5
193
-
149
262
1,700
153
1,475
3,833
152
14
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
59
-
645
244
1,443
-
62
70
324
62
$ 3,363
64
$ 8,913
44
$ 5,632
The loans described above increased the allowance for loan losses (“ALLL”) by $104,000 for the year
ended December 31, 2017, decreased the ALLL by $413,000 for the year ended December 31, 2016, and
increased the ALLL by $13,000 for the year ended December 31, 2015.
Of the 2017 modifications, 18 were made TDRs due to the fact that the borrower is in bankruptcy, 8 were
made TDR due to terming out lines of credit at below market terms, 14 were made TDR due to advancing
or renewing money to a watch list credit, 7 loans were placed under a forbearance agreement, and 18 were
made a TDR because the current debt was refinanced due to maturity or for payment relief.
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- 97 -
The following table presents loans by class modified as TDRs for which there was a payment default
within twelve months following the modification during the indicated:
Twelve Months Ended
December 31, 2017
($ in thousands)
Twelve Months Ended
December 31, 2016
($ in thousands)
Twelve Months Ended
December 31, 2015
($ in thousands)
TDRs
That Subsequently Defaulted:
Number of
Loans
Residential Owner Occupied
Residential Non Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Commercial Working Capital
Commercial Other
Home Equity and Home
Improvement
Consumer
Total
-
-
-
-
-
-
-
-
-
-
-
Recorded
Investment
(as of Period
End)
$ -
-
-
-
-
-
-
-
-
-
$ -
Recorded
Investment
(as of Period
End)
Number of
Loans
Number of
Loans
-
-
-
1
-
-
-
-
-
-
1
$ -
-
-
205
-
-
-
-
-
-
$ 205
-
-
-
-
-
-
1
5
1
-
7
Recorded
Investment
(as of Period
End)
$ -
-
-
-
-
-
120
1,791
22
-
$ 1,933
The TDRs that subsequently defaulted described above had no effect on the ALLL for the years ended
December 31, 2017, 2016 and 2015.
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.
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.
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
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- 98 -
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, 2017, 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
$ 7,534
85,802
$ 99
935
$
Total 1-4 Family Real Estate
93,336
Multi-Family Residential Real Estate
242,969
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
370,613
395,264
114,776
56,133
1,034
2,503
10,432
3,464
2,639
165
$
2,367
3,835
6,202
2,819
13,575
5,444
14,816
1,788
Total Commercial Real Estate
936,786
16,700
35,623
Construction
125,519
1,254
-
Commercial Working Capital
Commercial Other
222,526
280,013
7,605
3,443
5,743
8,598
Total Commercial
502,539
11,048
14,341
Home Equity and Home Improvement
Consumer Finance
-
-
-
-
600
82
Total Loans
$ 1,901,149
$ 32,539
$ 59,667
$
Loans acquired with deteriorated credit
quality (included in the totals above)
Loans acquired in current year (included
in totals above)
$41
$-
$3,783
$148,364
$3,502
$16,085
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Not
Graded
Total
$ 168,220
6,564
$ 178,220
97,136
174,784
275,356
111
156
-
-
915
248,402
394,776
404,172
132,231
59,001
1,071
990,180
22,401
149,174
-
-
-
135,674
29,093
235,874
292,054
527,928
136,274
29,175
$ 363,134
$ 2,356,489
$4
$3,828
$40,418
$208,369
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- 99 -
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
$ 5,980
58,041
$ 402
1,394
$
Total 1-4 Family Real Estate
64,021
1,796
Multi-Family Residential Real Estate
192,369
862
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
316,335
332,196
98,039
59,561
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
- 100 -
- 100 -
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. The outstanding balance of
those loans by segment is as follows (In thousands):
1-4 Family Residential Real Estate
Multi-Family Residential Real Estate
Commercial Real Estate Loans
Commercial
Consumer
Total Outstanding Balance
Recorded Investment, net of allowance of $0
Accretable yield, or income expected to be collected, is as follows:
Balance at January 1, 2017
New Loans Purchased
Accretion of Income
Reclassifications from Non-accretable
Charge-off of Accretable Yield
Balance at December 31, 2017
December 31, 2017
$ 1,154
309
2,921
407
2
$4,793
$ 3,828
2017
-
1,018
(204)
-
(10)
804
$
$
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses
during the twelve months ended December 31, 2017. No allowances for loan losses were reversed
during the same period.
Contractually required payments receivable of loans purchased with evidence of credit deterioration
during the period ended December 31, 2017, using information as of the date of acquisition are
included in the table below. There were no such loans purchased during the year ended December
31, 2016. (In Thousands)
1-4 Family Residential Real Estate
Commercial Real Estate
Commercial
Consumer
Total
Cash Flows Expected to be Collected at Acquisition $ 5,721
Fair Value of Acquired Loans at Acquisition $ 4,703
$1,720
4,724
785
4
$ 7,233
- 101 -
- 101 -
Loans purchased with evidence of deterioration of credit quality acquired prior to 2017 were $169,000
and $11,000 at December 31, 2016 and 2015, respectively and were paid off during 2017.
Loans to executive officers, directors, and their affiliates are as follows:
Beginning balance
New loans
Effect of changes in composition of related parties
Repayments
Ending Balance
Foreclosure Proceedings
Years Ended December 31
2016
$
2017
(In Thousands)
16,199
5,857
-
(5,328)
$ 16,728
$ 7,349
4,783
12,320
(8,253)
$ 16,199
Consumer mortgage loans collateralized by residential real estate property that are in the process of
foreclosure totaled $626,000 as of December 31, 2017.
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
$
2017
Years Ended December 31
2016
(In Thousands)
$ 5,311
4,664
2015
$ 4,564
3,714
(1,464)
90
2,340
3,560
(1,724)
123
1,959
3,503
(1,620)
266
2,149
Net mortgage banking income
$ 7,004
$ 7,270
$ 6,713
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.39 billion at
December 31, 2017, and $1.37 billion at December 31, 2016.
- 102 -
- 102 -
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
2017
Years Ended December 31
2016
(In Thousands)
2015
$ 10,117
1,587
(1,464)
$ 9,893
1,948
(1,724)
$ 9,923
1,590
(1,620)
10,240
10,117
9,893
(522)
90
(432)
$ 9,808
$ 9,930
(645)
123
(522)
$ 9,595
$ 9,770
(911)
266
(645)
$ 9,248
$ 9,802
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 2017, 2016 or 2015. Based on
management’s estimate of potential losses from secondary market buyback activity, a liability of $43,000 and
$79,000 was accrued at December 31, 2017 and 2016, respectively, and is reflected in other liabilities in the
Consolidated Statements of Financial Condition. Expense (credit) recognized related to the accrual was
$(36,000), $(135,000) and $(95,000) for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company’s servicing portfolio is comprised of the following:
Investor
Fannie Mae
Freddie Mac
Federal Home Loan Bank
Other
Totals
December 31
2017
2016
Number of
Loans
Principal
Outstanding
Number of
Loans
Principal
Outstanding
(In Thousands)
4,920
9,420
88
19
14,447
$ 461,783
913,632
9,723
930
$ 1,386,068
5,004
9,229
101
16
14,350
$ 470,692
889,280
11,081
965
$ 1,372,018
Custodial escrow balances maintained in connection with serviced loans were $13.5 million and $12.6
million at December 31, 2017 and 2016, respectively.
Significant assumptions at December 31, 2017, used in determining the value of MSRs include a
weighted average prepayment speed assumption (“PSA”) of 151 and a weighted average discount rate of
12.01%. Significant assumptions at December 31, 2016, used in determining the value of MSRs include
a weighted average prepayment rate of 152 PSA and a weighted average discount rate of 12.01%.
A sensitivity analysis of the current fair value to immediate 10% and 20% adverse changes in those
assumptions as of December 31, 2017, 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
- 103 -
- 103 -
(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
$
362
238
$
735
472
10% Adverse 20% Adverse
Change
Change
(In Thousands)
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
2017
2016
(In Thousands)
$
$
7,977
1,326
44,563
971
34,216
1,402
90,455
(50,238)
40,217
$
$
7,534
1,310
41,895
971
31,253
787
83,750
(46,792)
36,958
Depreciation expense was $3.6 million, $3.4 million and $3.3 million for the years ended December 31,
2017, 2016 and 2015, respectively.
Lease Agreements
The Company has entered into lease agreements covering ten First Insurance offices, four banking center
locations, one loan production office, two land leases for which the Company owns the banking centers,
one land lease which is primarily used for parking, one land lease for future branch development and
numerous stand-alone Automated Teller Machine sites with varying terms and options to renew. First
Federal and First Insurance share office space for one lease as a branch and insurance office.
Future minimum commitments under non-cancelable operating leases are as follows (In Thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
826
731
629
619
530
7,690
11,025
Rental expenses under operating leases amounted to $691,000, $571,000 and $601,000 in 2017, 2016,
and 2015, respectively.
- 104 -
- 104 -
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
2017
(In Thousands)
61,798
$
36,771
98,569
$
$
$
2016
61,798
-
61,798
Activity in intangible assets for the years ended December 31, 2017, 2016 and 2015 was as follows:
Balance as of January 1, 2015
Intangible assets acquired
Amortization of intangible assets
Balance as of December 31, 2015
Amortization of intangible assets
Balance as of December 31, 2016
Intangible assets acquired
Amortization of intangible assets
Balance as of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
(In Thousands)
Net
Value
$ 14,302
175
-
14,477
-
14,477
5,656
-
$ 20,133
$ (11,907)
-
(699)
(12,606)
(535)
(13,141)
-
(1,289)
$ (14,430)
$
$
2,395
175
(699)
1,871
(535)
1,336
5,656
(1,289)
5,703
Estimated amortization expense for each of the next five years and thereafter is as follows (In
Thousands):
2018
2019
2020
2021
2022
Thereafter
Total
11. Deposits
$
$
1,312
1,097
914
744
576
1,060
5,703
The following schedule sets forth interest expense by type of deposit:
Checking and money market accounts
Savings accounts
Certificates of deposit
Totals
Years Ended December 31
2017
2016
(In Thousands)
$
$
2,033
102
6,683
8,818
$
$
1,463
88
4,710
6,261
$
$
2015
1,186
89
4,066
5,341
- 105 -
- 105 -
Accrued interest payable on deposit accounts amounted to $97,000 and $42,000 at December 31, 2017
and 2016, respectively, which was comprised of $68,000 and $29,000 for certificates of deposit and
checking and money market accounts, respectively, at December 31, 2017, and $19,000 and $23,000 for
certificates of deposit and checking and money market accounts, respectively, at December 31, 2016.
A summary of deposit balances is as follows:
December 31
2017
2016
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
(In Thousands)
$
$
571,360
1,005,519
302,022
504,912
53,843
$ 2,437,656
487,663
816,665
243,369
400,080
33,851
$ 1,981,628
Scheduled maturities of certificates of deposit at December 31, 2017 are as follows (In Thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
252,895
180,739
52,453
47,516
25,016
136
558,755
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, 2017, and
December 31, 2016, were $1.0 billion and $843.8 million, respectively. First Federal could obtain
advances of up to approximately $567.4 million from the FHLB at December 31, 2017.
- 106 -
- 106 -
At year-end, advances from the FHLB were as follows:
Principal Terms
December 31, 2017
Putable advances
Single maturity fixed rate advances
Amortizable mortgage advances
Advance
Amount
(In Thousands)
Range of Maturities
$
$
5,000 March 2018
72,000 January 2018 to March 2022
7,306
84,306
September 2018 to August 2027
December 31, 2016
Putable advances
Single maturity fixed rate advances
Amortizable mortgage advances
$
5,000 March 2018
92,000 November 2017 to March 2022
6,943
$ 103,943
September 2018
Putable advances are callable at the option of the FHLB on a quarterly basis.
Weighted
Average
Interest
Rate
2.35%
1.46%
1.85%
2.35%
1.34%
1.78%
Estimated future minimum payments by fiscal year based on maturity date and current interest rates are as
follows (In Thousands):
2018
2019
2020
2021
2022
Thereafter
Total minimum payments
Less amounts representing interest
Totals
$
$
35,018
15,791
21,436
10,297
154
3,878
86,574
(2,268)
84,306
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, 2017 and 2016, 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, 2017 and 2016. Amounts are generally borrowed under the Cash Management
and REPO lines on an overnight basis.
13. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trust
In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (“Trust
Affiliate II”) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities).
In connection with the transaction, the Company issued $15.5 million of Junior Subordinated Deferrable
Interest Debentures (“Subordinated Debentures”) to Trust Affiliate II. The Company formed Trust
Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the
proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The
Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not
considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not
consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as
a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly
at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust
Preferred Securities issued by Trust Affiliate II was 3.09% and 2.46% as of December 31, 2017 and 2016
respectively.
- 107 -
- 107 -
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 2.97% and 2.34% as of December 31, 2017 and 2016 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
2017
(In Thousands)
$
20,619
15,464
2016
20,619
15,464
36,083
$
36,083
$
$
Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the
option of the issuer.
14. Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings
Total securities sold under agreement to repurchase are summarized as follows:
Securities sold under agreement to repurchase
Amounts outstanding at year-end
Year-end interest rate
Average daily balance during year
Maximum month-end balance during the year
Average interest rate during the year
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Years Ended December 31
2016
(In Thousands, Except Percentages)
2017
$
26,019
0.20%
23,337
26,019
0.23%
$
31,816
0.22%
52,821
57,984
0.26%
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, 2017 and 2016 is presented in the following tables.
Overnight and
Continuous
Up to 30
Days
30-90 Days
Greater
than 90
Days
At December 31, 2017
Repurchase agreements:
Mortgage-backed securities – residential
Collateralized mortgage obligations
Total borrowings
Gross amount of recognized liabilities for repurchase agreements
6,599
19,420
26,019
$
$
(In Thousands)
$ -
-
$ -
$ -
-
$ -
$
$
-
-
-
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)
$ -
-
$ -
$ -
-
$ -
$
$
-
-
-
Total
6,599
19,420
26,019
26,019
Total
21,222
10,594
31,816
31,816
$
$
$
$
$
$
As of December 31, 2017 and 2016, First Federal had the following undrawn lines of credit facilities
available for short-term borrowing purposes:
A $20.0 million line of credit with First Tennessee Bank. The rate on the line of credit is at three-
month LIBOR, which floats quarterly. This line was undrawn upon as of December 31, 2017 and
2016.
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, 2017, was
1.25%. This line was undrawn upon as of December 31, 2017 and 2016.
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,
2017 and 2016.
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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
$ 3,603
2,070
1,819
177
626
1,289
523
277
359
8,067(1)
$ 18,810
Years Ended December 31
2017
2015
2016
(In Thousands)
$ 2,902
1,835
1,781
244
512
535
456
266
303
7,118(2)
$ 15,952
$ 3,359
1,752
1,783
1,064
457
699
459
207
334
5,402
$ 15,516
1)
2)
Includes $1.1 million of acquisition related expenses included in other.
Includes $443,000 of acquisition related expenses and $300,000 of costs associated with
termination of a lease agreement.
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, 2017, 2016 and 2015 are the
following amounts that have not yet been recognized in net periodic benefit cost:
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Unrecognized prior service cost
Unrecognized actuarial losses
Total loss recognized in Accumulated Other
Comprehensive Income
Income tax effect
Net loss recognized in Accumulated Other
Comprehensive Income
2017
39
551
590
(206)
384
$
$
December 31
2016
(In Thousands)
2015
53
593
646
(226)
$
52
392
444
(155)
$
$
289
$
420
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, 2018, is $18,000
($14,000 net of tax) and $9,000 ($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
2017
(In Thousands)
2,985
58
117
29
-
166
(161)
3,194
-
132
29
(161)
-
(3,194)
$
$
$
$
2016
3,115
53
128
29
12
(184)
(168)
2,985
-
139
29
(168)
-
(2,985)
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
Years Ended December 31
2017
58
117
19
194
166
-
(19)
147
341
$
$
2016
2015
(In Thousands)
$
53
$
65
128
30
211
(184)
12
(30)
(202)
130
47
242
(204)
-
(47)
(251)
$
9
$
(9)
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The following assumptions were used in determining the components of the postretirement benefit
obligation:
Weighted average discount rates:
Used to determine benefit obligations at December 31
Used to determine net periodic postretirement benefit cost for years ended
December 31
2017
2016
2015
3.50%
4.00%
4.25%
4.00%
4.25%
4.25%
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
7.00%
7.50%
6.50%
5.00%
2022
5.00%
2022
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.
2018
2019
2020
2021
2022
2023 through 2027
Expected to be Paid
(In Thousands)
$ 174
181
194
210
191
1,073
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
One-Percentage-Point
Decrease
Year Ended December 31
2017
25
392
$
2016
2017
2016
(In Thousands)
$
27
369
$ (21)
(333)
$ (22)
(314)
The Company expects to contribute $174,000 before reflecting expected Medicare retiree drug subsidy
payments in 2018.
17. Regulatory Matters
First Defiance and First Federal are 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 Defiance’s financial statements. Under capital
adequacy guidelines, First Defiance and First Federal must maintain capital amounts in excess of
minimum ratios based on quantitative measures of their assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices.
In July 2013, the 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 minimum common equity Tier
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1 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 federal banking agencies have also established a system of “prompt corrective action” to resolve
certain problems of undercapitalized banks. The regulatory agencies can initiate certain mandatory
actions if First Federal fails to meet the minimum capital requirements, which could have a material effect
on the Company’s financial statements.
The following schedule presents First Defiance consolidated and First Federal’s regulatory capital ratios
as of December 31, 2017 and 2016 (Dollars in Thousands):
December 31, 2017
Actual
Minimum Required for
Adequately Capitalized
Minimum Required to be Well
Capitalized for Prompt
Corrective Action
Amount
Ratio
Amount
Ratio(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated
First Federal
Tier 1 Capital (2)
Consolidated
First Federal
$274,832
$298,571
10.43%
11.33%
$118,596
$118,534
$309,832
$298,571
10.80%
10.43%
$114,773
$114,539
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$309,832
$298,571
11.76%
11,33%
$158,128
$158,046
Total Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$336,515
$325,254
12.77%
12.35%
$210,838
$210,728
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$171,216
N/A
$143,173
N/A
$2210,728
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$263,410
N/A
10.0%
(1) Excludes capital conservation buffer of 1.25% as of December 31, 2017.
(2) Core capital is computed as a percentage of adjusted total assets of $2.87 billion for consolidated and $2.86
billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.64
billion for consolidated and $2.63 billion for the Bank.
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December 31, 2016
Actual
Minimum Required for
Adequately Capitalized
Minimum Required to be Well
Capitalized for Prompt
Corrective Action
Amount
Ratio
Amount
Ratio(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
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) (2)
Consolidated
First Federal
$269,809
$242,928
12.01%
10.81%
$134,811
$134,822
Total Capital (to Risk Weighted Assets) (2)
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 $2.21 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.
Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various
regulatory restrictions. First Federal paid $13.0 million in dividends to First Defiance in 2017 and $22.0
million in 2016. First Federal may not pay dividends to First Defiance in excess of its net profits (as
defined by statute) for the last two fiscal years, plus any year to date net profits without the approval of
the OCC. First Insurance paid $1.8 million in dividends to First Defiance in 2017 and $1.2 million in
dividends in 2016. First Defiance Risk Management paid $1.0 million in dividends to First Defiance in
2017 and 2016.
18. Income Taxes
Income tax expense for 2017 was impacted by the adjustment of our deferred tax assets and liabilities
related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs
Act, which was enacted on December 22, 2017. As a result of the new law, which is more fully discussed
below, the Company recognized a net tax expense of $154,000.
The components of income tax expense are as follows:
Current:
Federal
State and local
Deferred
Tax reform revaluation
Years Ended December 31
2017
2016
(In Thousands)
$
$
14,588
181
1,261
154
16,184
$
$
13,125
244
(615)
-
12,754
$
$
2015
11,299
146
(35)
-
11,410
The effective tax rates differ from federal statutory rate applied to income before income taxes due to the
following:
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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
BOLI surrender
Tax reform revaluation
Other
Totals
Years Ended December 31
2017
2016
2015
$
16,958
(In Thousands)
$
14,559
$
13,240
119
(1,218)
(1,212)
(364)
1,721
154
26
16,184
$
159
(1,168)
(341)
(414)
-
-
(41)
12,754
$
95
(1,219)
(255)
(415)
-
-
(36)
11,410
$
Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Significant components of First Defiance’s deferred federal income tax assets and liabilities are as
follows:
Deferred federal income tax assets:
Allowance for loan losses
Postretirement benefit costs
Deferred compensation
Impaired loans
Accrued vacation
Allowance for real estate held for sale losses
Deferred loan origination fees and costs
Accrued bonus
Other
Total deferred federal income tax assets
Deferred federal income tax liabilities:
FHLB stock dividends
Goodwill
Mortgage servicing rights
Fixed assets
Other intangible assets
Loan mark to market
Net unrealized gains on available-for-sale securities
Prepaid expenses
Other
Total deferred federal income tax liabilities
Net deferred federal income tax asset/ (liability)
December 31
2017
(In Thousands)
5,415
671
1,354
1,432
123
71
332
333
1,578
11,309
1,558
4,377
2,060
1,039
990
5
194
539
316
11,078
231
$
$
2016
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
$
$
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, 2017.
Retained earnings at December 31, 2017, 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
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- 115 -
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, 2017,
was approximately $2.31 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (In
Thousands):
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
Balance at January 1, 2017
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, 2017
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
398
-
-
-
398
398
-
-
-
-
(398)
-
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 $0, $40,000 and $0 for
the years ended December 31, 2017, 2016 and 2015. The amount accrued for interest and penalties was
$0, $40,000 and $0 at December 31, 2017, 2016 and 2015.
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 2014.
The Company currently operates primarily in the states of Ohio and Michigan, which tax financial
institutions based on their equity rather than their income.
Tax Cuts and Jobs Act – The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other
things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii)
eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset
regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurrent by
U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new
investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to
meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to
eliminate the exception for performance-based compensation and clarifies the definition of a covered
employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act
also significantly changes U.S. tax law related to foreign operations, however, such changes do not
impact First Defiance.
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As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, First
Defiance re-measured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory
federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to
reverse in the future. First Defiance recognized a net tax expense related to the re-measurement of its
deferred tax assets and liabilities totaling $154,000.
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 $1.19 million, $979,000
and $892,000 for the years ended December 31, 2017, 2016 and 2015, respectively. There were no
discretionary contributions in any of those years.
Group Life Plan
On June 30, 2010, First Federal adopted the First Federal Bank of the Midwest Executive Group Life Plan
– Post Separation (the “Group Life Plan”) in which various employees, including the Company’s named
executive officers, may participate. Under the terms of the Group Life Plan, First Federal will purchase
and own life insurance policies covering the lives of employees selected by the board of directors of First
Federal as participants. There was $248,000, $71,000 and $78,000 of expense recorded for the years
ended December 31, 2017, 2016 and 2015, respectively, with a liability of $1.69 million, $1.04 million
and $970,000 for future benefits recorded at December 31, 2017, 2016 and 2015, respectively. The
acquisition of CSB added $402,000 to this liability. The discount rate was reduced to 4.00% as of
December 31, 2016, resulting in an increase to the Company’s liability, and remained unchanged at
December 31, 2017.
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, 2017, 43,200 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. 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.
The Company approved a Short-Term (“STIP”) Equity Incentive Plan and a Long-Term (“LTIP”) Equity
Incentive Plan for selected members of management.
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Under the 2016 and 2017 STIPs, the participants could 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 24,757; 24,526; and 20,657 RSU’s to the participants in the 2015,
2016 and 2017 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.
In 2017, the Company also granted to employees 11,263 restricted shares, of which 2,727 were restricted
stock units and 8,536 were restricted stock grants. Of the 11,263 restricted shares granted, 1,839 were
issued to directors and have a one-year vesting period. The remaining 9,424 were issued to employees
and have a three year vesting period. The fair value of all granted restricted shares was determined by the
stock price at the date of the grant.
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,
2017
December 31,
2016
-
-
-
-
2.05%
8.96 years
41.00%
2.33%
- 118 -
- 118 -
Following is activity under the plans during 2017:
Stock options:
Options outstanding, January 1, 2017
Forfeited or cancelled
Exercised
Granted
Options outstanding, December 31, 2017
Vested or expected to vest at
December 31, 2017
Exercisable at December 31, 2017
Options
Outstanding
54,750
-
(11,550)
-
43,200
43,200
31,100
Information related to the stock option plans follows:
$
Weighted
Average
Exercise Price
22.21
-
24.41
-
21.62
$
$
$
21.62
17.31
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in 000’s)
3.15
3.15
1.62
$
$
$
1,311
1,311
1,078
Year Ended December 31
2017
2016
2015
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
(In Thousands, except per share amounts)
$
301
199
54
-
$
$ 752
714
165
$ 13.95
$ 1,069
1,469
160
$ 13.13
As of December 31, 2017, there was $103,000 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 2.3 years.
At December 31, 2017, 72,538 RSU’s were outstanding. Compensation expense is recognized over the
performance period based on the achievement of established targets. Total expense of $2.0 million, $1.3
million and $1.1 million was recorded during the years ended December 31, 2017, 2016 and 2015,
respectively, and approximately $774,000 and $773,000 is included within other liabilities at December
31, 2017 and 2016, respectively, related to the STIPs and LTIPs.
Unvested Shares
Unvested at January 1, 2017
Granted
Vested
Forfeited
Unvested at December 31, 2017
Restricted Stock Units
Stock Grants
Weighted-Average
Grant Date
Fair Value
$
$
32.31
50.56
25.77
26.17
40.52
Shares
75,468
23,384
(19,219)
(7,095)
72,538
Weighted-Average
Grant Date
Fair Value
$
$
32.30
33.24
26.92
37.02
50.56
Shares
11,161
27,755
(27,358)
(1,022)
10,536
The maximum amount of compensation expense that may be earned for the 2017 STIP and the 2015,
2016 and 2017 LTIPs at December 31, 2017, is approximately $3.9 million in the aggregate. However,
the estimated expense expected to be earned as of December 31, 2017, based on the performance
measures in the plans, is $3.4 million of which $960,000 was unrecognized at December 31, 2017 and
will be recognized over the remaining performance period.
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- 119 -
As of December 31, 2017, 143,422 shares were available for grant under the 2010 Equity Plan. Options
forfeited or cancelled under all plans except the 2010 Equity Plan are no longer available for grant to
other participants.
21. Parent Company Statements
Condensed parent company financial statements, which include transactions with subsidiaries, follow:
Statements of Financial Condition
Assets
Cash and cash equivalents
Investment in banking subsidiary
Investment in non-bank subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Accrued liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Statements of Income
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
December 31
2017
(In Thousands)
8,860
377,546
22,319
1,157
409,882
36,083
513
373,286
409,882
$
$
$
$
$
$
$
$
Years Ended December 31
2017
2016
(In Thousands)
$
$
$
15,800
-
(1,090)
1
(697)
14,014
(605)
14,619
17,649
32,268
32,270
$
$
$
24,200
-
(753)
-
(644)
22,803
(466)
23,269
5,574
28,843
25,436
$
$
$
2016
23,017
290,053
15,456
1,155
329,681
36,083
580
293,018
329,681
2015
30,900
1
(613)
1
(588)
29,701
(397)
30,098
(3,675)
26,423
25,931
- 120 -
- 120 -
Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Distribution in excess of (undistributed equity in) earnings
of subsidiaries
Change in other assets and liabilities
Net cash provided by (used in) operating activities
Investing activities:
Cash paid for Commercial Bancshares
Capital contribution to subsidiary
Net cash used in investing 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
Years Ended December 31
2017
2016
(In Thousands)
2015
$ 32,268
$ 28,843
$ 26,423
(17,649)
(358)
14,261
(12,340)
(6.491)
(18,831)
-
(9,859)
199
73
-
(9,587)
(14,157)
23,017
(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
Cash and cash equivalents at end of year
$ 8,860
$ 23,017
$ 12,919
22. Fair Value
FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the asset or
liability. The price in the principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows
or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount
that currently would be required to replace the service capacity of an asset (replacement cost). Valuation
techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or liability. Inputs may be observable, meaning those
that reflect the assumptions market participants would use in pricing the asset or liability developed based
on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy
for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
- 121 -
- 121 -
•
•
•
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that
the reporting entity has the ability to access at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly. These might include quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are observable for the asset
or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are
derived principally from or corroborated by market data by a correlation or other means.
Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect
an entity’s own assumptions about the assumptions that market participants would use in
pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Available for sale securities - Securities classified as available for sale are generally reported at fair
value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent
pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair
value measurements consider observable data that may include dealer quotes, market spreads, cash flows
and the bonds’ terms and conditions, among other things. Securities in Level 1 include federal agency
preferred stock securities. Securities in Level 2 include U.S. Government agencies, mortgage-backed
securities, corporate bonds and municipal securities.
Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals
obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained
to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three
methods to derive value: cost, sales or market comparison and income approach. The cost method bases
value on the cost to replace the current property. Value of market comparison approach evaluates the
sales price of similar properties in the same market area. The income approach considers net operating
income generated by the property and an investors required return. Adjustments are routinely made in the
appraisal process by the independent appraisers to adjust for differences between the comparable sales
and income data available. Comparable sales adjustments are based on known sales prices of similar type
and similar use properties and duration of time that the property has been on the market to sell. Such
adjustments made in the appraisal process are typically significant and result in a Level 3 classification of
the inputs for determining fair value.
Real Estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. These assets are then reviewed
monthly by members of the asset review committee for valuation changes and are accounted for at lower
of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate
appraisals which may utilize a single valuation approach or a combination of approaches including cost,
comparable sales and the income approach. Adjustments are routinely made in the appraisal process by
the independent appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments may be significant and typically result in a Level 3 classification of the
inputs for determining fair value.
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
- 122 -
- 122 -
received, a member of the Company’s asset quality or collections department reviews the assumptions
and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 20% to account for
other factors that may impact the value of collateral. In determining the value of impaired collateral
dependent loans and other real estate owned, significant unobservable inputs may be used, which
include: physical condition of comparable properties sold, net operating income generated by the
property and investor rates of return.
Mortgage servicing rights – On a quarterly basis, mortgage servicing rights are evaluated for
impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying
amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the
servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that
calculates the present value of estimated future net servicing income. The valuation model utilizes
assumptions that market participants would use in estimating future net servicing income and are
validated against available market data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly
based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes
of the commitments and other observable market data at the valuation date (Level 2).
The following table summarizes the financial assets measured at fair value on a recurring basis segregated
by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured on a Recurring Basis
December 31, 2017
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Available for sale securities:
Obligations of U.S. Government
corporations and agencies
Mortgage-backed - residential
REMICs
Collateralized mortgage obligations
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Mortgage banking derivative - asset
Mortgage banking derivative -liability
$ -
-
-
-
1
-
-
-
-
$
$
508
59,269
1,065
93,876
-
13,103
92,828
609
11
-
-
-
-
-
-
-
-
$
508
59,269
1,065
93,876
1
13,103
92,828
609
11
- 123 -
- 123 -
December 31, 2016
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
$
$
-
-
-
-
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
There were no assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended December 31, 2017 and 2016.
The following table summarizes the financial assets measured at fair value on a non-recurring basis
segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair
value:
Assets and Liabilities Measured on a Non-Recurring Basis
December 31, 2017
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
Total Fair
Value
Impaired loans
Commercial Real Estate
Commercial
Total impaired loans
Mortgage servicing rights
Real estate held for sale
CRE
Total Real Estate held for
sale
$
-
-
-
-
-
$
-
-
534
-
-
$ 1,787
2,817
4,604
$
1,787
2,817
4,604
-
227
227
534
227
227
December 31, 2016
Impaired loans
Level 1 Inputs
(In Thousands)
Level 2 Inputs
Level 3 Inputs
Total Fair
Value
1-4 Family Residential Real
Estate
Commercial Real Estate
Commercial
Total impaired loans
$
Mortgage servicing rights
Real estate held for sale
CRE
Total Real Estate held for
sale
-
-
-
-
-
-
$
-
-
-
657
-
-
$ 316
848
332
1,496
-
377
377
$316
848
332
1,496
657
377
377
- 124 -
- 124 -
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of
December 31, 2017, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair
Value
Valuation Technique
Unobservable Inputs
(Dollars in Thousands)
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Applies to all classes
$4,604 Appraisals which utilize
net
comparison,
sales
income and cost approach
$227 Appraisals which utilize
net
sales
income and cost approach
comparison,
Discounts
issues and changes
market conditions
for collection
in
Discounts for changes in
market conditions
Range of
Inputs
Weighted
Average
10-20%
10%
0%
0%
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:
Fair
Value
Valuation Technique
Unobservable Inputs
(Dollars in Thousands)
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Applies to all classes
$1,496 Appraisals which utilize
net
comparison,
sales
income and cost approach
$377 Appraisals which utilize
net
sales
income and cost approach
comparison,
Discounts
issues and changes
market conditions
for collection
in
Discounts for changes in
market conditions
Range of
Inputs
Weighted
Average
10-30%
11%
0-20%
7%
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a fair value of $4.6 million, with no valuation allowance and a fair value of $1.5
million with a valuation allowance of $1,000 at December 31, 2017 and 2016, respectively. A provision
expense of $993,000, $1.0 million, and a provision recovery of $580,000 for the years ended December
31, 2017, 2016 and 2015, 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
$534,000 with a valuation allowance of $432,000 and a fair value of $657,000 with a valuation allowance
of $522,000 at December 31, 2017 and 2016, respectively. A recovery of $90,000, $123,000 and
$266,000 for the years ended December 31, 2017, 2016 and 2015, 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 $20,000, $74,000
and $297,000 for the years ended December 31, 2017, 2016 and 2015, 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, 2017, and December 31, 2016. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of First Defiance.
- 125 -
- 125 -
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, 2017.
- 126 -
- 126 -
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, 2017
(In Thousands)
Total
Level 1
Level 2
Level 3
$ 113,693 $ 113,693 $ -
261,298
N/A
261,299
N/A
1
N/A
$ -
-
N/A
Carrying
Value
$ 113,693
261,298
15,992
2,332,465
8,706
2,315,791
8,706
-
13
10,830
917
2,304,961
7,776
$ 2,437,656
$ 2,444,683 $ 571,360 $ 1,873,323
$ -
84,279
26,019
36,083
83,261
26,019
35,385
-
-
-
83,261
26,019
-
-
-
35,385
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
$ 99,003 $ -
251,177
N/A
2
N/A
$ -
-
N/A
1,924,210
6,760
1,911,280
6,760
-
9
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
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
$14.8 million and $14.1 million of interest rate lock commitments at December 31, 2017 and 2016,
respectively. There were $23.2 million and $22.5 million of forward commitments for the future delivery
of residential mortgage loans at December 31, 2017 and 2016, respectively.
The fair value of these mortgage banking derivatives are reflected by a derivative asset or a derivative
liability. The table below provides data about the carrying values of these derivative instruments:
- 127 -
- 127 -
Assets
December 31, 2017
(Liabilities)
December 31, 2016
Assets (Liabilities)
Carrying
Value
Carrying
Value
Derivative
Net Carrying
Value
Carrying
Carrying
Value
Value
Derivative
Net Carrying
Value
(In Thousands)
$
609 $
11 $
598 $
491 $
- $
491
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:
Derivatives not designated as hedging
instruments
Twelve Months Ended December 31,
2017
2016
2015
(In Thousands)
Mortgage Banking Derivatives – Gain (Loss)
$ 107
$ (67)
$ 231
24. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
2017
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)
$
$
24,036
2,391
21,645
55
21,590
-
10,549
23,142
8,997
3,857
5,140
$
$
27,458
2,826
24,632
2,118
22,514
267
9,873
20,630
12,024
3,677
8,347
$
$
28,081
3,074
25,007
462
24,545
158
9,337
20,440
13,600
4,219
9,381
$
$
28,527
3,140
25,387
314
25,073
159
9,738
21,139
13,831
4,431
9,400
$ 0.54
$ 0.54
$ 0.82
$ 0.82
$ 0.92
$ 0.92
$ 0.93
$ 0.92
9,435
9,490
10,147
10,204
10,149
10,209
10,155
10,222
- 128 -
- 128 -
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
$
$
21,480
2,084
19,396
53
19,343
227
8,348
17,347
10,571
3,307
7,264
$
$
22,003
2,183
19,820
15
19,805
151
8,375
18,292
10,039
2,994
7,045
$
$
22,770
2,231
20,539
(149)
20,688
-
8,293
18,180
10,801
3,436
7,365
$ 0.80
$ 0.80
$ 0.81
$ 0.80
$ 0.78
$ 0.78
$ 0.82
$ 0.81
8,994
9,064
8,968
9,036
8,976
9,050
8,969
9,035
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, 2017:
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
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 Effect
(In Thousands)
Net of Tax
Amount
$
733
(584)
$ 256
(204)
(166)
(59)
19
2
$
7
$ 0
$
$
477
(380)
(107)
12
2
Before Tax
Amount
Tax Effect
(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)
- 129 -
- 129 -
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Balance January 1, 2017
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net other comprehensive income during period
Balance December 31, 2017
Balance January 1, 2016
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
$
$
$
Securities
Available
For Sale
504
477
Post-
retirement
Benefit
(In Thousands)
$
(289)
(108)
(380)
13
97
601
4,042
(3,207)
$
$
(95)
(384)
(420)
112
(331)
19
Net other comprehensive income during period
(3,538)
131
Accumulated
Other
Comprehensive
Income
$
$
$
215
369
(367)
2
217
3,622
(3,095)
(312)
(3,407)
Balance December 31, 2016
$
504
$
(289)
$
215
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, 2017. 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, 2017, 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, 2017, that have materially affected, or are reasonably likely to materially affect First
Defiance’s internal control over financial reporting.
Item 9B. Other Information
None.
- 130 -
- 130 -
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
12, 2018 for the annual meeting of First Defiance shareholders to be held on April 24, 2018 (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.
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.
- 131 -
- 131 -
Equity Compensation Plans
The following table provides information as of December 31, 2017, 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)
43,200
$21.62
143,422
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.
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, 2017
and 2016
(C) Consolidated Statements of Income for the years ended December 31, 2017,
2016 and 2015
(D) Consolidated Statements of Comprehensive Income for the years ended December 31,
2017, 2016 and 2015
(E) Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2017, 2016 and 2015
(F) Consolidated Statements of Cash Flows for the years ended December 31,
2017, 2016 and 2017
(G) Notes to Consolidated Financial Statements
(2)
Separate financial statement schedules are not being filed because of the absence of
conditions under which they are required or because the required information is included in
the consolidated financial statements or the related notes.
- 132 -
- 132 -
(3)
The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The
management contracts and compensation plans or arrangements required to be filed with this
Form 10-K are listed as Exhibits 10.1 through 10.24.
Item 16. 10-K Summary
None.
- 133 -
- 133 -
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, 2018
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,
2018.
Signature
Title
/s/ William J. Small
William J. Small
/s/ Donald P. Hileman
Donald P. Hileman
/s/ Kevin T. Thompson
Kevin T. Thompson
/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
/s/ Terri A. Bettinger
Terri A. Bettinger
/s/ Thomas K. Herman II
Thomas K. Herman II
/s/ Mark A. Robison
Mark A. Robison
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
Director
Director
- 134 -
- 134 -
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
4.1
10.3
10.4
10.7
10.8
Description
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 of First Defiance, as amended
Code of Regulations of First Defiance
Agreement to furnish instruments and agreements defining
rights of holders of long-term debt
Employment Agreement with Gregory R. Allen
2005 Stock Option and Incentive Plan
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
10.13
2010 Equity Incentive Plan
First Defiance Deferred Compensation Plan
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
10.16
10.18
10.19
10.20
10.21
10.22
10.23
21
23.1
31.1
Plan
First Defiance Financial Corp. and Affiliates Incentive Compensation Plan
First Defiance Financial Corp. Long-Term Restricted Stock Unit Award
Agreement (2012 Long Term Incentive)
Employment Agreement with Donald P. Hileman
Employment Agreement with Kevin T. Thompson
Form of Restricted Stock Award Agreement
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
- 135 -
- 135 -
(28)
(12)
(1)
(1)
(26)
(5)
(6)
(10)
(3)
(13)
(14)
(22)
(16)
(17)
(18)
(19)
(21)
(23)
(24)
(25)
(27)
(12)
(29)
(29)
(29)
(29)
(29)
(29)
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
(29)
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.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-3 filed
on November 10, 2009 (File No. 333-163014)
Incorporated herein by reference to exhibit 10.16 in the Registrant’s 2008 Form 10-K (Film No.
09683948)
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 10.2 in Form 8-K filed December 12, 2008 (Film No.
081245224)
Incorporated herein by reference to the like numbered exhibit in the Registrant’s 2016 Form 10-
K (File No. 17645447)
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 10-Q filed November 8, 2011 (Film
No. 111188059)
Incorporated herein by reference to exhibit 10.2 in Form 10-Q filed November 8, 2011 (Film
No. 111188059)
Incorporated herein by reference to exhibit 10.1 in Form 8-K filed March 15, 2012 (Film No.
12694926)
Incorporated herein by reference to exhibit 10.2 in Form 8-K filed March 15, 2012 (Film No.
12694926)
Incorporated herein by reference to exhibit 10.4 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 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)
Included herein
- 136 -
- 136 -
SUCCESS THROUGH FOCUS
SHAREHOLDER INFORMATION
As the fifth consecutive
year with record earnings,
2017 was a year filled
with both financial and
strategic
achievements
for First Defiance Financial
Corp. by balancing high
performance with strong
principles,
shareholder
value with client needs,
and clear focus on the
details with a vision of
the future. We served our
customers as a high-performing community bank and witnessed
continued improvement of our key metrics and strategic initiatives.
Donald P. Hileman
President & CEO
GROWTH
Our strong sales and service model allowed us to achieve balance
sheet growth in the face of competitive market pressures,
particularly in pricing. We successfully integrated Commercial
Savings Bank in the first quarter of 2017 and Corporate One
in the second quarter of 2017, marking our first
Benefits
in nine years. We continued to expand
bank acquisition
our commitment
the opening
of a
in Ann Arbor, Michigan,
and a new office that houses both our bank and insurance
agency in Sylvania, Ohio. Our successful growth strategy, defined
as deepening client relationships, expanding our branch and
insurance agency network and aligning leadership to support
accelerated growth within our metro markets, contributed to our
accomplishments and will carry into 2018 and beyond.
to metro markets with
loan production office
CLIENTS
Our people-focused mentality leads us to continually look for
ways to enhance our client experience in person and through
digital channels. A dedicated team of employees that concentrates
on client experience has allowed us to introduce our clients to
People Pay, a person to person digital payment solution, additional
Smart ATM locations, an improved, personalized online mortgage
experience and a new First Insurance Group app. In addition, we
realigned our Treasury Management team to improve processes and
provide in-depth customer service. We will continue to provide smart
solutions as more and more people choose to bank beyond our doors.
TECHNOLOGY
A focus on technology allowed us to gain efficiencies and
transform our customer service model. We view technology as
a means to offer clients additional choices and more personalized
solutions. Progress
initiatives
brought our first in-lobby automated teller unit into a branch
to provide clients a means to define their banking experience.
A foundation was established for an enhanced data strategy
with new data management software. This data-driven
approach will deepen our understanding of our clients and
assist in making client-focused decisions.
in our branch transformation
EMPLOYEES
We re-energized our teams; and now, more than ever, have a
synergy when working to accomplish our goals. Employee and
client feedback helped us bring new mission, vision and values
to life, and these values are being personified and recognized
throughout our company on a daily basis. This enthusiasm is
echoed in our employee engagement scores and has resulted in
significant progress within initiatives to attract and retain top talent.
We have great confidence in those working hard to achieve our
goals now and in the future.
COMMUNITIES
Our philosophy of building strong communities comes to life each
time we donate dollars or volunteer hours to the communities
we call home. By offering every employee paid time off to volunteer
for life-changing organizations, we are truly living our motto of
being Better Together. This pay-it-forward philosophy supports
our annual Pay it Forward events which have now contributed to
over $40,000 in funding for community-generated ideas to make
the places we call home even stronger. That’s a mission that will
always be in our sight.
As we move into 2018, we look to build on this momentum. We will
look closely to discover every opportunity to balance shareholder
value with smart solutions for our clients and our communities.
After all, it’s that focus that makes us better together.
Donald P. Hileman | President & CEO
ANNUAL MEETING
The Annual Meeting of Shareholders will be conducted virtually at 1:00 p.m. on Tuesday, April 24, 2018. Shareholders may access the Annual
Meeting by going to www.virtualshareholdermeeting.com/fdef2018
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 February 23, 2018, there were approximately 2,407
stockholders of record and 10,182,308 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 2017 totaled $1.00 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.
TOTAL RETURN PERFORMANCE
350
300
250
200
150
100
50
E
U
L
A
V
X
E
D
N
I
0
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
First Defiance Financial Corp.
SNL Bank NASDAQ
NASDAQ Composite
SNL Midwest Thrift
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
PRICE RANGE
Year Ended December 31, 2017
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$51.15
LOW
$46.27
First Quarter
$56.90
$48.78
Second Quarter
$53.99
$47.01
$56.91
$50.28
Third Quarter
Fourth Quarter
HIGH
LOW
$40.98
$34.80
$41.21
$37.53
$46.83
$35.90
$52.31
$36.91
First Defiance Financial Corp.
2017 Annual Report
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
419-782-5130
First-Fed.com
First Insurance Group
511 Fifth Street
Defiance, OH 43512
419-784-5431
Firstinsurancegrp.com
2
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People Focused | Community Minded | Trustworthy
For investor relations information, visit Fdef.com
People Focused | Community Minded | Trustworthy
SUCCESS THROUGH FOCUS
Cover photo courtesy of: www.123rf.com/alptraum