NEW HE IG HTS
2018
A N N UA L R E P O R T
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 44 full-service branches in northwest and central
Ohio, southeast Michigan and northeast Indiana, and a loan
production office in Ann Arbor, Michigan. First Insurance Group
is a full-service insurance agency with nine offices throughout
northwest Ohio.
Founded in the 1920s as Northwest Savings, First Federal Bank
was chartered in 1935 as a federal mutual savings and loan
company. First Federal Bank converted to a mutual holding
company and issued its first stock to the public and employees
in 1993. In September 1995, First Federal Bank converted to a full
stock company, trading stock on the NASDAQ national market
under the ticker symbol FDEF. At the same time, First Defiance
Financial Corp. was founded as the holding company for First
Federal Bank. In 1998, an additional business line was added
with the acquisition of an insurance agency, now known as First
Insurance Group. The Bank’s name was changed to First Federal
Bank of the Midwest in 1999, to better reflect our community
banking business strategy.
Since 2003, First Defiance has 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.
Donald P. Hileman
President & CEO
NEW HE IG HTS
Marking the sixth consecutive year with record earnings, 2018 took us to a higher level of
performance and an elevated client experience. Successful execution of key initiatives allowed us to
surpass $3 billion in assets and deliver additional shareholder value through a two-for-one stock split.
However, our definition of success goes well beyond the numbers on our financial statements. It’s the
synergies between our employees, both internally and with the communities we serve, that allowed
us to consistently rise to the challenge of finding smart solutions for all stakeholders.
GROWTH
Our commitment to both our legacy and metro markets was evident through the dedication of
leadership to keep decision making close to clients, the addition of staff to support growth, and the
expansion of our branch network. The opening of our forty-fourth, full-service branch in downtown
Fort Wayne, Indiana, positions us well for continued growth in an area that is experiencing exciting
economic development. In addition, we feel well-prepared for future expansion as we completed
prototypes for our branches of the future.
COMMUNITIES
Our growth throughout our footprint added opportunities to spread our “better together” philosophy.
Our employees rallied behind our inaugural Building Better Communities initiative in celebration
of National Homeownership Month by donating over 600 volunteer hours to create life-changing
experiences for families and to share knowledge with current and future homeowners. The cycle of
giving continued with our annual Pay It Forward campaign where employees performed over 700
random acts of kindness, in addition to funding over $10,000 worth of community-generated ideas to
make the places we call home even stronger. Movements like these help define who we are.
CLIENTS
We not only want to lead positive experiences within our communities, but for our clients. Strategic
initiatives allowed us to implement employee-led enhancements to our Treasury Management solutions
and procedures to make managing a business easier and more efficient. As industry trends still continue
to shift to transactions that occur outside of the branch, we were delighted to introduce online and
mobile services common for larger financial institutions to our community bank clients. Our clients
now can control access to their debit card within our mobile app and can utilize more than 32,000 ATMs
nationwide without a surcharge fee through the MoneyPass® ATM Network.
LOOKING AHEAD
Our performance for 2018 and plans for 2019 reflect our focus on shareholder value and at the same time,
our commitment to be a strong partner in the communities we are proud to call home. We will continue
to focus on building sustainable growth as we rise above competitive lending and deposit environments
by providing smart solutions and personalized service. We will commemorate our twentieth anniversary
of our Wealth Management division by paying it forward and sharing our knowledge. As we further
enhance our client experience, we will continue to build advancements in technology and digital
banking options into our suite of products and services. We are confident our emphasis on these
initiatives and living our better together philosophy will continue to take us to NEW HEIGHTS.
Donald P. Hileman | President & CEO
FINANCIAL H IG H LIG HTS
(In thousands, except per share amounts)
Summary of Operating Results
2018
2017
% Change
Net interest income
Provision for loan losses
Non-interest income (excluding securities gains/losses)
Securities gains (losses)
Non-interest expense
Net income
$108,255
$96,671
1,176
39,035
173
89,412
46,249
2,949
39,497
584
85,351
32,268
12.0%
-60.1%
-1.2%
-70.4%
4.8%
43.3%
Balance Sheet Data
2018
2017
% 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
Net interest margin
Return on average assets
Return on average equity
Efficiency ratio
$3,181,722
$2,993,403
2,511,708
2,322,030
2,620,882
2,437,656
399,589
373,286
28,331
26,683
6.3%
8.2%
7.5%
7.1%
6.2%
2018
$2.27
2.26
0.64
14.71
20,171
2018
3.98%
1.52%
12.03%
60.29%
2017
% Change
$1.62
1.61
0.50
13.24
20,312
2017
3.88%
1.13%
9.19%
61.81%
40.1%
40.4%
28.0%
11.1%
-0.7%
% Change
2.6%
34.5%
30.9%
-2.5%
All share data reflects a 2-for-1 stock split completed July 12, 2018.
Earnings Per Diluted Share
Deposits (in $ millions)
Return on Average Assets (%)
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
14
15
16
17
18
2,750
2,200
1,650
1,100
550
0
14
15
16
17
18
1.60
1.28
0.96
0.64
0.32
0.00
14
15
16
17
18
Dividends Per Share
Loans (in $ millions)
Return on Average Equity (%)
$0.70
$0.56
$0.42
$0.28
$0.14
$0.00
14
15
16
17
18
2,750
2,200
1,650
1,100
550
0
14
15
16
17
18
13.00
10.40
7.80
5.20
2.60
0.00
14
15
16
17
18
BOARD OF DI R EC TO RS
& COR POR ATE OFFICE R S
BOARD OF DIRECTORS
John L. Bookmyer
Chairman
First Defiance Financial Corp.
Chief Executive Officer
Pain Management Group
Findlay, Ohio
1, 2 & 3
Terri A. Bettinger
Former CIO
Franklin Data Center
Columbus, OH
2, 3 & 8
Douglas A. Burgei, D.V.M.
Retired Veterinarian
Napoleon, Ohio
3, 4, 5 & 7
Thomas K. Herman
Co-Founder, President & CEO
Aptera
Fort Wayne, Indiana
4, 5 & 8
Donald P. Hileman
President & Chief Executive
Officer
First Defiance Financial Corp.
1, 5, 6, 7 & 8
Robert E. Beach
Retired President & CEO
Commercial Bancshares, Inc.
Upper Sandusky, Ohio
5, 6, 7 & 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 Kalas Hinshaw Ltd.
Toledo, Ohio
4 & 8
Thomas A. Reineke
President & 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 & CEO
Vrsus Assets, LLC
Indianapolis, IN
2 & 3
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
Brent L. Beard
SVP, Controller & Treasurer
Timothy K. Harris
EVP, Chief Credit Officer
Justin R. Rodemich
SVP, Bank Operations
Kevin T. Thompson
EVP, Chief Financial Officer
Paul D. Nungester
EVP, Director of Finance &
Accounting
John R. Reisner
EVP, Chief Risk Officer &
Legal Counsel
Sharon L. Davis
EVP, Director of Human
Resources
Dennis E. Rose, Jr.
EVP, Director of Strategy
Management
Michael D. Mulford
EVP, Chief Credit
Administration Officer
Marybeth Shunck
EVP, Director of Sales
Amy L. Hackenberg
EVP, Southern Market Area
Executive
James R. Williams, III
EVP, Northern Market
Area Executive
Gregory R. Allen
EVP, Fort Wayne Market Area
Executive
Joel P. Jerger
EVP, Toledo Market Area
Executive
David D. Dygert
EVP, Columbus Market Area
Executive
Amy M. Daeger
SVP, Director of Retail
Administration
Brian A. Eitniear
SVP, Director of Corporate
Services
Charles V. Hoecherl
SVP, Treasury Management
Sales
David L. Kondas
SVP, Director of Wealth
Management
Rodney B. Walton
SVP, Senior Private Banker
Kathleen A. Miller
SVP, Information Technology
Martha J. Woelke
SVP, Retail Lending
Ryan J. Miller
SVP, Northern Market Area
Commercial Lending Manager
John W. Schuld
SVP, Southern Market Area
Commercial Lending Manager
Dirk VanHeyst
SVP, Senior Commercial
Lender
Danielle R. Figley
Corporate Secretary
FIRST DEFIANCE FINANCIAL CORP.
CORPORATE OFFICERS
Donald P. Hileman
President & Chief Executive
Officer
Sharon L. Davis
EVP, Director of Human
Resources
Kevin T. Thompson
EVP, Chief Financial Officer
Paul D. Nungester
EVP, Director of Finance &
Accounting
John R. Reisner
EVP, Chief Risk Officer &
Legal Counsel
Danielle R. Figley
Corporate Secretary
FIRST INSURANCE GROUP, INC.
CORPORATE OFFICERS
Donald P. Hileman
Chief Executive Officer
Ronald R. Burns
EVP, Group Health & Life
Michael R. Klein
President & Chief Operating
Officer
Brent L. Beard
Chief Financial Officer
Marvin K. Dubbs, Jr.
EVP, Property & Casualty
Kenneth G. Keller
EVP, Group Health & Life
John Payak, III
EVP, Property & Casualty
Timothy S. Whetstone
EVP, Property & Casualty
Lawrence H. Woods
EVP, Property & Casualty
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, 2018
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 the 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 every Interactive Data File required to be submitted 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 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 the 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, 2018, was approximately $675.1 million.
As of January 31, 2019, there were issued and outstanding 20,067,268 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 2019
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
Operations
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
Form 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
Page
3
25
32
32
34
34
34
36
37
56
59
130
130
130
131
131
132
132
132
133
133
134
- 2 -
- 2 -
Item 1. Business
PART I
First Defiance Financial Corp. (“First Defiance” or “the Company”) is a unitary thrift holding
company that, through its subsidiaries, First Federal Bank of the Midwest (“First Federal” or “the Bank”),
First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc.
(collectively, “the Subsidiaries”), focuses on traditional banking and property, casualty, life and group
health insurance products.
The Company’s philosophy is to grow and prosper, building long-term relationships based on top
quality service, high ethical standards, and safe and sound assets. The Company operates as a locally-
oriented, community-based financial services organization, augmented by experienced, centralized support
in select critical areas. The Company’s local market orientation is reflected in its market area management
and local advisory boards, which are comprised of local business persons, professionals and other
community representatives that assist area management in responding to local banking needs.
The Company’s operating objectives include expansion, diversification within its markets, growth
of its fee-based income, and growth organically and through acquisitions of financial institutions, branches
and financial services businesses. The Company seeks merger or acquisition partners that are culturally
similar, have experienced management and possess either significant market area presence or have the
potential for improved profitability through financial management, economies of scale and expanded
services. The Company regularly evaluates merger and acquisition opportunities and conducts due diligence
activities related to possible transactions with other financial institutions. As a result, merger or acquisition
discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving
cash, debt or equity securities may occur. Acquisitions typically involve the payment of premiums over
book and market values and, therefore, some dilution of the Company’s tangible book value and net income
per common share may occur in any future transaction.
At December 31, 2018, the Company had consolidated assets of $3.2 billion, consolidated deposits
of $2.6 billion, and consolidated stockholders’ equity of $399.6 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.
On June 22, 2018, the Company announced a stock split in the form of a share distribution of two
common shares for each outstanding common share. The stock split was distributed on July 12, 2018, to
shareholders of record as of July 2, 2018. All share and per share data in this Form 10-K have been adjusted
and are reflective of the stock split.
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 States 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, three full-service banking center
offices in Allen County in northeast Indiana, five full-service banking center offices in Lenawee County in
- 3 -
- 3 -
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 throughout First Federal’s
markets. The Maumee and Oregon, Ohio, 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-focused financial
institution, well regarded in its market areas. First Defiance accomplishes this through emphasis on local
decision making and empowering its employees with tools and knowledge to serve its customers’ needs.
First Defiance believes in a “Customer First” philosophy that is strengthened by its Mission & Vision and
Core Values initiatives. First Defiance also has a tagline of “Better Together” as an indication of its
commitment to local, responsive, personalized service. First Defiance believes this strategy results in
greater customer loyalty and profitability through core relationships. First Defiance is focused on
diversification of revenue sources and increased market penetration in areas where the growth
potential exists for a balance between acquisition and organic growth. The primary elements of First
Defiance’s business strategy are commercial banking, consumer banking, including the origination and
sale of single-family residential loans, enhancement of fee income, wealth management and insurance
sales, each united by a strong customer service culture throughout the organization. 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 objectives in the future. As such, 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
- 4 -
- 4 -
solutions to their financial needs. First Federal’s “Customer First” philosophy and culture complements this
need of its clients. First Federal believes this personal service model differentiates First Federal from its
competitors, particularly the larger regional institutions. First Federal offers a wide variety of products to
support commercial clients including remote deposit capture and other cash management services. First
Federal also believes that the small business customer is a strong market for First Federal. First Federal
participates in many of the Small Business Administration lending programs. Maintaining a diversified
portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit
characteristics of industries is an ongoing focus.
Consumer Banking - First Federal offers customers a full range of deposit and investment
products including demand, checking, money market, certificates of deposits, Certificate of Deposit
Account Registry Service (“CDARS”) and savings accounts. First Federal offers a full range of investment
products through the wealth management department and a wide variety of consumer loan products,
including residential mortgage loans, home equity loans, and installment loans. First Federal also offers
online banking services, which include mobile banking, People Pay (“P2P”), online bill pay, and online
account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000
ATMs nationwide without a surcharge fee.
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 for both our retail and commercial customers. First Federal’s pricing strategy considers
the whole relationship of the customer. First Federal continues to focus on increasing its market share in
the communities it serves by providing quality products with extraordinary customer service, business
development strategies and branch expansion. First Federal will look to grow its footprint in areas believed
to further complement its overall market share and complement its strategy of being a high-performing
community bank.
Asset Quality - Maintaining a strong credit culture is of the utmost importance to First Federal.
First Federal has maintained a strong credit approval and review process that has allowed the Company to
maintain a credit quality standard that balances the return with the risks of industry concentrations and loan
types. First Federal is primarily a collateral lender with an emphasis on cash flow performance, while
obtaining additional support from personal guarantees and secondary sources of repayment. First Federal
has directed its attention to loan types and markets that it knows well and in which it has historically been
successful. First Federal strives to have loan relationships that are well diversified in both size and industry,
and monitors the overall trends in the portfolio to maintain its industry and loan type concentration targets.
First Federal maintains a problem loan remediation process that focuses on detection and resolution. First
Federal maintains a strong process of internal control that subjects the loan portfolio to periodic internal
reviews as well as independent third-party loan review.
Expansion Opportunities - First Defiance believes it is well positioned to take advantage of
acquisitions or other business opportunities in its market areas. First Defiance believes it has a track record
of successfully accomplishing both acquisitions and de novo branching in its market area. This track record
puts the Company in a solid position to enter or expand its business. First Defiance will continue to be
disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a
focus on its primary geographic market area, which it knows well, and has been competing in for a long
period of time, as well as surrounding market areas.
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 Executive Officer can each approve transactions up to $3.0 million. Two of the three officers
- 5 -
- 5 -
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 86 CMO issues totaling $101.5 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, 2018.
First Defiance’s securities portfolio is classified as either “available-for-sale” or “held-to-
maturity.” Securities classified as “available-for-sale” may be sold prior to maturity due to changes in
interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s
liquidity needs.
The carrying value of securities at December 31, 2018, by contractual maturity is shown below.
Expected maturities will differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties. For purposes of the maturity table,
mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-
backed securities may mature earlier than their weighted-average contractual maturities because of
principal prepayments.
Contractually Maturing
Total
Weighted
Under 1 Average
Rate %
Year
1 - 5
Years
Weighted
Average
Rate %
6-10
Years
Weighted
Weighted
Average Over 10 Average
Years
Rate %
(Dollars in Thousands)
Rate % Amount Yield
Mortgage-backed
securities
CMOs - residential
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
$ 10,089
15,941
3.22
3.29
$ 31,531
51,402
3.20 $22,882
32,464
3.29
3.15
3.25
$ 11,715
4,618
3.15
3.31
$ 76,217 3.12
104,425 3.12
- -
519
2.00
2,000
3.00
-
-
2,519
2.00
802 4.07
- -
$ 26,832
9,528
12,910
$ 105,890
3.31
3.48
32,689
-
$ 90,035
3.61
-
56,805
3.38
- -
99,824
3.55
12,910 2.36
$ 73,138
$ 295,895
1,312
(2,605)
$ 294,602
(1) Tax exempt yield based on effective tax rate of 21%. Actual coupon rate is approximately equal to the weighted average rate disclosed
in the table times 79%.
- 6 -
- 6 -
The carrying value of investment securities is as follows:
Available-for-sale securities:
Obligations of U.S. government corporations and
agencies
Obligations of state and political subdivisions
CMOs - residential, REMICS and mortgage-backed
securities
Trust preferred stock and preferred stock
Corporate bonds
Total
2018
December 31,
2017
(In Thousands)
2016
$ 2,503
99,887
$ 508
92,828
$ 3,915
88,043
178,880
-
12,806
$ 294,076
154,210
1
13,103
$ 260,650
146,019
2
13,013
$ 250,992
Held-to-maturity securities:
Mortgage-backed securities
Obligations of state and political subdivisions
Total
$
51
475
$ 526
$
68
580
$ 648
$
91
93
$ 184
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 $43.0 million and $55.0 million in overnight investments at the Federal Reserve
at December 31, 2018 and 2017, respectively, which amount is included in interest-bearing deposits. First
Defiance had interest-earning deposits at the FHLB of Cincinnati and other financial institutions amounting
to $1.7 million and $2.0 million at December 31, 2018 and 2017, 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, 2018, First Federal serviced 14,606 loans totaling $1.41
billion of principal. The vast majority of the loans serviced for others are fixed rate conventional mortgage
loans. The Company primarily sells its loans to, and then services for, Freddie Mac, Fannie Mae and FHLB.
At December 31, 2018, 66.40%, 32.70% and 0.85% of the Company’s sold loans were to Freddie Mac,
Fannie Mae and FHLB, respectively.
As compensation for its mortgage servicing activities, the Company receives servicing fees, usually
approximating 0.25% per annum of the loan balances serviced, plus any late charges collected from
delinquent borrowers and other fees incidental to the services provided. In the event of a default by the
borrower, the Company receives no servicing fees until the default is cured.
The following table sets forth certain information regarding the number and aggregate principal
balance of the mortgage loans serviced by the Company, including both fixed and adjustable rate loans, at
various interest rates:
- 7 -
- 7 -
2018
December 31,
2017
2016
Number
of
Loans
Percentage
Percentage
Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
Principal
Balance
Principal
Balance
Principal
Balance
Principal
Balance
Principal
Balance
Principal
Balance
of
Loans
of
Loans
Percentage
1,843
$ 158,038
11.19%
2,024
$ 189,700
13.69%
2,191
$ 225,328
16.42%
(Dollars in Thousands)
Rate
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
6,218
4,746
1,096
557
146
14,606
647,182
495,217
77,154
28,672
5,570
$ 1,411,833
45.85
35.08
5.46
2.03
0.39
100.00%
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
100.00%
6,279
3,551
1,405
749
175
14,350
682,157
332,023
83,775
41,055
7,680
$ 1,372,018
49.72
24.20
6.11
2.99
0.56
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.
2018
December 31,
2017
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
2016
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
439
2,777
2,707
1,049
2,915
4,719
14,606
3.01% $ 10,212
172,130
19.01
249,274
18.53
93,775
7.18
299,815
19.96
0.72%
12.19
17.66
6.64
21.24
32.31
586,627
100.00% $1,411,833 100.00%
41.55
444
2,557
3,012
1,258
2,460
4,716
14,447
3.07%
17.70
20.85
8.71
17.03
$ 8,346
162,190
278,655
109,300
248,919
0.60%
11.70
20.10
7.89
17.96
32.64
578,658
100.00% $1,386,068 100.00%
41.75
529
1,784
3,671
1,526
1,846
4,994
14,350
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
34.81
613,668
100.00% $1,372,018 100.00%
44.74
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, 2018, First Federal’s limit on loans-to-one borrower was $52.6 million
and its five largest loans (including available lines of credit) or groups of loans to one borrower, including
related entities, were $30.5 million, $28.4 million, $28.2 million, $26.8 million and $26.6 million. All of
these loans or groups of loans were performing in accordance with their terms at December 31, 2018.
Loan Portfolio Composition – The net increase in net loans receivable over the prior year was
$189.7 million, $407.4 million (including $285.4 million acquired from CSB) and $137.8 million at
December 31, 2018, 2017, and 2016, 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 rental property totaled
$982.5 million at December 31, 2018, which represents 37.9% 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.
- 8 -
- 8 -
2018
2017
December 31,
2016
2015
2014
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
$
322,686
12.1% $
274,862
11.1% $
207,550
10.2% $
205,330
11.0% $
206,437
12.2%
278,358
1,126,452
265,772
1,993,268
10.4
42.3
10.0
74.8
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
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
fees
Allowance for loan losses
Net loans
19.1
4.8
1.3
25.2
100.0%
509,577
128,152
34,405
672,134
2,665,402
123,293
2,070
526,142
135,457
29,109
690,708
2,466,267
115,972
1,582
28,331
$ 2,511,708
26,683
$ 2,322,030
21.3
5.5
1.2
28.0
100.0%
469,055
118,429
16,680
604,164
2,035,162
23.0
5.8
0.8
29.6
100.0%
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
1,870,227 100.0%
1,686,319 100.0%
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
In addition to the loans reported above, First Defiance had $6.6 million, $10.4 million, $9.6 million,
$5.5 million, and $4.5 million in loans classified as held for sale at December 31, 2018, 2017, 2016, 2015
and 2014, 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, 2018, 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, 2018
Due Less
than 1
Due 1-2
Due 3-5
$ 559,270
$ 241,509
$ 902,900
Due 5-10
(In Thousands)
$ 141,645
Due 10-15
Due 15+
Total
$
56,473
$
91,471
$1,993,268
342,026
60,473
100,384
4,714
900
1,080
509,577
113,673
17,194
$1,032,163
2,455
6,183
$ 310,620
5,921
9,887
$1,019,092
2,924
1,141
$ 150,424
1,373
-
58,746
$
1,806
-
94,357
128,152
34,405
$ 2,665,402
$
Real estate
Other loans:
Commercial
Home equity and
improvement
Consumer finance
Total
The schedule above does not reflect the actual life of the Company’s loan portfolio. The average
life of loans is substantially less than their contractual terms because of prepayments and due-on-sale
clauses, which give First Defiance the right to declare a conventional loan immediately due and payable in
the event, among other things, that the borrower sells the real property subject to the mortgage and the loan
is not repaid.
The following table sets forth the dollar amount of gross loans due after one year from
December 31, 2018, which has fixed interest rates or which have floating or adjustable interest rates.
- 9 -
- 9 -
Real estate
Real estate
Real estate
Real estate
Real estate
Real estate
Commercial
Commercial
Commercial
Commercial
Commercial
Commercial
Other
Other
Other
Other
Other
Other
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Rates
Rates
Rates
Rates
Rates
Rates
Floating or
Floating or
Floating or
Floating or
Floating or
Floating or
Adjustable
Adjustable
Adjustable
Adjustable
Adjustable
Adjustable
Rates
Rates
Rates
Rates
Rates
Rates
(In Thousands)
(In Thousands)
(In Thousands)
(In Thousands)
(In Thousands)
(In Thousands)
Total
Total
Total
Total
Total
Total
$ 483,202
$ 483,202
$ 483,202
$ 483,202
$ 483,202
$ 483,202
105,171
105,171
105,171
105,171
105,171
105,171
30,189
30,189
30,189
30,189
30,189
30,189
$ 618,562
$ 618,562
$ 618,562
$ 618,562
$ 618,562
$ 618,562
$ 950,796
$ 950,796
$ 950,796
$ 950,796
$ 950,796
$ 950,796
62,380
62,380
62,380
62,380
62,380
62,380
1,501
1,501
1,501
1,501
1,501
1,501
$ 1,014,677
$ 1,014,677
$ 1,014,677
$ 1,014,677
$ 1,014,677
$ 1,014,677
$ 1,433,998
$ 1,433,998
$ 1,433,998
$ 1,433,998
$ 1,433,998
$ 1,433,998
167,551
167,551
167,551
167,551
167,551
167,551
31,690
31,690
31,690
31,690
31,690
31,690
$ 1,633,239
$ 1,633,239
$ 1,633,239
$ 1,633,239
$ 1,633,239
$ 1,633,239
Originations, Purchases and Sales of Loans – The lending activities of First Federal are subject
Originations, Purchases and Sales of Loans – The lending activities of First Federal are subject
Originations, Purchases and Sales of Loans – The lending activities of First Federal are subject
Originations, Purchases and Sales of Loans – The lending activities of First Federal are subject
Originations, Purchases and Sales of Loans – The lending activities of First Federal are subject
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
to the written, non-discriminatory underwriting standards and loan origination procedures established by
to the written, non-discriminatory underwriting standards and loan origination procedures established by
to the written, non-discriminatory underwriting standards and loan origination procedures established by
to the written, non-discriminatory underwriting standards and loan origination procedures established by
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
the Board of Directors and management. Loan originations are obtained from a variety of sources, including
the Board of Directors and management. Loan originations are obtained from a variety of sources, including
the Board of Directors and management. Loan originations are obtained from a variety of sources, including
the Board of Directors and management. Loan originations are obtained from a variety of sources, including
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
referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio
referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio
referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio
referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio
referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio
advertising and walk-in customers.
advertising and walk-in customers.
advertising and walk-in customers.
advertising and walk-in customers.
advertising and walk-in customers.
advertising and walk-in customers.
First Federal’s loan approval process for all types of loans is intended to assess the borrower’s
First Federal’s loan approval process for all types of loans is intended to assess the borrower’s
First Federal’s loan approval process for all types of loans is intended to assess the borrower’s
First Federal’s loan approval process for all types of loans is intended to assess the borrower’s
First Federal’s loan approval process for all types of loans is intended to assess the borrower’s
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
ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will
ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will
ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will
ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will
ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will
secure the loan.
secure the loan.
secure the loan.
secure the loan.
secure the loan.
secure the loan.
A commercial loan application is first reviewed by a commercial lender and underwritten by a
A commercial loan application is first reviewed by a commercial lender and underwritten by a
A commercial loan application is first reviewed by a commercial lender and underwritten by a
A commercial loan application is first reviewed by a commercial lender and underwritten by a
A commercial loan application is first reviewed by a commercial lender and underwritten by a
A commercial loan application is first reviewed by a commercial lender and underwritten by a
commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit
commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit
commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit
commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit
commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit
commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit
Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit
Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit
Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit
Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit
Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit
Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit
Administration Officer for approval. These two positions can also approve loans up to $2,000,000
Administration Officer for approval. These two positions can also approve loans up to $2,000,000
Administration Officer for approval. These two positions can also approve loans up to $2,000,000
Administration Officer for approval. These two positions can also approve loans up to $2,000,000
Administration Officer for approval. These two positions can also approve loans up to $2,000,000
Administration Officer for approval. These two positions can also approve loans up to $2,000,000
individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must
individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must
individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must
individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must
individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must
individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must
be presented for approval to the Executive Loan Committee.
be presented for approval to the Executive Loan Committee.
be presented for approval to the Executive Loan Committee.
be presented for approval to the Executive Loan Committee.
be presented for approval to the Executive Loan Committee.
be presented for approval to the Executive Loan Committee.
Residential mortgage applications are accepted by retail lenders or branch managers, who utilize
Residential mortgage applications are accepted by retail lenders or branch managers, who utilize
Residential mortgage applications are accepted by retail lenders or branch managers, who utilize
Residential mortgage applications are accepted by retail lenders or branch managers, who utilize
Residential mortgage applications are accepted by retail lenders or branch managers, who utilize
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
an automated underwriting system to review the loan request. First Federal also receives mortgage
an automated underwriting system to review the loan request. First Federal also receives mortgage
an automated underwriting system to review the loan request. First Federal also receives mortgage
an automated underwriting system to review the loan request. First Federal also receives mortgage
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
applications via an online residential mortgage origination system. A final approval of all residential
applications via an online residential mortgage origination system. A final approval of all residential
applications via an online residential mortgage origination system. A final approval of all residential
applications via an online residential mortgage origination system. A final approval of all residential
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
mortgage applications is made by a member of a centralized underwriting staff within their designated
mortgage applications is made by a member of a centralized underwriting staff within their designated
mortgage applications is made by a member of a centralized underwriting staff within their designated
mortgage applications is made by a member of a centralized underwriting staff within their designated
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 a
lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a
lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a
lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a
lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a
lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a
Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.
Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.
Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.
Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.
Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.
Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.
Retail lenders and branch managers are authorized to originate and approve direct consumer loan
Retail lenders and branch managers are authorized to originate and approve direct consumer loan
Retail lenders and branch managers are authorized to originate and approve direct consumer loan
Retail lenders and branch managers are authorized to originate and approve direct consumer loan
Retail lenders and branch managers are authorized to originate and approve direct consumer loan
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
requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess
requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess
requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess
requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess
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
of the lender’s approved lending limit may be approved by retail lending managers up to their approved
of the lender’s approved lending limit may be approved by retail lending managers up to their approved
of the lender’s approved lending limit may be approved by retail lending managers up to their approved
of the lender’s approved lending limit may be approved by retail lending managers up to their approved
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
lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy
lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy
lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy
lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy
lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy
must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan
must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan
must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan
must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan
must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan
must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan
Committee.
Committee.
Committee.
Committee.
Committee.
Committee.
First Federal offers adjustable-rate loans in order to decrease the vulnerability of its operations to
First Federal offers adjustable-rate loans in order to decrease the vulnerability of its operations to
First Federal offers adjustable-rate loans in order to decrease the vulnerability of its operations to
First Federal offers adjustable-rate loans in order to decrease the vulnerability of its operations to
First Federal offers adjustable-rate loans in order to decrease the vulnerability of its operations to
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
changes in interest rates. The demand for adjustable-rate loans in First Federal’s primary market area has
changes in interest rates. The demand for adjustable-rate loans in First Federal’s primary market area has
changes in interest rates. The demand for adjustable-rate loans in First Federal’s primary market area has
changes in interest rates. The demand for adjustable-rate loans in First Federal’s primary market area has
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
been a function of several factors, including customer preference, the level of interest rates, the expectations
been a function of several factors, including customer preference, the level of interest rates, the expectations
been a function of several factors, including customer preference, the level of interest rates, the expectations
been a function of several factors, including customer preference, the level of interest rates, the expectations
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
of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate
of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate
of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate
of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate
of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate
loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that
loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that
loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that
loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that
loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that
loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that
can be originated at any time is largely determined by the demand for each in a competitive environment.
can be originated at any time is largely determined by the demand for each in a competitive environment.
can be originated at any time is largely determined by the demand for each in a competitive environment.
can be originated at any time is largely determined by the demand for each in a competitive environment.
can be originated at any time is largely determined by the demand for each in a competitive environment.
can be originated at any time is largely determined by the demand for each in a competitive environment.
Adjustable-rate loans represented 22.0% of First Federal’s total originations of one-to-four family
Adjustable-rate loans represented 22.0% of First Federal’s total originations of one-to-four family
Adjustable-rate loans represented 22.0% of First Federal’s total originations of one-to-four family
Adjustable-rate loans represented 22.0% of First Federal’s total originations of one-to-four family
Adjustable-rate loans represented 22.0% of First Federal’s total originations of one-to-four family
Adjustable-rate loans represented 22.0% of First Federal’s total originations of one-to-four family
residential mortgage loans in 2018 compared to 9.9% and 10.8% during 2017 and 2016, respectively.
residential mortgage loans in 2018 compared to 9.9% and 10.8% during 2017 and 2016, respectively.
residential mortgage loans in 2018 compared to 9.9% and 10.8% during 2017 and 2016, respectively.
residential mortgage loans in 2018 compared to 9.9% and 10.8% during 2017 and 2016, respectively.
residential mortgage loans in 2018 compared to 9.9% and 10.8% during 2017 and 2016, respectively.
residential mortgage loans in 2018 compared to 9.9% and 10.8% during 2017 and 2016, respectively.
Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other
Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other
Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other
Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other
Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other
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
risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by
risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by
risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by
risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by
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
the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the
the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the
the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the
the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the
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.
underlying property may be adversely affected by higher interest rates.
underlying property may be adversely affected by higher interest rates.
underlying property may be adversely affected by higher interest rates.
underlying property may be adversely affected by higher interest rates.
underlying property may be adversely affected by higher interest rates.
- 10 -
- 10 -
- 10 -
- 10 -
- 10 -
- 10 -
- 10 -
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:
2018
Years Ended December 31,
2017
(In Thousands)
2016
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
$
282,109 $
70,665
279,251
184,631
186,943
58,918
22,260
1,084,777
-
-
240,921
74,342
181,289
205,088
219,588
68,856
15,185
1,005,269
285,448
11,476
335,738
236,598
317,128
889,464
195,313 $
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
Net increase in total loans and loans held for sale
$
Asset Quality
First Defiance’s credit policy establishes guidelines to manage credit risk and asset quality. These
guidelines include loan review and early identification of problem loans to ensure sound credit decisions.
First Defiance’s credit policies and review procedures are meant to minimize the risk and uncertainties
inherent in lending. In following the policies and procedures, management must rely on estimates,
appraisals and evaluations of loans and the possibility that changes in these could occur because of changing
economic conditions.
Delinquent Loans — The following table sets forth information concerning delinquent loans at
December 31, 2018, in dollar amount and as a percentage of First Defiance’s total loan portfolio. The
amounts presented represent the total outstanding principal balances of the related loans, rather than the
actual payment amounts that are past due.
30 to 59 Days
60 to 89 Days
90 Days and Over
Total
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
(Dollars in Thousands)
1-4 family residential real
estate
Multi- family residential
Commercial real estate
Construction
Commercial
Home equity and
improvement
Consumer finance
Total
$
$
946
-
130
-
297
1,427
133
2,933
0.04%
0.00
0.00
0.00
0.01
0.05
0.00
0.10%
$
993
-
417
-
53
0.04% $
0.00
0.02
0.00
0.00
1,571
-
3,008
-
4,073
144
76
$ 1,683
90
0.01
0.00
96
0.07% $ 8,838
0.06%
0.00
0.11
0.00
0.15
0.00
0.00
0.32%
$ 3,510
-
3,555
-
4,423
1,661
305
$ 13,454
0.14%
0.00
0.13
0.00
0.16
0.06
0.01
0.50%
Overall, the level of delinquencies at December 31, 2018, declined slightly from the levels at
December 31, 2017, when First Defiance reported that 0.53% of its outstanding loans were at least 30 days
delinquent. The level of total loans 90 or more days delinquent has increased to 0.32% at December 31,
2018, from 0.20% at December 31, 2017. The level of total loans 60-89 days delinquent decreased to 0.07%
at December 31, 2018, from 0.12% at December 31, 2017. The level of loans that were 30 to 59 days past
due decreased to 0.10% at December 31, 2018, from 0.21% at December 31, 2017. Management has
- 11 -
- 11 -
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.
Non-performing 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 $45.8 million, $56.3 million and
$27.4 million were considered impaired as of December 31, 2018, 2017 and 2016, respectively. 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 $1.8 million of interest received and recorded
in income during 2018 related to impaired loans. There was $1.4 million and $1.7 million recorded in 2017
and 2016, respectively. Unrecorded interest income based on the loan’s contractual terms on these impaired
loans and all non-performing loans in 2018, 2017 and 2016 was $1.1 million, $1.1 million, and $1.2 million,
respectively. The average recorded investment in impaired loans during 2018, 2017 and 2016 (excluding
loans accounted for under FASB ASC Topic 310 Subtopic 30) was $49.2 million, $47.4 million and $32.8
million, respectively. The total allowance for loan losses related to these loans was $0.6 million, $0.8
million, and $0.8 million at December 31, 2018, 2017 and 2016, respectively.
Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold.
First Defiance also repossesses other assets securing loans, consisting primarily of automobiles. When such
property is acquired it is recorded at 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 2018, First Defiance recognized $552,000 of expense related to
write-downs in value of real estate acquired by foreclosure or acquisition. The balance of real estate owned
at December 31, 2018, was $1.2 million. During 2017, there was $20,000 of expense related to write-
downs in fair value of real estate acquired by foreclosure or acquisition. The balance of real estate owned
at December 31, 2017 was $1.5 million.
As of December 31, 2018, First Defiance’s total non-performing loans amounted to $19.0 million
or 0.75% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $30.7
million or 1.31% of total loans, at December 31, 2017. Non-performing loans are loans which are more
than 90 days past due or on non-accrual. The non-performing loan balance for 2018 includes $16.3 million
of loans that were originated by First Federal and also considered impaired, compared to $25.5 million for
2017.
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.
- 12 -
- 12 -
Non-performing loans:
2018
2017
December 31,
2016
(Dollars in Thousands)
2015
2014
1-4 family residential real estate
Multi-family residential real estate
Commercial real estate
Commercial
Home equity and improvement
Consumer finance
Total non-performing loans
$ 3,640
102
10,255
4,500
393
126
19,016
$ 3,037
128
18,091
8,841
590
28
30,715
$ 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
Real estate owned
Total repossessed assets
1,205
1,205
1,532
1,532
455
455
1,321
1,321
6,181
6,181
Total non-performing assets
$ 20,221
$ 32,247
$ 14,803
$ 17,582
$ 30,311
Restructured loans, accruing
$ 11,573
$ 13,770
$ 10,544
$ 11,178
$ 24,686
Total non-performing assets as a
percentage of total assets
Total non-performing loans as a
percentage of total loans*
Total non-performing assets as a
0.64%
1.08%
0.60%
0.77%
1.39%
0.75%
1.31%
0.74%
0.90%
1.47%
percentage of total loans plus OREO*
0.80%
1.37%
0.76%
0.97%
1.83%
Allowance for loan losses as a percent
of total non-performing assets
* Total loans are net of undisbursed loan funds and deferred fees and costs.
140.11% 82.75% 174.86%
144.36%
81.71%
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.
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, 2018, First Defiance’s allowance for loan losses totaled $28.3 million compared
to $26.7 million at December 31, 2017. The following table sets forth the activity in First Defiance’s
allowance for loan losses during the periods indicated.
- 13 -
- 13 -
2018
Years Ended December 31,
2016
2015
2017
(Dollars in Thousands)
2014
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
$ 26,683
1,176
$ 25,884
2,949
$ 25,382
283
$ 24,766
136
$ 24,950
1,117
(261)
(1,387)
(724)
(233)
(269)
(2,874)
3,346
472
$ 28,331
(279)
(429)
(2,301)
(139)
(301)
(3,449)
1,299
(2,150)
$ 2 6,683
(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
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
148.99% 86.87% 180.40% 156.09% 102.64%
1.12%
1.14%
1.33%
1.41%
1.50%
average loans
-0.01%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
-0.02%
0.10%
-0.03%
0.08%
The provision for credit losses decreased in 2018 from the previous year despite growth in the loan
portfolio due to a decrease in net charge-offs and improving credit quality. Management feels that the level
of the allowance for loan losses at December 31, 2018, is sufficient to cover the estimated losses incurred
but not yet recognized in the loan portfolio.
The following table sets forth information concerning the allocation of First Defiance’s allowance
for loan losses by loan categories at the dates indicated. For information about the percent of total loans in
each category to total loans, see “Lending Activities-Loan Portfolio Composition” above.
2018
2017
December 31,
2016
2015
2014
Percent of
total loans
by category Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category
Amount
1-4 family residential $ 2,881
Multi-family
12.1% $ 2,532
11.1%
(Dollars in Thousands)
10.2%
$ 2,627
$ 3,212
11.0%
$ 2,494
12.2%
residential real
estate
Commercial real
estate
Construction
Commercial loans
Home equity and
improvement
loans
Consumer loans
3,101
12,041
682
7,281
10.4
42.3
10.0
19.1
2,702
10,354
647
7,965
10.1
40.0
10.8
21.3
2,228
10,625
450
7,361
9.7
41.5
9.0
23.0
2,151
11,772
517
5,192
9.0
41.8
8.7
22.4
2,453
9.3
11,268
221
6,509
40.6
6.7
23.7
2,026
319
$ 28,331
4.8
1.3
2,255
228
100.0% $ 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%
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
- 14 -
- 14 -
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. First Defiance has no national market certificates of deposit as of December 31, 2018 or 2017.
Average balances and average rates paid on deposits are as follows:
2018
Amount
Rate
Years Ended December 31,
2017
Amount
(Dollars in Thousands)
Rate
2016
Amount
Rate
$
562,439
-
$
528,926
-
$
441,731
-
1,026,383
297,492
621,239
$ 2,507,553
955,248
0.27%
284,814
0.04
530,414
1.78
0.56% $ 2,299,402
798,266
0.18%
235,137
0.04
1.33
430,487
0.38% $ 1,905,621
0.17%
0.04
1.12
0.33%
Noninterest-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, 2018 (In Thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
After December 31, 2019
Total retail certificates of deposit with
balances $250,000 or greater
$
24,347
20,481
8,791
6,865
29,328
$
89,812
The following table details the deposit accrued interest payable as of December 31:
Interest-bearing demand deposits and
money market accounts
Certificates of deposit
2018
2017
(In Thousands)
$
$
52
314
366
$
$
29
68
97
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.
- 15 -
- 15 -
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
2018
Years Ended December 31,
2017
(Dollars in Thousands)
2016
$
60,189
1.68%
$ 84,279
1.55%
$ 103,943
1.42%
Short-term:
FHLB advances
Weighted average interest rate
Securities sold under agreement to repurchase
Weighted average interest rate
$
25,000
2.45%
$ 5,741
0.31%
$
-
-
$ 26,019
0.20%
$
$
-
-
31,816
0.22%
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
2018
Years Ended December 31,
2017
(Dollars in Thousands)
2016
$
84,306
67,365
1.75%
$ 105,214
102,115
1.44%
$ 103,943
84,944
1.42%
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
2018
Years Ended December 31,
2017
(Dollars in Thousands)
2016
$
$
40,000
6,082
1.33%
5,741
8,911
0.26%
$
$
-
44
0.80%
26,019
23,337
0.23%
$
$
30,000
861
0.39%
57,984
52,821
0.26%
First Defiance borrows funds under a variety of programs at the FHLB. As of December 31, 2018,
there was $85.2 million outstanding under various 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, 2018 and 2017, no outstanding balances existed under First Defiance’s short-term Cash
Management Advance Line of Credit. The total available under the Cash Management Advance Line is
$15.0 million. In addition, First Defiance has a $100.0 million REPO Advance line of credit available,
under which $25.0 million was drawn at December 31, 2018. There were no borrowings against this line
at December 31, 2017. Amounts are generally borrowed under these lines on an overnight basis. First
Defiance’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, 2018, other than amounts available on the REPO and Cash Management line, First
- 16 -
- 16 -
Defiance had additional borrowing capacity with the FHLB of $447.4 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 $14.2 million at December 31, 2018, and $16.0
million at December 31, 2017. First Federal held stock of the FHLB of Indianapolis of $2,500 at December
31, 2018, and $5,000 at December 31, 2017.
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 4.29% and 3.09% as of December 31, 2018 and 2017,
respectively.
The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Subordinated Debentures. The Company entered into an agreement that fully and
unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust
Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the
Company’s option at any time now.
In October 2005, the Company formed an affiliated trust, First Defiance Statutory Trust I (“Trust
Affiliate I”) that issued $20.0 million of Trust Preferred Securities. In connection with the transaction, the
Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed
for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from
the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated
Debentures held by Trust Affiliate I are the sole assets of the trust. Distributions on the Trust Preferred
Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR
rate plus 1.38%, or 4.17% and 2.97% as of December 31, 2018 and 2017, 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 696 employees at December 31, 2018. None of these employees are represented
by a collective bargaining agent, and First Defiance believes that it maintains good relationships with its
personnel.
- 17 -
- 17 -
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 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.
Economic Growth, Regulatory Relief and Consumer Protection Act
On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the
“Regulatory Relief Act”) was signed into law. The Regulatory Relief Act was designed to provide
regulatory relief for banking organizations, particularly for all but the very largest, those with assets in
excess of $250 billion. Bank holding companies with assets of less than $100 billion are no longer subject
to enhanced prudential standards, and those with assets between $100 billion and $250 billion will be
relieved of those requirements in 18 months, unless the Federal Reserve Board takes action to maintain
those standards. Certain regulatory requirements applied only to banks with assets in excess of $50 billion
and so did not apply to First Federal even before the enactment of the Regulatory Relief Act.
The Regulatory Relief Act also provides that the banking regulators must adopt regulations
implementing the provision that banking organizations with assets of less than $10 billion are permitted to
satisfy capital standards and be considered “well capitalized” under the prompt corrective action framework
if their leverage ratios of tangible assets to average consolidated assets is between 8% and 10%, unless the
bank’s federal banking agency determines that the organization’s risk profile warrants a more stringent
leverage ratio. The Office of the Comptroller of the Currency (“OCC”), the Federal Reserve Board and the
FDIC have proposed for comment the leverage ratio framework for any banking organization with total
consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet
exposures, and a community bank leverage ratio greater than 9%. The community bank leverage ratio
would be calculated as the ratio of tangible equity capital divided by average total consolidated assets.
- 18 -
- 18 -
Tangible equity capital would be defined as total bank equity capital or total holding company equity
capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive
income, deferred tax assets arising from net operating loss and tax credit carry forwards, goodwill and other
intangible assets (other than mortgage servicing assets). Average total assets would be calculated in a
manner similar to the current tier 1 leverage ratio denominator in that amounts deducted from the
community bank leverage ratio numerator would also be excluded from the community bank leverage ratio
denominator.
The OCC, the Federal Reserve Board and the FDIC also adopted a rule providing banking
organizations the option to phase in over a three-year period the day-one adverse effects on regulatory
capital that may result from the adoption of new current expected credit loss methodology accounting under
U. S. generally accepted accounting principles (“GAAP”).
The Regulatory Relief Act also relieves bank holding companies and banks with assets of less than
$100 billion in assets from certain record-keeping, reporting and disclosure requirements.
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 federal 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 phased in from January 1, 2016, 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 CET1 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 CET1 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 (“ALLL”),
subject to new eligibility criteria, less applicable deductions.
The deductions from CET1 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).
- 19 -
- 19 -
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive
the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and
off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts
and classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
The 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 CET1 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 was fully phased
in effective January 1, 2019 at 2.5%.
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
CET1 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, 2018, First Federal met the ratio requirements in effect to be
deemed "well-capitalized." See Note 17 of the Notes to the Consolidated Financial Statements which is
incorporated herein by reference.
- 20 -
- 20 -
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, 2018. (Dollars in Thousands):
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
$303,860
$322,520
11.00%
11.68%
$124,339
$124,225
$338,860
$322,520
11.14%
10.62%
$121,716
$121,461
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$338,860
$322,520
12.26%
11.68%
$165,786
$165,633
Total Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$367,191
$350,851
13.29%
12,71%
$221,048
$220,844
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$179,436
N/A
$151,827
N/A
$220,844
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$276,055
N/A
10.0%
(1) Excludes capital conservation buffer of 1.875% as of December 31, 2018.
(2) Core capital is computed as a percentage of adjusted total assets of $3.04 billion for consolidated and for the
Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.76 billion for
consolidated and for the Bank.
In September 2017, the Federal Reserve, along with other bank regulatory agencies, proposed
amendments to its capital requirements to simplify various aspects of the capital rules for community banks,
including First Federal, in an attempt to reduce the regulatory burden for such smaller financial institutions.
In November 2017, the federal banking agencies extended, for the community 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. As described above, the bank regulatory agencies have
proposed revised capital requirements under the Regulatory Relief Act.
Dividends – Dividends paid by First Federal to First Defiance are subject to various regulatory
restrictions. First Federal paid $22.0 million in dividends to First Defiance in 2018 and $13.0 million in
2017. 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 $1.6 million in dividends to First Defiance in 2018 and $1.8 million in dividends in
2017. First Defiance Risk Management paid $950,000 in dividends to First Defiance in 2018 and $1.0
million in dividends in 2017.
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
- 21 -
- 21 -
participating. All loans to directors, executive officers and principal shareholders must be made on terms
substantially the same as offered in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program. Loans to executive officers are subject to additional
restrictions. 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 Deposit Insurance Fund (“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 DRR reached 1.36% at September 30, 2018. The
credits will be applied when the reserve ratio is at least 1.38%. 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 September 2019. The Financing Corporation has projected that the
last assessment will be collected on the March 29, 2019 FDIC invoice.
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 DIF. 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 (“CRA”): imposes a continuing and affirmative
obligation to fulfill the credit needs of its entire community, including low- and moderate-income
neighborhoods.
- 22 -
- 22 -
•
Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the
basis of any of various criteria.
•
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.
In October 2017, the CFPB issued a final rule (the “Payday Rule”) with respect to certain consumer
loans to be effective on January 16, 2018, although compliance with most sections is required starting on
August 19, 2019. The first major part of the rule makes it an unfair and abusive practice for a lender to
make short-term and longer-term loans with balloon payments (with certain exceptions) without reasonably
determining that the borrower has the ability to repay the loan. The second major part of the rule applies
to the same types of loans as well as certain other longer-term loans that are repaid directly from the
borrower's account. The rule states that it is an unfair and abusive practice for the lender to withdraw
payment from the borrower's account after two consecutive payment attempts have failed, unless the lender
obtains the consumer's new and specific authorization to make further withdrawals from the account. The
rule also requires lenders to provide certain notices to the borrower before attempting to withdraw payment
on a covered loan from the borrower’s account.
On February 6, 2019, the CFPB issued two proposals with respect to the Payday Rule. First, the
CFPB proposed to delay the compliance date for the mandatory underwriting provisions of the Payday Rule
to November 19, 2020. It has requested comments on the proposed delay to be made within 30 days.
Second, the CFPB proposed to rescind provisions of the Payday Rule that (1) provide that it is an unfair
and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan without
reasonably determining that the consumer has the ability to repay the loan according to its terms; (2)
prescribe mandatory underwriting requirements for making the ability-to-repay determination; (3) provide
exemptions of certain loans from the mandatory underwriting requirements; and (4) provide related
definitions, reporting and recordkeeping requirements. The CFPB has requested comments to be made
within 90 days on this proposal. These proposals do not change the provisions of the Payday Rule that
address lender payment practices with respect to covered loans. The CFPB also stated that it will be
considering other changes to the Payday Rule in response to requests received for exemptions of certain
types of lenders or loan products and may commence separate additional rulemaking initiatives.
CRA - Under the 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
- 23 -
- 23 -
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.”
In June 2010, the Federal Reserve, 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 First Defiance, 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
•
require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.
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 impact the operations of First Defiance
or its subsidiaries, as the Company does not engage in the businesses prohibited by the Volcker Rule and
banks under $10.0 billion in assets are exempted from the Volcker Rule provisions.
- 24 -
- 24 -
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 not the only
ones facing the Company. Additional risks and uncertainties that management is not aware of or that
management currently deems immaterial may also impair the Company’s business operations.
Economic, political 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, Northeast
Indiana and Southeast Michigan. 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 of 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
cost/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 First
Defiance’s ability to sell the collateral upon foreclosure.
The election of a new United States President in 2016 has resulted in substantial changes in
economic and political conditions for the United States and the remainder of the world. Economic turmoil
in Europe and Asia and changes in oil production in the Middle East affect the economy and stock prices
in the United States. The timing and circumstances of the United Kingdom leaving the European Union
(Brexit) and their effects on the United States are unknown. While these changes do not have a direct,
immediate impact on First Defiance’s financial performance, we cannot predict how the change in the
political climate will affect the economy and First Defiance’s performance in the future.
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, 2018, First Federal’s portfolio of commercial real estate loans totaled $1.4 billion,
or approximately 52.2% 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 flows and market values of the affected properties.
At December 31, 2018, First Federal’s portfolio of commercial loans totaled $509.6 million, or
approximately 19.1% of total loans. Commercial loans generally expose First Defiance to a greater risk of
nonpayment and loss than commercial real estate or residential real estate loans since repayment of such
loans often depends on the successful operations and income stream of the borrowers. First Federal’s
commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on
the underlying collateral provided by the borrower such as accounts receivable, inventory, machinery or
real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment
of these loans may be substantially dependent on the ability of the borrower to collect amounts due from
- 25 -
- 25 -
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.
If First Defiance's actual loan losses exceed its allowance for loan losses, First Defiance's net income
will decrease.
In accordance with GAAP, First Defiance must maintain an allowance for loan losses to provide
for loan defaults and non-performance, which when combined, are referred to as the allowance for loan
losses. First Defiance's allowance for loan losses is based upon a number of relevant factors, including, but
not limited to, trends in the level of nonperforming assets and classified loans, current economic conditions
in the primary lending area, prior experience, possible losses arising from specific problem loans, and
management's evaluation of the risks in the current portfolio. However, there are many factors that can
result in actual loan losses exceeding the allowance.
For instance, in deciding whether to extend credit or enter into other transactions with customers
and counterparties, First Defiance may rely on information provided to us by customers and counterparties,
including financial statements and other financial information. First Defiance may also rely on
representations of customers and counterparties as to the accuracy and completeness of that information
and, with respect to financial statements, on reports of independent auditors. Such information may not
turn out to be accurate. Further, First Defiance's loan customers may not repay their loans according to
their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining
loan balance. As a result, First Defiance may experience significant loan losses, which could have a
material adverse effect on its operating results.
The amount of future losses also is susceptible to changes in economic, operating and other
conditions, including changes in interest rates that may be beyond management's control, and these losses
may exceed current estimates. Further, federal regulatory agencies, as an integral part of their examination
process, review First Defiance's loans and allowance for loan losses and may require that First Defiance
increase its allowance. Moreover, the Financial Accounting Standards Board (“FASB”) has changed its
requirements for establishing the allowance, which will be effective for First Defiance in the first quarter
of 2020. That accounting change exposes First Defiance to increased risk of failure to establish a sufficient
allowance and the possibility that First Defiance will need to increase its allowance substantially through
an increase to the provision for loan losses, which will adversely affect First Defiance's net income.
As a result of any of the above factors, First Defiance's allowance for loan losses may not be
adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse
effect on First Defiance's operating results. There is no assurance that First Defiance will not further
increase the allowance for loan losses. Either of these occurrences could have a material adverse effect on
First Defiance's financial condition and results of operations.
Changes in interest rates can adversely affect First Defiance’s profitability.
First Defiance’s earnings and cash flows are largely dependent upon its net interest income. Net
interest income is the difference between interest income earned on interest-earning assets such as loans
and securities, and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.
Interest rates are highly sensitive to many factors that are beyond First Defiance’s control, including general
economic conditions and policies of various governmental and regulatory agencies and, in particular, the
Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could
influence not only the interest First Defiance receives on loans and securities and the amount of interest it
pays on deposits and borrowings, but such changes could also affect (i) First Defiance’s ability to originate
- 26 -
- 26 -
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. While we generally invest in securities with limited credit risk,
certain investment securities we hold possess higher credit risk since they represent beneficial interests in
structured investments collateralized by residential mortgages. All investment securities are subject to
changes in market value due to changing interest rates and implied credit spreads. Any substantial,
unexpected, or 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, regulations and periodic regulatory reviews 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 DIF, rather than First Defiance’s
shareholders.
As discussed above, in October 2017, the CFPB issued the Payday Rule with respect to certain
consumer loans to be effective on January 16, 2018, although compliance with most sections is required
starting on August 19, 2019. Then, on February 6, 2019, the CFPB issued two proposals with respect to
the Payday Rule regarding the underwriting provisions. These proposals do not change the provisions of
the Payday Rule that address lender payment practices with respect to covered loans. The CFPB also stated
that it will be considering other changes to the Payday Rule in response to requests received for exemptions
of certain types of lenders or loan products and may commence separate additional rulemaking initiatives.
First Defiance is currently assessing the expected effect of this new rule on First Defiance's lending
businesses and on First Defiance’s financial condition and results of operations. The costs of complying
with this regulation or a determination to discontinue certain types of consumer lending in light of the
expense of compliance could have an adverse effect on the financial conditions and results of operations of
the Company.
Changes in tax laws could adversely affect First Defiance's financial condition and results of
operations.
First Defiance is subject to extensive federal, state and local taxes, including income, excise,
sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to the tax laws could have a
material adverse effect on First Defiance's results of operations. In addition, First Defiance's customers are
subject to a wide variety of federal, state and local taxes. Changes in taxes paid by customers, including
changes in the deductibility of mortgage loan related expenses, may adversely affect their ability to
purchase homes or consumer products, which could adversely affect their demand for First Defiance's loans
and deposit products. In addition, such negative effects on First Defiance's customers could result in
- 27 -
- 27 -
defaults on the loans already made and decrease the value of mortgage-backed securities in which First
Defiance has invested.
On December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act,” was enacted into
law. This new tax legislation, among other changes, limits the amount of state, federal and local taxes that
taxpayers are permitted to deduct on their individual tax returns and eliminates other deductions in their
entirety. Such limits and eliminations may result in customer defaults on loans already made and decrease
the value of mortgage-backed securities in which First Defiance has invested.
The laws and regulations applicable to the banking industry could change at any time. The potential
exists for new laws and regulations, and bank regulatory agencies are expected to be active in responding
to concerns and trends identified in examinations. Increased regulation could increase First Defiance’s cost
of compliance and reduce its income to the extent that they limit the manner in which First Defiance may
conduct business, including its ability to offer new products, charge fees for specific products and services,
obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
First Defiance’s ability to meet cash flow needs on a timely basis at a reasonable cost may adversely
affect net income.
First Defiance’s principal sources of liquidity are local deposits and wholesale funding sources
such as FHLB advances, Federal Funds purchased, securities sold under repurchase agreements, and
brokered or other out-of-market certificate of deposit purchases. Also, First Defiance maintains a portfolio
of securities that can be used as a secondary source of liquidity. First Defiance’s access to funding sources
in amounts adequate to finance or capitalize its activities or on terms that are acceptable could be impaired
by factors that affect First Defiance directly or the financial services industry or economy in general, such
as further disruptions in the financial markets or negative views and expectations about the prospects for
the financial services industry.
Other possible sources of liquidity include the sale or securitization of loans, the issuance of
additional collateralized borrowings beyond those currently utilized with the FHLB, the issuance of debt
securities and the issuance of preferred or common securities in public or private transactions, or
borrowings from a commercial bank. First Defiance does not currently have any borrowings from a
commercial bank, but it has used them in the past.
Any decline in available funding could adversely impact our ability to originate loans, invest in
securities, meet our expenses, pay dividends to First Defiance’s shareholders, or fulfill obligations such as
repaying First Defiance’s borrowings or meeting deposit withdrawal demands, any of which could have a
material adverse impact on our liquidity, business, results of operations and financial condition.
Competition affects First Defiance’s earnings.
First Defiance’s continued profitability depends on its ability to continue to effectively compete to
originate loans and attract and retain deposits. Competition for both loans and deposits is intense in the
financial services industry. The Company competes in its market area by offering superior service and
competitive rates and products. The type of institutions First Defiance competes with include large regional
commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions,
finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their size and
ability to achieve economies of scale, certain of First Defiance’s competitors can offer a broader range of
products and services than the Company can offer. In addition, the OCC has recently announced that it will
start accepting applications for bank charters from nondepository financial technology companies engaged
in banking activities, which will add to the number of parties with whom the Company competes. Further,
technological advances allow consumers to pay bills and transfer funds electronically without banks.
Consumers can also shop for higher deposit interest rates at banks across the country, which may offer
higher rates because they have few or no physical branches. 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.
- 28 -
- 28 -
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
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 personal identification numbers (“PIN”) 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 customers 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.
- 29 -
- 29 -
First Defiance relies heavily on its own information systems and those of vendors to conduct
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. 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 focuses on planned growth, including strategic acquisitions, and its
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:
- 30 -
- 30 -
•
•
•
•
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.
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 unitary thrift 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 Federal 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 in 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
- 31 -
- 31 -
financial services industry could adversely affect First Defiance’s business, financial condition, or results
of operations.
A transition away from LIBOR as a reference rate for financial contracts could negatively affect
First Defiance’s income and expenses and the value of various financial contracts.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and
financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other
derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop
reporting such information after 2021. It is uncertain at this time whether LIBOR will change or cease to
exist or the extent to which those entering into financial contracts will transition to any other particular
benchmark. Other benchmarks may perform differently than LIBOR or alternative benchmarks have
performed in the past or have other consequences that cannot currently be anticipated. It is also uncertain
what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain
outstanding if LIBOR ceases to exist.
First Defiance may be the subject of litigation, which would result in legal liability and damage to its
business and reputation.
From time to time, First Defiance may be subject to claims or legal action from customers,
employees or others. Financial institutions like First Defiance are facing a growing number of significant
class actions, including those based on the manner of calculation of interest on loans and the assessment of
overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages
or claims for indeterminate amounts of damages. First Defiance is also involved from time to time in other
reviews, investigations and proceedings (both formal and informal) by governmental and other agencies
regarding its businesses. These matters also could result in adverse judgments, settlements, fines, penalties,
injunctions or other relief. Like other financial institutions, First Defiance is also subject to risk from
potential employee misconduct, including non-compliance with policies and improper use or disclosure of
confidential information. Substantial legal liability or significant regulatory action against First Defiance
could materially adversely affect its business, financial condition or results of operations and/or cause
significant reputational harm to its business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2018, First Federal conducted its business from its main office at 601 Clinton St.,
Defiance, Ohio, and 43 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 October 2018, First Federal opened a branch located at 203 E. Berry St., Fort Wayne, Indiana.
This office is leased.
First Defiance maintains its headquarters in the main office of First Federal at 601 Clinton St.,
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, 2018. See Note 9 to the Consolidated Financial Statements.
- 32 -
- 32 -
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
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
203 E. Berry St., Fort Wayne, IN
First Insurance Group
511 Fifth St., Defiance, OH
209 W. Poe Rd., Bowling Green, OH
204 E. High St., Bryan, 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
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
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Net Book Value
of Property
Deposits
(In Thousands)
$
2,908
4,495
490
282
778
216
1,030
634
593
250
731
510
810
669
250
142
972
624
777
276
866
674
744
477
1,151
-
-
646
178
150
453
1,325
1,508
1,859
928
158
1,106
83
167
132
686
613
56
-
16
26
$ 268,657
N/A
160,615
75,492
97,500
52,327
42,728
45,905
92,873
36,928
64,763
61,838
129,991
107,898
97,812
22,156
55,377
101,954
108,086
44,050
51,231
37,187
42,202
50,288
44,475
33,692
19,395
85,995
50,110
36,192
49,559
64,201
14,884
56,102
9,970
2,073
121,574
20,610
54,926
12,662
36,909
41,947
9,145
-
7,669
934
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
409
-
-
-
-
-
-
-
-
$ 31,848
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 2,620,882
- 33 -
- 33 -
Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings that are incidental to and occur in the
ordinary course of business which, in the aggregate, are believed by management to be immaterial to the
financial condition of First Defiance.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol
“FDEF.” As of January 31, 2019, the Company had approximately 2,347 shareholders of record.
The line graph below compares the yearly percentage change in cumulative total shareholder return
on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the SNL
NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31, 2013,
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.
Index
First Defiance Financial Corp.
NASDAQ Composite
SNL Bank NASDAQ
SNL Midwest Thrift
12/31/13
100.00
100.00
100.00
100.00
12/31/14
134.08
114.75
103.57
114.29
Period Ending
12/31/15
151.90
122.74
111.80
139.95
12/31/16
208.51
133.62
155.02
168.52
12/31/17
217.83
173.22
163.20
160.27
12/31/18
210.01
168.30
137.56
146.29
- 34 -
- 34 -
The following table provides information regarding First Defiance’s purchases of its common
shares during the fourth quarter period ended December 31, 2018:
Period
October 1 – October 31, 2018
November 1 – November 30, 2018
December 1 – December 31, 2018
Total
Total Number
of Shares
Purchased
-
145,422
85,738
231,160
Average
Price Paid
Per Share
$
-
27.63
26.96
$ 27.38
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
-
145,422
85,738
231,160
Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs (1)
755,000
609,578
523,840
523,840
(1) On January 29, 2016, the Company announced that its Board of Directors authorized a program for the
repurchase of up to 5% of the outstanding common shares or 900,000 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.
- 35 -
- 35 -
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, 2018. 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
Non-performing 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
Noninterest income
Noninterest 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:
Non-performing assets to total assets
at end of period (1)
Allowance for loan losses to total
loans*
Net charge-offs (recoveries) to average loans
2018
$ 3,182,376
294,602
2,511,708
28,331
20,221
2,624,534
85,189
399,589
$
$
2.27
2.26
19.81
14.71
0.64
28.19%
20,468
20,171
124,717
16,462
108,255
1,176
39,208
89,412
56,875
10,626
46,249
1.52%
12.03%
3.79%
3.98%
2.93%
60.29%
12.56%
12.61%
0.64%
1.12%
-0.02%
As of and For the Year Ended December 31,
2016
(Dollars and Shares in Thousands, Except Per Share Data)
2015
2017
$ 2,993,403
261,298
2,322,030
26,683
32,247
2,440,581
84,279
373,286
$ 2,477,597
251,176
1,914,603
25,884
14,803
1,984,278
103,943
293,018
$ 2,297,676
236,678
1,776,835
25,382
17,582
1,838,811
59,902
280,197
$
$
1.62
1.61
18.38
13.24
0.50
30.96%
20,056
20,312
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%
$
$
1.61
1.60
16.31
12.80
0.44
27.41%
18,070
17,966
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%
$
$
1.44
1.41
15.39
11.89
0.39
27.00%
18,742
18,204
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%
2014
$ 2,178,952
239,634
1,622,020
24,766
30,311
1,763,122
21,544
279,505
$
$
1.28
1.22
15.09
11.62
0.31
24.51%
19,938
18,470
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%
(1) Non-performing assets include non-accrual loans that are contractually past due 90 days or more and real estate, mobile homes and other
assets acquired by foreclosure or deed-in-lieu thereof.
(2) Refer to Non-GAAP Financial Measures in Item 7- Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
* Total loans are net of undisbursed loan funds and deferred fees and costs.
- 36 -
- 36 -
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 or customers.
• 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.
- 37 -
- 37 -
• 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 (“PCAOB”), the Financial
Accounting Standards Board (“FASB”) 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, 2018 and 2017.
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)
December 31,
2018
108,255
1,004
109,259
$
$
$
December 31,
2017
96,671
1,914
98,585
$
$ 39,035
89,412
$ 39,497
85,351
2,744,752
2,741,215
(3,537)
2,542,129
2,545,261
3,132
3.98%
60.29%
3.88%
61.81%
December 31,
$
$
2018
399,589
(98,569)
(4,391)
296,629
December 31,
2017
$ 373,286
(98,569)
(5,703)
$ 269,014
20,171
20,312
Tangible book value per share (1) / (2)
$
14.71
$ 13.24
- 38 -
- 38 -
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 44 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 conducts business
throughout First Federal’s markets. The previous Maumee and Oregon, Ohio 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.
On June 22, 2018, the Company announced a stock split in the form of a share distribution of
two common shares for each outstanding common share. The stock split was distributed on July 12,
2018, to shareholders of record as of July 2, 2018. All share and per share data in this Form 10-K have
been adjusted and are reflective of the stock split.
Financial Condition
Assets at December 31, 2018, totaled $3.18 billion compared to $2.99 billion at December
31, 2017, an increase of $188.3 million or 6.3%. The increase in assets was primarily due to an
increase in loans receivable, net of undisbursed loan funds and deferred fees and costs, of $191.3
million, and an increase in securities of $33.3 million. These increases were funded primarily by an
increase in total deposits of $183.2 million.
Securities
The securities portfolio increased $33.3 million to $294.6 million at December 31, 2018. The
2018 activity in the portfolio included $76.6 million of purchases, which were partially offset by $1.2
million of amortization, $32.7 million of principal pay-downs and maturities, and $5.5 million of
securities being sold. There was a net loss of $3.5 million in the market value of available-for-sale
securities. For additional information regarding First Defiance’s investment securities see Note 5 to
the Consolidated Financial Statements.
Loans
Loans receivable, net of undisbursed loan funds and deferred fees and costs, increased
$191.3 million to $2.54 billion at December 31, 2018. For more details on the loan balances, see Note 7
– Loans Receivable to the Consolidated Financial Statements.
- 39 -
- 39 -
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 $1.85 billion and $1.76 billion at December 31, 2018 and 2017, respectively, and
accounted for approximately 71.8% and 71.4% of First Defiance’s loan portfolio at the end of those
respective periods. First Defiance believes it has been able to establish itself as a leader in its market area
in the commercial and commercial real estate lending area by hiring experienced lenders and providing a
high level of customer service to its commercial lending clients.
The 1-4 family residential portfolio totaled $322.7 million at December 31, 2018, compared with
$274.9 million at the end of 2017. At the end of 2018, those loans comprised 12.1% of the total loan
portfolio, up from 11.1% at December 31, 2017.
Construction loans, which include one-to-four family and commercial real estate properties,
increased to $265.8 million at December 31, 2018, compared to $265.5 million at December 31, 2017.
These loans accounted for approximately 10.0% and 10.8% of the total loan portfolio at December 31, 2018
and 2017, respectively.
Home equity and home improvement loans decreased to $128.2 million at December 31, 2018,
from $135.5 million at the end of 2017. At the end of 2018, those loans comprised 4.8% of the total loan
portfolio, down from 5.5% at December 31, 2017.
Consumer finance and mobile home loans were $34.4 million at December 31, 2018 up from $29.1
million at the end of 2017. These loans accounted for approximately 1.3% and 1.2% of the total loan
portfolio at December 31, 2018 and 2017, respectively.
In order to properly assess the collateral dependent loans included in its loan portfolio, the
Company has established policies regarding the monitoring of the collateral underlying such loans. The
Company requires an appraisal that is less than one year old for all new collateral dependent real estate
loans, and all renewed collateral dependent real estate loans where significant new money is extended. The
appraisal process is handled by the Credit Department, which selects the appraiser and orders the appraisal.
First Defiance’s loan policy prohibits the account officer from talking or communicating with the appraiser
to insure that the appraiser is not influenced by the account officer in any way in making a determination
of value.
First Federal generally does not require updated appraisals for performing loans unless significant
new money is requested by the borrower.
When a collateral dependent loan is downgraded to classified status, First Federal reviews the most
current appraisal on file and if appropriate, based on First Federal’s assessment of the appraisal, such as
age, market, etc. First Federal will discount the appraisal amount to a more appropriate current value based
on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s
estimation of the selling costs. In most instances, if the appraisal is more than twelve to fifteen months old,
a new appraisal may be required. Finally, First Federal assesses whether there is any collateral short fall,
taking into consideration guarantor support and liquidity, and determines if a charge-off is necessary.
All loans over 90 days past due and/or on non-accrual are classified as non-performing loans. Non-
performing status automatically occurs in the month in which the 90-day delinquency occurs. When a
collateral dependent loan moves to non-performing status, First Federal generally gets a new third party
appraisal and charges the loan down appropriately based upon the new appraisal and an estimate of costs
to liquidate the collateral. All properties that are moved into the Other Real Estate Owned (“OREO”)
category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value,
which is determined based on appraised value less First Federal’s estimate of the liquidation costs.
First Federal does not adjust any appraisals upward without written documentation of this valuation
change from the appraiser. When setting reserves and charge-offs on classified loans, appraisal values may
be discounted downward based upon First Federal’s experience with liquidating similar properties.
- 40 -
- 40 -
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.
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 and the balance is over $250,000,
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. For loans that are
considered TDRs and the balance is under $250,000 a specific reserve is carried in the allowance for loan
and lease losses based on a general reserve analysis. As of December 31, 2018, and December 31, 2017,
First Federal had $11.6 million and $13.8 million, respectively, of loans that were still performing and
which were classified as TDRs.
Allowance for Loan Losses
The allowance for loan losses represents management’s assessment of the estimated probable
incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy
of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to
economic conditions, changes in interest rates and the effect of such changes on collateral values and
borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-
performing loan balances. The allowance for loan losses is a material estimate that is susceptible to
significant fluctuation and is established through a provision for loan losses based on management’s
evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring
procedures, the Company utilizes an outside party to conduct an independent loan review of commercial
loan and commercial real estate loan relationships. The goal is to have approximately 55% to 60% of the
portfolio reviewed annually. This includes all relationships over $5.0 million with new exposure greater
than $2.0 million and a sample of other relationships greater than $5.0 million; loan relationships between
$1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of other relationships
between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million. Management
utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system
as well as to assist in the assessment of the overall adequacy of the allowance for loan losses associated
with these types of loans.
The allowance for loan loss is made up of two basic components. The first component of the
allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the
analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all
substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on
the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. For
loans that are considered impaired and the balance is over $250,000, 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
- 41 -
- 41 -
collateral, any shortfall is usually charged-off. For loans that are considered impaired and the balance is
under $250,000 a specific reserve is carried in the allowance for loan and lease losses based on a general
reserve analysis. The Company also considers the impacts of any Small Business Association or Farm
Service Agency guarantees. The specific reserve was $595,000 at December 31, 2018, and $758,000 at
December 31, 2017.
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 remained steady at $5.9 million at December 31, 2018, from $6.0
million at December 31, 2017, due to relatively small changes 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, 2018, indicated a general reserve of $21.8 million
compared with $20.0 million at December 31, 2017, an increase of $1.8 million. Management reviews the
overall economic, environmental and risk factors quarterly and determines appropriate adjustments to these
sub-factors based on that review.
- 42 -
- 42 -
The economic factors for all loan segments decreased in 2018 primarily due to strengthening trends
in the U.S. economy, particularly unemployment rates, which decreased in all markets.
The environmental factors increased in 2018 for all loan segments. This is principally due to an
increase in credit concentrations and an increase in the mix of lending in First Federal’s defined
metro markets.
The risk factors decreased in 2018 in most loan segments with the largest decrease being in
commercial. This is due to favorable 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 0.48% for construction loans to 1.50% 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 2018 was $1.2 million compared to $2.9 million for 2017. The
allowance for loan losses was $28.3 million at December 31, 2018, and $26.7 million at December 31,
2017, and represented 1.12% and 1.14% of loans, net of undisbursed loan funds and deferred fees and costs,
respectively. The provision was offset by charge-offs of $2.9 million and recoveries of $3.3 million
resulting in an increase to the overall allowance for loan loss of $1.6 million. In management’s opinion, the
overall allowance for loan losses of $28.3 million as of December 31, 2018, 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 2018,
First Defiance recorded OREO write-downs that totaled $552,000. These amounts were included in other
noninterest expense. Management believes that the values recorded at December 31, 2018, for OREO and
repossessed assets represent the realizable value of such assets.
Total classified loans decreased from $59.4 million at December 31, 2017 to $50.8 million at
December 31, 2018, a reduction of $8.6 million, due to payoffs and an upgrade of a large classified
relationship during 2018.
First Defiance’s ratio of allowance for loan losses to non-performing loans was 149.0% at
December 31, 2018, compared with 86.9% at December 31, 2017. 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, 2018, are appropriate.
At December 31, 2018, First Defiance had total non-performing assets of $20.2 million, compared
to $32.2 million at December 31, 2017. Non-performing assets include loans that are 90 days past due,
OREO and other assets held for sale.
The decrease in non-performing assets between December 31, 2018, and December 31, 2017, is
primarily in commercial loans and commercial real estate loans. The balance of commercial non-
performing loans was $4.3 million lower at December 31, 2018, compared to December 31, 2017. The
balance of commercial real estate loans was $7.9 million lower at December 31, 2018, compared to
December 31, 2017.
Non-performing loans in the 1-4 family residential, commercial real estate and commercial loan
categories represent 1.13%, 0.74% and 0.88% of the total loans in those categories respectively at December
31, 2018, compared to 1.10%, 1.47% and 1.68% respectively for the same categories at December 31, 2017.
Management believes that the current allowance for loan losses is appropriate and that the provision for
loan losses recorded in 2018 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
- 43 -
- 43 -
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 Loan Loss Reserve Committee.
The net charge-offs and non-accrual loan balances as a percentage of total are presented in the table
below at December 31, 2018 and 2017.
Table 1 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2018
As of December 31, 2018
Net
Charge-offs
(Recoveries)
(In Thousands)
$ 130
-
610
(1,497)
207
78
% of Total Net
Charge-offs
(Recoveries)
Non-accrual
% of Total Non-
Loans
Accrual Loans
27.54%
0.00%
129.24%
(317.16)%
43.85%
16.53%
(In Thousands)
$ 3,640
-
10,357
4,500
126
393
19.14%
0.00%
54.47%
23.66%
0.66%
2.07%
Residential
Construction
Commercial real estate
Commercial
Consumer finance
Home equity and improvement
Total
$ (472)
100.00%
$ 19,016
100.00%
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)
Non-accrual
% 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%
The following table sets forth information concerning the allocation of First Defiance’s allowance
for loan losses by loan categories at December 31, 2018 and 2017.
Table 2 – Allowance for Loan Loss Allocation by Loan Category
December 31, 2018
December 31, 2017
Amount
Percent of
total loans
by category Amount
Percent of
total loans
by category
(Dollars in Thousands)
1-4 family residential
$ 2,881
12.1%
$ 2,532
11.1%
Multi-family residential real
estate
Commercial real estate
Construction
Commercial loans
3,101
12,041
682
7,281
Home equity and improvement loans 2,026
Consumer loans
319
$ 28,331
10.4
42.3
10.0
19.1
4.8
1.3
2,702
10,354
647
7,965
2,255
228
100.0% $ 26,683
10.1
40.0
10.8
21.3
5.5
1.2
100.0%
- 44 -
- 44 -
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, 2018, the total contractual receivable for those loans was $2.5 million and the
recorded value was $2.3 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 Chief Credit Officer. 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, 2018, totaled $53.0 million, compared to $50.8 million at
December 31, 2017. 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, 2018, and December 31, 2017. Core deposit
intangibles and other intangible assets decreased to $4.4 million at December 31, 2018, compared to $5.7
million at December 31, 2017. During 2018, changes to the core deposit intangibles and other intangibles
were due to the recognition of $1.3 million of amortization expense. No impairment of goodwill was
recorded in 2018 or 2017.
Deposits
Total deposits at December 31, 2018, were $2.62 billion compared to $2.44 billion at December
31, 2017, an increase of $183.2 million or 7.5%. Noninterest-bearing checking accounts grew by $35.8
million, interest-bearing checking accounts and money markets grew by $35.0 million, savings decreased
by $9.2 million and retail certificates of deposit grew by $121.6 million. Management can utilize the
national market for certificates of deposit to supplement its funding needs if necessary. For more details on
the deposit balances in general see Note 11 – Deposits to the Consolidated Financial Statements.
Borrowings
FHLB advances totaled $85.2 million at December 31, 2018, compared to $84.3 million at
December 31, 2017. The balance at the end of 2018 includes thirteen fixed-rate advances totaling $59.0
million with rates ranging from 1.14% to 2.50%, one amortizing advance of $1.2 million with a rate of
2.14% and one overnight advance of $25.0 million with a rate of 2.45%.
At December 31, 2018, First Defiance also had $5.7 million of securities that were sold with
agreements to repurchase, compared to $26.0 million at December 31, 2017.
- 45 -
- 45 -
Equity
Total stockholders’ equity increased $26.3 million to $399.6 million at December 31, 2018,
compared to $373.3 million at December 31, 2017. The increase in stockholders’ equity was the result of
recording net income of $46.2 million. This was partially offset by the payment of $13.0 million of common
stock dividends, the repurchase of 231,160 shares of common stock totaling $6.3 million and other
comprehensive loss of $2.4 million.
Results of Operations
Summary
First Defiance reported net income of $46.2 million for the year ended December 31, 2018,
compared to $32.3 million and $28.8 million for the years ended December 31, 2017 and 2016, respectively.
On a diluted per common share basis, First Defiance earned $2.26 in 2018, $1.61 in 2017 and $1.60 in
2016.
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 $108.3 million for the year ended December 31, 2018, compared to $96.7
million and $78.9 million for the years ended December 31, 2017 and 2016, respectively. The tax-
equivalent net interest margin was 3.98%, 3.88% and 3.74% for the years ended December 31, 2018, 2017
and 2016, respectively. The margin increased 10 basis points between 2017 and 2018. The increase in
margin in 2018 was primarily due to the increase in interest rates as the federal rate hikes impacted asset
yields more favorably than deposit costs as well as the mix of our noninterest-bearing balances. Interest-
earning asset yields increased 26 basis points (to 4.59% in 2018 from 4.33% in 2017) and the cost of
interest- bearing liabilities between the two periods increased 21 basis points (to 0.80% in 2018 from 0.59%
in 2017).
Total interest income increased by $16.6 million or 15.4% to $124.7 million for the year ended
December 31, 2018, from $108.1 million for the year ended December 31, 2017. This is due to solid loan
growth, the increase in interest rates and a more profitable earning asset mix. Interest income from loans
increased to $114.4 million for 2018 compared to $99.5 million in 2017, which represents an increase of
14.9%. The average balance of loans receivable increased $184.3 million to $2.4 billion at December 31,
2018, from $2.2 billion at December 31, 2017.
During the same period, the average balance of investment securities increased to $280.0 million
in 2018 from $258.8 million for the year ended December 31, 2017. Interest income from investment
securities increased to $8.1 million in 2018 compared to $6.9 million in 2017, which represents an increase
of 17.1%. The overall duration of investments increased to 4.29 years at December 31, 2018, from 3.40
years at December 31, 2017.
Interest expense increased by $5.0 million in 2018 compared to 2017, to $16.5 million from $11.4
million. This increase was mainly due to a 21 basis point increase in the average cost of interest-bearing
liabilities in 2018 and a $127.5 million increase in the average balance of interest-bearing liabilities. The
average balance of interest-bearing deposits increased $175.3 million to $1.95 billion at December 31,
2018, from $1.77 billion at December 31, 2017. Interest expense related to interest-bearing deposits was
$13.9 million in 2018 compared to $8.8 million in 2017.
Interest expenses on FHLB advances and other interest-bearing funding sources were $1.3 million
and $23,000 respectively, in 2018 and $1.5 million and $208,000 respectively in 2017. The decrease in
- 46 -
- 46 -
FHLB advance expense was due to a $28.7 million decrease in the average balance of FHLB advances to
$73.4 million at December 31, 2018, compared to $102.2 million at December 31, 2017. The decrease in
average balances of FHLB advances offset an increase in the rate paid on FHLB advances as it increased
to 1.72% at December 31, 2018, from 1.44% at December 31, 2017. Interest expense recognized by the
Company related to subordinated debentures was $1.3 million in 2018 and $935,000 in 2017 due to rising
rates.
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 primarily 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 primarily 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.
- 47 -
- 47 -
The following table shows an analysis of net interest margin on a tax equivalent basis for the years
ended December 31, 2018, 2017 and 2016:
Table 3 – Net Interest Margin
Year Ended December 31,
Average
Balance
2018
Interest
(1)
Yield/
Rate (2)
Average
Balance
(In Thousands)
2017
Interest
(1)
Yield/
Rate
Average
Balance
2016
Interest
(1)
$ 2,382,941
279,867
63,261
15,146
$114,500
9,036
1,270
915
4.80% $ 2,198,639
258,775
3.23%
72,215
2.01%
15,632
6.04%
$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
Yield/
Rate
4.34%
3.48%
0.54%
4.00%
2,741,215
125,721
4.59%
2,545,261
110,016
4.33%
2,168,046
89,213
4.13%
Interest-Earning Assets:
Loans receivable (5)
Securities (6)
Interest-earning deposits
FHLB stock
Total interest-earning
assets
Noninterest-earning
assets
307,310
Total Assets
$3,048,525
306,270
$2,851,531
229,393
$2,397,439
Interest-Bearing Liabilities:
Interest-bearing deposits
FHLB advances
Subordinated debentures
Other borrowings
Total interest-bearing
liabilities
Noninterest-bearing
demand deposits
Total including non-
interest- bearing
demand deposits
Other noninterest
liabilities
Total Liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income;
$ 1,945,114
73,421
36,083
8,947
$13,897
1,261
1,281
23
0.71% $ 1,769,786
102,155
1.72%
36,156
3.55%
27,929
0.26%
$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%
1.50%
2.09%
0.26%
2,063,565
16,462
0.80%
1,936,026
11,431
0.59%
1,638,713
8,440
0.52%
562,439
−
528,926
−
441,731
−
2,626,004
16,462
0.63%
2,464,952
11,431
0.46%
2,080,444
8,440
0.41%
38,216
2,664,220
384,305
35,343
2,500,295
351,236
31,361
2,111,805
285,634
$ 3,048,525
$ 2,851,531
$ 2,397,439
interest rate spread (3)
$109,259
3.79%
$98,585
3.74%
$80,773
3.61%
Net interest margin (4)
Average interest-earning
assets to average interest-
bearing liabilities
3.98%
132.8%
3.88%
131.5%
3.74%
132.3%
(1) Interest on certain tax exempt loans (amounting to $380,000, $375,000 and $383,000 in 2018, 2017 and 2016, respectively) and tax-exempt securities
($3.4 million, $3.2 million and $3.0 million in 2018, 2017, and 2016, respectively) is not taxable for Federal income tax purposes. The average balance
of such loans was $10.5 million, $11.5 million and $11.8 million in 2018, 2017, and 2016, respectively, while the average balance of such securities
was $98.2 million, $91.2 million and $83.4 million in 2018, 2017, and 2016, 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 21% for 2018 and 35% for 2017 and 2016.
(2) At December 31, 2018, the yields earned and rates paid were as follows: loans receivable, 4.80%; securities, 3.32%; FHLB stock, 6.00%; total interest-
earning assets, 4.66%; deposits, 0.57%; FHLB advances, 1.88%; other borrowings, 0.26%, subordinated debentures, 4.22%; total including non-
interest-bearing liabilities, 0.66%; and interest rate spread, 3.99%.
(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.
- 48 -
- 48 -
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
The following table describes the extent to which changes in interest rates and changes in volume of
The following table describes the extent to which changes in interest rates and changes in volume of
expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities,
interest-related assets and liabilities have affected First Defiance’s tax-equivalent interest income and interest
interest-related assets and liabilities have affected First Defiance’s tax-equivalent interest income and interest
information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior
expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities,
expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities,
year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and
information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior
information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior
volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change
year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and
year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and
due to rate and the change due to volume.
volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change
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.
due to rate and the change due to volume.
Table 4 – Changes in Interest Rates and Volumes (1)
Total
increase
(decrease)
Total
Total
increase
increase
(decrease)
(decrease)
$ 19,319
783
$ 19,319
$ 19,319
469
783
783
232
469
469
232
232
$ 20,803
$ 20,803
$ 20,803
2017 vs. 2016
Increase
2017 vs. 2016
(decrease)
2017 vs. 2016
due to
Increase
Increase
volume
(decrease)
(decrease)
due to
due to
volume
volume
$ 15,527
849
$ 15,527
$ 15,527
28
849
849
80
28
28
80
80
$ 16,484
$ 16,484
$ 16,484
Interest-
Bearing
Liabilities
Interest-
Interest-
1,429
$
Bearing
Bearing
236
Liabilities
Liabilities
-
1,429
1,429
$
$
(89)
236
236
-
-
(89)
(89)
1,576
$
Table 4 – Changes in Interest Rates and Volumes (1)
Table 4 – Changes in Interest Rates and Volumes (1)
Increase
(decrease)
due to
Increase
Increase
rate
(decrease)
(decrease)
due to
due to
rate
rate
$ 6,107
(306)
$ 6,107
$ 6,107
549
(306)
(306)
156
549
549
156
156
$ 6,506
$ 6,506
$ 6,506
Interest-Earning Assets
Loans
Securities
Interest-Earning Assets
Interest-Earning Assets
Interest-earning
Loans
Loans
deposits
Securities
Securities
FHLB stock
Interest-earning
Interest-earning
deposits
deposits
Total interest-earning
FHLB stock
FHLB stock
assets
Total interest-earning
Total interest-earning
Interest-Bearing Liabilities
assets
assets
2018 vs. 2017
Increase
2018 vs. 2017
(decrease)
2018 vs. 2017
due to
Increase
Increase
volume
(decrease)
(decrease)
due to
due to
volume
volume
$
8,651
688
8,651
8,651
(115)
688
688
(25)
(115)
(115)
(25)
(25)
9,199
$
$
$
$
$
Year Ended December 31,
(In Thousands)
Year Ended December 31,
Year Ended December 31,
(In Thousands)
(In Thousands)
Total
increase
(decrease)
Total
Total
increase
increase
(decrease)
(decrease)
$ 14,758
382
$ 14,758
$ 14,758
434
382
382
131
434
434
131
131
$ 15,705
Increase
(decrease)
due to
Increase
Increase
rate
(decrease)
(decrease)
due to
due to
rate
rate
$ 3,792
(66)
$ 3,792
$ 3,792
441
(66)
(66)
152
441
441
152
152
$ 4,319
9,199
9,199
$ 15,705
$ 15,705
$ 4,319
$ 4,319
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
387
387
1,576
1,576
$ 4,644
$ 4,644
$ 1,415
$ 1,415
liabilities
liabilities
$ 10,674
$ 10,674
$ 17,812
$ 17,812
$
2,991
2,991
$
$ 17,812
944
(461)
(2)
944
944
(94)
(461)
(461)
(2)
(2)
(94)
(94)
387
2,557
182
182
2,557
2,557
70
182
182
182
182
70
70
2,991
5,079
(209)
346
5,079
5,079
(185)
(209)
(209)
346
346
(185)
(185)
5,031
$ 4,135
252
348
$ 4,135
$ 4,135
(91)
252
252
348
348
(91)
(91)
$ 4,644
$ 1,128
(54)
182
$ 1,128
$ 1,128
159
(54)
(54)
182
182
159
159
$ 1,415
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.
Interest-Bearing Liabilities
Interest-Bearing Liabilities
Deposits
FHLB advances
Subordinated Debentures
Deposits
Deposits
Notes Payable
FHLB advances
FHLB advances
Subordinated Debentures
Subordinated Debentures
Total interest- bearing
Notes Payable
Notes Payable
liabilities
Total interest- bearing
Total interest- bearing
$
5,031
5,031
$
Increase in net interest income
$ 10,674
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the
Increase in net interest income
Increase 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
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the
Provision for Loan Losses – First Defiance’s provision for loan losses was $1.2 million for the
year ended December 31, 2018, compared to $2.9 million for December 31, 2017, and $283,000 for
Provision for Loan Losses – First Defiance’s provision for loan losses was $1.2 million for the
Provision for Loan Losses – First Defiance’s provision for loan losses was $1.2 million for the
December 31, 2016.
year ended December 31, 2018, compared to $2.9 million for December 31, 2017, and $283,000 for
year ended December 31, 2018, compared to $2.9 million for December 31, 2017, and $283,000 for
December 31, 2016.
December 31, 2016.
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
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
considered by management include identifiable risk in the portfolios, historical experience, the volume and
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
type of lending conducted by First Defiance, the amount of non-performing loans (including loans which
considered by management include identifiable risk in the portfolios, historical experience, the volume and
considered by management include identifiable risk in the portfolios, historical experience, the volume and
meet the FASB ASC Topic 310 definition of impaired), the amount of loans graded by management as
type of lending conducted by First Defiance, the amount of non-performing loans (including loans which
type of lending conducted by First Defiance, the amount of non-performing loans (including loans which
substandard, doubtful, or loss, general economic conditions (particularly as they relate to First Defiance’s
meet the FASB ASC Topic 310 definition of impaired), the amount of loans graded by management as
meet the FASB ASC Topic 310 definition of impaired), the amount of loans graded by management as
market areas) and other factors related to the collectability of First Defiance’s loan portfolio. See also
substandard, doubtful, or loss, general economic conditions (particularly as they relate to First Defiance’s
substandard, doubtful, or loss, general economic conditions (particularly as they relate to First Defiance’s
Allowance for Loan Losses in this Management’s Discussion and Analysis and Note 7 to the Consolidated
market areas) and other factors related to the collectability of First Defiance’s loan portfolio. See also
market areas) and other factors related to the collectability of First Defiance’s loan portfolio. See also
Financial Statements.
Allowance for Loan Losses in this Management’s Discussion and Analysis and Note 7 to the Consolidated
Allowance for Loan Losses in this Management’s Discussion and Analysis and Note 7 to the Consolidated
Financial Statements.
Financial Statements.
Noninterest Income – Noninterest income decreased by $873,000 or (2.2%) in 2018 to $39.2
million from $40.1 million for the year ended December 31, 2017. That followed an increase of $6.1
Noninterest Income – Noninterest income decreased by $873,000 or (2.2%) in 2018 to $39.2
Noninterest Income – Noninterest income decreased by $873,000 or (2.2%) in 2018 to $39.2
million or 17.8% in 2017 from $34.0 million in 2016.
million from $40.1 million for the year ended December 31, 2017. That followed an increase of $6.1
million from $40.1 million for the year ended December 31, 2017. That followed an increase of $6.1
million or 17.8% in 2017 from $34.0 million in 2016.
million or 17.8% in 2017 from $34.0 million in 2016.
Service fees and other charges increased to $13.1 million for the year ended December 31, 2018,
from $12.1 million for 2017 and increased from $10.9 million for 2016. The increase in service fees and
Service fees and other charges increased to $13.1 million for the year ended December 31, 2018,
Service fees and other charges increased to $13.1 million for the year ended December 31, 2018,
from $12.1 million for 2017 and increased from $10.9 million for 2016. The increase in service fees and
from $12.1 million for 2017 and increased from $10.9 million for 2016. The increase in service fees and
- 49 -
- 49 -
- 49 -
- 49 -
other charges in 2018 and 2017 from 2016 is primarily due to increased number of deposit accounts and
the CSB acquisition in 2017.
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 automated clearing house (“ACH”)
transaction, an online banking or voice-response transfer, or an automated teller machine (“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, 2018 and 2017, related to the overdraft privilege product, net of adjustments to the allowance for
uncollectible overdrafts, were both $2.8 million, respectively. Accounts charged-off are included in
noninterest expense. The allowance for uncollectible overdrafts was $34,000 at December 31, 2018, and
$24,000 at December 31, 2017.
Noninterest income also includes gains, losses and impairment on investment securities. In 2018,
First Defiance realized a $173,000 gain on sale of securities. In 2017, a $584,000 gain was recognized
compared to a $509,000 gain in 2016.
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 $7.1 million, $7.0
million and $7.3 million in 2018, 2017 and 2016, respectively. The $73,000 increase in 2018 from 2017 is
attributable to a decrease of $123,000 in mortgage servicing rights amortization expense along with a
$70,000 increase in servicing revenue and a $42,000 positive change in the valuation adjustments on
mortgage servicing rights. This was partially offset by a $162,000 decrease in the gain on sale of loans.
First Defiance originated $205.9 million of residential mortgages for sale into the secondary market in 2018
compared with $213.5 million in 2017. The balance of the mortgage servicing right valuation allowance
was $300,000 at the end of 2018.
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 was $432,000 at the end of 2017. See Note 8 to the
Consolidated Financial Statements.
Gains on the sale of non-mortgage loans, which include SBA and FSA loans, totaled $317,000 in
2018 compared to $217,000 in 2017 and $753,000 in 2016. The volume of eligible SBA loans decreased
in 2018 and 2017 from levels in 2016.
- 50 -
- 50 -
Insurance commission income increased $1.2 million or 9.5% to $14.1 million in 2018 from $12.9
million in 2017 mainly due to having a full year results of the Corporate One acquisition and an increase in
general production in the property and casualty and group employee benefits lines of business. 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.
Income from bank owned life insurance decreased $1.3 million in 2018 to $1.8 million from $3.1
million in 2017. 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. The increase to $3.1 million in 2017 from $909,000 in 2016 is also due to
the enhancement value gain.
Trust income decreased $241,000 to $2.1 million in 2018 from $2.3 million in 2017 and $1.7
million. The decrease in 2018 is due to a $428,000 positive accrual adjustment recorded in 2017 to bring
trust fees to an accrual basis of accounting.
Other income decreased $1.3 million to $598,000 in 2018 compared to $1.9 million in 2017 and
$1.5 million in 2016. The $1.3 million decrease in 2018 included a $388,000 decrease in deferred
compensation plan assets compared to a $377,000 increase for the same period in 2017 due to stock market
performance in 2018. The $316,000 increase in 2017 is due mainly to group benefit referral fees.
Noninterest Expense – Total noninterest expense for 2018 was $89.4 million compared to $85.4
million for the year ended December 31, 2017, and $71.1 million for the year ended December 31, 2016.
Compensation and benefits increased $2.8 million or 5.5% to $52.6 million from $49.8 million in
2017. The increase is mainly related to merit increases and investing some of the benefits of lower tax rates
in support of our metro market growth strategies. Occupancy expense increased $934,000, to $8.6 million
in 2018 compared to $7.7 million in 2017 and data processing expense increased $818,000 to $8.6 million
in 2018 from $7.7 million in 2017 both increases primarily related to our metro market growth initiatives.
Other noninterest expenses decreased $181,000 to $18.6 million in 2018 from $18.8 million in 2017. This
decrease is due to an $806,000 benefit from the deferred compensation accounting correction as well as a
$1.2 million reduction year over year due to the decline in the liabilities of the deferred compensation plan
as a result of the stock market performance in the fourth quarter of 2018. See Note 19 to the Consolidation
Financial Statements for further details.
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 noninterest 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.
Income Taxes – Income taxes totaled $10.6 million in 2018 compared to $16.2 million in 2017
and $12.8 million in 2016. The effective tax rates for those years were 18.7%, 33.4%, and 30.7%,
respectively. The tax rate is lower than the statutory 21% and 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.
- 51 -
- 51 -
Concentrations of Credit Risk
Financial institutions such as First Defiance generate income primarily through lending and
investing activities. The risk of loss from lending and investing activities includes the possibility that losses
may occur from the failure of another party to perform according to the terms of the loan or investment
agreement. This possibility is known as credit risk.
Lending or investing activities that concentrate assets in a way that exposes the Company to a material
loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and
investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due
to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and
loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence
to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable
levels. First Defiance’s loan portfolio is concentrated geographically in its northwest and central Ohio, northeast
Indiana, and southeast Michigan market areas. Management has also identified lending for income-generating
rental properties as an industry concentration. Total loans for income-generating rental property totaled $982.5
million at December 31, 2018, which represents 37.9% 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 0.03% at December 31, 2018. 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 $53.1 million, $36.0 million and $27.0 million in 2018,
2017 and 2016, 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 2018.
In considering the more typical investing activities, during 2018, $32.6 million and $5.5 million was
generated from the combination of maturity or pay-downs and the sale or call of available-for-sale investment
securities, respectively, and $220.0 million was used by an increase in loans while $76.6 million was used to
purchase available-for-sale investment securities. 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.
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 2018,
total deposits increased by $183.2 million. Securities sold under repurchase arrangements decreased by $20.3
million in 2018. Also in 2018, the Company paid $13.0 million in common stock dividends and $6.3 million
in common stock purchases. In 2017, total deposits increased by $148.1 million. Securities sold under
- 52 -
- 52 -
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 and $6.3 million in common stock repurchases. For additional information about cash flows
from First Defiance’s operating, investing and financing activities, see the Consolidated Statements of Cash
Flows included in the Consolidated Financial Statements.
At December 31, 2018, 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, 2018
Contractual Obligations
Total
Less than
1 year
3-5 years
More than
5 years
Certificates of deposit
FHLB fixed advances including interest (1)
Subordinated debentures
Securities sold under repurchase agreements
Lease obligations
Post-retirement benefits
Total contractual obligations
(1) Includes principal payments of $85,189, interest payments of $1,534 and fair value adj. on acquired balances of $24.
$417,562
45,926
-
5,741
967
168
$470,364
$680,384
86,747
36,083
5,741
12,279
1,903
$823,137
$46,503
3,388
-
-
1,507
390
$51,788
-
563
36,083
-
8,078
969
$45,693
$
1-3 years
(In Thousands)
$216,319
36,870
-
-
1,727
376
$255,292
At December 31, 2018, 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
$ 44,352
114,308
7,523
382,189
548,372
Amount of Commitment Expiration by Period
Less than
1 year
$ 15,811
8,876
4,150
162,724
191,561
1-3 years
(In Thousands)
3-5 years
More than
5 years
$ 5,228
14,914
1,777
4,349
26,268
$ 8,465
31,197
1,164
7,018
47,844
$ 14,848
59,321
432
208,098
282,699
Standby letters of credit
7,239
7,209
30
-
-
Total Commitments
$555,611
$198,770
$26,298
$47,844
$282,699
In addition to the above commitments, at December 31, 2018, First Defiance had commitments to sell
$8.6 million of loans to Freddie Mac, Fannie Mae, or FHLB of Cincinnati.
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, 2018, First Defiance had additional borrowing capacity of $447.4 million under its
agreements with the FHLB.
First Federal is subject to various capital requirements of the OCC. At December 31, 2018, First
Federal had capital ratios that exceeded the standard to be considered “well capitalized.” For additional
- 53 -
- 53 -
information about First Defiance and First Federal’s capital requirements, see Note 17 – Regulatory Matters to
the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
First Defiance has established various accounting policies that govern the application of accounting
principles generally accepted in the United States (“GAAP”) in the preparation of its Consolidated Financial
Statements. The significant accounting policies of First Defiance are described in the footnotes to the
Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions
by management, which have a material impact on the carrying value of certain assets and 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
and central Ohio, northeast Indiana and southeast Michigan regions in which the Company does business.
Factors relative to specific credits that are considered include a customer’s payment history, a
customer’s recent financial performance, an assessment of the value of collateral held, knowledge of the
customer’s character, the financial strength and commitment of any guarantors, the existence of any customer
or industry concentrations, changes in a customer’s competitive environment and any other issues that may
impact a customer’s ability to meet his obligations.
Economic factors that are considered include levels of unemployment and inflation, specific plant or
business closings in the Company’s market area, the impact of strikes or other work stoppages, the impact of
weather or environmental conditions, especially relative to agricultural borrowers, and other matters that may
have an impact on the economy as a whole.
In addition to the identification of specific customers who may be potential credit problems,
management considers its historical losses, the results of independent loan reviews, an assessment of the
adherence to underwriting standards, and other factors in providing for loan losses that have not been
specifically classified. Management believes that the level of its allowance for loan loss is sufficient to cover
the estimates loss incurred but not yet recognized on the loan portfolio. Refer to 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
- 54 -
- 54 -
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.
Goodwill and Intangibles - First Defiance has two reporting units: First Federal and First
Insurance. At December 31, 2018, 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, 2018 and 2017.
- 55 -
- 55 -
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 for 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, 2018, 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 2.88% 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 $1.40 billion, which was split between $181.7 million of
fixed-rate loans and $1.22 billion of adjustable-rate loans, at December 31, 2018. The commercial loan
portfolio decreased to $509.6 million, which was split between $165.8 million of fixed-rate loans and
$343.8 million of adjustable-rate loans, at December 31, 2018. 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 $128.2 million of home equity and improvement
loans at December 31, 2018, of which $116.8 million fluctuate with changes in the prime lending rate and
$11.3 million have fixed rates. First Federal also has $34.4 million of consumer loans at December 31,
2018, 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, 2018, and December
31, 2017, 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, 2018,
net interest income sensitivity to changes in interest rates for the twelve months subsequent to December
31, 2018, was slightly less liability sensitive for the ramp and shock compared to the sensitivity profile for
the twelve months subsequent to December 31, 2017. The Company did not complete an earnings at risk
analysis for the down 200 basis point change in rates as of December 31, 2017. Management noted the
likelihood of a decrease beyond 100 basis points as of December 31, 2017, was considered to be unlikely
given the interest rate levels at that time and therefore was not included in this analysis.
- 56 -
- 56 -
Table 7 – Net Interest Income Sensitivity Profile
(dollars in thousands)
Gradual Change in Interest Rates
+200
+100
-100
-200
Immediate Change in Interest Rates
+200
+100
-100
-200
Impact on Future Annual Net Interest Income
December 31, 2018
December 31, 2017
$ 1,910
981
(2,025)
(6,236)
$ 3,424
1,865
(5,057)
(14,455)
1.61%
0.83%
-1.71%
-5.27%
$ 2,354
1,200
(3,033)
-
2.89%
1.57%
-4.27%
-12.21%
$ 4,821
2,463
(6,223)
-
2.18%
1.11%
-2.81%
-
4.47%
2.28%
-5.77%
-
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, 2018, except for the down 200 basis points over the first twelve months in a static and dynamic-shock
balance sheet as well as in the down 200 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 200 basis points as of December 31, 2018, 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, 2018
Economic Value of Equity
Change in Rates
$ Amount
$ Change
% Change
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
- 200 bp
751,259
741,404
729,505
710,688
684,507
642,625
578,124
(Dollars in Thousands)
66,752
56,897
44,998
26,181
-
9.75%
8.31%
6.57%
3.82%
-
(6.12)%
(15.54)%
(41,882)
(106,383)
December 31, 2017
Economic Value of Equity
Change in Rates
$ Amount
$ Change
% Change
+ 400 bp
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
- 100 bp
700,563
685,883
668,127
647,439
620,019
585,967
(Dollars in Thousands)
80,544
65,864
48,108
27,420
-
12.99%
10.62%
7.76%
4.42%
-
(5.49)%
(34,052)
- 57 -
- 57 -
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
25.96%
25.13%
24.25%
23.18%
21.92%
20.26%
18.04%
404 bp
322 bp
233 bp
126 bp
-
(165) bp
(387) bp
Economic Value of Equity as % of
Present Value of Assets
Ratio
Change
25.63%
24.63%
23.53%
22.36%
21.01%
19.52%
462 bp
362 bp
252 bp
135 bp
-
(149) bp
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of December
31, 2018, First Federal would experience a 6.57% 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, 2018, was 1.75 years while the average duration of its liabilities was 3.52 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.
- 58 -
- 58 -
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,
2018.
Crowe 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, 2018. The
report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2018, is included in this Item 8.
Donald P. Hileman
President and
Chief Executive Officer
Kevin T. Thompson
Executive Vice President and
Chief Financial Officer
- 59 -
- 59 -
Crowe LLP
Independent Member Crowe Global
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, 2018 and 2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2018 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,
2018, 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.
- 60 -
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 external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We have served as the Company's auditor since 2005.
South Bend, Indiana
February 28, 2019
Crowe LLP
- 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
$ 55,962
$ 58,693
December 31,
2018
2017
Federal funds sold
Securities available-for-sale, carried at fair value
Securities held-to-maturity, carried at amortized cost (fair value $526 and
$649 at December 31, 2018 and 2017, respectively)
Loans held for sale
Loans receivable, net of allowance of $28,331 and
43,000
98,962
294,076
526
294,602
6,613
55,000
113,693
260,650
648
261,298
10,435
$26,683 at December 31, 2018 and 2017, respectively
2,511,708
2,322,030
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 (OREO)
Goodwill
Core deposit and other intangibles
Deferred taxes
Other assets
Total assets
10,119
9,641
14,217
67,660
40,670
1,205
98,569
4,391
-
23,365
9,808
8,706
15,992
66,230
40,217
1,532
98,569
5,703
231
38,959
$
3,181,722
$ 2,993,403
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
Deferred taxes
Other liabilities
Total liabilities
Commitments and Contingent Liabilities (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized;
no shares issued
Preferred stock, $.01 par value per share:
4,963,000 shares authorized; no shares issued
Common stock, $.01 par value per share:
50,000,000 shares authorized; 25,398,992 and 25,425,682 shares issued
and 20,171,392 and 20,312,082 shares outstanding, respectively(1)
Additional paid-in capital
Accumulated other comprehensive income,
net of tax of $(468) and $117, respectively
Retained earnings
Treasury stock, at cost, 5,227,600 and 5,113,600
shares respectively(1)
Total stockholders’ equity
December 31,
2018
2017
$ 607,198
$ 571,360
2,013,684
1,866,296
2,620,882
2,437,656
85,189
5,741
36,083
84,279
26,019
36,083
3,652
2,925
264
30,322
-
33,155
2,782,133
2,620,117
-
-
127
161,593
(2,148)
295,588
(55,571)
399,589
-
-
127
160,940
217
262,900
(50,898)
373,286
Total liabilities and stockholders’ equity
$ 3,181,722
$ 2,993,403
(1) Share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018.
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,
2018
2017
2016
$
114,398
$
99,540
$
80,217
4,738
3,396
1,270
915
124,717
13,897
1,261
1,281
23
16,462
108,255
1,176
107,079
13,100
7,077
14,085
317
173
2,091
1,767
598
39,208
52,566
8,641
1,021
8,555
18,629
89,412
56,875
10,626
46,249
2.27
2.26
0.64
$
$
$
$
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
1.62
1.61
0.50
$
$
$
$
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
1.61
1.60
0.44
$
$
$
$
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 -
Consolidated Statements of Comprehensive Income
FIRST DEFIANCE FINANCIAL CORP.
(Dollar Amounts in Thousands)
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
(Dollar Amounts in Thousands)
(Dollar Amounts in Thousands)
(Dollar Amounts in Thousands)
(Dollar Amounts in Thousands)
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
2018
2017
For the Years Ended December 31,
For the Years Ended December 31,
For the Years Ended December 31,
For the Years Ended December 31,
For the Years Ended December 31,
For the Years Ended December 31,
For the Years Ended December 31,
2016
2017
2017
2018
2018
2016
2017
2018
2017
2018
2016
2016
2016
2016
2017
2017
2018
2018
Net income
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale
Reclassification adjustment for (gains) losses realized in
securities arising during the period
Net unrealized gains (losses)
income
Income tax effect
Net of tax amount
Change in unrealized gain/(loss) on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical
Net amortization and deferral
plan realized during the period
Net gain (loss) activity during the period
Income tax effect
Net of tax amount
Total other comprehensive income (loss)
Comprehensive income
See accompanying notes
$46,249
(3,356)
(3,529)
(173)
(2,787)
742
560
18
578
(203)
375
$43,837
(2,412)
65
$32,268
Net income
Change in securities available-for-sale (AFS):
Net income
Change in securities available-for-sale (AFS):
Net income
Net income
Net income
Net income
Change in securities available-for-sale (AFS):
Change in securities available-for-sale (AFS):
Change in securities available-for-sale (AFS):
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale
Unrealized holding gains (losses) on available-for-sale
Unrealized holding gains (losses) on available-for-sale
Unrealized holding gains (losses) on available-for-sale
Unrealized holding gains (losses) on available-for-sale
Unrealized holding gains (losses) on available-for-sale
securities arising during the period
securities arising during the period
Reclassification adjustment for (gains) losses realized in
Reclassification adjustment for (gains) losses realized in
Reclassification adjustment for (gains) losses realized in
Reclassification adjustment for (gains) losses realized in
Reclassification adjustment for (gains) losses realized in
income
income
Net unrealized gains (losses)
Net unrealized gains (losses)
Net unrealized gains (losses)
Net unrealized gains (losses)
Net unrealized gains (losses)
Reclassification adjustment for (gains) losses realized in
securities arising during the period
securities arising during the period
securities arising during the period
securities arising during the period
(584)
Net unrealized gains (losses)
148
income
income
income
income
732
(51)
Income tax effect
Net of tax amount
97
Income tax effect
Net of tax amount
Income tax effect
Income tax effect
Income tax effect
Income tax effect
Net of tax amount
Net of tax amount
Net of tax amount
Net of tax amount
Change in unrealized gain/(loss) on postretirement benefit:
Change in unrealized gain/(loss) on postretirement benefit:
Change in unrealized gain/(loss) on postretirement benefit:
Change in unrealized gain/(loss) on postretirement benefit:
Change in unrealized gain/(loss) on postretirement benefit:
Change in unrealized gain/(loss) on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical
Net gain (loss) on defined benefit postretirement medical
Net gain (loss) on defined benefit postretirement medical
Net gain (loss) on defined benefit postretirement medical
Net gain (loss) on defined benefit postretirement medical
Net gain (loss) on defined benefit postretirement medical
plan realized during the period
plan realized during the period
(166)
Net amortization and deferral
Net amortization and deferral
Net amortization and deferral
Net amortization and deferral
Net amortization and deferral
Net amortization and deferral
Net gain (loss) activity during the period
Net gain (loss) activity during the period
Net gain (loss) activity during the period
Net gain (loss) activity during the period
Net gain (loss) activity during the period
Net gain (loss) activity during the period
(146)
Income tax effect
Income tax effect
Income tax effect
Income tax effect
Income tax effect
51
Income tax effect
Net of tax amount
Net of tax amount
Net of tax amount
Net of tax amount
Net of tax amount
(95)
Net of tax amount
plan realized during the period
plan realized during the period
plan realized during the period
plan realized during the period
20
$46,249
$46,249
$46,249
$46,249
$46,249
$46,249
$32,268
$32,268
$32,268
$32,268
$32,268
$32,268
$28,843
$28,843
$28,843
$28,843
$28,843
$28,843
(3,356)
(3,356)
(3,356)
(3,356)
(3,356)
(3,356)
732
732
732
732
732
732
(4,933)
(4,933)
(4,933)
(4,933)
(4,933)
(4,933)
(173)
(173)
(173)
(173)
(173)
(173)
(3,529)
(3,529)
(3,529)
(3,529)
(3,529)
(3,529)
(584)
(584)
(584)
(584)
(584)
(584)
148
148
148
148
148
148
742
742
742
742
742
742
(2,787)
(2,787)
(2,787)
(2,787)
(2,787)
(2,787)
(51)
(51)
(51)
(51)
(51)
(51)
97
97
97
97
97
97
(509)
(509)
(509)
(509)
(509)
(509)
(5,442)
(5,442)
(5,442)
(5,442)
(5,442)
(5,442)
1,904
1,904
1,904
1,904
1,904
1,904
(3,538)
(3,538)
(3,538)
(3,538)
(3,538)
(3,538)
560
560
560
560
560
560
18
18
18
18
18
18
578
578
578
578
578
578
(203)
(203)
(203)
(203)
(203)
(203)
375
375
375
375
375
375
(166)
(166)
(166)
(166)
(166)
(166)
20
20
20
20
20
20
(146)
(146)
(146)
(146)
(146)
(146)
51
51
51
51
51
51
(95)
(95)
(95)
(95)
(95)
(95)
172
172
172
172
172
172
30
30
30
30
30
30
202
202
202
202
202
202
(71)
(71)
(71)
(71)
(71)
(71)
131
131
131
131
131
131
Total other comprehensive income (loss)
2
Comprehensive income
$32,270
Total other comprehensive income (loss)
Comprehensive income
Total other comprehensive income (loss)
Total other comprehensive income (loss)
Total other comprehensive income (loss)
Total other comprehensive income (loss)
Comprehensive income
Comprehensive income
Comprehensive income
Comprehensive income
(2,412)
(2,412)
(2,412)
(2,412)
(2,412)
(2,412)
$43,837
$43,837
$43,837
$43,837
$43,837
$43,837
2
2
2
2
2
2
$32,270
$32,270
$32,270
$32,270
$32,270
$32,270
(3,407)
(3,407)
(3,407)
(3,407)
(3,407)
(3,407)
$25,436
$25,436
$25,436
$25,436
$25,436
$25,436
(3,407)
$25,436
See accompanying notes
See accompanying notes
See accompanying notes
See accompanying notes
See accompanying notes
See accompanying notes
65
65
65
65
65
65
- 65 -
2016
$28,843
(4,933)
(5,442)
(509)
1,904
(3,538)
172
30
202
(71)
131
Total
Stockholder’s
Equity
$ 280,197
(6,293)
(7,890)
$ 293,018
32,268
28,843
(3,407)
274
714
517
63
2
215
199
56,532
838
73
(9,859)
$ 373,286
46,249
(2,412)
-
636
420
111
568
104
(6,330)
(13,043)
Balance at January 1, 2016
Net income
Balance at January 1, 2016
Net income
Balance at January 1, 2016
Net income
Other comprehensive loss
Stock based compensation expenses
Shares issued under stock option plan,
net of 3,224 repurchased and retired
Other comprehensive loss
Stock based compensation expenses
Shares issued under stock option plan,
net of 3,224 repurchased and retired
Other comprehensive loss
Stock based compensation expenses
Shares issued under stock option plan,
net of 3,224 repurchased and retired
Restricted share activity under stock incentive
Restricted share activity under stock incentive
Shares issued from direct stock sales
Shares repurchased
Common stock dividends declared
plans
plans
Restricted share activity under stock incentive
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
Stock based compensation expenses
Shares issued under stock option plan,
plans
$
Other comprehensive income
Stock based compensation expenses
Shares issued under stock option plan,
Other comprehensive income
Stock based compensation expenses
Shares issued under stock option plan,
Capital stock issuance
Restricted share activity under stock incentive
Capital stock issuance
Restricted share activity under stock incentive
net of 15,014 repurchased and retired
net of 15,014 repurchased and retired
-
Balance at December 31, 2016
net of 15,014 repurchased and retired
plans
Shares issued from direct stock sales
Common stock dividends declared
Shares issued from direct stock sales
Common stock dividends declared
Capital stock issuance
Balance at December 31, 2017
Balance at December 31, 2017
Restricted share activity under stock incentive
Net income
Net income
plans
Net income
plans
Net income
Shares issued from direct stock sales
Common stock dividends declared
Balance at December 31, 2017
Other comprehensive loss
Adoption of ASU 2018-02 – See Note 2
Deferred compensation plan
Stock based compensation expenses
Shares issued under stock option plan,
net of 8,872 repurchased and retired
Other comprehensive loss
Adoption of ASU 2018-02 – See Note 2
Deferred compensation plan
Stock based compensation expenses
$
Shares issued under stock option plan,
net of 8,872 repurchased and retired
Restricted share activity under stock incentive
plans net of 17,818 repurchased and retired
Restricted share activity under stock incentive
plans net of 17,818 repurchased and retired
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, 2018
Balance at December 31, 2018
Other comprehensive loss
Adoption of ASU 2018-02 – See Note 2
Deferred compensation plan
Stock based compensation expenses
Shares issued under stock option plan,
net of 8,872 repurchased and retired
Restricted share activity under stock incentive
plans net of 17,818 repurchased and retired
See accompanying notes
See accompanying notes
Shares issued from direct stock sales
Shares repurchased
Common stock dividends declared
Balance at December 31, 2018
See accompanying notes
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
FIRST DEFIANCE FINANCIAL CORP.
(Dollar Amounts In Thousands, except number of shares)
Consolidated Statements of Changes in Stockholders’ Equity
Common
(Dollar Amounts In Thousands, except number of shares)
Stock
Common
Warrant
Stock
Common
Common
Additional
-
$
Warrant
Stock
Stock
Paid-In
-
$
$ 127
Capital
Warrant
-
$
$ 125,734
Common
Stock
Shares(1)
Preferred
Common
18,205,662
Stock
Stock
Shares(1)
-
18,205,662
Additional
Paid-In
Additional
Capital
Paid-In
$ 125,734
Capital
$ 125,734
Common
Common
Stock
Stock
$ 127
Shares(1)
Common
18,205,662
Stock
$ 127
Accumulated
Other
Comprehensive
Income (Loss)
$ 3,622
-
Preferred
$
Stock
-
$
Preferred
Stock
$
72,716
72,716
72,716
20,810
2,960
(335,736)
20,810
2,960
(335,736)
20,810
2,960
(335,736)
$
-
17,966,412
-
8,088
2,279,004
8,088
2,279,004
55,754
2,824
55,754
2,824
8,088
2,279,004
$
-
-
274
(21)
370
33
274
274
(21)
(21)
370
370
33
33
51
33,792
447
45
$
-
-
$ 160,940
51
33,792
215
447
51
45
33,792
$ 160,940
17,966,412
$ 127
$ 127
$
$
-
-
$ 126,390
$ 126,390
$ 215
17,966,412
$ 127
$
-
$ 126,390
215
215
2
$
20,312,082
20,312,082
$ 127
$ 127
$
55,754
2,824
-
20,312,082
$ 127
38,628
$
-
(2,412)
47
447
45
420
$ 160,940
(93)
420
(93)
38,628
$ 217
$ 217
(9,859)
$ 262,900
46,249
(2,412)
47
(47)
48,300
3,542
(231,160)
48,300
3,542
(231,160)
258
68
258
68
$
$
-
20,171,392
20,171,392
$ 127
$ 127
$
-
$
-
-
$ 161,593
420
$ 161,593
$ (2,148)
$ (2,148)
(13,043)
$ 295,588
Accumulated
Other
Comprehensive
Accumulated
Other
Income (Loss)
Comprehensive
$ 3,622
Income (Loss)
Retained
Earnings
$ 219,737
(3,407)
28,843
(3,407)
$ 3,622
(3,407)
(26)
(72)
Retained
Earnings
Treasury
$ 219,737
Stock
28,843
$(69,023)
Retained
Earnings
Treasury
Total
$ 219,737
Stock
Stockholder’s
28,843
$(69,023)
Equity
$ 280,197
28,843
(3,407)
274
Treasury
Total
Stock
Stockholder’s
$(69,023)
Equity
$ 280,197
28,843
(3,407)
274
(26)
761
(72)
219
30
(6,293)
761
(26)
714
714
761
219
(72)
30
(6,293)
517
517
219
63
63
(6,293)
30
(6,293)
(7,890)
(6,293)
(7,890)
$ 293,018
$ 293,018
32,268
32,268
2
$(74,306)
2
215
215
(7,890)
$ 240,592
$(74,306)
32,268
$ 215
(7,890)
$ 240,592
32,268
2
$ 215
$(74,306)
(7,890)
$ 240,592
32,268
231
22,740
409
(83)
28
$(50,898)
(18)
2
(83)
(18)
(83)
231
22,740
(18)
409
28
(9,859)
$ 262,900
$(50,898)
46,249
$ 217
(270)
(2,412)
(201)
47
(47)
636
(270)
636
(9,859)
$ 262,900
474
46,249
474
511
36
(6,330)
511
(47)
36
(6,330)
(201)
(13,043)
$ 295,588
$(55,571)
$(55,571)
199
56,532
199
56,532
838
838
231
73
73
(9,859)
22,740
(9,859)
$ 373,286
$ 373,286
46,249
46,249
409
(2,412)
(2,412)
-
28
-
636
636
420
420
$(50,898)
111
111
568
568
104
104
(6,330)
(6,330)
636
(13,043)
(13,043)
$ 399,589
$ 399,589
38,628
48,300
3,542
(231,160)
(93)
258
68
$
-
20,171,392
$ 127
$
-
$ 161,593
$ (2,148)
(270)
(201)
(13,043)
$ 295,588
474
511
36
(6,330)
$(55,571)
$ 399,589
66
66
- 66 -
66
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Dollar Amounts in Thousands)
(Dollar Amounts in Thousands)
Years Ended December 31,
Years Ended December 31,
2017
2017
Years Ended December 31,
2017
2016
2016
2016
2018
2018
2018
$ 46,249
$ 46,249
$ 46,249
$ 32,268
$ 32,268
$ 32,268
$ 28,843
$ 28,843
$ 28,843
1,176
1,176
3,688
3,688
1,176
3,688
861
861
1,341
1,341
(132)
(132)
1,312
1,312
(4,819)
(4,819)
861
1,341
(132)
1,312
(4,819)
13
13
13
581
581
581
(173)
(173)
(173)
881
881
881
212,688
212,688
212,688
(205,884)
(205,884)
(205,884)
420
420
420
568
568
568
(154)
(154)
(154)
(1,767)
(1,767)
(1,767)
(2,878)
(2,878)
(2,878)
(916)
(916)
(916)
53,055
53,055
53,055
2,949
2,949
3,567
3,567
2,949
3,567
283
283
3,356
3,356
283
3,356
740
740
1,464
1,464
(89)
(89)
1,289
1,289
(4,881)
(4,881)
740
1,464
(89)
1,289
(4,881)
48
48
48
(56)
(56)
(56)
(584)
(584)
(584)
1,261
1,261
1,261
215,727
215,727
215,727
(213,479)
(213,479)
(213,479)
215
215
215
838
838
838
(171)
(171)
(171)
(3,085)
(3,085)
(3,085)
(3,591)
(3,591)
(3,591)
1,527
1,527
1,527
35,957
35,957
35,957
1,128
1,128
1,128
1,724
1,724
1,724
(123)
(123)
(123)
535
535
535
(6,064)
(6,064)
(6,064)
-
-
-
(300)
(300)
(300)
(509)
(509)
(509)
(615)
(615)
(615)
262,958
262,958
262,958
(263,679)
(263,679)
(263,679)
274
274
274
517
517
517
(192)
(192)
(192)
(909)
(909)
(909)
(4,121)
(4,121)
(4,121)
3,878
3,878
3,878
26,984
26,984
26,984
122
122
122
128
128
128
59
59
59
32,620
32,620
32,620
32,687
32,687
32,687
36,390
36,390
36,390
5,503
5,503
5,503
887
887
887
14
14
14
(76,647)
(76,647)
(76,647)
(4,168)
(4,168)
(4,168)
-
-
-
337
337
337
17,689
17,689
17,689
1,775
1,775
1,775
-
-
-
-
-
-
28,729
28,729
28,729
(219,885)
(219,885)
(219,885)
(213,024)
(213,024)
(213,024)
34,248
34,248
34,248
554
554
554
849
849
849
(73,007)
(73,007)
(73,007)
(3,263)
(3,263)
(3,263)
(20,000)
(20,000)
(20,000)
-
-
-
-
-
-
-
-
-
19,359
19,359
19,359
(11,476)
(11,476)
(11,476)
20,227
20,227
20,227
(133,184)
(133,184)
(133,184)
(132,878)
(132,878)
(132,878)
14,871
14,871
14,871
1,705
1,705
1,705
1
1
1
(71,276)
(71,276)
(71,276)
(2,106)
(2,106)
(2,106)
-
-
-
-
-
-
-
-
-
3
3
3
-
-
-
(822)
(822)
(822)
20,816
20,816
20,816
(158,121)
(158,121)
(158,121)
(158,480)
(158,480)
(158,480)
Operating Activities
Operating Activities
Operating Activities
Net income
Net income
Net income
Adjustments to reconcile net income to net cash
Adjustments to reconcile net income to net cash
Adjustments to reconcile net income to net cash
provided by operating activities:
provided by operating activities:
and equipment
provided by operating activities:
Provision for loan losses
Provision for loan losses
Provision for depreciation
Provision for depreciation
Net amortization of premium and discounts on loans,
Net amortization of premium and discounts on loans,
securities, deposits and debt obligations
Provision for loan losses
Provision for depreciation
Net amortization of premium and discounts on loans,
securities, deposits and debt obligations
securities, deposits and debt obligations
Amortization of mortgage servicing rights
Amortization of mortgage servicing rights
Amortization of mortgage servicing rights
Net recovery of mortgage servicing rights
Net recovery of mortgage servicing rights
Net recovery of mortgage servicing rights
Amortization of intangibles
Amortization of intangibles
Amortization of intangibles
Gain on sale of loans
Gain on sale of loans
Gain on sale of loans
Loss on sale or disposals or write-downs of property, plant
Loss on sale or disposals or write-downs of property, plant
Loss on sale or disposals or write-downs of property, plant
and equipment
and equipment
(Gain) loss on sale or write-down of OREO
(Gain) loss on sale or write-down of OREO
(Gain) loss on sale or write-down of OREO
Gain on sale or call of securities
Gain on sale or call of securities
Gain on sale or call of securities
Change in deferred taxes
Change in deferred taxes
Change in deferred taxes
Proceeds from sale of loans held for sale
Proceeds from sale of loans held for sale
Proceeds from sale of loans held for sale
Origination of loans held for sale
Origination of loans held for sale
Origination of loans held for sale
Stock based compensation expenses
Stock based compensation expenses
Stock based compensation expenses
Restricted stock unit expense
Restricted stock unit expense
Restricted stock unit expense
Excess tax benefit (expense) on stock compensation plans
Excess tax benefit (expense) on stock compensation plans
Excess tax benefit (expense) on stock compensation plans
Income from bank owned life insurance
Income from bank owned life insurance
Income from bank owned life insurance
Change in interest receivable and other assets
Change in interest receivable and other assets
Change in interest receivable and other assets
Change in accrued interest and other liabilities
Change in accrued interest and other liabilities
Change in accrued interest and other liabilities
Net cash provided by operating activities
Net cash provided by operating activities
Net cash provided by operating activities
Investing Activities
Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity
Proceeds from maturities, calls and paydowns of held-to-maturity
Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity
securities
securities
securities
Proceeds from maturities, calls and paydowns of available-for-sale
Proceeds from maturities, calls and paydowns of available-for-sale
Proceeds from maturities, calls and paydowns of available-for-sale
securities
securities
securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of OREO
Proceeds from sale of OREO
Proceeds from sale of OREO
Proceeds from sale of office properties and equipment
Proceeds from sale of office properties and equipment
Proceeds from sale of office properties and equipment
Purchases of available-for-sale securities
Purchases of available-for-sale securities
Purchases of available-for-sale securities
Purchases of office properties and equipment
Purchases of office properties and equipment
Purchases of office properties and equipment
Investment in bank owned life insurance
Investment in bank owned life insurance
Investment in bank owned life insurance
Proceeds from bank owned life insurance death benefit
Proceeds from bank owned life insurance death benefit
Proceeds from bank owned life insurance death benefit
Proceeds from sale of bank owned life insurance
Proceeds from sale of bank owned life insurance
Proceeds from sale of bank owned life insurance
Proceeds from FHLB stock redemption
Proceeds from FHLB stock redemption
Proceeds from FHLB stock redemption
Net cash received (paid) in acquisitions
Net cash received (paid) in acquisitions
Net cash received (paid) in acquisitions
Purchase of portfolio mortgage loans
Purchase of portfolio mortgage loans
Purchase of portfolio mortgage loans
Proceeds from sale of non-mortgage loans
Proceeds from sale of non-mortgage loans
Proceeds from sale of non-mortgage loans
Net increase in loans receivable
Net increase in loans receivable
Net increase in loans receivable
Net cash used in investing activities
Net cash used in investing activities
Net cash used in investing activities
Continued
Continued
Continued
67
67
67
- 67 -
FIRST DEFIANCE FINANCIAL CORP.
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows (continued)
(Dollar Amounts in Thousands)
Consolidated Statements of Cash Flows (continued)
(Dollar Amounts in Thousands)
Years Ended December 31,
Years Ended December 31,
2018
2017
2016
2018
2017
2016
Financing Activities
Net increase in deposits and advance payments by borrowers
Repayment of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Decrease in securities sold under repurchase agreements
Cash dividends paid on common stock
Net cash paid for repurchase of common stock
Proceeds from exercise of stock options
Proceeds from direct treasury stock sales
Net cash provided by financing activities
Financing Activities
Net increase in deposits and advance payments by borrowers
183,764
Repayment of Federal Home Loan Bank advances
(34,090)
Proceeds from Federal Home Loan Bank advances
35,000
Decrease in securities sold under repurchase agreements
(20,278)
Cash dividends paid on common stock
(13,043)
Net cash paid for repurchase of common stock
(6,330)
Proceeds from exercise of stock options
111
Proceeds from direct treasury stock sales
104
Net cash provided by financing activities
145,238
148,065
(31,070)
10,000
(5,797)
(9,859)
-
199
73
111,611
145,467
183,764
(959)
(34,090)
45,000
35,000
(25,372)
(20,278)
(7,890)
(13,043)
(6,293)
(6,330)
714
111
63
104
150,730
145,238
148,065
(31,070)
10,000
(5,797)
(9,859)
-
199
73
111,611
145,467
(959)
45,000
(25,372)
(7,890)
(6,293)
714
63
150,730
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Increase (decrease) in cash and cash equivalents
(14,731)
Cash and cash equivalents at beginning of period
113,693
Cash and cash equivalents at end of period
$ 98,962
14,690
99,003
$ 113,693
19,234
(14,731)
79,769
113,693
$
99,003
$ 98,962
14,690
99,003
$ 113,693
19,234
79,769
99,003
$
Supplemental cash flow information:
Interest paid
Income taxes paid
Transfer from other liability to equity
Supplemental cash flow information:
Interest paid
Income taxes paid
Transfer from other liability to equity
$ 16,198
7,950
636
$
11,382
14,350
-
$ 8,370
$ 16,198
12,700
7,950
-
636
$
11,382
14,350
-
$ 8,370
12,700
-
Transfers from loans to other real estate owned and other
Transfers from loans to other real estate owned and other
Transfer from (to) property and equipment to real estate and other
assets held for sale
assets held for sale
assets held for sale
705
Transfer from (to) property and equipment to real estate and other
(130)
17,840
548
Sale of bank owned life insurance not yet settled
Securities traded but not yet settled
assets held for sale
1,141
-
-
-
583
1,141
(44)
-
357
-
-
-
705
(130)
17,840
548
583
(44)
-
357
Sale of bank owned life insurance not yet settled
Securities traded but not yet settled
See accompanying notes.
See accompanying notes.
68
- 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. All significant intercompany transactions and balances are eliminated in consolidation.
First Federal is primarily engaged in attracting deposits from the general public through its branches 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 conducts business throughout First Federal’s markets, offering
property and casualty, and group health and life insurance products.
First Defiance Risk Management was incorporated on December 20, 2012, as a wholly owned insurance
company subsidiary of the Company to insure the Company and its subsidiaries against certain risks unique to the
operations of the Company and for which insurance may not be currently available or economically feasible
in today’s insurance marketplace.
On June 22, 2018, the Company announced a stock split in the form of a share distribution of two common
shares for each outstanding common share. The stock split was distributed on July 12, 2018, to shareholders
of record as of July 2, 2018. All share and per share data in this Form 10-K have been adjusted and are
reflective of the stock split.
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 (“GAAP”) 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
comprehensive income (loss) includes unrealized gains and losses on available-for-sale securities and the
income and other comprehensive
income consists of net
(loss). Other
income
69
- 69 -
net unrecognized actuarial
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.
losses and unrecognized prior
service costs associated with
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
$1,723,000 and $1,048,000, respectively, at December 31, 2018, 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
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 amortized cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to maturity.
Securities available-for-sale consists of those securities which might be sold prior to maturity due to changes
in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other
factors. 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, 2018, the Company
held $14.2 million at the FHLB of Cincinnati and $2,500 at the FHLB of Indianapolis.
70
- 70 -
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal amount outstanding, net of deferred loan fees and costs, purchase premiums and discounts
and the allowance for loan losses. Deferred fees net of deferred incremental loan origination costs, are amortized
to interest income generally over the contractual life of the loan using the interest method without anticipating
prepayments. The recorded investment in loans includes accrued interest receivable, 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 those loans considered 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 Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“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.
71
- 71 -
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 non-
accrual 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 non-accrual 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. When a loan is considered 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 or Credit Administration Officer to
determine whether or not the modification constitutes a troubled debt restructure. Commercial and commercial
real estate loan relationships greater than $250,000 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. Impaired loan relationships less than
$250,000 are aggregated by loan segment and risk level and given a specific reserve based on the general reserve
factor for that loan segment and risk level. 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 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.
72
- 72 -
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 loans 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 loans are 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% loan-to-value (“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 home equity and
improvement 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 the 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
noninterest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying loans, driven, generally, by changes in market interest rates.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying
amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics,
73
- 73 -
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 $3.8 million, $3.7 million and $3.6 million for the
years ended December 31, 2018, 2017 and 2016. 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.
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
74
- 74 -
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
environment; both banking and insurance entities are subject to various regulatory bodies and a number of specific
regulations.
75
- 75 -
Quantitative thresholds as stated in FASB ASC Topic 280, Segment Reporting are monitored. For the year ended
December 31, 2018, the reported revenue for First Insurance was 8.6% of total revenue for First Defiance. Total
revenue includes interest income plus noninterest income. Net income for First Insurance for the year ended
December 31, 2018 was 4.5% of consolidated net income. Total assets of First Insurance at December 31, 2018,
were 0.7% 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 First Federal
to First Defiance. 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. The Company recognizes interest and/or penalties related to income
tax matters in income tax expense.
In December 2017, a law was enacted which changed the corporate federal income tax rate from 35% to 21%,
beginning January 1, 2018. Accordingly, the Company’s deferred tax assets and liabilities were re-measured at
December 31, 2017, using the 21% corporate federal income tax rate resulting in a net tax expense of $154,000.
An effective tax rate of 21% 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.
76
- 76 -
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 which did
not result in any changes to net income or equity.
Accounting Standards Updates
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts
with Customers.” This 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. Subsequent to the issuance of ASU 2014-
09, the FASB issued targeted updates to clarify specific implementation issues including 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.” For financial reporting purposes, this 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. Since the guidance
does not apply to revenue associated with financial instruments, including loans and securities that are accounted
for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with
financial instruments, including interest income and expense. The Company completed its overall assessment of
revenue streams and review of related contracts potentially affected by the ASU, including trust and asset
management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance
commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the
method in which the Company currently recognizes revenue for these revenue streams. The Company adopted
ASU 2014-09 and its related amendments on its required effective date of January 1, 2018, utilizing the modified
retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative
effect adjustment to opening retained earnings was not deemed necessary. See “Revenue Recognition” below for
additional information related to revenue generated from contracts with customers.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and
Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity
investments (except those accounted for under the equity method of accounting or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an
entity may choose to measure equity investments that do not have readily determinable fair values at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments
without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a
qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair
value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost
77
- 77 -
for entities that are not public business entities; (4) eliminate the requirement for public business entities to
disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed
for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to
use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a
liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option for financial instruments; (7) require separate
presentation of financial assets and financial liabilities by measurement category and form of financial asset (that
is, securities or loans receivable) on the balance sheet or the accompanying notes to the financial statements; and
(8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No.
2016-01 on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements.
Also in conjunction with the adoption, the Company’s fair value measurement of financial instruments was based
upon an exit price notion as required in ASU 2016-01. The guidance was applied on a prospective approach
resulting in prior-periods no longer being comparable.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive
income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of public law
No. 115-97, known as the Tax Cuts and Jobs Act (“Tax Act”). Consequently, the reclassification eliminates the
stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported
to financial statement users. However, because the ASU only relates to the reclassification of the income tax
effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be
included in income from continuing operations is not affected. The Company adopted ASU No. 2018-02 during
the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained
earnings. The reclassification increased AOCI and decreased retained earnings by $47,000, with zero net effect
on total shareholders’ equity.
In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to
increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on
the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted. The Company elected to apply ASU 2016-02 as of the beginning of the period of
adoption (January 1, 2019) and will not restate comparative periods. The Company also expect to elect certain
optional practical expedients. The Company has implemented a third party software solution to assist with the
accounting under the new standard. The Company’s operating leases relate primarily to office space and bank
branches. Upon adoption of ASU 2016-02 on January 1, 2019, the Company expects to recognize right-to-use
assets and related lease liabilities totaling approximately $8.8 million and $9.3 million, respectively.
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 aren’t 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 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
78
- 78 -
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 continues its
implementation efforts through its established Company-wide implementation committee along with a third-party
software vendor to assist in the implementation process. The committee’s 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 adopt this
ASU early.
Revenue Recognition
Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”),
establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and
cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires
an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as
performance obligations are satisfied.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue
generated from financial instruments, such as loans, letters of credit, and investment securities, as well as revenue
related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within
the Company’s disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope
of ASC 606, which are presented in the Company’s statement of income as components of noninterest income are
as follows:
• Service charges on deposit accounts - these represent general service fees for monthly account
maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based
revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue
is recognized when our performance obligation is completed which is generally monthly for account
maintenance services or when a transaction has been completed (such as a wire transfer). Payment for
such performance obligations are generally received at the time the performance obligations are satisfied.
Service charges on deposit accounts that are within the scope of ASC 606 were $7.6 million in 2018.
Income from services charges on deposit accounts is included in service fees and other charges in
noninterest income.
•
Interchange income - this represents fees earned from debit and credit cardholder transactions.
Interchange fees from cardholder transactions represent a percentage of the underlying transaction value
and are recognized daily, concurrent with the transaction processing services provided to the cardholder.
Interchange fees were $4.1 million in 2018, which are reported net of network related charges.
Interchange income is included in service fees and other charges in noninterest income.
• Wealth management and trust fee income - this represents monthly fees due from wealth management
customers as consideration for managing the customers’ assets. Wealth management and trust services
include custody of assets, investment management, escrow services, and fees for trust services and similar
fiduciary activities. Revenue is recognized when our performance obligation is completed each month,
which is generally the time that payment is received. Also included are fees received from a third party
broker-dealer as part of a revenue-sharing agreement for fees earned from customers that we refer to the
third party. These fees are paid to us by the third party on a quarterly basis and recognized ratably
throughout the quarter as our performance obligation is satisfied. Revenue from wealth management and
79
- 79 -
trust services were $821,000 and $2.1 million, respectively, in 2018. Income from wealth management
services is included in other noninterest income in total noninterest income. Trust fees are reported
separately in total noninterest income.
• Gain/loss on sales of other real estate owned (“OREO”) - the Company records a gain or loss from the
sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of
an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses
whether the buyer is committed to perform their obligations under the contract and whether collectability
of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the
gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining
the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a
significant financing component is present. Income from the gain/loss on sales of OREO was a loss of
$28,000 in 2018. Income from the gain or loss on sales of OREO is included in other noninterest income
in total noninterest income.
•
Insurance commissions - this represents new commissions that are recognized when the Company sells
insurance policies to customers. The Company is also entitled to renewal commissions and, in some cases,
contingent commissions in the form of profit sharing which are recognized in subsequent periods. The
initial commission is recognized when the insurance policy is sold to a customer. Renewal commission
is variable consideration and is recognized in subsequent periods when the uncertainty around variable
consideration is subsequently resolved (i.e., when customer renews the policy). Contingent commission
is also a variable consideration that is not recognized until the variability surrounding realization of
revenue is resolved. Another source of variability is the ability of the policy holder to cancel the policy
anytime and in such cases, the Company may be required, under the terms of the contract, to return part
of the commission received. The variability related to cancellation of the policy is not deemed significant
and thus, does not impact the amount of revenue recognized. In the event the policyholder chooses to
cancel the policy at any time, the revenue for amounts which qualify for claw-back are reversed in the
period the cancellation occurs. Management views the income sources from insurance commissions in
two categories: (i) new/renewal commissions and (ii) contingent commissions. Insurance commissions
were $14.1 million for 2018, of which, $13.1 million were new/renewal commissions and $1.0 million
were contingent commissions.
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 Federal. CSB operated seven full-service
banking offices in northwest and north central, Ohio and one 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 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 central Ohio. The acquisition offered 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
80
- 80 -
market area. The intangible assets were 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.
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 – Noninterest-Bearing
Deposits – Interest-Bearing
Advances from FHLB
Accrued Interest Payable and Other Liabilities
Total Identifiable Net Assets
February 24, 2017
(In Thousands)
$
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
Goodwill
$
28,894
Under the terms of the Merger Agreement, Commercial Bancshares common shareholders had the opportunity to
elect to receive 2.3616 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 2,279,004 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.
81
- 81 -
Net Interest Income
Provision for loan losses
Noninterest Income
Noninterest 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, except per share data)
$
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 was due and paid the second quarter of 2018, and up
to $2.3 million may 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 maximum 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,
the Company recorded goodwill of $7.9 million as well as identifiable intangible assets of $756,000 consisting of
a 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. The transaction enhanced employee benefit offerings and expanded First Insurance’s presence
into adjacent markets in northwest Ohio.
82
- 82 -
4. Earnings Per Common Share
4. Earnings Per Common Share
Basic earnings per share is calculated using the two-class method. The two-class method is an earnings allocation
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
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
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
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
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.
considered participating securities (i.e. unvested restricted stock), not subject to performance based measures.
The following table sets forth the computation of basic and diluted earnings per common share for the years ended
The following table sets forth the computation of basic and diluted earnings per common share for the years ended
December 31:
December 31:
Basic Earnings Per Share:
Net income available to common shareholders
Basic Earnings Per Share:
Less: Income allocated to participating securities
Net income available to common shareholders
Net income allocated to common shareholders
Less: Income allocated to participating securities
Net income allocated to common shareholders
Weighted average common shares outstanding
Including participating securities
Weighted average common shares outstanding
Less: Participating securities
Including participating securities
Average common shares
Less: Participating securities
Average common shares
Basic earnings per common share
Basic earnings per common share
Diluted Earnings Per Share:
Net income allocated to common shareholders
Diluted Earnings Per Share:
Net income allocated to common shareholders
Weighted average common shares outstanding
for basic earnings per common share
Weighted average common shares outstanding
Add: Dilutive effects of stock options
for basic earnings per common share
Average shares and dilutive potential common
Add: Dilutive effects of stock options
shares
Average shares and dilutive potential common
shares
Diluted earnings per common share
Diluted earnings per common share
2016
2017
2018
(In Thousands, Except Per Share Amounts)
2016
2017
2018
(In Thousands, Except Per Share Amounts)
$ 28,843
39
$ 28,843
$ 28,804
39
$ 28,804
$ 32,268
5
$ 32,268
$ 32,263
5
$ 32,263
$ 46,249
16
$ 46,249
$ 46,233
16
$ 46,233
20,358
9
20,358
20,349
9
20,349
2.27
2.27
$
$
19,950
18
19,950
19,932
18
19,932
1.62
1.62
17,960
22
17,960
17,938
22
17,938
1.61
1.61
$
$
$
$
$ 46,233
$ 46,233
20,349
119
20,349
119
20,468
20,468
2.26
2.26
$
$
$ 32,263
$ 32,263
19,932
124
19,932
124
20,056
20,056
1.61
1.61
$
$
$ 28,804
$ 28,804
17,938
132
17,938
132
18,070
18,070
1.60
1.60
$
$
Shares subject to issue upon exercise of options of 10,500 in 2018, zero in 2017 and 25,100 in 2016 were
Shares subject to issue upon exercise of options of 10,500 in 2018, zero in 2017 and 25,100 in 2016 were
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
excluded from the diluted earnings per common share calculation as they were anti-dilutive.
83
83
- 83 -
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, 2018 and 2017, and the corresponding amounts of gross unrealized
and unrecognized gains and losses:
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
2018
Available-for-sale
(In Thousands)
Obligations of U.S. government corporations
and agencies
Mortgage-backed securities - residential
REMICs
Collateralized mortgage obligations -
residential
Corporate bonds
Obligations of state and political
subdivisions
Total Available-for-Sale
$
$
2,519
76,165
2,712
103,026
12,910
2
111
4
124
44
$
(18)
(1,566)
(7)
$ 2,503
74,710
2,709
(1,689)
(148)
101,461
12,806
99,349
$ 296,681
1,258
$ 1,543
(720)
$ (4,148)
99,887
$ 294,076
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)
$
$
8
31
12
475
526
$
$
-
-
-
-
-
$
$
-
-
-
-
-
$ 8
31
12
475
$ 526
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
2017
Available-for-sale
Obligations of U.S. government corporations
and agencies
$
Mortgage-backed securities - residential
REMICs
Collateralized mortgage obligations -
residential
Preferred stock
Corporate bonds
Obligations of state and political
subdivisions
Total Available-for-Sale
(In Thousands)
$
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
84
- 84 -
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
The amortized cost and fair value of the investment securities portfolio at December 31, 2018, 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.
2018
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 in one year or less
Due after five years through
ten years
MBS
Total
Available-for-Sale
Fair
Value
Amortized
Cost
(In Thousands)
$
771
$
773
22,957
22,969
34,245
56,805
181,903
$ 296,681
34,904
56,550
178,880
$ 294,076
$
31
$
31
444
51
$ 526
444
51
$ 526
Securities pledged at year-end 2018 and 2017 had a carrying amount of $143.9 million and $135.4 million,
respectively, and were pledged to secure public deposits, securities sold under repurchase agreements and FHLB
advances.
As of December 31, 2018, the Company’s investment portfolio consisted of 438 securities, 177 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, 2018.
The following table summarizes First Defiance’s securities that were in an unrealized loss position at December
31, 2018, and December 31, 2017:
85
- 85 -
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
$
-
$
-
$
500
$
(18)
$
500
$
(18)
11,589
-
11,613
5,752
11,974
8
(71)
-
(53)
(148)
(69)
-
48,665
857
70,585
-
16,492
26
(1,495)
(7)
(1,636)
-
(651)
-
60,254
857
82,198
5,752
28,466
34
(1,566)
(7)
(1,689)
(148)
(720)
-
$
40,936
$
(341)
$ 137,125
$ (3,807)
$
178,061
$ (4,148)
$
-
$
-
$
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)
At December 31, 2018
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
Held to maturity securities:
Total temporarily impaired
securities
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
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 liquidity
86
- 86 -
position and it is not more than likely that the Company will be required to sell the investments before anticipated
recovery.
In 2018, 2017 and 2016, management determined there was no OTTI.
There were no credit losses relating to debt securities recognized in earnings for the years ended December 31,
2018, 2017 and 2016.
Realized gains from the sales and calls of investment securities totaled $173,000 ($136,000 after tax) in 2018
while there were realized gains of $584,000 ($380,000 after tax) and $509,000 ($331,000 after tax) in 2017 and
2016, respectively.
The proceeds from sales and calls of securities and the associated gains and losses for the years ended December
31 are listed below:
Proceeds
Gross realized gains
Gross realized losses
2018
$
5,503
178
(5)
6. Commitments and Contingent Liabilities
2017
(In Thousands)
$ 34,248
665
(81)
2016
$ 14,871
509
-
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):
2018
2017
Commitments to make loans
Unused lines of credit
Standby letters of credit
Total
Fixed Rate
44,352
7,523
-
51,875
$
$
Variable Rate
$
$
114,308
382,189
7,239
503,736
Fixed Rate
42,458
6,245
-
48,703
$
$
$
Variable Rate
161,778
408,831
7,605
578,214
$
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments
at December 31, 2018, had interest rates ranging from 3.25% to 18.00% and maturities ranging from less than one
year to 30 years.
In addition to the above commitments, at December 31, 2018, First Defiance had commitments to sell $8.6 million
of loans to Freddie Mac, Fannie Mae, or FHLB of Cincinnati.
87
- 87 -
7. Loans
Loans receivable consist of the following:
Real Estate:
Secured by 1-4 family residential
Secured by multi-family residential
Secured by commercial real estate
Construction
Other Loans:
Commercial
Home equity and improvement
Consumer Finance
Total loans
Deduct:
December 31,
2018
December 31,
2017
(In Thousands)
$
322,686
278,358
1,126,452
265,772
1,993,268
509,577
128,152
34,405
672,134
2,665,402
$
274,862
248,092
987,129
265,476
1,775,559
526,142
135,457
29,109
690,708
2,466,267
Undisbursed loan funds
Net deferred loan origination fees and costs
Allowance for loan loss
Totals
(123,293)
(2,070)
(28,331)
$ 2,511,708
(115,972)
(1,582)
(26,683)
$ 2,322,030
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
88
- 88 -
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,
2018
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
$ 2,532
$ 2,702
$ 10,354
$ 647
$ 7,965
$ 2,255
$ 228
$ 26,683
Charge-Offs
Recoveries
(261)
-
(1,387)
-
(724)
(269)
(233)
(2,874)
131
57
720
-
2,221
191
26
3,346
Provisions
479
342
2,354
35
(2,181)
(151)
298
1,176
Ending Allowance
$ 2,881
$ 3,101
$ 12,041
$ 682
$ 7,281
$ 2,026
$ 319
$ 28,331
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
(279)
-
(429)
-
(2,301)
(301)
(139)
(3,449)
115
32
657
-
243
167
85
1,299
Provisions
69
442
(499)
197
2,662
3
75
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
(350)
-
(92)
-
(615)
(268)
(94)
(1,419)
Recoveries
Provisions
166
-
923
-
335
(401)
77
(1,978)
(67)
2,386
150
200
64
1,638
66
283
Ending Allowance
$ 2,627
$ 2,228
$ 10,625
$ 450
$ 7,361
$ 2,386
$ 207
$ 25,884
89
- 89 -
l
a
t
o
T
e
c
n
a
n
i
F
r
e
m
u
s
n
o
C
t
n
e
m
e
v
o
r
p
m
I
&
y
t
i
u
q
E
e
m
o
H
l
a
i
c
r
e
m
m
o
C
n
o
i
t
c
u
r
t
s
n
o
C
l
a
i
c
r
e
m
m
o
C
e
t
a
t
s
E
l
a
e
R
y
l
i
m
a
F
i
t
l
u
M
l
a
i
t
n
e
d
i
s
e
R
e
t
a
t
s
E
l
a
e
R
y
l
i
m
a
F
4
-
1
l
a
i
t
n
e
d
i
s
e
R
e
t
a
t
s
E
l
a
e
R
f
o
s
a
d
o
h
t
e
m
t
n
e
m
r
i
a
p
m
i
n
o
d
e
s
a
b
d
n
a
t
n
e
m
g
e
s
o
i
l
o
f
t
r
o
p
y
b
s
n
a
o
l
n
i
t
n
e
m
t
s
e
v
n
i
d
e
d
r
o
c
e
r
e
h
t
d
n
a
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
e
h
t
n
i
e
c
n
a
l
a
b
e
h
t
s
t
n
e
s
e
r
p
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
)
s
d
n
a
s
u
o
h
T
n
I
(
:
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
5
9
5
$
1
6
3
7
,
7
2
8
1
3
-
-
1
3
3
,
8
2
$
9
1
3
0
4
9
,
5
4
$
5
4
$
$
$
-
6
2
0
,
2
3
6
9
$
$
-
4
8
7
,
1
2
0
2
,
7
1
8
2
,
7
$
2
8
6
7
7
4
,
0
1
$
-
$
$
1
4
0
,
2
1
$
1
0
1
,
3
4
3
3
,
6
2
$
7
4
3
,
1
$
$
4
7
7
,
6
$
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
i
s
n
a
o
L
1
8
8
,
2
$
e
c
n
a
l
a
b
e
c
n
a
w
o
l
l
a
g
n
i
d
n
e
l
a
t
o
T
:
s
n
a
o
L
-
2
8
6
6
4
9
,
1
1
8
9
0
,
3
6
0
7
,
2
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
e
v
i
t
c
e
l
l
o
C
-
-
-
y
t
i
l
a
u
q
t
i
d
e
r
c
d
e
t
a
r
o
i
r
e
t
e
d
h
t
i
w
d
e
r
i
u
q
c
A
2
4
2
$
9
7
$
-
$
5
9
$
3
$
5
7
1
$
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
I
:
s
n
a
o
l
o
t
e
l
b
a
t
u
b
i
r
t
t
a
e
c
n
a
l
a
b
e
c
n
a
w
o
l
l
a
g
n
i
d
n
E
:
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
A
2
2
2
,
0
0
5
,
2
6
8
4
,
4
3
5
6
0
,
8
2
1
0
3
7
,
0
0
5
6
9
0
,
2
4
1
5
5
3
,
2
0
1
,
1
5
0
1
,
7
7
2
5
8
3
,
5
1
3
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
e
v
i
t
c
e
l
l
o
c
s
n
a
o
L
1
3
3
,
2
-
-
7
7
1
-
6
4
8
6
9
2
2
1
0
,
1
y
t
i
l
a
u
q
t
i
d
e
r
c
d
e
t
a
r
o
i
r
e
t
e
d
h
t
i
w
d
e
r
i
u
q
c
a
s
n
a
o
L
3
9
4
,
8
4
5
,
2
$
1
3
5
,
4
3
$
8
2
0
,
9
2
1
$
4
8
3
,
1
1
5
$
6
9
0
,
2
4
1
$
5
3
5
,
9
2
1
,
1
$
8
4
7
,
8
7
2
$
1
7
1
,
3
2
3
$
e
c
n
a
l
a
b
s
n
a
o
l
g
n
i
d
n
e
l
a
t
o
T
0
9
- 90 -
l
a
t
o
T
e
c
n
a
n
i
F
r
e
m
u
s
n
o
C
t
n
e
m
e
v
o
r
p
m
I
&
y
t
i
u
q
E
e
m
o
H
l
a
i
c
r
e
m
m
o
C
n
o
i
t
c
u
r
t
s
n
o
C
l
a
i
c
r
e
m
m
o
C
e
t
a
t
s
E
l
a
e
R
y
l
i
m
a
F
i
t
l
u
M
l
a
i
t
n
e
d
i
s
e
R
e
t
a
t
s
E
l
a
e
R
y
l
i
m
a
F
4
-
1
l
a
i
t
n
e
d
i
s
e
R
e
t
a
t
s
E
l
a
e
R
f
o
s
a
d
o
h
t
e
m
t
n
e
m
r
i
a
p
m
i
n
o
d
e
s
a
b
d
n
a
t
n
e
m
g
e
s
o
i
l
o
f
t
r
o
p
y
b
s
n
a
o
l
n
i
t
n
e
m
t
s
e
v
n
i
d
e
d
r
o
c
e
r
e
h
t
d
n
a
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
a
e
h
t
n
i
e
c
n
a
l
a
b
e
h
t
s
t
n
e
s
e
r
p
e
l
b
a
t
g
n
i
w
o
l
l
o
f
e
h
T
)
s
d
n
a
s
u
o
h
T
n
I
(
:
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
8
5
7
$
-
-
5
2
9
,
5
2
-
8
2
2
3
8
6
,
6
2
$
8
2
2
8
0
6
,
6
5
$
0
5
$
$
$
-
5
5
2
,
2
6
7
1
,
1
$
$
-
6
7
9
,
1
8
7
7
,
7
5
6
9
,
7
$
7
4
6
3
7
3
,
4
1
$
-
$
$
4
5
3
,
0
1
$
2
0
7
,
2
1
2
8
,
1
3
$
8
7
2
,
2
$
$
2
3
5
,
2
$
e
c
n
a
l
a
b
e
c
n
a
w
o
l
l
a
g
n
i
d
n
e
l
a
t
o
T
0
1
9
,
6
$
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
i
s
n
a
o
L
:
s
n
a
o
L
-
7
4
6
6
3
2
,
0
1
5
9
6
,
2
5
6
3
,
2
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
e
v
i
t
c
e
l
l
o
C
-
-
-
y
t
i
l
a
u
q
t
i
d
e
r
c
d
e
t
a
r
o
i
r
e
t
e
d
h
t
i
w
d
e
r
i
u
q
c
A
9
7
2
$
7
8
1
$
-
$
8
1
1
$
7
$
7
6
1
$
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
l
a
u
d
i
v
i
d
n
I
:
s
n
a
o
l
o
t
e
l
b
a
t
u
b
i
r
t
t
a
e
c
n
a
l
a
b
e
c
n
a
w
o
l
l
a
g
n
i
d
n
E
:
s
e
s
s
o
l
n
a
o
l
r
o
f
e
c
n
a
w
o
l
l
A
3
5
0
,
6
9
2
,
2
5
2
1
,
9
2
8
9
0
,
5
3
1
8
1
2
,
3
1
5
4
7
1
,
9
4
1
8
3
2
,
6
5
9
3
2
8
,
5
4
2
7
7
3
,
7
6
2
t
n
e
m
r
i
a
p
m
i
r
o
f
d
e
t
a
u
l
a
v
e
y
l
e
v
i
t
c
e
l
l
o
c
s
n
a
o
L
8
2
8
,
3
-
-
7
3
3
-
1
2
1
,
2
1
0
3
9
6
0
,
1
y
t
i
l
a
u
q
t
i
d
e
r
c
d
e
t
a
r
o
i
r
e
t
e
d
h
t
i
w
d
e
r
i
u
q
c
a
s
n
a
o
L
9
8
4
,
6
5
3
,
2
$
5
7
1
,
9
2
$
4
7
2
,
6
3
1
$
8
2
9
,
7
2
5
$
4
7
1
,
9
4
1
$
0
8
1
,
0
9
9
$
2
0
4
,
8
4
2
$
6
5
3
,
5
7
2
$
e
c
n
a
l
a
b
s
n
a
o
l
g
n
i
d
n
e
l
a
t
o
T
1
9
- 91 -
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, 2018, 2017 and 2016
(In Thousands):
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, 2018, 2017 and 2016
(In Thousands):
Year Ended December 31, 2018
Year Ended December 31, 2018
Average
Balance
Interest
Income
Recognized
Average
Balance
Cash Basis
Income
Recognized
Interest
Income
Recognized
Cash Basis
Income
Recognized
4,704
$
7,058
2,354
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
Residential Owner
Occupied
Residential Non
Owner Occupied
Total 1-4 Family
Residential Real
Estate
Multi-Family
Residential Real
Estate
CRE Owner Occupied
9,992
CRE Non Owner
Occupied
Agriculture Land
Other CRE
13,827
1,304
2,620
1,644
Total Commercial
Real Estate
Construction
Commercial Working
Capital
Commercial Other
Total Commercial
Home Equity and
Home Improvement
Consumer Finance
Total Impaired
Loans
Total Commercial
Real Estate
27,743
Construction
-
Commercial Working
8,047
Capital
Commercial Other
Total Commercial
Home Equity and
1,150
Home Improvement
Consumer Finance
39
Total Impaired
Loans
3,501
11,548
$ 49,182
$
$
151
4,704
$
150
$
151
$
150
133
2,354
126
133
284
7,058
276
284
90
1,644
89
90
234
9,992
221
234
94
2,620
93
94
575
106
13,827
1,304
575
106
575
106
27,743
1,009
-
-
1,009
995
-
-
256
8,047
245
256
119
375
3,501
11,548
119
364
119
375
38
1,150
38
38
4
39
4
4
126
276
89
221
93
575
106
995
-
245
119
364
38
4
$ 1,800
$ 49,182
$1,766
$ 1,800
$1,766
- 92 -
- 92 -
- 92 -
Year Ended December 31, 2017
Average
Balance
Interest
Income
Recognized
Cash Basis
Income
Recognized
$
3,811
$
138
$
138
3,038
6,849
2,471
10,592
3,768
9,667
1,603
25,630
-
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
- 93 -
- 93 -
Year 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
- 94 -
- 94 -
The following table presents loans individually evaluated for impairment by class of loans (In
Thousands):
December 31, 2018
December 31, 2017
Unpaid
Principal
Balance*
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Unpaid
Principal
Balance*
Allowance
for Loan
Losses
Allocated
Recorded
Investment
$ 901
950
1,851
$ 775
955
1,730
$ -
-
-
$ 2,507 $ 2,364
1,708
1,711
4,072
4,218
$ -
-
-
1,296
7,464
1,824
14,915
464
24,667
-
7,569
2,095
9,664
-
-
$ 37,478
$ 3,926
1,152
5,078
44
2,419
350
37
1,107
3,913
-
525
560
1,085
1,013
45
$ 11,178
-
1,302
-
6,202
-
1,659
-
14,994
-
462
-
23,317
-
-
-
7,498
-
2,100
-
9,598
-
-
-
-
$ 35,947 $ -
2,095
12,273
3,085
13,029
981
29,368
-
5,462
9,916
15,378
630
42
$ 51,731
2,102
11,804
2,925
13,185
768
28,682
-
5,422
7,644
13,066
584
42
$ 48,548
-
-
-
-
-
-
-
-
-
-
-
-
$ -
$ 3,884 $ 148
27
175
1,160
5,044
$ 1,841
1,031
2,872
$ 1,814
1,024
2,838
$ 137
30
167
44
1,935
353
38
691
3,017
-
528
352
880
963
45
3
38
16
2
39
95
-
55
24
79
242
1
$ 9,993 $ 595
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
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
- 95 -
- 95 -
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,
2018
December 31,
2017
(In Thousands)
$ 19,016
-
19,016
1,205
$ 20,221
$ 30,715
-
30,715
1,532
$ 32,247
Troubled debt restructuring, still accruing
$ 11,573
$ 13,770
The following table presents the aging of the recorded investment in past due and non-accrual loans as of
December 31, 2018, 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
$ 199,664
119,988
$ 887
64
$ 821 $ 1,402 $ 3,110
409
180
165
$ 3,266
363
Total 1-4 Family Residential Real
Estate
319,652
951
1,001
1,567
3,519
3,629
Multi-Family Residential Real Estate
278,748
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other Commercial Real Estate
416,879
534,823
129,040
45,232
-
52
6
66
11
-
-
-
102
300
119
-
-
138
-
2,869
-
490
125
2,935
11
4,377
620
5,253
-
Total Commercial Real Estate
1,125,974
135
419
3,007
3,561
10,250
Construction
Commercial Working Capital
Commercial Other
Total Commercial
Home Equity and Home Improvement
Consumer Finance
142,096
217,832
289,125
506,957
127,346
34,224
-
268
32
300
1,446
134
-
-
54
54
146
77
-
-
-
3,838
235
4,106
321
4,021
480
4,073
4,427
4,501
90
96
1,682
307
394
126
Total Loans
$ 2,534,997
$ 2,966
$ 1,697
$ 8,833
$ 13,496
$ 19,002
- 96 -
- 96 -
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 $ 1,227 $ 3,081
736
233
8
$ 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
393,125
403,656
131,753
58,784
987,318
149,174
233,632
291,455
422
195
1
412
13
621
-
102
82
-
-
422
128
188
91
-
-
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
Total Commercial
525,087
184
1,264
1,393
2,841
8,843
Home Equity and Home Improvement
Consumer Finance
133,144
28,800
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
Troubled Debt Restructurings
As of December 31, 2018 and 2017, the Company had a recorded investment in troubled debt restructurings
(“TDRs”) of $19.2 million and $21.7 million, respectively. The Company allocated $581,000 and
$751,000, of specific reserves to those loans at December 31, 2018 and 2017, and committed to lend
additional amounts totaling up to $169,000 and $242,000 at December 31, 2018 and 2017.
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
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 real estate loans modified in a TDR often involve temporary interest-
only payments, re-amortization of remaining debt in order to lower payments, and sometimes reducing the
interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are
comprised of loans where monthly payments are lowered, either through interest rate reductions or principal
only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized
into principal, or the term and amortization are extended. Home equity modifications are made infrequently
and usually involve providing an interest rate that is lower than the borrower would be able to obtain due
- 97 -
- 97 -
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, $7.6 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
Year Ended
December 31, 2018
Loans Modified as a TDR for the
Year Ended
December 31, 2017
Loans Modified as a TDR for the
Year Ended
December 31, 2016
Number of
Loans
Recorded
Investment (as of
period end)
Number of
Loans
Recorded
Investment (as
of period end)
Number of
Loans
Recorded
Investment (as of
period end)
18
4
-
12
1
-
-
5
1
7
8
56
$ 980
24
$ 982
17
189
-
1,639
42
-
-
2,898
44
89
29
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
$ 5,910
64
$ 8,913
44
$ 5,632
TDRs
Residential Owner Occupied
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
The loans described above increased the allowance for loan losses (“ALLL”) by $110,000 for the year
ended December 31, 2018, decreased the ALLL by $104,000 for the year ended December 31, 2017, and
increased the ALLL by $413,000 for the year ended December 31, 2016.
Of the 2018 modifications, four were made a TDR due to terming out lines of credit, 18 were made
a TDR due to advancing or renewing money to a watch list credit, one loan was made a TDR due to a
reduction of the interest rate, five were made a TDR due to extending the maturity, 18 were made a TDR
due to bankruptcy and 10 were made a TDR because the current debt was refinanced due to maturity or for
payment relief.
- 98 -
- 98 -
The following table presents loans by class modified as TDRs for which there was a payment default
within twelve months following the modification during the indicated:
Year Ended
December 31, 2018
($ in thousands)
Year Ended
December 31, 2017
($ in thousands)
TDRs
That Subsequently Defaulted:
Number of
Loans
Recorded
Investment
(as of Period
End)
Number of
Loans
Residential Owner Occupied
Residential Non Owner Occupied
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
Commercial Working Capital
Commercial Other
Home Equity and Home
Improvement
Consumer
Total
1
1
-
-
-
-
3
1
1
-
7
$ 76
45
-
-
-
-
2,644
30
61
-
$ 2,856
-
-
-
-
-
-
-
-
-
-
-
Recorded
Investment
(as of Period
End)
$ -
-
-
-
-
-
-
-
-
-
$
-
Year Ended
December 31, 2016
($ in thousands)
Recorded
Investment
(as of Period
End)
Number of
Loans
-
-
-
1
-
-
-
-
-
-
1
$
-
-
-
205
-
-
-
-
-
-
$ 205
The TDRs that subsequently defaulted described above increased the ALLL by $17,000 for the year ended
December 31, 2018, and had no effect on the ALLL for the years ended December 31, 2017 and 2016.
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
- 99 -
- 99 -
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, 2018, 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
Not
Graded
Total
Residential Owner Occupied
Residential Non Owner Occupied
$ 9,419
109,885
$ 91
700
$ 3,130
3,087
$ - $ 190,134
6,725
-
$ 202,774
120,397
Total 1-4 Family Real Estate
119,304
791
6,217
Multi-Family Residential Real Estate
276,594
-
2,047
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
402,008
529,842
111,595
42,189
5,724
2,807
4,023
730
9,547
2,297
16,358
1,244
Total Commercial Real Estate
1,085,634
13,284
29,446
Construction
122,775
219
-
Commercial Working Capital
Commercial Other
205,903
279,234
6,546
7,011
9,489
3,201
Total Commercial
485,137
13,557
12,690
Home Equity and Home Improvement
Consumer Finance
-
-
-
-
434
206
-
-
-
-
-
-
-
-
-
-
-
-
-
196,859
323,171
107
278,748
89
-
-
1,082
417,368
534,946
131,976
45,245
1,171
1,129,535
19,102
142,096
-
-
-
128,594
34,325
221,938
289,446
511,384
129,028
34,531
Total Loans
$ 2,089,444
$ 27,851
$ 51,040
$ - $ 380,158
$ 2,548,493
- 100 -
- 100 -
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
Not
Graded
Total
Residential Owner Occupied
Residential Non Owner Occupied
$ 7,534
85,802
$ 99
935
$ 2,367
3,835
$ - $ 168,220
6,564
-
$ 178,220
97,136
Total 1-4 Family Real Estate
93,336
1,034
6,202
Multi-Family Residential Real Estate
242,969
2,503
2,819
CRE Owner Occupied
CRE Non Owner Occupied
Agriculture Land
Other CRE
370,613
395,264
114,776
56,133
10,432
3,464
2,639
165
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
-
-
-
-
-
-
-
-
-
-
-
-
-
174,784
275,356
111
248,402
156
-
-
915
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
Total Loans
$ 1,901,149
$ 32,539
$ 59,667
$ - $ 363,134
$ 2,356,489
- 101 -
- 101 -
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):
December 31, 2018
December 31, 2017
1-4 Family Residential Real Estate
Multi-Family Residential Real Estate
Commercial Real Estate Loans
Commercial
Consumer
Total Outstanding Balance
$ 1,045
300
899
227
-
$ 2,471
$ 1,154
309
2,921
407
2
4,793
$
Recorded Investment, net of allowance of $0
$ 2,331
$ 3,828
Accretable yield, or income expected to be
collected, is as follows:
2018
Balance at January 1
New Loans Purchased
Accretion of Income
Reclassification from Non-accretable
Charge-off of Accretable Yield
Balance at December 31
$ 804
-
(139)
-
(197)
$ 468
2017
$ -
1,018
(163)
-
(8)
$ 847
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses
during the twelve months ended December 31, 2018 or 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,
2018. (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
- 102 -
- 102 -
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,
2017
2018
(In Thousands)
$ 16,728
10,806
(217)
(5,754)
$ 21,563
$ 16,199
5,857
-
(5,328)
$ 16,728
Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure
totaled $796,000 as of December 31, 2018.
8. Mortgage Banking
Net revenues from the sales and servicing of mortgage loans consisted of the following:
Gain from sale of mortgage loans
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue
Amortization of mortgage servicing rights
Mortgage servicing rights valuation adjustments
Years Ended December 31,
2017
(In Thousands)
$ 4,664
2016
$ 5,311
2018
$ 4,502
3,784
(1,341)
132
2,575
3,714
(1,464)
90
2,340
3,560
(1,724)
123
1,959
Net mortgage banking income
$ 7,077
$ 7,004
$ 7,270
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.41 billion at
December 31, 2018, and $1.39 billion at December 31, 2017.
Activity for capitalized mortgage servicing rights (“MSRs”) and the related valuation allowance is as
follows:
2018
Years Ended December 31,
2017
(In Thousands)
2016
Mortgage servicing assets:
Balance at beginning of period
Loans sold, servicing retained
Amortization
Carrying value before valuation allowance
at end of period
Valuation allowance:
Balance at beginning of period
Impairment recovery (charges)
Balance at end of period
Net carrying value of MSRs at end of period
Fair value of MSRs at end of period
$ 10,240
1,520
(1,341)
$ 10,117
1,587
(1,464)
$ 9,893
1,948
(1,724)
10,419
10,240
10,117
(432)
132
(300)
$ 10,119
$ 10,656
(522)
90
(432)
$ 9,808
$ 9,930
(645)
123
(522)
$ 9,595
$ 9,770
- 103 -
- 103 -
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 2018, 2017 or 2016. Based on
management’s estimate of potential losses from secondary market buyback activity, a liability of $43,000 was
accrued at both December 31, 2018 and 2017, and is reflected in other liabilities in the Consolidated Statements
of Financial Condition. Expense (credit) recognized related to the accrual was $0, $(36,000) and $(135,000)
for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company’s servicing portfolio is comprised of the following:
Investor
Fannie Mae
Freddie Mac
Federal Home Loan Bank
Other
Totals
December 31,
2018
2017
Number of
Loans
Principal
Outstanding
Number of
Loans
Principal
Outstanding
(In Thousands)
4,919
9,571
99
17
14,606
$ 461,730
937,406
11,983
714
$ 1,411,833
4,920
9,420
88
19
14,447
$ 461,783
913,632
9,723
930
$ 1,386,068
Custodial escrow balances maintained in connection with serviced loans were $14.3 million and $13.5
million at December 31, 2018 and 2017, respectively.
Significant assumptions at December 31, 2018, used in determining the value of MSRs include a weighted
average prepayment speed assumption (“PSA”) of 131 and a weighted average discount rate of 12.01%.
Significant assumptions at December 31, 2017, used in determining the value of MSRs include a weighted
average prepayment rate of 151 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, 2018, is presented below. These sensitivities are hypothetical. Changes in
fair value based on 10% and 20% variation in assumptions generally cannot be extrapolated because the
relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect
of a variation in a particular assumption on the fair value of the MSR is calculated independently without
changing any other assumption. In reality, changes in one factor may result in changes in another (for
example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result
in changes in the discount rates), which might magnify or counteract the sensitivities.
Assumption:
Decline in fair value from increase in prepayment rate
Decline in fair value from increase in discount rate
$
332
220
$ 670
459
10% Adverse 20% Adverse
Change
Change
(In Thousands)
- 104 -
- 104 -
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,
2018
2017
(In Thousands)
$
$
7,977
1,326
44,632
1,015
34,871
692
90,513
(49,843)
40,670
$
$
7,977
1,326
44,563
971
34,216
1,402
90,455
(50,238)
40,217
Depreciation expense was $3.7 million, $3.6 million and $3.4 million for the years ended December 31,
2018, 2017 and 2016, respectively.
Lease Agreements
The Company has entered into lease agreements covering nine First Insurance offices, five 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):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
967
884
843
768
739
8,078
12,279
Rental expenses under operating leases amounted to $1.0 million, $691,000 and $571,000 in 2018, 2017,
and 2016, respectively.
10. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the year is as follows:
Beginning balance
Goodwill acquired or adjusted during the year
Ending balance
December 31,
2018
2017
(In Thousands)
$
$
98,569
-
98,569
$
$
61,798
36,771
98,569
- 105 -
- 105 -
Acquired Intangible Assets
Activity in intangible assets for the years ended December 31, 2018, 2017 and 2016, was as follows:
Balance as of January 1, 2016
Amortization of intangible assets
Balance as of December 31, 2016
Intangible assets acquired
Amortization of intangible assets
Balance as of December 31, 2017
Amortization of intangible assets
Balance as of December 31, 2018
Gross
Carrying
Amount
$ 14,477
-
14,477
5,656
-
20,133
-
$ 20,133
Accumulated
Amortization
(In Thousands)
$ (12,606)
(535)
(13,141)
-
(1,289)
(14,430)
(1,312)
$ (15,742)
Net
Value
$
$
1,871
(535)
1,336
5,656
(1,289)
5,703
(1,312)
4,391
Estimated amortization expense for each of the next five years and thereafter is as follows (In Thousands):
2019
2020
2021
2022
2023
Thereafter
Total
11. Deposits
$
$
1,097
914
744
576
439
621
4,391
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,
2018
2017
(In Thousands)
$
$
3,997
115
9,785
13,897
$
$
2,033
102
6,683
8,818
$
$
2016
1,463
88
4,710
6,261
Accrued interest payable on deposit accounts amounted to $366,000 and $97,000 at December 31, 2018
and 2017, respectively, which was comprised of $314,000 and $52,000 for certificates of deposit and
checking and money market accounts, respectively, at December 31, 2018, and $68,000 and $29,000 for
certificates of deposit and checking and money market accounts, respectively, at December 31, 2017.
A summary of deposit balances is as follows:
December 31,
2018
2017
Noninterest-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
- 106 -
- 106 -
(In Thousands)
$
$
607,198
1,040,471
292,829
591,822
88,562
$ 2,620,882
571,360
1,005,519
302,022
504,912
53,843
$ 2,437,656
Scheduled maturities of certificates of deposit at December 31, 2018, are as follows (In Thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
417,562
130,756
85,563
33,184
13,319
-
680,384
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, 2018, and December 31, 2017,
were $1.2 billion and $1.0 billion, respectively. First Federal could obtain advances of up to approximately
$447.4 million from the FHLB at December 31, 2018.
At year-end, advances from the FHLB were as follows:
Principal Terms
December 31, 2018
Single maturity fixed rate advances
Amortizable mortgage advances
Overnight advances
Fair value adj. on acquired balances
December 31, 2017
Putable advances
Single maturity fixed rate advances
Amortizable mortgage advances
Fair value adj. on acquired balances
Advance
Amount
(In Thousands)
Range of Maturities
59,000 January 2019 to March 2022
1,213 August 2027
25,000 Overnight
(24)
$ 85,189
$
5,000 March 2018
72,000 January 2018 to March 2022
7,306 September 2018 to August 2027
(27)
$ 84,279
Putable advances are callable at the option of the FHLB on a quarterly basis.
Weighted
Average
Interest
Rate
1.67%
2.14%
2.45%
2.35%
1.46%
1.85%
- 107 -
- 107 -
Estimated future minimum payments by fiscal year based on maturity date and current interest rates are as
follows (In Thousands):
2019
2020
2021
2022
2023
Thereafter
Total minimum payments
Less amounts representing interest
Less fair value adj. on acquired balances
Totals
$
45,926
21,563
15,307
219
3,169
563
86,747
(1,534)
(24)
$ 85,189
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, 2018 and 2017, 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. Twenty-five million was drawn on this line at
December 31, 2018. There were no borrowings against this line at December 31, 2017. 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 4.29% and 3.09% as of December 31, 2018 and 2017,
respectively.
The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole
or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that
fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee.
The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed
at the Company’s option at any time now.
The Company also sponsors an affiliated trust, First Defiance Statutory Trust I (“Trust Affiliate I”), that
issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company
issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the
purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the
sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures
held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary
beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s
financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the
Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the
three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by
Trust Affiliate I was 4.17% and 2.97% as of December 31, 2018 and 2017, respectively.
- 108 -
- 108 -
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 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.
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
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
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:
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 I due December 2035
First Defiance Statutory Trust II due June 2037
First Defiance Statutory Trust II due June 2037
Total junior subordinated debentures owed to
Total junior subordinated debentures owed to
unconsolidated subsidiary Trusts
unconsolidated subsidiary Trusts
2018
December 31,
2017
December 31,
2018
(In Thousands)
20,619
15,464
$
$
20,619
15,464
(In Thousands)
$
$
20,619
15,464
20,619
15,464
2017
$
36,083
$
36,083
$
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.
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
14. Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings
Total securities sold under agreement to repurchase are summarized as follows:
Total securities sold under agreement to repurchase are summarized as follows:
Years Ended December 31,
Years Ended December 31,
2018
2018
2017
2017
(In Thousands, Except Percentages)
(In Thousands, Except Percentages)
Securities sold under agreement to repurchase
Securities sold under agreement to repurchase
Amounts outstanding at year-end
Amounts outstanding at year-end
Year-end interest rate
Year-end interest rate
Average daily balance during year
Average daily balance during year
Maximum month-end balance during the year
Maximum month-end balance during the year
Average interest rate during the year
Average interest rate during the year
$
5,741
$
5,741
$ 26,019
$ 26,019
0.31%
0.31%
0.20%
0.20%
8,911
18,259
8,911
18,259
23,337
26,019
23,337
26,019
0.26%
0.26%
0.23%
0.23%
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.
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
The remaining contractual maturity of the securities sold under agreements to repurchase in the
consolidated balance sheets as of December 31, 2018 and 2017, is presented in the following tables.
consolidated balance sheets as of December 31, 2018 and 2017, is presented in the following tables.
Overnight and
Continuous
Overnight and
Continuous
Up to 30
Days
Up to 30
Days
30-90 Days
Greater
than 90
Days
(In Thousands)
Greater
than 90
Days
30-90 Days
(In Thousands)
Total
Total
At December 31, 2018
Repurchase agreements:
Mortgage-backed securities – residential
4,199
Collateralized mortgage obligations
1,542
Total borrowings
5,741
Gross amount of recognized liabilities for repurchase agreements
At December 31, 2018
Repurchase agreements:
Mortgage-backed securities – residential
$
Collateralized mortgage obligations
Total borrowings
Gross amount of recognized liabilities for repurchase agreements
4,199
$
1,542
5,741
$
$
$ -
-
$ -
$ -
-
$ -
$ -
-
$ -
$
$ -
-
$
$ -
$
$
-
-
-
$
-
-
-
$
$
4,199
$
1,542
$
5,741
5,741
$
4,199
1,542
5,741
5,741
- 109 -
- 109 -
- 109 -
Overnight and
Continuous
Up to 30
Days
30-90 Days
Greater
than 90
Days
Total
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)
$ -
-
$ -
$ -
-
$ -
$
$
-
-
-
$
$
$
6,599
19,420
26,019
26,019
As of December 31, 2018 and 2017, 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, 2018 and
2017.
A $11.2 million line of credit with the Federal Reserve Bank Discount Window, at an interest rate
of 50 basis points over the federal funds rate. The fed funds rate as of December, 31, 2018, was
2.25%. This line was undrawn upon as of December 31, 2018 and 2017.
A $20.0 million line of credit with MUFG Union Bank, N.A. The rate on this line of credit is Union
Bank’s federal funds rate, which floats daily. This line was undrawn upon as of December 31,
2018 and 2017.
15. Other Noninterest Expense
The following is a summary of other noninterest expense:
Legal and other professional fees
Marketing
State financial institutions tax
OREO expenses and write-downs
Printing and office supplies
Amortization of intangibles
Postage
Check charge-offs and fraud losses
Credit and collection expense
Other
Total other noninterest expense
2016
2018
Years Ended December 31,
2017
(In Thousands)
$ 3,603
2,070
1,819
177
626
1,289
523
277
359
$ 2,902
1,835
1,781
244
512
535
456
266
303
$ 3,328
2,407
2,118
742
631
1,312
505
415
379
6,792(1)
$ 18,629
8,067(2)
$ 18,810
7,118(3)
$ 15,952
1)
2)
3)
Includes a credit of $806,000 for an accounting correction related to the Deferred Compensation
Plan. See Note 19 for further details.
Includes $1.1 million of acquisition related expenses.
Includes $443,000 of acquisition related expenses and $300,000 of costs associated with
termination of a lease agreement.
- 110 -
- 110 -
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, 2018, 2017 and 2016, are the
following amounts that have not yet been recognized in net periodic benefit cost:
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
2018
97
(86)
11
80
91
$
$
December 31,
2017
(In Thousands)
$
39
551
590
(206)
$
2016
52
392
444
(155)
$
384
$
289
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, 2019, is $14,000
($11,000 net of tax) and $0, 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
- 111 -
- 111 -
December 31,
2018
2017
(In Thousands)
$
$
3,194
55
105
32
72
(632)
(184)
2,642
-
152
32
(184)
-
(2,642)
$
$
2,985
58
117
29
-
166
(161)
3,194
-
132
29
(161)
-
(3,194)
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
2018
$
55
Years Ended December 31,
2017
(In Thousands)
$
58
2016
$
53
105
18
178
(632)
72
(18)
(578)
$
(400)
$
117
19
194
166
-
(19)
147
341
128
30
211
(184)
12
(30)
(202)
$
9
The following assumptions were used in determining the components of the postretirement benefit
obligation:
Weighted average discount rates:
Used to determine benefit obligations at December 31
Used to determine net periodic postretirement benefit cost for years ended
December 31
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend
rate)
Year that rate reaches ultimate trend rate
2018
2017
2016
4.00%
3.50%
6.50%
3.90%
2075
3.50%
4.00%
7.00%
5.00%
2022
4.00%
4.25%
7.50%
5.00%
2022
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.
2019
2020
2021
2022
2023
2024 through 2028
Expected to be Paid
(In Thousands)
$
168
181
195
209
181
969
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
Years Ended December 31,
2017
(In Thousands)
$
2018
$
$
One-Percentage-Point
Decrease
Years Ended December 31,
2017
2018
22
178
25
392
(18)
(153)
$ (21)
(333)
The Company expects to contribute $168,000 before reflecting expected Medicare retiree drug subsidy
payments in 2019.
- 112 -
- 112 -
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 First Defiance and First Federal 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 First Defiance and First Federal. The rules include a minimum common equity Tier 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 First
Defiance’s financial statements.
The following schedule presents First Defiance consolidated and First Federal’s regulatory capital ratios as
of December 31, 2018 and 2017 (Dollars in Thousands):
December 31, 2018
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
$303,860
$322,520
11.00%
11.68%
$124,339
$124,225
$338,860
$322,520
11.14%
10.62%
$121,716
$121,461
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$338,860
$322,520
12.26%
11.68%
$165,786
$165,633
Total Capital (to Risk Weighted Assets) (2)
Consolidated
First Federal
$367,191
$350,851
13.29%
12.71%
$221,048
$220,844
4.5%
4.5%
4.0%
4.0%
6.0%
6.0%
8.0%
8.0%
N/A
$179,436
N/A
$151,827
N/A
$220,844
N/A
6.5%
N/A
5.0%
N/A
8.0%
N/A
$276,055
N/A
10.0%
(1) Excludes capital conservation buffer of 1.875% as of December 31, 2018.
(2) Core capital is computed as a percentage of adjusted total assets of $3.04 billion for consolidated and for the
Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.76 billion for
consolidated and for the Bank.
- 113 -
- 113 -
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
$210,728
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.
Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various regulatory
restrictions. First Federal paid $22.0 million in dividends to First Defiance in 2018 and $13.0 million in
2017. 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 $1.6 million in dividends to First Defiance in 2018 and $1.8 million in dividends in 2017.
First Defiance Risk Management paid $950,000 in dividends to First Defiance in 2018 and $1.0 million in
2017.
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
2018
Years Ended December 31,
2017
(In Thousands)
2016
$
$
9,538
207
881
-
10,626
$
$
14,588
181
1,261
154
16,184
$
$
13,125
244
(615)
-
12,754
- 114 -
- 114 -
The effective tax rates differ from federal statutory rate applied to income before income taxes due to the
following:
2018
Years Ended December 31,
2017
(In Thousands)
2016
Tax expense at statutory rate (21%-2018 35%-
2017 and 2016)
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
$
11,944
$
16,958
$
14,559
164
(770)
(255)
(325)
-
-
(132)
10,626
$
119
(1,218)
(1,212)
(364)
1,721
154
26
16,184
$
159
(1,168)
(341)
(414)
-
-
(41)
12,754
$
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
Net unrealized gains on available-for-sale securities
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,
2018
2017
(In Thousands)
$
$
5,802
473
1,011
1,154
11
62
435
638
547
1,273
11,406
1,558
4,584
2,125
2,046
778
7
-
550
22
11,670
(264)
$
$
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
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate
taxable income in future periods and the reversal of deferred tax liabilities during the same period. The
Company has evaluated the available evidence supporting the realization of its deferred tax assets and
determined it is more likely than not that the assets will be realized and thus no valuation allowance was
required at December 31, 2018.
- 115 -
- 115 -
Retained earnings at December 31, 2018, include approximately $11.0 million for which no tax provision
for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31,
1987, which is the end of the Company’s base year for purposes of calculating the bad debt deduction for
tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb
bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on
the above amount at December 31, 2018, 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, 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
Balance at January 1, 2018
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, 2018
$
$
$
$
$
$
-
-
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, $0 and $40,000 for the
years ended December 31, 2018, 2017 and 2016. The amount accrued for interest and penalties was $0, $0
and $40,000 at December 31, 2018, 2017 and 2016.
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 2015.
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) established a new, flat corporate federal statutory income tax rate of 21%, (ii)
eliminated the corporate alternative minimum tax and allowed the use of any such carryforwards to offset
regular tax liability for any taxable year, (iii) limited the deduction for net interest expense incurrent by
U.S. corporations, (iv) allowed businesses to immediately expense, for tax purposes, the cost of new
investments in certain qualified depreciable assets, (v) eliminated or reduced certain deductions related to
meals and entertainment expenses, (vi) modified the limitation on excessive employee remuneration to
eliminate the exception for performance-based compensation and clarifies the definition of a covered
employee and (vii) limited the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act
- 116 -
- 116 -
also significantly changed U.S. tax law related to foreign operations, however, such changes did not impact
First Defiance.
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 as of December 31, 2017.
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 $1.31 million, $1.19 million
and $979,000 for the years ended December 31, 2018, 2017 and 2016, 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 $38,000, $248,000 and $71,000 of expense recorded for the years ended
December 31, 2018, 2017 and 2016, respectively, with a liability of $1.71 million and $1.69 million for
future benefits recorded at December 31, 2018 and 2017, respectively. The acquisition of CSB added
$402,000 to this liability in 2017. 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, 2018.
Deferred Compensation
The deferred compensation plan covers all directors and certain employees that elect to participate. Under
the plan, the Company pays each participant, or their beneficiary, the amount of fees deferred plus interest
over a defined time period. In the fourth quarter of 2018, the stock market declined significantly resulting
in a significant decline in the value of the assets and liabilities of the deferred compensation plan and an
accounting correction in the deferred compensation plan was recognized. The deferred compensation plan
has approximately $5.0 million in assets and liabilities as of December 31, 2018, which are matched in
terms of investment elections. Every year, other noninterest income and other noninterest expense reflects
the changes in fair value of the underlying investments in the assets and liabilities, respectively. The
Company made an accounting correction, which is expected to minimize any net impact to earnings from
the deferred compensation plan going forward. This accounting correction was deemed immaterial which
resulted in a one-time reduction to other noninterest expense of $806,000, including a $636,000 adjustment
to equity for the phantom stock elections within the plan, and a $170,000 adjustment for the tax liability, as
of December 31, 2018. The phantom shares are carried at cost in equity and will be treated as outstanding
shares for earnings per share calculations. The net expense (income) recorded for the deferred compensation
plan, excluding the one-time accounting correction, for each of the last three years was $15,000, $427,000
and $528,000 in 2018, 2017 and 2016, respectively, resulting in a deferred compensation liability of $4.5
million and $6.1 million as of year-end 2018 and 2017, respectively.
- 117 -
- 117 -
20. Stock Compensation Plans
First Defiance has established equity based compensation plans for its directors and employees. On
February 27, 2018, the Board adopted, and the shareholders approved at the 2018 Annual Shareholders
Meeting, the First Defiance Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018
Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to
the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. All
awards currently outstanding under prior plans will remain in effect in accordance with their respective
terms. Any new awards will be made under the 2018 Equity Plan. The 2018 Equity Plan allows for issuance
of up to 900,000 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, 2018, 39,400 options had been granted pursuant to 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”) Incentive Plan and a Long-Term (“LTIP”) Equity Incentive
Plan for selected members of management.
Under the 2017 and 2018 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 between 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 49,052, 41,314 and 41,676 RSU’s to the participants in the 2016, 2017 and
2018 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 the payment.
A total of 49,514 RSU’s were issued to the participants of the 2015 LTIP in the first quarter of 2018 for the
three year performance period ended December 31, 2017.
In 2018, the Company also granted to employees 23,952 restricted shares, of which 7,348 were RSUs and
16,604 were restricted stock grants. Of the 16,604 restricted stock grants, 4,104 were issued to directors
and have a one-year vesting period. The remaining 12,500 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
- 118 -
- 118 -
interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the
interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the
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.
time of the grant.
time of the grant.
There were no options granted during the twelve months ended December 31, 2018, or December
There were no options granted during the twelve months ended December 31, 2018, or December
There were no options granted during the twelve months ended December 31, 2018, or December
31, 2017.
31, 2017.
31, 2017.
Following is activity under the plans during 2018:
Following is activity under the plans during 2018:
Following is activity under the plans during 2018:
Options outstanding, January 1, 2018
Options outstanding, January 1, 2018
Options outstanding, January 1, 2018
Forfeited or cancelled
Forfeited or cancelled
Forfeited or cancelled
Exercised
Exercised
Exercised
Granted
Granted
Granted
Options outstanding, December 31, 2018
Options outstanding, December 31, 2018
Options outstanding, December 31, 2018
Vested or expected to vest at
Vested or expected to vest at
Vested or expected to vest at
December 31, 2018
December 31, 2018
December 31, 2018
Exercisable at December 31, 2018
Exercisable at December 31, 2018
Exercisable at December 31, 2018
Options
Options
Options
Outstanding
Outstanding
Outstanding
86,900
86,900
86,900
-
-
-
(47,500)
(47,500)
(47,500)
-
-
-
39,400
39,400
39,400
$
$
Weighted
Weighted
Weighted
Average
Average
Average
Exercise Price
Exercise Price
Exercise Price
10.81
10.81
10.81
-
-
-
8.15
8.15
8.15
-
-
-
14.00
14.00
14.00
$
$
$
$
39,400
39,400
39,400
23,900
23,900
23,900
$
$
$
$
$
$
14.00
14.00
12.21
12.21
14.00
12.21
Information related to the stock option plans is as follows:
Information related to the stock option plans is as follows:
Information related to the stock option plans is as follows:
Weighted
Weighted
Weighted
Average
Average
Average
Remaining
Remaining
Remaining
Contractual
Contractual
Contractual
Term (in years)
Term (in years)
Term (in years)
Aggregate
Aggregate
Intrinsic
Intrinsic
Aggregate
Intrinsic
Value
Value
Value
(in 000’s)
(in 000’s)
(in 000’s)
4.96
4.96
4.96
4.96
4.96
4.14
4.14
4.96
4.14
$
$
$
$
$
$
414
414
414
414
414
294
294
414
294
$
$
$
Intrinsic value of options exercised
Intrinsic value of options exercised
Intrinsic value of options exercised
Cash received from option exercises
Cash received from option exercises
Cash received from option exercises
Tax benefit realized from option exercises
Tax benefit realized from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
Weighted average fair value of options granted
Weighted average fair value of options granted
Years Ended December 31,
Years Ended December 31,
Years Ended December 31,
2016
2016
2017
2017
2018
2018
2016
2017
2018
(In Thousands, except per share amounts)
(In Thousands, except per share amounts)
(In Thousands, except per share amounts)
$
$
$
893
893
893
111
111
111
28
28
28
-
-
-
$
$
$
$ 301
$ 301
$ 301
198
198
198
54
54
54
-
-
-
$
$
$
$ 752
$ 752
$ 752
714
714
714
165
165
165
$ 13.95
$ 13.95
$ 13.95
As of December 31, 2018, there was $50,000 of total unrecognized compensation costs related to unvested
As of December 31, 2018, there was $50,000 of total unrecognized compensation costs related to unvested
As of December 31, 2018, there was $50,000 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
stock options granted under the Company’s equity plans. The cost is expected to be recognized over a
stock options granted under the Company’s equity plans. The cost is expected to be recognized over a
weighted-average period of 1.6 years.
weighted-average period of 1.6 years.
weighted-average period of 1.6 years.
At December 31, 2018, 174,958 restricted share awards were outstanding. Compensation expense is
At December 31, 2018, 174,958 restricted share awards were outstanding. Compensation expense is
At December 31, 2018, 174,958 restricted share awards were outstanding. Compensation expense is
recognized over the performance period based on the achievement of established targets. Total expense of
recognized over the performance period based on the achievement of established targets. Total expense of
recognized over the performance period based on the achievement of established targets. Total expense of
$2.0 million, $2.0 million and $1.3 million was recorded during the years ended December 31, 2018, 2017
$2.0 million, $2.0 million and $1.3 million was recorded during the years ended December 31, 2018, 2017
$2.0 million, $2.0 million and $1.3 million was recorded during the years ended December 31, 2018, 2017
and 2016, respectively, and approximately $961,000 and $774,000 is included within other liabilities at
and 2016, respectively, and approximately $961,000 and $774,000 is included within other liabilities at
and 2016, respectively, and approximately $961,000 and $774,000 is included within other liabilities at
December 31, 2018 and 2017, respectively, related to the STIPs and LTIPs.
December 31, 2018 and 2017, respectively, related to the STIPs and LTIPs.
December 31, 2018 and 2017, respectively, related to the STIPs and LTIPs.
Restricted Stock Units
Restricted Stock Units
Restricted Stock Units
Stock Grants
Stock Grants
Stock Grants
Unvested Shares
Unvested Shares
Unvested Shares
Shares
Shares
Shares
Weighted-Average
Weighted-Average
Weighted-Average
Grant Date
Grant Date
Grant Date
Fair Value
Fair Value
Fair Value
Unvested at January 1, 2018
Unvested at January 1, 2018
Unvested at January 1, 2018
Granted
Granted
Granted
Vested
Vested
Vested
Forfeited
Forfeited
Forfeited
Unvested at December 31, 2018
Unvested at December 31, 2018
Unvested at December 31, 2018
145,076
145,076
145,076
49,024
49,024
49,024
(49,514)
(49,514)
(49,514)
-
-
-
144,586
144,586
144,586
$
$
$
$
$
$
20.26
20.26
20.26
26.97
26.97
26.97
16.15
16.15
16.15
-
-
-
23.94
23.94
23.94
Shares
Shares
Shares
21,072
21,072
21,072
66,118
66,118
66,118
(56,818)
(56,818)
(56,818)
-
-
-
30,372
30,372
30,372
Weighted-Average
Grant Date
Fair Value
Weighted-Average
Weighted-Average
Grant Date
Grant Date
Fair Value
Fair Value
$
$
$
$
$
$
25.28
25.28
25.28
19.68
19.68
19.68
17.51
17.51
17.51
-
-
-
28.48
28.48
28.48
The maximum amount of compensation expense that may be earned for the 2018 STIP and the 2016, 2017
The maximum amount of compensation expense that may be earned for the 2018 STIP and the 2016, 2017
The maximum amount of compensation expense that may be earned for the 2018 STIP and the 2016, 2017
and 2018 LTIPs at December 31, 2018, is approximately $4.3 million in the aggregate. However, the
and 2018 LTIPs at December 31, 2018, is approximately $4.3 million in the aggregate. However, the
and 2018 LTIPs at December 31, 2018, is approximately $4.3 million in the aggregate. However, the
estimated expense expected to be earned as of December 31, 2018, based on the performance measures in
estimated expense expected to be earned as of December 31, 2018, based on the performance measures in
estimated expense expected to be earned as of December 31, 2018, based on the performance measures in
- 119 -
- 119 -
- 119 -
- 119 -
the plans, is $3.7 million of which $899,000 was unrecognized at December 31, 2018, and will be
recognized over the remaining performance period.
As of December 31, 2018, 895,500 shares were available for grant under the 2018 Equity Plan. Options
forfeited or cancelled under all plans except the 2018 Equity Plans are no longer available for grant to other
participants.
21. Parent Company Statements
Condensed parent company financial statements, which include transactions with subsidiaries, are as
follow:
Statements of Financial Condition
Assets
Cash and cash equivalents
Investment in banking subsidiary
Investment in non-bank subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Accrued liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Statements of Income
December 31,
2018
2017
(In Thousands)
$
$
$
$
12,153
398,922
23,372
1,723
436,170
36,083
498
399,589
436,170
$
$
$
$
8,860
377,546
22,319
1,157
409,882
36,083
513
373,286
409,882
2018
Years Ended December 31,
2017
(In Thousands)
2016
Dividends from subsidiaries
Interest expense
Other income
Noninterest expense
Income before income taxes and equity in earnings of subsidiaries
Income tax credit
Income before equity in earnings of subsidiaries
Undistributed equity in earnings of subsidiaries
Net income
Other comprehensive income (loss)
Comprehensive income
$
$
24,550 $
(1,281)
1
(831)
22,439
(431)
22,870
23,379
46,249
(2,412)
43,837 $
15,800 $
(1,090)
1
(697)
14,014
(605)
14,619
17,649
32,268
2
32,270 $
24,200
(753)
-
(644)
22,803
(466)
23,269
5,574
28,843
(3,407)
25,436
- 120 -
- 120 -
Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
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
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
2018
Years Ended December 31,
2017
(In Thousands)
2016
$ 46,249
$ 32,268
$ 28,843
(23,379)
(17,649)
(419)
22,451
(358)
14,261
(5,574)
235
23,504
-
-
-
(12,340)
(6,491)
(18,831)
-
-
-
(6,330)
(13,043)
111
104
(19,158)
3,293
8,860
-
(9,859)
199
73
(9,587)
(14,157)
23,017
(6,293)
(7,890)
714
66
(13,406)
10,098
12,919
Cash and cash equivalents at end of year
$ 12,153
$ 8,860
$ 23,017
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
- 122 -
- 122 -
properties) whose qualifications and licenses have been reviewed and verified by the Company. Once
received, a member of the Company’s asset quality or collections department reviews the assumptions and
approaches utilized in the appraisal. Appraisal values are discounted from 0% to 20% to account for other
factors that may impact the value of collateral. In determining the value of impaired collateral dependent
loans and other real estate owned, significant unobservable inputs may be used, which include: physical
condition of comparable properties sold, net operating income generated by the property and investor rates
of return.
Mortgage servicing rights – On a quarterly basis, mortgage servicing rights are evaluated for impairment
based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an
individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is
carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present
value of estimated future net servicing income. The valuation model utilizes assumptions that market
participants would use in estimating future net servicing income and are validated against available market
data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly
based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes
of the commitments and other observable market data at the valuation date (Level 2).
The following table summarizes the financial assets measured at fair value on a recurring basis segregated
by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured on a Recurring Basis
December 31, 2018
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
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
Mortgage banking derivative -liability
(In Thousands)
$ -
$
2,503
$
-
-
-
-
-
-
-
-
74,710
2,709
101,461
-
12,806
99,887
367
73
-
-
-
-
-
-
-
-
$
2,503
74,710
2,709
101,461
-
12,806
99,887
367
73
- 123 -
- 123 -
December 31, 2017
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
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
Mortgage banking derivative -liability
(In Thousands)
$ -
$
508
$
-
-
-
1
-
-
-
-
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
There were no assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the years ended December 31, 2018 and 2017.
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, 2018
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
Total Fair
Value
$ -
$ -
$ 1,456
319
1,775
$ 1,456
319
1,775
-
629
-
629
-
-
705
705
705
705
December 31, 2017
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(In Thousands)
Total Fair
Value
$ -
$ -
$ 1,787
2,817
4,604
$ 1,787
2,817
4,604
-
534
-
534
-
-
227
227
227
227
Impaired loans
Commercial Real Estate
Commercial
Total impaired loans
Mortgage servicing rights
Real estate held for sale
CRE
Total Real Estate held for
sale
Impaired loans
Commercial Real Estate
Commercial
Total impaired loans
Mortgage servicing rights
Real estate held for sale
CRE
Total Real Estate held for
sale
-
-
-
-
-
-
-
-
- 124 -
- 124 -
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December
31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:
Fair
Fair
Fair
Value
Value
Value
Valuation Technique
Valuation Technique
Valuation Technique
Impaired Loans- Applies to
Impaired Loans- Applies to
all loan classes
all loan classes
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Real estate held for sale –
Real estate held for sale –
Applies to all classes
Applies to all classes
Applies to all classes
$1,775 Appraisals which utilize
net
$1,775 Appraisals which utilize
$1,775 Appraisals which utilize
net
net
comparison,
comparison,
sales
income and cost approach
sales
sales
income and cost approach
income and cost approach
comparison,
$705 Appraisals which utilize
net
$705 Appraisals which utilize
$705 Appraisals which utilize
net
comparison,
net
comparison,
sales
income and cost approach
sales
sales
income and cost approach
income and cost approach
comparison,
Unobservable Inputs
Unobservable Inputs
Unobservable Inputs
(Dollars in Thousands)
(Dollars in Thousands)
(Dollars in Thousands)
Discounts
Discounts
Discounts
issues and changes
issues and changes
issues and changes
market conditions
market conditions
market conditions
for collection
for collection
for collection
in
in
in
Discounts for changes in
Discounts for changes in
Discounts for changes in
market conditions
market conditions
market conditions
Range of
Range of
Range of
Inputs
Inputs
Inputs
Weighted
Weighted
Weighted
Average
Average
Average
10-13%
10-13%
10-13%
10.86%
10.86%
10.86%
20%
20%
20%
20%
20%
20%
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December
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:
31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
Fair
Fair
Fair
Value
Value
Value
Valuation Technique
Valuation Technique
Valuation Technique
Unobservable Inputs
Unobservable Inputs
Unobservable Inputs
(Dollars in Thousands)
(Dollars in Thousands)
(Dollars in Thousands)
Impaired Loans- Applies to
Impaired Loans- Applies to
all loan classes
all loan classes
Impaired Loans- Applies to
all loan classes
Real estate held for sale –
Real estate held for sale –
Real estate held for sale –
Applies to all classes
Applies to all classes
Applies to all classes
$4,604 Appraisals which utilize
net
$4,604 Appraisals which utilize
$4,604 Appraisals which utilize
sales
net
comparison,
comparison,
net
income and cost approach
sales
sales
income and cost approach
income and cost approach
comparison,
$227 Appraisals which utilize
net
$227 Appraisals which utilize
$227 Appraisals which utilize
sales
net
comparison,
comparison,
net
income and cost approach
sales
sales
income and cost approach
income and cost approach
comparison,
Discounts
Discounts
Discounts
issues and changes
issues and changes
issues and changes
market conditions
market conditions
market conditions
for collection
for collection
for collection
in
in
in
Discounts for changes in
Discounts for changes in
Discounts for changes in
market conditions
market conditions
market conditions
Range of
Range of
Range of
Inputs
Inputs
Inputs
Weighted
Weighted
Weighted
Average
Average
Average
10-20%
10-20%
10-20%
11%
11%
11%
0%
0%
0%
0%
0%
0%
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral
dependent loans, had a fair value of $1.8 million, with a valuation allowance of $9,000 and a fair value of
dependent loans, had a fair value of $1.8 million, with a valuation allowance of $9,000 and a fair value of
dependent loans, had a fair value of $1.8 million, with a valuation allowance of $9,000 and a fair value of
$4.6 million with no valuation allowance at December 31, 2018 and 2017, respectively. A provision
$4.6 million with no valuation allowance at December 31, 2018 and 2017, respectively. A provision
$4.6 million with no valuation allowance at December 31, 2018 and 2017, respectively. A provision
expense of $1.2 million, $993,000, $1.0 million for the years ended December 31, 2018, 2017 and 2016,
expense of $1.2 million, $993,000, $1.0 million for the years ended December 31, 2018, 2017 and 2016,
expense of $1.2 million, $993,000, $1.0 million for the years ended December 31, 2018, 2017 and 2016,
respectively, related to these impaired loans was included in earnings.
respectively, related to these impaired loans was included in earnings.
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 $629,000
Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $629,000
Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $629,000
with a valuation allowance of $300,000 and a fair value of $534,000 with a valuation allowance of $432,000
with a valuation allowance of $300,000 and a fair value of $534,000 with a valuation allowance of $432,000
with a valuation allowance of $300,000 and a fair value of $534,000 with a valuation allowance of $432,000
at December 31, 2018 and 2017, respectively. A recovery of $132,000, $90,000 and $123,000 for the years
at December 31, 2018 and 2017, respectively. A recovery of $132,000, $90,000 and $123,000 for the years
at December 31, 2018 and 2017, respectively. A recovery of $132,000, $90,000 and $123,000 for the years
ended December 31, 2018, 2017 and 2016, respectively, was included in earnings.
ended December 31, 2018, 2017 and 2016, respectively, was included in earnings.
ended December 31, 2018, 2017 and 2016, respectively, was included in earnings.
Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for
Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for
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 $552,000, $20,000
changes in market conditions. The change in fair value of real estate held for sale was $552,000, $20,000
changes in market conditions. The change in fair value of real estate held for sale was $552,000, $20,000
and $74,000 for the years ended December 31, 2018, 2017 and 2016, respectively, which was recorded
and $74,000 for the years ended December 31, 2018, 2017 and 2016, respectively, which was recorded
and $74,000 for the years ended December 31, 2018, 2017 and 2016, respectively, which was recorded
directly as an adjustment to current earnings through noninterest expense.
directly as an adjustment to current earnings through noninterest expense.
directly as an adjustment to current earnings through noninterest expense.
In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative
In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative
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
condensed consolidated statement of financial condition based on carrying amount and estimated fair values
condensed consolidated statement of financial condition based on carrying amount and estimated fair values
of financial instruments as of December 31, 2018, and December 31, 2017. Accordingly, the aggregate fair
of financial instruments as of December 31, 2018, and December 31, 2017. Accordingly, the aggregate fair
of financial instruments as of December 31, 2018, and December 31, 2017. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of First Defiance.
value amounts presented do not represent the underlying value of First Defiance.
value amounts presented do not represent the underlying value of First Defiance.
Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and
Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and
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
therefore the results may not be precise. Subjective factors include, among other things, estimated cash
therefore the results may not be precise. Subjective factors include, among other things, estimated cash
- 125 -
- 125 -
- 125 -
- 125 -
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 Company adopted the amendments to ASU 2016-01 relating to the loan portfolio in 2018 and an exit
price income approach is now used to determine the fair value. The loans were valued on an individual
basis, with consideration given to the loans underlying characteristics, including account types, remaining
terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal
and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a
discounted cash flow approach to estimate the fair value of the loans using assumptions for the coupon
rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and
estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly
in the projected cash flows. The model applies various assumptions regarding credit, interest, and
prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. As
of December 31, 2017, the fair value was estimated by discounting the future cash flows using the rates at
which similar notes would be written for the same remaining maturities or an entry price income approach.
The market rates used were based on current rates the Company would impose for similar loans and reflect
a market participant assumption about risks associated with non-performance, illiquidity, and the structure
and term of the loans along with local economic and market conditions. For all periods presented, the
estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell,
or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest
rate). All impaired loans are classified as Level 3 within the valuation hierarchy.
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 noninterest-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, 2018.
- 126 -
- 126 -
Financial Assets:
Cash and cash equivalents
Investment securities
FHLB Stock
Loans, net, including loans
held for sale
Accrued interest receivable
Financial Liabilities:
Deposits
Advances from FHLB
Securities sold under repurchase
agreements
Subordinated debentures
Financial Assets:
Cash and cash equivalents
Investment securities
FHLB Stock
Loans, net, including loans
held for sale
Accrued interest receivable
Financial Liabilities:
Deposits
Advances from FHLB
Securities sold under repurchase
agreements
Subordinated debentures
Fair Value Measurements at December 31, 2018
(In Thousands)
Total
Level 1
Level 2
Level 3
Carrying
Value
$
98,962
294,602
14,217
$
98,962
294,602
N/A
$ 98,962 $ - $ -
-
294,602
N/A
N/A
-
N/A
2,518,321
9,641
2,501,096
9,641
-
18
6,865
1,168
2,494,231
8,455
$ 2,620,882
85,189
$ 2,613,965
84,281
$ 607,198 $ 2,006,767
84,281
-
$ -
-
5,741
36,083
5,741
28,854
-
-
5,741
-
-
28,854
Fair Value Measurements at December 31, 2017
(In Thousands)
Total
Level 1
Level 2
Level 3
Carrying
Value
$ 113,693
261,298
15,992
$ 113,693
261,299
N/A
$ 113,693 $ - $ -
-
261,298
N/A
N/A
1
N/A
2,332,465
8,706
2,315,791
8,706
-
13
10,830
917
2,304,961
7,776
$ 2,437,656
84,279
$ 2,444,683
83,261
$ 571,360 $ 1,873,323
83,261
-
$ -
-
26,019
36,083
26,019
35,385
-
-
26,019
-
-
35,385
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
$8.6 million and $14.8 million of interest rate lock commitments at December 31, 2018 and 2017,
respectively. There were $11.5 million and $23.2 million of forward commitments for the future delivery
of residential mortgage loans at December 31, 2018 and 2017, 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, 2018
(Liabilities)
December 31, 2017
Assets (Liabilities)
Carrying
Value
Carrying
Value
Derivative
Net Carrying
Value
Carrying
Value
Carrying
Value
Derivative
Net Carrying
Value
(In Thousands)
$
367 $
73 $
294 $
609 $
11 $
598
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
Years Ended December 31, 2018
2017
2016
(In Thousands)
Mortgage Banking Derivatives – Gain (Loss)
$
(304)
$
107
$ (67)
24. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
2018
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)
$
$
28,905
3,218
25,687
(1,095)
26,782
-
10,703
23,251
14,234
2,497
11,737
$
$
30,299
3,752
26,547
423
26,124
-
10,214
22,665
13,673
2,564
11,109
$
$
31,963
4,434
27,529
1,376
26,153
76
9,846
22,286
13,789
2,483
11,306
$
$
33,550
5,058
28,492
472
28,020
97
8,272
21,210
15,179
3,082
12,097
$
0.58
$ 0.58
$ 0.54
$ 0.54
$ 0.55
$ 0.55
$ 0.60
$ 0.59
20,330
20,438
20,388
20,492
20,400
20,467
20,313
20,404
- 128 -
- 128 -
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
0.27
$
$ 0.27
$ 0.41
$ 0.41
$ 0.46
$ 0.46
$ 0.47
$ 0.46
18,870
18,980
20,294
20,408
20,298
20,418
20,310
20,444
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.
Years ended December 31, 2018:
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
Years 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
Before Tax
Amount
Tax Effect
(In Thousands)
Net of Tax
Amount
$
$
$
$
(3,356)
(173)
$
(706)
(36)
560
200
$
$
18
(2,951)
Before Tax
Amount
733
(584)
(166)
19
2
$
3
(539)
Tax Effect
(In Thousands)
256
(204)
(59)
7
-
$
$
$
$
(2,650)
(137)
360
15
(2,412)
Net of Tax
Amount
477
(380)
(107)
12
2
- 129 -
- 129 -
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Accumulated
Securities
Available
For Sale
Post-
Other
retirement Comprehensive
Benefit
Income
Balance January 1, 2018
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
$
601
$
(384 ) $
(In Thousands)
(2,651 )
360
(136 )
15
Net other comprehensive income during period
(2,787 )
375
Reclassification adjustment upon adoption of
ASU 2018-02
129
(82 )
Balance December 31, 2018
$
(2,057 ) $
(91 ) $
Balance January 1, 2017
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive loss
$
504
$
(289 ) $
477
(108 )
(380 )
13
Net other comprehensive income during period
97
(95 )
Balance December 31, 2017
$
601
$
(384 ) $
217
(2,291 )
(121)
(2, 412)
47
(2,148 )
215
369
(367)
2
217
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, 2018. 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, 2018, 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, 2018, 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 Company’s definitive proxy statement which will be filed
no later than 120 days after December 31, 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 the Governance Documents tab on the Investor Relations page.
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 “COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE COMPENSATION”
in the Proxy Statement, and is incorporated herein by reference.
The Compensation Committee Report and information related to compensation committee
interlocks and insider participation have been respectively set forth under the section immediately following
the section captioned
the heading “COMPENSATION COMMITTEE REPORT” and under
“Compensation Committee Interlocks and Insider Participation” following the heading “PROPOSAL 1 –
Election of Directors” in the Proxy Statement, and are incorporated herein by reference.
- 131 -
- 131 -
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information regarding security ownership of certain beneficial owners and management and
information relating thereto is set forth in the section under the heading “BENEFICIAL OWNERSHIP” in
the Proxy Statement, and is incorporated herein by reference.
Equity Compensation Plans
The following table provides information as of December 31, 2018, 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
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Plan Category
Equity Compensation Plans Approved
by Security Holders
(a)
39,400
(b)
$14.00
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a)
(c)
895,500
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.
- 132 -
- 132 -
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 LLP)
(B) Consolidated Statements of Financial Condition as of December 31, 2018
and 2017
(C) Consolidated Statements of Income for the years ended December 31, 2018,
2017 and 2016
(D) Consolidated Statements of Comprehensive Income for the years ended December 31,
2018, 2017 and 2016
(E) Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2018, 2017 and 2016
(F) Consolidated Statements of Cash Flows for the years ended December 31,
2018, 2017 and 2016
(G) Notes to Consolidated Financial Statements
(2) Separate financial statement schedules are not being filed because of the absence of conditions
under which they are required or because the required information is included in the
consolidated financial statements or the related notes.
(3) The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The
management contracts and compensation plans or arrangements required to be filed with this
Form 10-K are listed as Exhibits 10.1 through 10.29.
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, 2019
FIRST DEFIANCE FINANCIAL CORP.
By:
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,
2019.
Signature
Title
John L. Bookmyer
Donald P. Hileman
Kevin T. Thompson
Robert E. Beach
Douglas A. Burgei, D.V.M.
Thomas A. Reineke
Barbara A. Mitzel
Jean A. Hubbard
Samuel S. Strausbaugh
Charles D. Niehaus
Terri A. Bettinger
Thomas K. Herman
Mark A. Robison
Chairman of the Board
President and Chief
Executive Officer
Executive Vice President and Chief
Financial Officer (principal accounting officer)
Director
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.
The SEC 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
Agreement and Plan of Merger, dated August 23, 2016, by and between
First Defiance and Commercial Bancshares, Inc.
Description
2.2
Amendment to Agreement and Plan of Merger, dated October 31, 2016, by
3.1
3.2
3.3
4.1
10.1
10.2
10.3
and between First Defiance and Commercial Bancshares, Inc.
Articles of Incorporation of First Defiance
Amendment to Articles of Incorporation of First Defiance
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 Stock Option Award Agreement under 2005 Stock Option and
Incentive Plan
10.4
First Federal Amended and Restated Executive Group Life Plan – Post
Separation
10.5
10.6
2010 Equity Incentive Plan
First Amendment to First Defiance Financial Corp. 2010 Equity Incentive
Plan
10.7
2010 Equity Plan Form of Long-Term Incentive Performance-Based
Award Agreement
10.8
2010 Equity Plan Form of Short-Term Incentive Performance-Based
Award Agreement
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Form of Restricted Stock Award Agreement under 2010 Equity Plan
Form of Restricted Stock Unit Award Agreement under 2010 Equity Plan
First Defiance Deferred Compensation Plan
First Defiance Financial Corp. and Affiliates Incentive Compensation Plan
Form of First Defiance Financial Corp. Long-Term Restricted Stock Unit
Award Agreement under the Incentive Compensation Plan
Employment Agreement with Donald P. Hileman
Employment Agreement with Kevin T. Thompson
2014 Change of Control and Non-Solicitation Agreement with John R.
Reisner
(28)
(12)
(1)
(30)
(31)
(26)
(5)
(6)
(3)
(13)
(14)
(18)
(16)
(17)
(25)
(12)
(22)
(19)
(21)
(23)
(24)
(27)
10.17
Change of Control Agreement and Non-Compete Agreement with Gregory
(32)
R. Allen
10.18
10.19
10.20
First Amendment to Donald P. Hileman’s Employment Agreement
First Amendment to Kevin T. Thompson’s Employment Agreement
Form of Restricted Stock Award Agreement under 2018 Equity Incentive
Plan
10.21
Form of Restricted Stock Unit Award Agreement under 2018 Equity
Incentive Plan
10.22
10.23
First Defiance Deferred Compensation Plan, revised October 30, 2014
2018 Change of Control and Non-Solicitation Agreement with John R.
Reisner
10.24
2018 Employment Agreement with Donald P. Hileman
(33)
(34)
(35)
(36)
(37)
(38)
(39)
- 135 -
- 135 -
10.25
10.26
2018 Employment Agreement with Kevin T. Thompson
Form of Performance-Based Restricted Stock Unit Award Agreement
(LTIP) under the 2018 Equity Incentive Plan
10.27
Form of Performance-Based Restricted Stock Unit Award Agreement
(Long-Term Equity Asset Growth) under the 2018 Equity Incentive Plan
10.28
Form of Performance-Based Restricted Stock Unit Award Agreement
(LTIP) under the 2010 Equity Incentive Plan
10.29
Form of Performance-Based Restricted Stock Unit Award Agreement
(Long-Term Equity Asset Growth) under the 2010 Equity Incentive Plan
21
23.1
31.1
List of Subsidiaries of the Company
Consent of Crowe LLP
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Statements of Financial Condition, (ii) the Consolidated
Statements of Income, (iii) the Consolidated Statements of
Comprehensive Income, (iv) the Consolidated Statements of Changes in
Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows,
and (vi) the Notes to the Consolidated Financial Statements tagged as
blocks of text and in detail.
(40)
(29)
(29)
(29)
(29)
(29)
(29)
(29)
(29)
(29)
(29)
(29)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
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 10.2 in the Registrant’s 2004 Form 10-K (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.16 in the Registrant’s 2008 Form 10-K (File No.
000-26850)
Incorporated herein by reference to Appendix B to the 2001 Proxy Statement (File No. 000-26850)
Incorporated herein by reference to Exhibit 10.4 in Form 8-K filed October 1, 2007 (File No. 000-
26850)
Incorporated herein by reference to Appendix A to the 2005 Proxy Statement (File No. 000-26850)
Incorporated herein by reference to Exhibit 3 in Form 8-K filed December 8, 2008 (F File No.
000-26850)
Incorporated herein by reference to Exhibit 10 in Form 8-K filed December 8, 2008 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed December 12, 2008 (File No.
000-26850)
Incorporated herein by reference to Exhibit 4 in Form 8-K filed December 8, 2008 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.24 in the Registrant’s 2016 Form 10-K (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.1 in Form 10-Q filed November 2, 2010 (File No.
000-26850)
Incorporated herein by reference to Annex A to 2010 Proxy Statement (File No. 000-26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed March 4, 2011 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.1 in Form 10-Q filed November 8, 2011 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.2 in Form 10-Q filed November 8, 2011 (File No.
000-26850)
- 136 -
- 136 -
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed March 15, 2012 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.2 in Form 8-K filed March 15, 2012 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.3 in Form 8-K filed March 15, 2012 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.4 in Form 8-K filed March 15, 2012 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed December 23, 2005 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed December 30, 2013 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.2 in Form 8-K filed December 30, 2013 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.3 in Form 8-K filed December 30, 2013 (File No.
000-26850)
Incorporated herein by reference to Exhibit 4.1 in Registrant’s 2014 Form 10-K (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.23 in Registrant’s 2015 Form 10-K (File No. 000-
26850)
Incorporated herein by reference to Exhibit 2.1 in Form 8-K filed August 24, 2016 (File No. 000-
26850)
Included herein
Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on June 22, 2018
(File No. 000-26850).
Incorporated by reference to Exhibit 4.3 of the Registrant’s Form S-8 POS filed on July 17, 2018
(333-197203).
Incorporated herein by reference to Exhibit 10.4 in Form 10-Q filed May 8, 2018 (File No. 000-
26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed February 23, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.2 in Form 8-K filed February 23, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.1 in Form 10-Q filed August 7, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.2 in Form 10-Q filed August 7, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.3 in Form 10-Q filed August 7, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed March 22, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.1 in Form 8-K filed December 27, 2018 (File No.
000-26850)
Incorporated herein by reference to Exhibit 10.2 in Form 8-K filed December 27, 2018 (File No.
000-26850)
- 137 -
- 137 -
This page intentionally left blank
- 138 -
SHAREHOLDER I N FOR MATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be conducted virtually at 1:00
p.m., Eastern Time, on Tuesday, April 30, 2019. Shareholders may access the
Annual Meeting at www.virtualshareholdermeeting.com/fdef2019
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 January 31, 2019,
there were approximately 2,347 stockholders of record and 20,067,268
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 2018 totaled $0.64 per share.
TOTAL RETURN PERFORMANCE
300
250
200
150
100
50
E
U
L
A
V
X
E
D
N
I
0
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17 12/31/18
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
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.
PRICE RANGE
Year Ended December 31, 2018
Year Ended December 31, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
$29.93
LOW
$25.51
$33.72
$27.63
$35.00
$29.61
$31.09
$22.78
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
LOW
$25.58
$23.14
$28.45
$24.39
$27.00
$23 .51
$28.46
$25.14
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
For investor relations information, visit Fdef.com