UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM
10-Q
(Mark
One)
ý
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. For the Quarterly Period Ended
September 30,
2008
|
OR
o
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Transition Period from
___________to__________
|
Commission
file number
0-26850
First Defiance Financial
Corp.
(Exact
name of registrant as specified in its charter)
Ohio
|
|
34-1803915
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
Number)
|
|
|
|
601 Clinton Street,
Defiance, Ohio
|
|
43512
|
(Address
or principal executive office)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code:
(419)
782-5015
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
ý
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large
accelerated filer
o
|
Accelerated
filer
ý
|
Non-accelerated
filer
o
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes
o
No
ý
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date. Common Stock, $.01 Par Value – 8,117,120
shares outstanding at November 10, 2008.
FIRST
DEFIANCE FINANCIAL CORP.
|
|
Page
Number
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
|
|
7
|
|
|
|
|
|
26
|
|
|
|
|
|
41
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
42
|
|
|
|
|
|
42
|
|
|
|
|
|
42
|
|
|
|
|
|
43
|
|
|
|
|
|
43
|
|
|
|
|
|
43
|
|
|
|
|
|
44
|
PART
1-FINANCIAL I
N
FORMATION
FIRST
DEFIANCE FINANCIAL CORP.
Consolidated
Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts
in Thousands)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(In
Thousands)
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash and amounts due from
depository institutions
|
|
$
|
34,230
|
|
|
$
|
53,976
|
|
Interest-bearing
deposits
|
|
|
358
|
|
|
|
11,577
|
|
|
|
|
34,588
|
|
|
|
65,553
|
|
Securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, carried at
fair value
|
|
|
113,036
|
|
|
|
112,370
|
|
Held-to-maturity, carried at
amortized cost
|
|
|
|
|
|
|
|
|
(fair value $1,010 and $1,161 at
September 30, 2008
|
|
|
|
|
|
|
|
|
and December 31, 2007,
respectively)
|
|
|
978
|
|
|
|
1,117
|
|
|
|
|
114,014
|
|
|
|
113,487
|
|
Loans
held for sale
|
|
|
9,363
|
|
|
|
5,751
|
|
Loans
receivable, net of allowance of $23,445 at September
|
|
|
|
|
|
|
|
|
30,
2008 and $13,890 at December 31, 2007, respectively
|
|
|
1,572,882
|
|
|
|
1,275,806
|
|
Accrued
interest receivable
|
|
|
8,672
|
|
|
|
6,755
|
|
Federal
Home Loan Bank stock
|
|
|
21,376
|
|
|
|
18,586
|
|
Bank
owned life insurance
|
|
|
29,174
|
|
|
|
28,423
|
|
Premises
and equipment
|
|
|
47,379
|
|
|
|
40,545
|
|
Real
estate and other assets held for sale
|
|
|
4,776
|
|
|
|
2,460
|
|
Goodwill
|
|
|
56,830
|
|
|
|
36,820
|
|
Core
deposit and other intangibles
|
|
|
8,771
|
|
|
|
3,551
|
|
Mortgage
servicing rights
|
|
|
9,335
|
|
|
|
5,973
|
|
Other
assets
|
|
|
4,866
|
|
|
|
5,694
|
|
Total
assets
|
|
$
|
1,922,026
|
|
|
$
|
1,609,404
|
|
(continued)
FIRST
DEFIANCE FINANCIAL CORP.
Consolidated
Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts
in Thousands)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(In
Thousands)
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,435,804
|
|
|
$
|
1,217,858
|
|
Advances from the Federal Home
Loan Bank
|
|
|
173,581
|
|
|
|
139,536
|
|
Short term
borrowings
|
|
|
21,200
|
|
|
|
−
|
|
Securities sold under repurchase
agreements
|
|
|
49,038
|
|
|
|
30,055
|
|
Subordinated
debentures
|
|
|
36,083
|
|
|
|
36,083
|
|
Advance payments by
borrowers
|
|
|
496
|
|
|
|
762
|
|
Deferred taxes
|
|
|
1,469
|
|
|
|
1,306
|
|
Other liabilities
|
|
|
14,679
|
|
|
|
17,850
|
|
Total
liabilities
|
|
|
1,732,350
|
|
|
|
1,443,450
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value per
share:
|
|
|
|
|
|
|
|
|
5,000 shares authorized; no
shares issued
|
|
|
−
|
|
|
|
−
|
|
Common stock, $.01 par value per
share:
|
|
|
|
|
|
|
|
|
25,000 shares authorized; 12,739
and 11,703 shares
|
|
|
|
|
|
|
|
|
issued and 8,117 and 7,059 shares
outstanding, respectively
|
|
|
127
|
|
|
|
117
|
|
Additional paid-in
capital
|
|
|
140,360
|
|
|
|
112,651
|
|
Stock acquired by
ESOP
|
|
|
−
|
|
|
|
(202
|
)
|
Accumulated other comprehensive
income (loss), net of
|
|
|
|
|
|
|
|
|
tax of ($2,657) and ($224),
respectively
|
|
|
(4,933
|
)
|
|
|
(415
|
)
|
Retained earnings
|
|
|
126,760
|
|
|
|
126,630
|
|
Treasury stock, at cost, 4,622 and
4,644 shares
Respectively
|
|
|
(72,638
|
)
|
|
|
(72,827
|
)
|
Total
stockholders’ equity
|
|
|
189,676
|
|
|
|
165,954
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,922,026
|
|
|
$
|
1,609,404
|
|
See
accompanying notes
FIRST
DEFIANCE FINANCIAL CORP.
Consolidated
Conden
s
ed Statements of Income
(UNAUDITED)
(Amounts
in Thousands, except per share data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
24,902
|
|
|
$
|
22,983
|
|
|
$
|
72,220
|
|
|
$
|
67,882
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,078
|
|
|
|
1,129
|
|
|
|
3,365
|
|
|
|
3,403
|
|
Non-taxable
|
|
|
357
|
|
|
|
310
|
|
|
|
1,017
|
|
|
|
887
|
|
Interest-bearing
deposits
|
|
|
5
|
|
|
|
262
|
|
|
|
119
|
|
|
|
483
|
|
FHLB stock
dividends
|
|
|
301
|
|
|
|
305
|
|
|
|
797
|
|
|
|
898
|
|
Total
interest income
|
|
|
26,643
|
|
|
|
24,989
|
|
|
|
77,518
|
|
|
|
73,553
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,658
|
|
|
|
10,536
|
|
|
|
23,851
|
|
|
|
30,130
|
|
FHLB advances and
other
|
|
|
1,603
|
|
|
|
1,636
|
|
|
|
4,803
|
|
|
|
5,253
|
|
Subordinated
debentures
|
|
|
461
|
|
|
|
597
|
|
|
|
1,445
|
|
|
|
1,518
|
|
Notes payable
|
|
|
555
|
|
|
|
193
|
|
|
|
1,217
|
|
|
|
519
|
|
Total
interest expense
|
|
|
10,277
|
|
|
|
12,962
|
|
|
|
31,316
|
|
|
|
37,420
|
|
Net
interest income
|
|
|
16,366
|
|
|
|
12,027
|
|
|
|
46,202
|
|
|
|
36,133
|
|
Provision
for loan losses
|
|
|
4,907
|
|
|
|
671
|
|
|
|
8,761
|
|
|
|
1,704
|
|
Net
interest income after provision for loan losses
|
|
|
11,459
|
|
|
|
11,356
|
|
|
|
37,441
|
|
|
|
34,429
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees and other
charges
|
|
|
3,717
|
|
|
|
2,764
|
|
|
|
9,756
|
|
|
|
7,997
|
|
Insurance commission
income
|
|
|
1,179
|
|
|
|
1,180
|
|
|
|
4,381
|
|
|
|
4,244
|
|
Mortgage banking
income
|
|
|
1,011
|
|
|
|
921
|
|
|
|
3,627
|
|
|
|
2,780
|
|
Gain on sale of non-mortgage
loans
|
|
|
134
|
|
|
|
138
|
|
|
|
177
|
|
|
|
204
|
|
Gain (loss) on
securities
|
|
|
(2,051
|
)
|
|
|
21
|
|
|
|
(2,564
|
)
|
|
|
21
|
|
Trust income
|
|
|
114
|
|
|
|
95
|
|
|
|
343
|
|
|
|
280
|
|
Income from Bank Owned Life
Insurance
|
|
|
224
|
|
|
|
321
|
|
|
|
751
|
|
|
|
929
|
|
Other non-interest
income
|
|
|
(188
|
)
|
|
|
144
|
|
|
|
(166
|
)
|
|
|
407
|
|
Total
non-interest income
|
|
|
4,140
|
|
|
|
5,584
|
|
|
|
16,305
|
|
|
|
16,862
|
|
Non-interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
7,980
|
|
|
|
6,424
|
|
|
|
22,421
|
|
|
|
19,610
|
|
Occupancy
|
|
|
1,949
|
|
|
|
1,516
|
|
|
|
5,562
|
|
|
|
4,324
|
|
State franchise
tax
|
|
|
533
|
|
|
|
355
|
|
|
|
1,540
|
|
|
|
1,074
|
|
Data processing
|
|
|
1,221
|
|
|
|
941
|
|
|
|
3,384
|
|
|
|
2,838
|
|
Acquisition related
charges
|
|
|
20
|
|
|
|
-
|
|
|
|
1,032
|
|
|
|
-
|
|
Amortization of
intangibles
|
|
|
424
|
|
|
|
167
|
|
|
|
1,035
|
|
|
|
481
|
|
Other non-interest
expense
|
|
|
3,106
|
|
|
|
2,893
|
|
|
|
9,250
|
|
|
|
7,623
|
|
Total
non-interest expense
|
|
|
15,233
|
|
|
|
12,296
|
|
|
|
44,224
|
|
|
|
35,950
|
|
Income
before income taxes
|
|
|
366
|
|
|
|
4,644
|
|
|
|
9,522
|
|
|
|
15,341
|
|
Federal
income taxes
|
|
|
44
|
|
|
|
1,515
|
|
|
|
3,046
|
|
|
|
4,995
|
|
Net
Income
|
|
|
322
|
|
|
|
3,129
|
|
|
|
6,476
|
|
|
|
10,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.44
|
|
|
$
|
0.83
|
|
|
$
|
1.46
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.44
|
|
|
$
|
0.83
|
|
|
$
|
1.44
|
|
Dividends
declared per share (Note 6)
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
$
|
0.78
|
|
|
$
|
0.75
|
|
Average
shares outstanding (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,113
|
|
|
|
7,080
|
|
|
|
7,813
|
|
|
|
7,101
|
|
Diluted
|
|
|
8,123
|
|
|
|
7,171
|
|
|
|
7,842
|
|
|
|
7,201
|
|
FIRST
DEFIANCE FINANCIAL CORP.
Consolidated
Condensed Statement of Changes in Stockholders’ Equity
(Amounts
in Thousands)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
193,800
|
|
|
$
|
164,657
|
|
|
$
|
165,954
|
|
|
$
|
159,825
|
|
Adjustment
to initially apply FIN 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
Balance
at beginning of period as adjusted
|
|
|
193,800
|
|
|
|
164,657
|
|
|
|
165,954
|
|
|
|
159,625
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
322
|
|
|
|
3,129
|
|
|
|
6,476
|
|
|
|
10,346
|
|
Other comprehensive income
(loss)
|
|
|
(2,400
|
)
|
|
|
483
|
|
|
|
(4,518
|
)
|
|
|
(28
|
)
|
Total
comprehensive income
|
|
|
(2,078
|
)
|
|
|
3,612
|
|
|
|
1,958
|
|
|
|
10,318
|
|
ESOP
shares released
|
|
|
-
|
|
|
|
333
|
|
|
|
551
|
|
|
|
1,376
|
|
Stock
option expense
|
|
|
65
|
|
|
|
72
|
|
|
|
181
|
|
|
|
202
|
|
Tax
benefit of employee plans
|
|
|
-
|
|
|
|
-
|
|
|
|
72
|
|
|
|
56
|
|
Shares
issued under stock option plans
|
|
|
-
|
|
|
|
-
|
|
|
|
768
|
|
|
|
462
|
|
Treasury
shares repurchased
|
|
|
(10
|
)
|
|
|
(2,216
|
)
|
|
|
(635
|
)
|
|
|
(4,271
|
)
|
Acquisition
of Huber, Harger, Welt and Smith
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250
|
|
Acquisition
of Pavilion Bancorp
|
|
|
-
|
|
|
|
-
|
|
|
|
27,128
|
|
|
|
-
|
|
Common
cash dividends declared (Note 6)
|
|
|
(2,101
|
)
|
|
|
(1,752
|
)
|
|
|
(6,301
|
)
|
|
|
(5,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
$
|
189,676
|
|
|
$
|
164,706
|
|
|
$
|
189,676
|
|
|
$
|
164,706
|
|
See
Accompanying Notes
FIRST
DEFIA
N
CE FINANCIAL CORP.
Consolidated
Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts
in Thousands)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
13,360
|
|
|
$
|
9,514
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of held-to-maturity securities
|
|
|
138
|
|
|
|
204
|
|
Proceeds
from maturities of available-for-sale securities
|
|
|
24,787
|
|
|
|
17,355
|
|
Proceeds
from sale of securities of available-for-sale securities
|
|
|
−
|
|
|
|
2,521
|
|
Proceeds
from sale of real estate and other assets held for sale
|
|
|
2,739
|
|
|
|
2,120
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
−
|
|
|
|
5
|
|
Net
cash received in acquisition of Huber, Harger, Welt and
Smith
|
|
|
−
|
|
|
|
190
|
|
Net
cash paid for acquisition of Pavilion Bancorp, Inc.
|
|
|
(23,902
|
)
|
|
|
−
|
|
Proceeds
from sale of non-mortgage loans
|
|
|
10,707
|
|
|
|
11,320
|
|
Purchases
of available-for-sale securities
|
|
|
(25,970
|
)
|
|
|
(20,499
|
)
|
Investment
in bank owned life insurance
|
|
|
-
|
|
|
|
(2,060
|
)
|
Purchases
of office properties and equipment
|
|
|
(3,240
|
)
|
|
|
(5,664
|
)
|
Net
(increase) decrease in loans receivable
|
|
|
(88,327
|
)
|
|
|
(41,506
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(103,068
|
)
|
|
|
(36,014
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits and advance payments by
borrowers
|
|
|
8,726
|
|
|
|
69,560
|
|
Repayment
of Federal Home Loan Bank long-term advances
|
|
|
(6,399
|
)
|
|
|
(653
|
)
|
Net
increase (decrease) in Federal Home Loan Bank short-term
advances
|
|
|
15,300
|
|
|
|
(33,100
|
)
|
Proceeds
from issuance of subordinated debentures
|
|
|
−
|
|
|
|
15,464
|
|
Proceeds
from Federal Home Loan Bank long-term advances
|
|
|
19,000
|
|
|
|
−
|
|
Increase
(decrease) in securities sold under repurchase agreements
|
|
|
16,737
|
|
|
|
(5,779
|
)
|
Net
increase in short-term borrowings
|
|
|
11,200
|
|
|
|
−
|
|
Purchase
of common stock for treasury
|
|
|
(635
|
)
|
|
|
(4,271
|
)
|
Cash
dividends paid
|
|
|
(6,026
|
)
|
|
|
(5,325
|
)
|
Proceeds
from exercise of stock options
|
|
|
768
|
|
|
|
462
|
|
Excess
tax benefits from exercise of stock options
|
|
|
72
|
|
|
|
56
|
|
Net
cash provided by (used in) financing activities
|
|
|
58,743
|
|
|
|
36,414
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(30,965
|
)
|
|
|
9,914
|
|
Cash
and cash equivalents at beginning of period
|
|
|
65,553
|
|
|
|
50,023
|
|
Cash
and cash equivalents at end of period
|
|
$
|
34,588
|
|
|
$
|
59,937
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
32,125
|
|
|
$
|
36,725
|
|
Income
taxes paid
|
|
$
|
6,682
|
|
|
$
|
4,520
|
|
Transfers
from loans to other real estate owned and other
|
|
|
|
|
|
|
|
|
assets held for
sale
|
|
$
|
3,648
|
|
|
$
|
3,510
|
|
See
accompanying notes.
FIRST
DEFIANCE FINANCIAL CORP.
Notes to
Consolidated Condensed Financial Statements
(Unaudited
at Septemb
e
r 30, 2008 and 2007)
1.
Principles of Consolidation
The
consolidated condensed financial statements include the accounts of First
Defiance Financial Corp. ("First Defiance" or "the Company"), its two wholly
owned subsidiaries, First Federal Bank of the Midwest ("First Federal") and
First Insurance and Investments, Inc. (“First Insurance”). In the opinion of
management, all significant inter-company accounts and transactions have been
eliminated in consolidation.
2
.
Basis of
Presentation
The
consolidated condensed statement of financial condition at December 31, 2007 has
been derived from the audited financial statements at that date, which were
included in First Defiance’s Annual Report on Form 10-K.
The
accompanying consolidated condensed financial statements as of September 30,
2008 and for the three and nine month periods ended September 30, 2008 and 2007
have been prepared by First Defiance without audit and do not include
information or footnotes necessary for the complete presentation of financial
condition, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States. These consolidated condensed
financial statements should be read in conjunction with the financial statements
and notes thereto included in First Defiance's 2007 Annual Report on Form 10-K
for the year ended December 31, 2007. However, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for the fair
presentation of the financial statements have been made. The results for the
three and nine month periods ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the entire year.
Goodwill
Goodwill
is the excess of the purchase price over the fair value of the assets and
liabilities of companies acquired through business combinations accounted for
under the purchase method. Goodwill is evaluated at the business unit level,
which for First Defiance are First Federal and First Insurance. At September 30,
2008 goodwill totaled $56.8 million, an increase of $20.0 million from the $36.8
million balance reported at December 31, 2007. The increase in goodwill is the
result of the Pavilion Bancorp, Inc (“Pavilion”) acquisition, which was
completed on March 14, 2008. The acquisition of Huber, Harger, Welt and Smith
(“HHWS”) added $1.7 million of goodwill in February 2007.
2
.
Basis of Presentation
(continued)
Income
Taxes
The
Company’s effective tax rate differs from the statutory 35% federal tax rate
primarily because of the volatility of income tax expense attributable to the
change in income before income taxes and the impact of the Company’s tax exempt
income on obligations of state and political subdivisions and bank-owned life
insurance. In accordance with Accounting Principles Board Opinion No. 28, income
tax expense should be recorded using the Company’s best estimate of the
effective tax rate for a full year. With the other-than-temporary impairment
charge recorded for the Company’s FHLMC and FNMA preferred stock holdings and
the higher than anticipated provisions for loan losses being necessary, the
Company’s pre-tax income is lower than expected. As a result, the Company’s tax
exempt income has had a larger impact than originally estimated and resulted in
a lower expected tax rate for the year.
Stock
Compensation
The
Company accounts for stock-based awards in accordance with Statement of
Financial Accounting Standard (“SFAS”) 123(R)
Share-Based Payment
, which
requires measurement of compensation cost for all stock-based awards based on
the grant-date fair value and recognition of compensation cost over the service
period of stock-based awards, which is usually the same as the vesting period.
The fair value of stock options and stock grants is determined using the
Black-Scholes valuation model. SFAS 123(R) provides for expense recognition, for
both new and existing stock-based awards, as the required services are
rendered.
The
Securities and Exchange Commission (“SEC”) has published Staff Accounting
Bulletin No. 107 (“SAB 107”), which expressed the views of the Staff regarding
the interaction between SFAS No. 123(R) and certain SEC rules and regulations
and provided the Staff’s views regarding the valuation of stock-based payment
arrangements for public companies. SAB 107 requires that stock-based
compensation be classified in the same expense category as cash compensation.
Accordingly, the Company has included stock-based compensation and benefits in
the condensed consolidated statements of income as part of compensation and
benefits.
Segment
Information
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.
2.
Basis of Presentation (continued)
Quantitative
thresholds of SFAS 131,
Disclosures about Segments of an
Enterprise and Related Information
are evaluated on an annual basis and
First Insurance has not met any of those thresholds. Accordingly, all of the
financial services operations are considered by management to be aggregated in
one reportable segment.
New
Accounting Standards
On
October 10, 2008, the FASB issued FSP SFAS 157-3,
Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
. The FSP
clarifies the application of FASB Statement No. 157,
Fair Value Measurements
, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The FSP is effective immediately,
and includes prior periods for which financial statements have not been issued,
and therefore the Company is subject to the provision of the FSP effective
September 30, 2008. The implementation of FSP SFAS 157-3 did not affect the
Company’s fair value measurement as of September 30, 2008.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157 (“SFAS 157”),
Fair Value Measurements
. This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. This standard is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued Staff
Position (“FSP”) 157-2, which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The Company adopted SFAS 157 as of January 1, 2008 and its
adoption was not material to the Company’s financial statements.
In
November 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 109,
Written Loan
Commitments Recorded at Fair Value Through Earnings
(SAB 109). SAB 109
supercedes SAB 105,
Application of Accounting Principles
to Loan Commitments
, and indicates that the expected net future cash
flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB 109 became effective beginning January 1, 2008 and did not
have a material effect on the Company’s financial position, results of
operations or cash flows.
In
February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
. The Statement provides companies with
an option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The Company did not elect the fair
value option for any financial assets or financial liabilities as of January 1,
2008, the effective date of the Statement.
2
.
Basis of Presentation
(continued)
Recent
Accounting Pronouncements
In May
2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles.
SFAS 162 identifies the sources of accounting
principles and the framework for selecting principles to be used in the
preparation for financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP Hierarchy). The hierarchical guidance provided by SFAS
162 did not have a significant impact on the Company’s financial position,
results of operations or cash flows.
In March
2008, the FASB issued SFAS 161,
Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133.
SFAS 161 amends SFAS 133,
Accounting for Derivative
Instruments and Hedging Activities,
by amending and expanding the
disclosure requirements of SFAS 133 to provide greater transparency about i) how
and why an entity uses derivative instruments, ii) how derivative instruments
and related hedge items are accounted for under SFAS 133 and its related
interpretations, and iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash flows. To
meet those objectives, SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161
is effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company’s financial position, results of operations or
cash flows.
In
December 2007, the FASB issued Statement No. 141R,
Business Combinations (Revised
2007).
Statement No. 141R replaces Statement No. 141,
Business Combinations,
and
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. Statement No. 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process required
under Statement No. 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
value. Statement No. 141R requires acquirers to expense acquisition related
costs as incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under Statement No.
141.
Under
Statement 141R, the requirements of Statement 146,
Accounting for Costs Associated with
Exit or Disposal Activities
, would have to be met in order to accrue for
a restructuring plan in purchase accounting. Pre-acquisition contingencies are
to be recognized at fair value, unless it is a non-contractual contingency that
is not likely to materialize, in which case, nothing should be recognized in
purchase accounting and instead, that contingency would be subject to the
probable and estimable recognition criteria of Statement No. 5,
Accounting for Contingencies
.
This
2
.
Basis of Presentation
(continued)
Statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.
3. Fair
Value
SFAS 157
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.
SFAS 157
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.
3.
Fair Value (continued)
In
Accordance with SFAS 157, the Company groups its assets and liabilities measured
at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine
the fair value. These levels are:
|
·
|
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 that 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. The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows and the bond’s terms and conditions, among other things.
Securities in Level 1 include U.S. Government agency preferred stock. Securities
in Level 2 include U.S. Government agencies, mortgage-backed securities,
municipal securities. Securities in Level 3 include trust preferred
securities.
Impaired loans
. Impaired
loans are reported at the fair value of the underlying collateral, if repayment
is expected solely from collateral. Impaired loans that are not collateral
dependent are reported at the present value of anticipated cash flows. Impaired
loans are valued using Level 3 inputs.
Mortgage servicing rights
.
Mortgage servicing rights are reported at fair value utilizing Level 3 inputs.
MSRs are valued by a third party consultant using a proprietary cash flow
valuation model.
The
following table summarizes the financial assets measured at fair value on a
recurring and non-recurring basis as of September 30, 2008, segregated by the
level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:
3.
Fair Value (continued)
Assets and Liabilities
Measured on a Recurring Basis
|
|
Level
1 Inputs
|
|
|
Level
2 Inputs
|
|
|
Level
3 Inputs
|
|
|
Total
Fair
Value
|
|
|
|
(In
Thousands)
|
|
Available
for sale securities
|
|
$
|
152
|
|
|
$
|
110,252
|
|
|
$
|
2,632
|
|
|
$
|
113,036
|
|
The
following table presents a roll-forward of the balance sheet amounts for the
three and nine months ended September 30, 2008, for available for sale
securities where fair value is determined within Level 3 of the valuation
hierarchy.
|
|
Fair
Value Measurements
Using
Significant Unobservable Inputs (Level 3)
|
|
|
|
Three
Months Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2008
|
|
Balance
at beginning of period
|
|
$
|
5,562
|
|
|
$
|
8,642
|
|
Total
gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
(150
|
)
|
|
|
(682
|
)
|
Included
in other comprehensive income
(presented
gross of taxes)
|
|
|
(2,774
|
)
|
|
|
(5,147
|
)
|
Purchases,
issuances, and settlements
|
|
|
(6
|
)
|
|
|
(181
|
)
|
Transfers
in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Balance
at September 30, 2008
|
|
$
|
2,632
|
|
|
$
|
2,632
|
|
Assets and Liabilities
Measured on a Non-Recurring Basis
|
|
Level
1 Inputs
|
|
|
Level
2 Inputs
|
|
|
Level
3 Inputs
|
|
|
Total
Fair
Value
|
|
|
|
(In
Thousands)
|
|
Impaired
loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,923
|
|
|
$
|
5,923
|
|
Mortgage
servicing rights
|
|
|
-
|
|
|
|
-
|
|
|
|
9,335
|
|
|
|
9,335
|
|
Mortgage
servicing rights which are carried at lower of cost or fair value were written
down to fair value of $9,335,000, resulting in a valuation allowance of
$128,000. A charge of $36,000 was included in earnings for the quarterly period
ended September 30, 2008. A charge of $12,000 was included in earnings for the
nine month period ended September 30, 2008.
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, derived from an appraisal or evaluation, had a
carrying amount of $5,923,000, with a valuation allowance of
$3,164,000.
4.
Stock Compensation Plans
First
Defiance has established incentive stock option plans for its directors and
employees and has reserved 1,727,485 shares of common stock for issuance under
the plans. As of September 30, 2008, 444,150 options (432,150 for employees and
12,000 for directors) have been granted and remain outstanding at option prices
based on the market value of the underlying shares on the date the options were
granted.
The
Company can issue incentive stock options and nonqualified stock options under
their incentive stock plans. Generally, one-fifth of the options awarded become
exercisable on each of the first five anniversaries of the date of grant. The
option period expires ten years from the date of grant and the exercise price is
the market price at the date of grant.
Following
is activity under the plans:
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Option
Prices
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Option
Prices
|
|
Options
outstanding, beginning of period
|
|
|
418,339
|
|
|
$
|
20.79
|
|
|
|
404,154
|
|
|
$
|
19.36
|
|
Forfeited
or cancelled
|
|
|
(16,703
|
)
|
|
|
23.73
|
|
|
|
(2,550
|
)
|
|
|
25.98
|
|
Exercised
|
|
|
(52,486
|
)
|
|
|
14.64
|
|
|
|
(32,922
|
)
|
|
|
14.04
|
|
Granted
|
|
|
95,000
|
|
|
|
17.15
|
|
|
|
54,250
|
|
|
|
27.41
|
|
Options
outstanding, end of period
|
|
|
444,150
|
|
|
$
|
20.62
|
|
|
|
422,932
|
|
|
$
|
20.76
|
|
Vested
or expected to vest at
period
end
|
|
|
423,154
|
|
|
$
|
20.54
|
|
|
|
|
|
|
|
|
|
Exercisable
at period end
|
|
|
252,550
|
|
|
$
|
19.55
|
|
|
|
|
|
|
|
|
|
Proceeds,
related tax benefits realized from options exercised and intrinsic value of
options exercised were as follows:
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
received from option exercises
|
|
$
|
768,355
|
|
|
$
|
462,076
|
|
Tax
benefit realized from option exercises
|
|
|
72,310
|
|
|
|
55,414
|
|
Intrinsic
value of options exercised
|
|
|
289,655
|
|
|
|
475,048
|
|
As of
September 30, 2008, there was $626,000 of total unrecognized compensation costs
related to unvested stock options granted under the Company Stock Option Plans.
The cost is expected to be recognized over a weighted-average period of 3.2
years.
As of
September, 2008 there were 142,500 shares available for grant under the
Company’s stock option plans.
The fair
value of stock options granted during the nine months ended September 30, 2008
and 2007 was determined at the date of grant using the Black-Scholes stock
option-pricing model and the following assumptions:
4.
Stock Compensation Plans (continued)
|
|
Nine
Months Ended September 30,
|
|
|
2008
|
|
|
2007
|
|
Expected
average risk-free rate
|
|
|
4.26
|
%
|
|
|
4.86
|
%
|
Expected
average life
|
|
6.46
|
years
|
|
6.63
|
years
|
Expected
volatility
|
|
|
22.50
|
%
|
|
|
21.80
|
%
|
Expected
dividend yield
|
|
|
6.08
|
%
|
|
|
3.64
|
%
|
The
weighted-average fair value of options granted for the nine months ended
September 30, 2008 and 2007 were $1.98 and $5.33, respectively.
5.
Acquisitions
On March
14, 2008, First Defiance completed the acquisition of Pavilion, which is
headquartered in Adrian, Michigan. Each Pavilion shareholder received 1.4209
shares of First Defiance common stock and $37.50 in cash for each share of
Pavilion stock. In connection with this transaction, 1,036,861 shares of First
Defiance common stock were issued at a total value of $27.1 million. The common
shares issued were valued at $26.117 per share, representing the average of the
closing bid and ask price as of the date of the merger announcement plus two
days prior and two days subsequent to the announcement. The total cost of the
transaction, including legal and investment banking fees, was $55.5 million. The
assets and liabilities of Pavilion were recorded on the balance sheet at their
fair value as of the acquisition date. The results of Pavilion’s operations have
been included in the First Defiance’s consolidated statement of income from the
date of acquisition.
The
following tables summarize the estimated fair values of the net assets acquired
and the computation of the purchase price and goodwill related to the Pavilion
acquisition. The numbers in the following two tables below have been
adjusted through September 30, 2008.
|
|
Acquisition
Date
|
|
|
|
March
14, 2008
|
|
|
|
(In
Thousands)
|
|
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,514
|
|
Investment
securities
|
|
|
9,136
|
|
Loans,
net of allowance for loan losses
|
|
|
232,639
|
|
Premises
and equipment
|
|
|
6,992
|
|
Federal
Home Loan Bank stock
|
|
|
2,036
|
|
Goodwill
and other intangibles
|
|
|
26,265
|
|
Other
assets
|
|
|
6,680
|
|
Total
Assets
|
|
|
288,262
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
|
209,385
|
|
Borrowings
|
|
|
18,403
|
|
Other
liabilities
|
|
|
4,929
|
|
Total
Liabilities
|
|
|
232,717
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
55,545
|
|
|
|
|
|
|
5.
Acquisitions
(continued)
|
|
Acquisition
Date
|
|
|
|
March
14, 2008
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
Purchase
price
|
|
$
|
55,545
|
|
Pavilion’s
carrying value of net assets acquired
|
|
|
(28,268
|
)
|
Excess
purchase price over Pavilion’s carrying
|
|
|
|
|
Value
of net assets acquired
|
|
|
27,277
|
|
|
|
|
|
|
Purchase
accounting adjustments
|
|
|
|
|
Portfolio
loans
|
|
|
(7,886
|
)
|
Premises
and equipment
|
|
|
2,579
|
|
Mortgage
servicing rights
|
|
|
(1,010
|
)
|
Deposits
|
|
|
752
|
|
Deferred
tax liabilities
|
|
|
4,553
|
|
Total
net tangible assets
|
|
|
(1,012
|
)
|
Core
deposit and other intangibles
|
|
|
(6,255
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
20,010
|
|
The
estimated fair values of Pavilion’s acquired assets and liabilities, including
identifiable intangible assets, are preliminary and subject to refinement, as
additional information becomes available. Any subsequent adjustments to the fair
value of assets and liabilities acquired, identifiable intangible assets, or
other purchase accounting adjustments will result in adjustments to
goodwill.
During
the nine months ended September 30, 2008, First Defiance recognized $1,032,000
of acquisition related charges, of which, $198,000 related to retention bonuses
and $171,000 related to termination of certain contracts. The remaining $663,000
includes items related to professional services, start-up costs of system
conversions, supplies and other non-recurring costs associated with the
completion of the acquisition and the transition of operations. Management
believes that that the acquisition related costs have essentially been completed
as of September 30, 2008.
On
February 28, 2007, First Defiance acquired HHWS, an insurance agency
headquartered in Bowling Green, Ohio for a purchase price comprised of 76,435
shares of First Defiance common stock and future consideration to be paid in
cash in 2009 and 2010. As of December 31, 2007, management has reported goodwill
of $1.7 million and identifiable intangible assets of $800,000 consisting of
customer relationship intangible of $620,000 and a non-compete intangible of
$180,000.
6.
Dividends on Common Stock
As of
September 30, 2008, First Defiance had declared a quarterly cash dividend of
$.26 per share for the third quarter of 2008, payable on October 24,
2008.
7.
Earnings Per Share
Basic
earnings per share as disclosed under SFAS No. 128 has been calculated by
dividing net income by the weighted average number of shares of common stock
outstanding for the three and nine month periods ended September 30, 2008 and
2007. First Defiance accounts for the shares issued to its Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 of the
American Institute of Certified Public Accountants ("AICPA"). As a result,
shares controlled by the ESOP are not considered in the weighted average number
of shares of common stock outstanding until the shares are committed for
allocation to an employee's individual account. In the calculation of diluted
earnings per share for the three and nine month periods ended September 30, 2008
and 2007, the effect of shares issuable under stock option plans have been
accounted for using the Treasury Stock method.
The
following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator
for basic and diluted
earnings
per share – Net income
|
|
$
|
322
|
|
|
$
|
3,129
|
|
|
$
|
6,476
|
|
|
$
|
10,346
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic
earnings
per share – weighted average
shares
|
|
|
8,113
|
|
|
|
7,080
|
|
|
|
7,813
|
|
|
|
7,101
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock
options
|
|
|
10
|
|
|
|
91
|
|
|
|
29
|
|
|
|
100
|
|
Denominator
for diluted earnings per
share
– adjusted weighted average
shares
and assumed conversions
|
|
|
8,123
|
|
|
|
7,171
|
|
|
|
7,842
|
|
|
|
7,201
|
|
Basic
earnings per share from net income
|
|
$
|
0.04
|
|
|
$
|
0.44
|
|
|
$
|
0.83
|
|
|
$
|
1.46
|
|
Diluted
earnings per share from
net
income
|
|
$
|
0.04
|
|
|
$
|
0.44
|
|
|
$
|
0.83
|
|
|
$
|
1.44
|
|
Shares
under option totaling 333,000 and 305,413 for the three and nine month periods
ended September 30, 2008 and 201,103 and 205,103 for the three and nine month
periods ended September 30, 2007 were excluded from the diluted earnings per
share calculation as they were anti-dilutive.
8.Investment
Securities
The
following is a summary of available-for-sale and held-to-maturity securities (in
thousands):
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
At
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations
of U.S. Government
corporations and
agencies
|
|
$
|
15,577
|
|
|
$
|
236
|
|
|
$
|
(61
|
)
|
|
$
|
15,752
|
|
Mortgage-backed
securities
|
|
|
35,519
|
|
|
|
183
|
|
|
|
(174
|
)
|
|
|
35,528
|
|
REMICs
|
|
|
3,064
|
|
|
|
20
|
|
|
|
-
|
|
|
|
3,084
|
|
Collateralized mortgage
obligations
|
|
|
21,810
|
|
|
|
170
|
|
|
|
(101
|
)
|
|
|
21,879
|
|
Preferred stock
|
|
|
8,663
|
|
|
|
-
|
|
|
|
(5,879
|
)
|
|
|
2,784
|
|
Obligations of state and political
subdivisions
|
|
|
34,793
|
|
|
|
249
|
|
|
|
(1,033
|
)
|
|
|
34,009
|
|
Totals
|
|
$
|
119,426
|
|
|
$
|
858
|
|
|
$
|
(7,248
|
)
|
|
$
|
113,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
certificates
|
|
$
|
153
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
159
|
|
FNMA certificates
|
|
|
395
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
395
|
|
GNMA certificates
|
|
|
130
|
|
|
|
2
|
|
|
|
-
|
|
|
|
132
|
|
Obligations of state and
political subdivisions
|
|
|
300
|
|
|
|
24
|
|
|
|
-
|
|
|
|
324
|
|
Totals
|
|
$
|
978
|
|
|
$
|
34
|
|
|
$
|
(2
|
)
|
|
$
|
1,010
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations
of U.S. Government
corporations and
agencies
|
|
$
|
24,565
|
|
|
$
|
354
|
|
|
$
|
(1
|
)
|
|
$
|
24,918
|
|
Mortgage-backed
securities
|
|
|
26,453
|
|
|
|
289
|
|
|
|
(55
|
)
|
|
|
26,687
|
|
REMICs
|
|
|
3,064
|
|
|
|
41
|
|
|
|
-
|
|
|
|
3,105
|
|
Collateralized mortgage
obligations
|
|
|
20,103
|
|
|
|
173
|
|
|
|
(77
|
)
|
|
|
20,199
|
|
Preferred stock
|
|
|
9,374
|
|
|
|
29
|
|
|
|
(761
|
)
|
|
|
8,642
|
|
Obligations of state and
political subdivisions
|
|
|
28,251
|
|
|
|
568
|
|
|
|
-
|
|
|
|
28,819
|
|
Totals
|
|
$
|
111,810
|
|
|
$
|
1,454
|
|
|
$
|
(894
|
)
|
|
$
|
112,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
certificates
|
|
$
|
195
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
201
|
|
FNMA certificates
|
|
|
472
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
475
|
|
GNMA certificates
|
|
|
150
|
|
|
|
2
|
|
|
|
-
|
|
|
|
152
|
|
Obligations of state and
political
Subdivisions
|
|
|
300
|
|
|
|
33
|
|
|
|
-
|
|
|
|
333
|
|
Totals
|
|
$
|
1,117
|
|
|
$
|
45
|
|
|
$
|
(1
|
)
|
|
$
|
1,161
|
|
8.
Investment Securities (continued)
The
following table summarizes First Defiance’s securities that were in an
unrealized loss position at September 30, 2008:
|
|
Duration
of Unrealized Loss Position
|
|
|
|
|
|
|
Less
than 12 Months
|
|
|
12
Month or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
Thousands)
|
|
At
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
treasury securities and obligations of U.S. government
corporations
and
agencies
|
|
$
|
6,198
|
|
|
$
|
(61
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,198
|
|
|
$
|
(61
|
)
|
Mortgage-backed
securities
|
|
|
19,062
|
|
|
|
(151
|
)
|
|
|
1,512
|
|
|
|
(23
|
)
|
|
|
20,574
|
|
|
|
(174
|
)
|
Collateralized
mortgage obligations and REMICs
|
|
|
8,039
|
|
|
|
(97
|
)
|
|
|
367
|
|
|
|
(4
|
)
|
|
|
8,406
|
|
|
|
(101
|
)
|
Preferred
stock
|
|
|
633
|
|
|
|
(1,060
|
)
|
|
|
2,000
|
|
|
|
(4,819
|
)
|
|
|
2,633
|
|
|
|
(5,879
|
)
|
Obligations
of state and political subdivisions
|
|
|
19,306
|
|
|
|
(1,002
|
)
|
|
|
396
|
|
|
|
(31
|
)
|
|
|
19,702
|
|
|
|
(1,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
135
|
|
|
|
(2
|
)
|
|
|
81
|
|
|
|
-
|
|
|
|
216
|
|
|
|
(2
|
)
|
Total
temporarily
impaired
securities
|
|
$
|
53,373
|
|
|
$
|
(2,373
|
)
|
|
$
|
4,356
|
|
|
$
|
(4,877
|
)
|
|
$
|
57,729
|
|
|
$
|
(7,250
|
)
|
The
Company recognized other-than-temporary impairment totaling $2,051,000 in the
2008 third quarter and $2,564,000 for the year-to-date period ended September
30, 2008. The majority of the other-than-temporary impairment recognized in the
third quarter of 2008 is related to the $1,901,000 write-down of the preferred
stock issued by Fannie Mae and Freddie Mac. The Company invested $1.0 million in
the preferred shares of each agency in January 2008 and wrote those investments
down to fair value of $87,000 (Fannie Mae) and $64,000 (Freddie Mac) as of
September 30, 2008. The Company also recorded other-than-temporary impairment of
$150,000 in the third quarter of 2008 and $663,000 for the year-to-date period
ended September 30, 2008, on two trust preferred securities where management
believes it is likely that the principal balance will not be fully recovered.
The unrealized losses are primarily the result of the changes in interest rates,
or in the case of certain trust preferred securities, a lack of liquidity in the
trading of this type of investment. Management does not believe these factors
will prohibit the Company from receiving its contractual principal and interest
payments. First Defiance has the ability and intent to hold these securities for
a period necessary for fair value to recover to the amortized cost. With the
exception of Fannie Mae, Freddie Mac, and the two trust preferred securities,
First Defiance does not believe the unrealized losses on securities as of
September 30, 2008 represent other-than-temporary impairment.
9.
Loans
Loans
receivable consist of the following (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Real
Estate:
|
|
|
|
|
|
|
One-to-four family
residential
|
|
$
|
250,244
|
|
|
$
|
229,588
|
|
Construction
|
|
|
75,822
|
|
|
|
56,698
|
|
Non-residential and
multi-family
|
|
|
746,676
|
|
|
|
580,621
|
|
|
|
|
1,072,742
|
|
|
|
866,907
|
|
Other
Loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
353,453
|
|
|
|
283,072
|
|
Consumer finance
|
|
|
41,964
|
|
|
|
37,743
|
|
Home equity and
improvement
|
|
|
158,992
|
|
|
|
128,080
|
|
|
|
|
554,409
|
|
|
|
448,895
|
|
Total
real estate and other loans
|
|
|
1,627,151
|
|
|
|
1,315,802
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Loans in process
|
|
|
29,794
|
|
|
|
25,074
|
|
Net deferred loan origination
fees and costs
|
|
|
1,030
|
|
|
|
1,032
|
|
Allowance for loan
loss
|
|
|
23,445
|
|
|
|
13,890
|
|
Totals
|
|
$
|
1,572,882
|
|
|
$
|
1,275,806
|
|
On March
14, 2008, $172.2 million of commercial loans, $29.3 million of consumer loans,
$30.0 million of mortgage loans and $1.1 million of credit card receivables were
acquired in conjunction with the Pavilion acquisition.
Changes
in the allowance for loan losses were as follows (in thousands):
|
|
Three
Months ended
September
30,
|
|
|
Nine
Months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$
|
20,578
|
|
|
$
|
13,417
|
|
|
$
|
13,890
|
|
|
$
|
13,579
|
|
Provision
for loan losses
|
|
|
4,907
|
|
|
|
671
|
|
|
|
8,761
|
|
|
|
1,704
|
|
Reserve
acquired from Pavilion
|
|
|
121
|
|
|
|
-
|
|
|
|
4,258
|
|
|
|
-
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
real estate
|
|
|
478
|
|
|
|
128
|
|
|
|
816
|
|
|
|
223
|
|
Non-residential and multi-family
real estate
|
|
|
1,495
|
|
|
|
586
|
|
|
|
2,277
|
|
|
|
1,669
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
220
|
|
|
|
92
|
|
Home equity and
improvement
|
|
|
216
|
|
|
|
10
|
|
|
|
306
|
|
|
|
51
|
|
Consumer finance
|
|
|
73
|
|
|
|
25
|
|
|
|
156
|
|
|
|
119
|
|
Total
charge-offs
|
|
|
2,262
|
|
|
|
749
|
|
|
|
3,775
|
|
|
|
2,154
|
|
Recoveries
|
|
|
101
|
|
|
|
88
|
|
|
|
311
|
|
|
|
298
|
|
Net
charge-offs
|
|
|
2,161
|
|
|
|
661
|
|
|
|
3,464
|
|
|
|
1,856
|
|
Ending
allowance
|
|
$
|
23,445
|
|
|
$
|
13,427
|
|
|
$
|
23,445
|
|
|
$
|
13,427
|
|
9.
Loans (continued)
The
following table presents the aggregate amounts of non-performing assets,
comprised of non-accrual loans and real estate owned on the dates
indicated:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(in
thousands)
|
|
Non-accrual
loans
|
|
$
|
24,630
|
|
|
$
|
9,217
|
|
Restructured
loans, accruing
|
|
|
905
|
|
|
|
-
|
|
Total
non-performing loans
|
|
|
25,535
|
|
|
$
|
9,217
|
|
Real
estate and other assets held for sale
|
|
|
4,776
|
|
|
|
2,460
|
|
Total
non-performing assets
|
|
$
|
30,311
|
|
|
$
|
11,677
|
|
Impaired loans having
recorded investments of $12.8 million at September 30, 2008 and $8.6 million at
December 31, 2007, have been recognized in conformity with FASB Statement No.
114, as amended by FASB Statement No. 118. The total allowance for loan losses
related to these loans was $4.5 million at September 30, 2008 and $1.4 million
at December 31, 2007.
10.Deposits
A summary
of deposit balances is as follows (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Non-interest-bearing
checking accounts
|
|
$
|
158,139
|
|
|
$
|
121,563
|
|
Interest-bearing
checking and money market accounts
|
|
|
365,251
|
|
|
|
342,367
|
|
Savings
accounts
|
|
|
145,019
|
|
|
|
105,873
|
|
Retail
certificates of deposit less than $100,000
|
|
|
557,643
|
|
|
|
509,720
|
|
Retail
certificates of deposit greater than $100,000
|
|
|
177,848
|
|
|
|
137,927
|
|
Brokered
or national certificates of deposit
|
|
|
31,904
|
|
|
|
408
|
|
|
|
$
|
1,435,804
|
|
|
$
|
1,217,858
|
|
On March
14, 2008, $45.6 million of non-interest-bearing checking accounts, $39.7 million
of interest-bearing checking accounts, $26.2 million of savings accounts and
$97.9 million of certificates of deposit were acquired as part of the Pavilion
acquisition.
11.
Borrowings
First
Defiance’s debt, Federal Home Loan Bank (FHLB) advances and junior subordinated
debentures owed to unconsolidated subsidiary trusts are comprised of the
following:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(in
thousands)
|
|
FHLB
Advances:
|
|
|
|
|
|
|
Overnight
borrowings
|
|
$
|
26,600
|
|
|
$
|
11,300
|
|
Single
maturity fixed rate advances
|
|
|
10,000
|
|
|
|
10,000
|
|
Single
maturity LIBOR based advances
|
|
|
45,000
|
|
|
|
45,000
|
|
Putable
advances
|
|
|
64,000
|
|
|
|
45,000
|
|
Strike-rate
advances
|
|
|
27,000
|
|
|
|
27,000
|
|
Amortizable
mortgage advances
|
|
|
981
|
|
|
|
1,236
|
|
Total
|
|
$
|
173,581
|
|
|
$
|
139,536
|
|
Borrowings
on Bank Line of Credit
|
|
$
|
20,000
|
|
|
$
|
-
|
|
Federal
funds borrowed
|
|
$
|
1,200
|
|
|
$
|
-
|
|
Junior
subordinated debentures owed to
unconsolidated
subsidiary trusts
|
|
$
|
36,083
|
|
|
$
|
36,083
|
|
On March
14, 2008, $4.5 million of variable rate advances and $1.7 million of amortizing
mortgage advances were acquired with the Pavilion acquisition. These advances
all matured during the second quarter of 2008.
The
putable advances can be put back to the Company at the option of the FHLB on a
quarterly basis. $19.0 million of the putable advances with a weighted average
rate of 2.72% are not yet callable by the FHLB. The call dates for these
advances range from January 14, 2009 to February 11, 2011 and the maturity dates
range from February 11, 2013 to March 12, 2018. The FHLB has the option to call
the remaining $45.0 million of putable advances with a weighted average rate of
5.25%. The maturity dates of these advances range from September 1, 2010 to
November 7, 2013. The strike-rate advances are putable at the option of the FHLB
only when the three month LIBOR rates exceed the agreed upon strike-rate in the
advance contract which ranges from 7.5% to 8.0%. The three month LIBOR rate at
September 30, 2008 was 4.05%. The weighted average rate of the strike-rate
advances is 4.18% and the maturity dates range from March 8, 2011 to February
25, 2013.
In March
2008, First Defiance borrowed $20.0 million under its revolving line of credit
with a commercial bank. The line of credit is secured by the stock of First
Defiance and the interest rate is either the lender’s prime rate or LIBOR plus
1.50%, whichever is selected by First Defiance. First Defiance used the cash
from this borrowing to fund a portion of the cash purchase price paid to
Pavilion shareholders. The interest rate on that borrowing at September 30, 2008
was 4.59%.
Pavilion
had $10 million of Fed Funds Purchased as of the acquisition date, which was
paid off immediately following the closing.
11. Borrowings
(continued)
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 this 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.
Distributions on the Trust Preferred Securities issued by Trust Affiliate II are
payable quarterly at a fixed rate equal to 6.441% for the first five years and a
floating interest rate based on three-month LIBOR plus 1.50% points, repricing
quarterly, thereafter.
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. 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 4.20%
and 6.37% on September 30, 2008 and December 31, 2007 respectively.
The Trust
Preferred Securities issued by Trust Affiliates I and II are subject to
mandatory redemption, in whole or part, upon repayment of the Subordinated
Debentures. The Company has entered into agreements that fully and
unconditionally guarantee the Trust Preferred Securities subject to the terms of
the guarantees. The Trust Preferred Securities and Subordinated Debentures
issued by Trust Affiliate I mature on December 15, 2035 but may be redeemed by
the issuer at par after October 28, 2010. The Trust Preferred Securities issued
by Trust Affiliate II mature on June 15, 2037, but may be redeemed at the
Company’s option at any time on or after June 15, 2012, or at any time upon
certain events.
A summary
of all junior debentures issued by the Company to affiliates follows. These
amounts represent the par value of the obligations owed to these affiliates,
including the Company’s equity interest in the trusts. Junior subordinated
debentures owed to the following affiliates were as follows:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
First
Defiance Statutory Trust I due December 2035
|
|
$
|
20,619
|
|
|
$
|
20,619
|
|
First
Defiance Statutory Trust II due June 2037
|
|
|
15,464
|
|
|
|
15,464
|
|
Total
junior subordinated debentures owed to unconsolidated subsidiary
Trusts
|
|
$
|
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.
12.Commitments,
Guarantees and Contingent Liabilities
Loan
commitments are made to accommodate the financial needs of First Defiance’s
customers; however, there are no long-term, fixed-rate loan commitments that
result in market risk. Standby letters of credit obligate the Company to pay a
third party beneficiary when a customer fails to repay an outstanding loan or
debt instrument, or fails to perform some contractual non-financial obligation.
Standby letters of credit are issued to address customers’ financing needs and
to facilitate customers’ trade transactions.
If
amounts are drawn under standby letters of credit, such amounts are treated as
loans. Both loan commitments and standby letters of credit 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
loan and unused lines of credit) and standby letters of credit was as
follows:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(In
Thousands)
|
|
Loan
commitments
|
|
$
|
367,192
|
|
|
$
|
280,152
|
|
Standby
Letters of Credit
|
|
|
19,385
|
|
|
|
9,147
|
|
Total
|
|
$
|
386,577
|
|
|
$
|
289,299
|
|
The
remaining weighted average life for outstanding standby letters of credit was
less than one year at September 30, 2008. The Company had $3.4 million of
standby letters of credit with a life longer than one year.
13.
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. A description of employees or former employees eligible for
coverage is included in Footnote 16 in the financial statements included in
First Defiance’s 2007 Annual Report on Form 10-K.
Net
periodic postretirement benefit costs include the following components for the
three and nine month periods ended September 30, 2008 and 2007:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
Thousands)
|
|
Service
cost-benefits attributable
to service during the
period
|
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
39
|
|
|
$
|
37
|
|
Interest
cost on accumulated post-
retirement benefit
obligation
|
|
|
37
|
|
|
|
31
|
|
|
|
110
|
|
|
|
94
|
|
Net
amortization and deferral
|
|
|
15
|
|
|
|
11
|
|
|
|
46
|
|
|
|
32
|
|
Net
periodic postretirement benefit cost
|
|
$
|
65
|
|
|
$
|
54
|
|
|
$
|
195
|
|
|
$
|
163
|
|
14.
Income Taxes
First
Defiance adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109
(“FIN 48”) on January
1, 2007. As of December 31, 2007 the Company had unrecognized tax benefits in
accordance with FIN 48 of $498,000. Details regarding these unrecognized tax
benefits are in Footnote 18 of First Defiance’s 2007 Annual Report on Form 10-K.
During the current quarter, there were no material changes to the amount of
unrecognized tax benefits or to any assumptions regarding the calculation of
these unrecognized tax benefits.
Federal
tax returns for years ended December 31, 2004 and later are subject to audit by
the Internal Revenue Service.
Item 2. Management's
Discussion and Anal
y
sis of Financial Condition and Results of
Operations
General
First
Defiance Financial Corp. (“First Defiance” or “the Company”) is a holding
company which conducts business through its two wholly owned subsidiaries, First
Federal Bank of the Midwest (“First Federal”) and First Insurance and
Investments, Inc. (“First Insurance”). First Federal is a federally chartered
savings bank that provides financial services through 36 full-service branches
in communities based in northwest Ohio, northeast Indiana, and
southeastern Michigan. On March 14, 2008, First Defiance completed the
acquisition of Pavilion Bancorp, Inc. (“Pavilion”), which added eight banking
centers in southeast Michigan, expanding the Company’s reach to markets adjacent
to its existing branch network. 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 services. First Insurance sells a variety of property and
casualty, group health and life, and individual health and life insurance
products and investment and annuity products. Insurance products are sold
through First Insurance’s offices in Defiance and Bowling Green, Ohio while
investment and annuity products are sold through registered investment
representatives located at certain First Federal banking center
locations.
First
Defiance invests in U.S. Treasury and federal government agency obligations,
obligations of municipal and other political subdivisions, mortgage-backed
securities which are issued by federal agencies, corporate bonds, and
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). Management determines the appropriate classification of all
such securities at the time of purchase in accordance with FASB Statement No.
115,
Accounting for Certain
Investments in Debt and Equity Securities
.
Securities
are classified as held-to-maturity when First Defiance has the positive intent
and ability to hold the security to maturity. Held-to-maturity securities are
stated at amortized cost and had a recorded value of $978,000 at September 30,
2008. Securities not classified as held-to-maturity are classified as
available-for-sale, which are stated at fair value and had a recorded value of
$113.0 million at September 30, 2008. The available-for-sale portfolio consists
of U.S. Treasury securities and obligations of U.S. Government corporations and
agencies ($15.8 million), certain municipal obligations ($34.0 million), CMOs
and REMICs ($24.9 million), mortgage backed securities ($35.5 million) and
preferred stock ($2.8 million).
In
accordance with SFAS No. 115, unrealized holding gains and losses deemed
temporary on available-for-sale securities are reported in a separate component
of stockholders' equity, net of tax, and are not reported in earnings until
realized. Net unrealized holding losses on available-for-sale securities were
$6.4 million at September 30, 2008. The impact to stockholders’ equity of
unrealized losses on available-for-sale securities was $4.2 million after
considering the related deferred tax liability.
The
profitability of First Defiance is primarily dependent on its net interest
income and non-interest income. Net interest income is the difference between
interest income on interest-earning assets, principally loans and securities,
and interest expense on interest-bearing deposits, Federal Home Loan Bank
advances, and other borrowings. The Company’s non-interest income
includes
deposit
and loan servicing fees, mortgage banking income, and insurance commissions.
First Defiance's earnings also depend on the provision for loan losses and
non-interest expenses, such as employee compensation and benefits, occupancy and
equipment expense, deposit insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
Participation in the
Treasury Capital Purchase Plan
On
October 3, 2008, Congress passed the Emergency Economic Stabilization Act of
2008 (“EESA”), which provides the U.S. Secretary of the Treasury with broad
authority to deploy up to $750 billion into the financial system to help restore
stability and liquidity to U.S. capital and credit markets. On
October 24, 2008, Treasury announced plans to direct up to $250 billion of the
EESA funding to the Treasury Capital Purchase Program (“CPP”), which provides
for a direct equity investment through the purchase by the Treasury of perpetual
preferred stock in participating financial institutions. Companies
participating in the CPP must comply with a number of operating restrictions,
including limits on executive compensation, stock redemptions and increases in
cash dividends.
The CPP
provides for a minimum investment of 1% of risk-weighted assets, with a maximum
investment equal to the lesser of 3% of total risk-weighted assets or $25
billion. The perpetual preferred stock investment will have a
dividend rate of 5% per year, until the fifth anniversary of the Treasury
investment, and a dividend of 9%, thereafter. The
preferred
stock cannot be redeemed for three years unless the issuer raises a specified
amount of private capital, The CPP also requires participating institutions to
issue to the Treasury warrants for common stock equal to 15% of the
capital invested by the Treasury.
Participation
in the program is voluntary and subject to approval by the
Treasury. Applications must be submitted by November 14, 2008 and are
subject to approval by the Treasury. The Company has filed an
application to participate in this program, but no assurance can be given that
the Company will receive approval.
Forward-Looking
Information
Certain
statements contained in this quarterly report that are not historical facts,
including but not limited to statements that can be identified by the use of
forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, or
“continue” or the negative thereof or other variations thereon or comparable
terminology 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 differ materially from those indicated
in such statements due to risks, uncertainties and changes with respect to a
variety of market and other factors.
Changes in Financial
Condition
At
September 30, 2008, First Defiance's total assets, deposits and stockholders'
equity amounted to $1.92 billion, $1.44 billion and $189.7 million,
respectively, compared to $1.61 billion, $1.22 billion and $166.0 million,
respectively, at December 31, 2007.
Net loans
receivable (excluding loans held for sale) increased $297.1 million to $1.57
billion at September 30, 2008 compared to $1.28 billion at December 31, 2007.
The increase included increases in commercial real estate loans (up $166.1
million), commercial loans (up $70.4 million), one-to-four family residential
real estate loans (up $20.7 million), home equity and improvement loans (up
$30.9 million), construction loans (up $19.1 million), and consumer loans (up
$4.2 million). Of the $297.1 million increase in loans receivable, $232.6
million was the result of the Pavilion acquisition. The remaining growth is
primarily in the commercial and non-residential real estate loan categories and
is the result of strong loan demand in the Company’s market area.
The
investment securities portfolio increased $527,000 to $114.0 million at
September 30, 2008 from $113.5 million at December 31, 2007. The increase is the
result of $26.0 million of securities being purchased during the first nine
months of 2008 mostly offset by $18.0 million of securities being matured or
called in the period and principal pay downs of $6.8 million in CMO’s and
mortgage-backed securities. First Defiance also acquired $9.1 million of
investment securities through the Pavilion acquisition. The unrealized loss in
the investment portfolio was $6.4 million at September 30, 2008 compared to an
unrealized gain of $560,000 at December 31, 2007.
Deposits
increased from $1.22 billion at December 31, 2007 to $1.44 billion as of
September 30, 2008. Of the $217.9 million increase, non-interest bearing demand
deposits increased $36.6 million to $158.1 million, savings deposits increased
$39.1 million to $145.0 million, interest-bearing demand deposits and money
market accounts increased $22.9 million to $365.3 million, and retail time
deposits increased $119.3 million to $767.4 million. The Pavilion acquisition
added $209.0 million in deposits as of March 14, 2008 which consisted of $45.6
million in non-interest-bearing demand deposits, $39.7 million in
interest-bearing demand deposits, $26.2 million in savings, and $97.9 million in
retail time deposits.
The FHLB
advances increased $34.1 million to $173.6 million at September 30, 2008 from
$139.5 million at December 31, 2007. First Defiance added $19.0 million in
putable advances during the first quarter of 2008 which have attractive rates
with one to two year lock-out periods before they can be called by the FHLB.
First Defiance also acquired $6.2 million of advances in the Pavilion
acquisition, all of which matured during the 2008 second quarter. The balance of
the increase in outstanding FHLB advances is in overnight advances. The higher
level of advances has funded loan growth during the first nine months of
2008.
Stockholders’
equity increased from $166.0 million at December 31, 2007 to $189.7 million at
September 30, 2008. The increase is primarily the result of issuing 1,036,861
shares of common stock valued at $26.117 per common share to Pavilion
shareholders. The Company also recorded net income of $6.5 million, realized
$768,000 of proceeds from stock option exercises, declared $6.3 million of cash
dividends, and repurchased $635,000 of treasury shares.
High
Loan-to-Value Mortgage Loans
The
majority of First Defiance’s mortgage loans are collateralized by one-to-four
family residential real estate and have loan-to-value ratios of 80% or less.
First Federal usually requires residential mortgage loan borrowers whose
loan-to-value is greater than 80% to purchase private mortgage insurance (PMI).
First Federal does originate and retain a limited number of residential mortgage
loans with loan-to-value ratios that exceed 80% where PMI is not required if
the
borrower
possesses other demonstrable strengths. The loan-to-value ratios on these loans
are generally limited to 85% and exceptions must be approved by First Federal’s
senior loan committee. Management monitors the balance of one-to-four family
residential loans, including home equity loans and committed lines of credit
that exceed certain loan-to-value standards (90% for owner occupied residences,
85% for non-owner occupied residences and one-to-four family construction loans,
75% for developed land and 65% for raw land). Total loans that exceed those
standards at September 30, 2008 totaled $35.2 million. 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.
Average Balances, Net
Interest Income and Yields Earned and Rates Paid
The
following table presents for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resultant yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in thousands of dollars and rates, and the net interest margin. The table
reports interest income from tax-exempt loans and investment on a tax-equivalent
basis. All average balances are based upon daily balances.
|
|
Three Months Ended September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest(1)
|
|
|
Rate(2)
|
|
|
Balance
|
|
|
Interest(1)
|
|
|
Rate(2)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$
|
1,585,489
|
|
|
$
|
24,934
|
|
|
|
6.26
|
%
|
|
$
|
1,244,531
|
|
|
$
|
22,995
|
|
|
|
7.33
|
%
|
Securities
|
|
|
118,502
|
|
|
|
1,636
|
|
|
|
5.31
|
|
|
|
112,645
|
|
|
|
1,615
|
|
|
|
5.66
|
|
Interest-earning
deposits
|
|
|
2,231
|
|
|
|
5
|
|
|
|
0.89
|
|
|
|
21,760
|
|
|
|
262
|
|
|
|
4.78
|
|
FHLB
stock and other
|
|
|
21,121
|
|
|
|
301
|
|
|
|
5.67
|
|
|
|
18,585
|
|
|
|
305
|
|
|
|
6.51
|
|
Total
interest-earning assets
|
|
|
1,727,343
|
|
|
|
26,876
|
|
|
|
6.18
|
|
|
|
1,397,521
|
|
|
|
25,177
|
|
|
|
7.14
|
|
Non-interest-earning
assets
|
|
|
201,644
|
|
|
|
|
|
|
|
|
|
|
|
152,653
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,928,987
|
|
|
|
|
|
|
|
|
|
|
$
|
1,550,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,268,016
|
|
|
$
|
7,658
|
|
|
|
2.40
|
%
|
|
$
|
1,074,413
|
|
|
$
|
10,536
|
|
|
|
3.89
|
%
|
FHLB
advances and other
|
|
|
174,343
|
|
|
|
1,603
|
|
|
|
3.66
|
|
|
|
128,597
|
|
|
|
1,636
|
|
|
|
5.05
|
|
Notes
payable
|
|
|
64,368
|
|
|
|
555
|
|
|
|
3.43
|
|
|
|
24,935
|
|
|
|
193
|
|
|
|
3.07
|
|
Subordinated
debentures
|
|
|
36,228
|
|
|
|
461
|
|
|
|
5.06
|
|
|
|
36,295
|
|
|
|
597
|
|
|
|
6.53
|
|
Total
interest-bearing liabilities
|
|
|
1,542,955
|
|
|
|
10,277
|
|
|
|
2.65
|
|
|
|
1,264,240
|
|
|
|
12,962
|
|
|
|
4.07
|
|
Non-interest
bearing deposits
|
|
|
169,257
|
|
|
|
-
|
|
|
|
|
|
|
|
103,181
|
|
|
|
-
|
|
|
|
|
|
Total
including non-interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
demand
deposits
|
|
|
1,712,212
|
|
|
|
10,277
|
|
|
|
2.39
|
|
|
|
1,367,421
|
|
|
|
12,962
|
|
|
|
3.76
|
|
Other
non-interest-bearing liabilities
|
|
|
22,323
|
|
|
|
|
|
|
|
|
|
|
|
18,002
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,734,535
|
|
|
|
|
|
|
|
|
|
|
|
1,385,423
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
194,452
|
|
|
|
|
|
|
|
|
|
|
|
164,751
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stock-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
holders'
equity
|
|
$
|
1,928,987
|
|
|
|
|
|
|
|
|
|
|
$
|
1,550,174
|
|
|
|
|
|
|
|
|
|
Net
interest income; interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate
spread
|
|
|
|
|
|
$
|
16,599
|
|
|
|
3.53
|
%
|
|
|
|
|
|
$
|
12,215
|
|
|
|
3.07
|
%
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.81
|
%
|
|
|
|
|
|
|
|
|
|
|
3.47
|
%
|
Average
interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
|
|
|
|
|
|
|
|
112
|
%
|
|
|
|
|
|
|
|
|
|
|
111
|
%
|
________________________
(1)
|
Interest
on certain tax-exempt loans and securities is not taxable for Federal
income tax purposes. In order to compare the tax-exempt yields on these
assets to taxable yields, the interest earned on these assets is adjusted
to a pre-tax equivalent amount based on the marginal corporate federal
income tax rate of 35%.
|
(3)
|
Net
interest margin is net interest income divided by average interest-earning
assets.
|
|
|
Nine Months Ended September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest(1)
|
|
|
Rate(2)
|
|
|
Balance
|
|
|
Interest(1)
|
|
|
Rate(2)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$
|
1,485,455
|
|
|
$
|
72,297
|
|
|
|
6.50
|
%
|
|
$
|
1,233,987
|
|
|
$
|
67,916
|
|
|
|
7.36
|
%
|
Securities
|
|
|
118,908
|
|
|
|
4,959
|
|
|
|
5.50
|
|
|
|
112,466
|
|
|
|
4,795
|
|
|
|
5.68
|
|
Interest-earning
deposits
|
|
|
6,311
|
|
|
|
119
|
|
|
|
2.52
|
|
|
|
12,461
|
|
|
|
483
|
|
|
|
5.18
|
|
FHLB
stock and other
|
|
|
20,199
|
|
|
|
797
|
|
|
|
5.27
|
|
|
|
18,585
|
|
|
|
898
|
|
|
|
6.46
|
|
Total
interest-earning assets
|
|
|
1,630,873
|
|
|
|
78,172
|
|
|
|
6.40
|
|
|
|
1,377,499
|
|
|
|
74,092
|
|
|
|
7.19
|
|
Non-interest-earning
assets
|
|
|
193,324
|
|
|
|
|
|
|
|
|
|
|
|
151,905
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,824,197
|
|
|
|
|
|
|
|
|
|
|
$
|
1,529,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,210,631
|
|
|
$
|
23,851
|
|
|
|
2.63
|
%
|
|
$
|
1,053,810
|
|
|
$
|
30,130
|
|
|
|
3.82
|
%
|
FHLB
advances and other
|
|
|
161,891
|
|
|
|
4,803
|
|
|
|
3.96
|
|
|
|
139,087
|
|
|
|
5,253
|
|
|
|
5.05
|
|
Notes
payable
|
|
|
48,018
|
|
|
|
1,217
|
|
|
|
3.39
|
|
|
|
22,920
|
|
|
|
519
|
|
|
|
3.03
|
|
Subordinated
debentures
|
|
|
36,245
|
|
|
|
1,445
|
|
|
|
5.33
|
|
|
|
31,147
|
|
|
|
1,518
|
|
|
|
6.52
|
|
Total
interest-bearing liabilities
|
|
|
1,456,785
|
|
|
|
31,316
|
|
|
|
2.87
|
|
|
|
1,246,964
|
|
|
|
37,420
|
|
|
|
4.01
|
|
Non-interest
bearing deposits
|
|
|
155,000
|
|
|
|
-
|
|
|
|
|
|
|
|
100,908
|
|
|
|
-
|
|
|
|
|
|
Total
including non-interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
demand
deposits
|
|
|
1,611,785
|
|
|
|
31,316
|
|
|
|
2.60
|
|
|
|
1,347,872
|
|
|
|
37,420
|
|
|
|
3.71
|
|
Other
non-interest-bearing liabilities
|
|
|
25,082
|
|
|
|
|
|
|
|
|
|
|
|
18,042
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,636,867
|
|
|
|
|
|
|
|
|
|
|
|
1,365,914
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
187,330
|
|
|
|
|
|
|
|
|
|
|
|
163,490
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stock-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
holders'
equity
|
|
$
|
1,824,197
|
|
|
|
|
|
|
|
|
|
|
$
|
1,529,404
|
|
|
|
|
|
|
|
|
|
Net
interest income; interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate
spread
|
|
|
|
|
|
$
|
46,856
|
|
|
|
3.53
|
%
|
|
|
|
|
|
$
|
36,672
|
|
|
|
3.18
|
%
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
Average
interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
|
|
|
|
|
|
|
|
|
112
|
%
|
|
|
|
|
|
|
|
|
|
|
110
|
%
|
________________________________
(1)
|
Interest
on certain tax-exempt loans and securities is not taxable for Federal
income tax purposes. In order to compare the tax-exempt yields on these
assets to taxable yields, the interest earned on these assets is adjusted
to a pre-tax equivalent amount based on the marginal corporate federal
income tax rate of 35%.
|
(3)
|
Net
interest margin is net interest income divided by average interest-earning
assets.
|
Results of
Operations
Three Months Ended September
30, 2008 and 2007
First
Defiance’s net income for the quarter ended September 30, 2008 was $322,000
compared to income of $3.1 million for the comparable period in 2007. Basic and
diluted earnings per share for the three months ended September 30, 2008 were
both $0.04 compared to basic and diluted earnings per share of $0.44 for the
quarter ended September 30, 2007.
Net Interest Income
.
The
Federal Reserve Board influences the general market rates of interest, including
the deposit and loan rates offered by First Federal and many other financial
institutions. The targeted federal funds rate, which is established by the
Federal Reserve Board’s Open Market Committee, lowered the target rate by 1.0%
in 2007 and by an additional 2.25% during the first nine months of 2008, to
2.00%. The targeted federal funds rate drives the Company’s pricing of a
substantial balance of loans in the commercial and home equity portfolios. First
Defiance managed the impact of the change in the prime rate by effectively
managing its deposit rates and by changing the mix of its interest-bearing
liabilities.
Net
interest income was $16.4 million for the third quarter of 2008 compared to
$12.0 million in the third quarter of 2007. Net interest income, the difference
between interest income earned on interest-earning assets and interest expense
incurred on interest-bearing liabilities, is the most significant component of
First Defiance’s earnings and is affected by changes in the volumes, rates and
composition of interest-earning assets and interest-bearing liabilities. For the
third quarter of 2008, total interest income was $26.6 million, a $1.7 million
increase over the third quarter of 2007. The increase in interest income was due
to a $329.8 million increase in average earning assets, offset by a decline of
96 basis points in the yield of those assets. The amount of interest income
recognized was also impacted in the third quarter of 2008 by an increase in the
balance of loans that were delinquent by more than 90 days. It is the Company’s
policy to reverse interest accrued on loans when they become 90 days past due.
As a result of the increase in these non-performing loans, interest income was
reduced by $550,000 in the third quarter of 2008 compared to $325,000 for the
same period in 2007.
Interest
expense was $10.3 million for the third quarter of 2008 compared to $13.0
million in the third quarter of 2007. The majority of the decrease in interest
expense occurred in interest-bearing deposits, where despite average balances
increasing $193.6 million to $1.268 billion for the third quarter of 2008, the
cost of that funding decreased 149 basis points between the 2007 and 2008 third
quarters, to 2.40% from 3.89%.
Net
interest margin for the quarter ended September 30, 2008 was 3.81%, a 34 basis
point improvement from the 2007 third quarter margin of 3.47%. The Company's
interest rate spread improved to 3.53% in the 2008 third quarter compared to
3.07% in the same 2007 quarterly period. The margin was favorably impacted by an
increase in the average balance of non-interest bearing deposits, which were
$169.3 million in the third quarter of 2008 compared to $103.2 million in the
same period in 2007. The Pavilion acquisition had a favorable impact on the
margin as Pavilion had historically operated at a higher margin than First
Defiance.
Provision
for Loan Losses.
The
provision for loan losses is determined by management as the amount to be added
to the allowance for loan losses after net charge-offs have been deducted to
bring the allowance to a level which, in management’s estimation, is necessary
to absorb probable credit losses within the existing loan portfolio. The
provision for loan losses was $4.9 million in the third quarter of 2008 compared
to $671,000 for the third quarter of 2007. The period over period increase was
primarily as attributable to thirty credits which accounted for $3.1
million of provision expense in the 2008 third quarter. Charge-offs for the
third quarter of 2008 were $2.3 million and recoveries of previously charged off
loans totaled $101,000 for net charge-offs of $2.2 million. By comparison,
$749,000 of charge-offs were recorded in the 2007 third quarter and $88,000 of
recoveries were realized for net charge-offs of $661,000. As a percentage of
average loans, annualized net charge-offs were 0.55% for the third quarter of
2008 compared to 0.21% in the same period in 2007.
Non-performing
assets, which include non-accrual loans, restructured loans, and real estate
owned, increased to $30.3 million at September 30, 2008 from $11.9 million at
September 30, 2007 and from $11.7 million at December 31, 2007. Non-performing
assets and asset quality ratios for First Defiance were as follows at September
30, 2008 and December 31, 2007:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(in
thousands)
|
|
Non-accrual
loans
|
|
$
|
24,630
|
|
|
$
|
9,217
|
|
Restructured
loans, accruing
|
|
|
905
|
|
|
|
-
|
|
Total
non-performing loans
|
|
$
|
25,535
|
|
|
$
|
9,217
|
|
Real
estate and other assets held for sale
|
|
|
4,776
|
|
|
|
2,460
|
|
Total
non-performing assets
|
|
$
|
30,311
|
|
|
$
|
11,677
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loans losses as a percentage of total loans
|
|
|
1.47
|
%
|
|
|
1.08
|
%
|
Allowance
for loan losses as a percentage of non-
performing
assets
|
|
|
77.35
|
%
|
|
|
118.95
|
%
|
Allowance
for loan losses as a percentage of non-
performing
loans
|
|
|
91.82
|
%
|
|
|
150.70
|
%
|
Total
non-performing assets as a percentage of total assets
|
|
|
1.58
|
%
|
|
|
0.73
|
%
|
Total
non-performing loans as a percentage of total loans
|
|
|
1.60
|
%
|
|
|
0.71
|
%
|
Of the
$24.6 million in non-accrual loans, $5.4 million were 1-4 family residential
loans, $18.8 million were commercial or commercial real estate loans and
$400,000 were home equity or consumer loans.
Included
in the non-performing assets at September 30, 2008 are $8.8 million in
non-accrual loans and $3.0 million in REO related to the former Pavilion
operation. Excluding the acquired assets, the Company’s overall non-performing
assets have increased by $6.8 million since the beginning of 2008.
Certain
impaired loans acquired in an acquisition are recorded at fair value in
accordance with AICPA Statement of Position 03-3,
Accounting for Certain Loans or Debt
Securities Acquired in a
Transfer
(“SOP 03-3”), net of
any expected credit losses. As such, these loans are included in the
non-performing loan balances without any offsetting allowance for loan losses.
Such impairment discounts totaled $4.1 million at September 30, 2008 and are
reflected in the net loan receivable for the period ended September 30, 2008.
First
Federal Bank’s Asset Review Committee meets monthly to review the status of
work-out strategies for all criticized relationships, which include all
non-accrual loans. Based on such factors as anticipated collateral values in
liquidation scenarios, cash flow projections, assessment of net worth of
guarantors and all other factors which may mitigate risk of loss, the Asset
Review Committee makes recommendations regarding required allowances and
proposed charge-offs which are approved by the Senior Loan Committee (in the
case of charge-offs) or the Loan Loss Reserve Committee (in the case of specific
allowances). At September 30, 2008 the specific allowance for loan losses
recorded against the $18.8 million of non-accrual commercial and commercial real
estate loans totaled $3.89 million. The allowance for loan losses at
September 30, 2008 was $23.4 million compared to $13.9 million at December 31,
2007. The increase in the allowance for loan losses includes $4.3 million
acquired from Pavilion. In management’s opinion, the allowance for
loan losses at September 30,2 008, is appropriate, but the allowance is
monitored closely and may increase or decrease depending on a variety of factors
such as levels and trends of delinquencies, chargeoffs and recoveries,
non-performing loans, and overall risk in the portfolios
Non-Interest Income
.
Total
non-interest income decreased to $4.1 million in the third quarter of 2008,
compared with $5.6 million in the same period in 2007, primarily as a result of
losses on investment securities.
Service Fees.
Service fees and other charges increased by $953,000 or 34.5% in the 2008
third quarter compared to the same period in 2007. The increase was primarily
related to the additional accounts acquired in the Pavilion
acquisition.
Service
fees also include fees generated by First Defiance’s overdraft privilege
program. This 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. Overdraft limits are established for all customers without
discrimination using a risk assessment approach for each account classification.
An allowance for losses is recognized for any accounts that are overdrawn for 30
or more days. Accounts overdrawn for more than 60 days are automatically charged
off. Overdrawn balances, net of allowance for losses, are
reflected as loans on First Defiance’s balance sheet.
The fees
charged for this service are the same as the fee charged for a non-sufficient
fund item that is returned. These fees are considered to be compensation for
providing a service to the customer and therefore are deemed to be
non-interest income rather than interest income. Fee income related to the
overdraft privilege product, net of adjustments to the allowance for
uncollectible overdrafts, was $2.3 million for the quarter ended September 30,
2008 compared to $1.9 million for the same period in 2007.
Mortgage Banking
Activity.
Total revenue from the sale and servicing of mortgage loans
increased $90,000 to $1.0 million for the third quarter of 2008 compared to
$921,000 for the same period of
2007.
Gains realized from the sale of mortgage loans decreased to $624,000 from
$674,000 in the third quarter of 2007. Mortgage loan servicing revenue increased
by $269,000 or 63.7% in the third quarter of 2008 compared to the third quarter
of 2007. The increase in servicing revenue was partially offset by an increase
of $118,000 in amortization of mortgage servicing rights and the $50,000 decline
in gains. Management also records a valuation adjustment to record mortgage
servicing rights at the lower of cost or market. In the 2008 third quarter, that
valuation allowance was increased by $36,000, compared to an increase of $25,000
in the 2007 third quarter. The interest rate environment that produces increased
mortgage origination activity also typically causes increases in mortgage
servicing rights amortization and impairment, creating a natural hedge in the
mortgage banking line of business.
Loss on
Securities.
Non-interest income was reduced in the third quarter of 2008
by $2.1 million as First Defiance recognized other-than-temporary impairment
(“OTTI”) charges for certain impaired investment securities, where in
management’s opinion, the value of the investment will not be recovered. First
Defiance recognized a $1.9 million OTTI charge in the third quarter of 2008
relating to the perpetual preferred securities issued by Fannie Mae and Freddie
Mac. The OTTI was determined by management as a result of the action taken by
the United States Treasury Department and the Federal Housing Finance Agency on
September 7, 2008, which placed Fannie Mae and Freddie Mac into conservatorship.
First Defiance invested $1.0 million each in preferred stock of Fannie Mae and
Freddie Mac in January 2008 and as of September 30, 2008, had a combined market
value of $151,000. First Defiance also recorded $150,000 of OTTI on its
investment in the equity notes of two trust preferred collateralized debt
obligations (“CDOs”) in the 2008 third quarter as a result of the default by the
issuers of the securities. At September 30, 2008, the market value of
those CDOs, which had a total original cost of $1.0 million, has been written
down to $168,000.
Non-Interest
Expense.
Non-interest
expense increased to $15.2 million for the third quarter of 2008 compared to
$12.3 million for the same period in 2007. Increases across the board are
attributable to the Pavilion acquisition which closed late in the 2008 first
quarter.
Compensation and
Benefits
. Compensation and benefits increased to $8.0 million for the
quarter ended September 30, 2008 from $6.4 million for the same period in 2007.
Compensation and benefit expense increased $605,000 as a direct result of the
Pavilion acquisition. The remaining increase, excluding the Pavilion
acquisition, is mainly due to year-over-year merit increases and an increase in
staff to support the operations of the
Company.
Occupancy
.
Occupancy costs increased $433,000 in the third quarter of 2008 mostly resulting
from the Pavilion acquisition which increased expense $270,000. Also, the
opening of First Federal’s new operations center in December of 2007 increased
occupancy costs by $236,000 in the third quarter of 2008, compared to the same
period in 2007.
Other
Non-Interest Expenses
. Other non-interest expenses (including state
franchise tax, data processing, amortization of intangibles and other) increased
by $900,000 to $5.3 million for the quarter ended September 30, 2008 from $4.4
million for the same period in 2007. Significant increases between the 2008 and
2007 third quarters include an increase in expense for state franchise tax and
data processing of $178,000 and $280,000, respectively, due mainly from the
normal
growth of the Company and the Pavilion acquisition. Amortization of intangibles
increased $257,000 due to recording amortization expense relating to the core
deposit and customer relationship intangible in conjunction with the Pavilion
acquisition. Other expense increased due to an increase in FDIC deposit
insurance expense as the result of changes in the assessments rates and
utilization of the one-time credits issued by the FDIC early in the 2008 first
quarter.
The
efficiency ratio for the third quarter of 2008 was 66.84% compared to 69.16% for
the third quarter of 2007.
Income
Taxes.
First
Defiance computes federal income tax expense in accordance with FASB Statement
No. 109, which resulted in an effective tax rate of 12.02% for the quarter ended
September 30, 2008 compared to 32.62% for the same period in 2007. The
volatility of income tax expense is primarily attributable to the change in
income before income taxes and the impact of the Company’s tax exempt income on
obligations of state and political subdivisions and bank-owned life insurance.
In accordance with Accounting Principles Board Opinion No. 28, income tax
expense should be recorded using the Company’s best estimate of the effective
tax rate for a full year. With other-than-temporary impairment charge recorded
for the Company’s FHLMC and FNMA preferred stock holdings and the higher than
anticipated provisions for loan losses being necessary, the Company’s pre-tax
income is lower than expected. As a result, the Company’s tax exempt income has
had a larger impact than originally estimated and resulted in a lower expected
tax rate for the year.
Nine Months Ended September
30, 2008 and 2007
First
Defiance recognized net income for the nine months ended September 30, 2008 of
$6.5 million compared to income of $10.3 million for the comparable period in
2007. Basic and diluted earnings per share for the nine months ended September
30, 2008 were both $0.83, compared to basic and diluted earnings per share of
$1.46 and $1.44 for the nine months ended September 30, 2007.
Net Interest Income
.
Net
interest income was $46.2 million for the nine months ended September 30, 2008
compared to $36.1 million for the same period in 2007. For the nine month period
ended September 30, 2008, total interest income was $77.5 million, a $4.0
million increase over the same period in 2007. The increase in interest income
is due to a $253.4 million increase in average interest-earning assets to $1.63
billion as of September 30, 2008, mainly as a result of the Pavilion
acquisition. The increase in average earning assets was somewhat offset by a
decline in yield of those assets. The amount of interest income recognized was
also affected in the first nine months of 2008 by an increase in the balance of
loans that were delinquent by more than 90 days. It is the Company’s policy to
reverse interest accrued on loans when they become 90 days past due. As a result
of the increase in these non-performing loans, interest income was reduced by
$1.3 million in the first nine months of 2008 compared to $656,000 for the same
period in 2007.
Interest
expense decreased by $6.1 million to $31.3 million for the nine months ended
September 30, 2008 compared to $37.4 million for the nine months ended September
30, 2007. While the average balance of interest-bearing liabilities increased by
$209.8 million between the first nine
months of
2007 and 2008, the expense associated with the higher balance was more than
offset by a decline in the average cost of interest-bearing deposits for the
nine months ending September 30, 2008, to 2.87%, a 114 basis point decrease from
the 4.01% average cost in the first nine months of 2007.
Provision
for Loan Losses.
The
provision for loan losses was $8.8 million for the nine months ended September
30, 2008, compared to $1.7 million during the nine months ended September 30,
2007. The year over year increase was primarily the result of the deterioration
of a number of large credits in the commercial loan portfolio along with a
decline in the overall economy in the Company’s primary market area, and the
resulting increase in loan delinquencies. Charge-offs for the first nine months
of 2008 were $3.8 million and recoveries of previously charged off loans totaled
$311,000 for net charge-offs of $3.5 million. By comparison, $2.2 million of
charge-offs were recorded in the same period of 2007 and $298,000 of recoveries
were realized for net charge-offs of $1.9 million.
Non-Interest Income
.
Total
non-interest income decreased to $16.3 million for the nine months ended
September 30, 2008 from $16.9 million recognized in the same period of
2007.
Service Fees.
Service fees and other charges increased by $1.8 million or 22.0% in the
nine months ended September 30, 2008 compared to the same period in 2007. The
increase is mostly due to a $700,000 increase in fees associated with the
Company’s overdraft product. The remaining increase was primarily
related to an overall increase in the number of accounts serviced following the
Pavilion acquisition.
Mortgage Banking
Activity.
Total revenue from the sale and servicing of mortgage loans
increased 30.5% to $3.6 million for the nine months ended September 30, 2008
from $2.8 million for the same period of 2007. Gains realized from the sale of
mortgage loans increased $816,000 to $2.8 million for the first nine months of
2008 from $2.0 million during the same period of 2007. Mortgage loan servicing
revenue increased $573,000 in the first nine months of 2008 compared to the same
period of 2007. These increases were offset by a $528,000 increase in the
amortization of mortgage servicing rights in the first nine months of 2008 when
compared to 2007.
Insurance and
Investment Sales Commission.
Insurance and investment sales commission
income increased $137,000, to $4.4 million for the nine months ended September
30, 2008, from $4.2 million during the same period of 2007. This is the result
of the acquisition of the Huber, Harger, Welt and Smith Insurance Agency in late
February 2007.
Loss on
Securities.
Non-interest income was reduced for the nine months ended
September 30, 2008 by $2.6 million as First Defiance recognized
other-than-temporary impairment charges in the third quarter of 2008 of $1.0
million relating to the perpetual preferred securities issued by Fannie Mae and
Freddie Mac and $168,000 relating the equity notes of the two trust preferred
CDOs discussed above. There was no such impairment expense during the same
period in 2007.
Other
Non-Interest Income.
Other non-interest income declined by $715,000 in
the first nine months of 2008 compared to 2007. The accounting for the Company’s
deferred compensation plan
assets
had an impact on this fluctuation as the value of the life insurance assets used
to fund the plan increased by $133,000 in the first nine months of 2007 and
declined by $382,000 in the first nine months of 2008 resulting in a net decline
in total income related to this item of $515,000. This was offset by a related
change in the deferred compensation liability, which is included in other
non-interest expense. Also, earnings from the Company’s BOLI declined in the
first nine months of 2008 due to a lower crediting rate on the Company’s
investment.
Non-Interest
Expense.
Non-interest
expense increased to $44.2 million for the first nine months of 2008 compared to
$36.0 million for the same period in 2007. The year-to-date 2008 amount includes
$1.0 million of non-recurring costs associated with the Pavilion acquisition.
These costs included termination fees of certain contracts, costs to grant prior
service credit to former Pavilion employees in the Company’s retiree medical
plan and other non-recurring costs associated with the completion of the
acquisition and the transition of operations. Also in the first nine months of
2008, $752,000 of loss was recognized related to a former investment advisor.
This expense was recorded in June of 2008 second quarter after a claim under the
Company’s fidelity bond policy was denied.
Compensation and
Benefits
. Compensation and benefits increased to $22.4 million for the
nine month period ended September 30, 2008 from $19.6 million for the same
period in 2007. In 2008, the Company incurred approximately $1.3 million of
compensation expense related to the acquisition of Pavilion. Compensation also
increased because of year-over-year annual pay increases.
Occupancy
.
Occupancy costs increased $1.2 million for the nine month period ended September
30, 2008. The Pavilion acquisition increased expense by $607,000. Also, the
opening of First Federal’s new operations center in December of 2007 increased
occupancy costs by $523,000 in the first nine months of 2008, compared to the
same period in 2007.
Other
Non-Interest Expenses
. Other non-interest expenses (including state
franchise tax, data processing, amortization of intangibles and other) increased
by $3.2 million to $15.2 million for the first nine months of 2008 from $12.0
million for the same period in 2007. Significant increases between the first
nine months of 2008 and 2007 include an increase in expense for state franchise
tax and data processing of $466,000 and $546,000, respectively, due mainly to
the normal growth of the Company and the Pavilion acquisition. Amortization of
intangibles increased $554,000 due to recording amortization of the core deposit
and customer relationship intangibles in conjunction with the Pavilion
acquisition. Other expense increased due to the $752,000 related to losses
associated with the former investment advisor which were not covered by First
Defiance’s fidelity bond. Also, FDIC deposit insurance expense increased
$691,000 in the first nine months of 2008, compared to the same
period in 2007, the result of changes in the assessments rates and utilization
of the one-time credits issued by the FDIC early in the 2008 first quarter.
There was no deposit insurance expense in the first nine months of 2007, as
credits granted by the FDIC were used to offset quarterly assessments through
the end of 2007.
The
efficiency ratio for the first nine months of 2008 was 67.29% compared to 67.18%
for the same period of 2007. Excluding the impact of the acquisition related
costs, the efficiency ratio for the first nine months of 2008 was
65.72%.
Liquidity and Capital
Resources
As a
regulated financial institution, First Federal is required to maintain
appropriate levels of "liquid" assets to meet short-term funding
requirements.
First
Defiance generated $13.2 million of cash from operating activities during the
first nine months of 2008. The Company's cash from operating activities resulted
from net income for the period, adjusted for various non-cash items, including
the provision for loan losses, depreciation and amortization of mortgage
servicing rights, gain on sales of securities, loans and property, plant and
equipment, ESOP expense related to release of shares, changes in loans available
for sale, interest receivable, other assets, and other liabilities. The primary
investing activity of First Defiance is the origination of loans, which is
funded with cash provided by operations, proceeds from the amortization and
prepayments of existing loans, the sale of loans, proceeds from the sale or
maturity of securities, borrowings from the FHLB, and customer
deposits.
At
September 30, 2008, First Defiance had $107.4 million in outstanding loan
commitments and loans in process to be funded generally within the next nine
months and an additional $279.2 million committed under existing consumer and
commercial lines of credit and standby letters of credit. Also at that date,
First Defiance had commitments to sell $9.9 million of loans held-for-sale.
Also, the total amount of certificates of deposit that are scheduled to mature
by September 30, 2009 is $375.2 million. First Defiance believes that it has
adequate resources to fund commitments as they arise and that it can adjust the
rate on savings certificates to retain deposits in changing interest rate
environments. If First Defiance requires funds beyond its internal funding
capabilities, advances from the FHLB of Cincinnati and other financial
institutions are available.
First
Federal is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible capital
requirement, a core capital requirement, and a risk-based capital requirement.
The following table sets forth First Federal's compliance with each of the
capital requirements at September 30, 2008.
|
|
Core
Capital
|
|
|
Risk-Based
Capital
|
|
|
|
Adequately
Capitalized
|
|
|
Well
Capitalized
|
|
|
Adequately
Capitalized
|
|
|
Well
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
capital
|
|
$
|
185,346
|
|
|
$
|
185,346
|
|
|
$
|
201,706
|
|
|
$
|
201,706
|
|
Minimum
required regulatory capital
|
|
|
74,540
|
|
|
|
93,175
|
|
|
|
134,050
|
|
|
|
167,563
|
|
Excess
regulatory capital
|
|
$
|
110,806
|
|
|
$
|
92,171
|
|
|
$
|
67,656
|
|
|
$
|
34,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
capital as a percentage of assets (1)
|
|
|
9.95
|
%
|
|
|
9.95
|
%
|
|
|
12.04
|
%
|
|
|
12.04
|
%
|
Minimum
capital required as a percentage
of
assets
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
|
|
8.00
|
%
|
|
|
10.00
|
%
|
Excess
regulatory capital as a percentage of assets
|
|
|
5.95
|
%
|
|
|
4.95
|
%
|
|
|
4.04
|
%
|
|
|
2.04
|
%
|
(1)
|
Core
capital is computed as a percentage of adjusted total assets of $1.86
billion. Risk-based capital is computed as a percentage of total
risk-weighted assets of $1.68
billion.
|
Critical
Accounting Policies
First
Defiance has established various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of its financial statements. The significant accounting policies
of First Defiance are described in the footnotes to the consolidated financial
statements included in the Company’s Annual Report on Form 10-K. 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. Those policies which are identified and discussed in detail
in the Company’s Annual Report on Form 10-K include the Allowance for Loan
Losses and the Valuation of Mortgage Servicing Rights. There have been no
material changes in assumptions or judgments relative to those critical policies
during the first nine months of 2008.
Item 3. Qualitative and
Quantitative Dis
c
losure About Market Risk
As
discussed in detail in the 2007 Annual Report on Form 10-K, First Defiance’s
ability to maximize net income is dependent on management’s ability to plan and
control net interest income through management of the pricing and mix of assets
and liabilities. Because a large portion of assets and liabilities of First
Defiance are monetary in nature, changes in interest rates and monetary or
fiscal policy affect its financial condition and can have significant impact on
the net income of the Company. First Defiance does not use off-balance sheet
derivatives to enhance its risk management, nor does it engage in trading
activities beyond the sale of mortgage loans.
First
Defiance monitors its exposure to interest rate risk on a monthly basis through
simulation analysis which measures the impact changes in interest rates can have
on net 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.
The results of the simulation indicate that in an environment where interest
rates rise or fall 100 basis points over a 12 month period, using September 30,
2008 amounts as a base case, First Defiance’s net interest income would be
impacted by less than the board mandated guidelines of 10%.
Item 4. Cont
r
ols and Procedures
Disclosure
Controls are procedures designed to ensure that information required to be
disclosed in the Company's reports filed under the Exchange Act, such as this
report, is recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls are also designed to
ensure that such information is accumulated and communicated to management,
including the Chief Executive Officer and Interim Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
An
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and the Interim
Chief Financial Officer, of the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of September 30, 2008. Based upon that evaluation, the
Chief Executive Officer and Interim Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective. No changes occurred
in the Company’s internal controls over financial reporting during the quarter
ended September 30, 2008 that materially affected, or are reasonably likely to
materially affect, the internal controls over financial reporting.
FIRST
DEFIANCE FINANCIAL CORP.
PART
II-
O
THER INFORMATION
|
Legal
Proceedings
|
|
|
|
First
Defiance is not engaged in any legal proceedings of a material
nature.
|
|
Risk
Factors
|
|
There
were no material changes to the risk factors as presented in First
Defiance Financial Corp.’s annual report on Form 10-K for the year ended
December 31, 2007.
|
|
|
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
(c)Stock
Repurchases. The Company made the following repurchases in the quarter ended
September 30, 2008:
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
Number of
Shares
Purchased
as
Part of
Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of Shares
that
May Yet Be
Purchased
Under
the
Plans or
Programs
(1)
|
July1,
2008 –
July
31, 2008
|
215
|
$15.34
|
215
|
93,579
|
August
1, 2008 –
August
31, 2008
|
240
|
$14.86
|
240
|
93,339
|
September
1, 2008 –
September
30, 2008
|
215
|
$16.10
|
215
|
93,124
|
Total
for 2008
Third
Quarter
|
670
|
$15.41
|
670
|
93,124
|
(1) On
July 18, 2003, the registrant announced that its Board of Directors had
authorized management to repurchase up to 10% of the Registrant’s common stock
(639,828 shares) through the open market or in any private transaction. The
authorization does not have an expiration date.
|
Defaults
upon Senior Securities
|
|
|
|
Not
applicable.
|
|
|
|
|
Submission
of Matters to a Vote of Security Holders
|
|
|
|
|
Not
applicable.
|
|
|
|
|
|
Other
Information
|
|
|
|
|
|
Not
applicable.
|
|
|
|
|
|
Exhibits
|
|
|
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
|
|
|
FIRST
DEFIANCE FINANCIAL CORP.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed by the undersigned thereunto duly
authorized.
|
First
Defiance Financial Corp.
|
|
(Registrant)
|
|
|
|
|
|
|
Date:
November 10,
2008
|
By:
|
/s/ William J.
Small
|
|
|
William
J. Small
|
|
|
Chairman,
President and
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
Date:
November 10,
2008
|
By:
|
/s/ Donald P.
Hileman
|
|
|
Donald
P. Hileman
|
|
|
Interim
Chief
|
|
|
Financial
Officer
|
44
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