UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the Quarterly Period Ended March 31, 2017
OR
¨ | 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 of 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 x No ¨
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark 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.
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 – 10,145,890 shares outstanding at April 28, 2017.
FIRST DEFIANCE FINANCIAL CORP.
INDEX
1 |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except share and per share data)
March 31, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and amounts due from depository institutions | $ | 53,998 | $ | 53,003 | ||||
Federal funds sold | 116,000 | 46,000 | ||||||
169,998 | 99,003 | |||||||
Securities: | ||||||||
Available-for-sale, carried at fair value | 260,601 | 250,992 | ||||||
Held-to-maturity, carried at amortized cost (fair value $773 and $187 at March 31, 2017 and December 31, 2016, respectively) | 771 | 184 | ||||||
261,372 | 251,176 | |||||||
Loans held for sale | 7,955 | 9,607 | ||||||
Loans receivable, net of allowance of $25,749 at March 31, 2017 and $25,884 at December 31, 2016, respectively | 2,212,257 | 1,914,603 | ||||||
Mortgage servicing rights | 9,672 | 9,595 | ||||||
Accrued interest receivable | 8,872 | 6,760 | ||||||
Federal Home Loan Bank stock | 15,992 | 13,798 | ||||||
Bank owned life insurance | 64,968 | 52,817 | ||||||
Premises and equipment | 42,824 | 36,958 | ||||||
Real estate and other assets held for sale | 705 | 455 | ||||||
Goodwill | 90,768 | 61,798 | ||||||
Core deposit and other intangibles | 6,004 | 1,336 | ||||||
Deferred Taxes | 1,219 | 2,212 | ||||||
Other assets | 36,091 | 17,479 | ||||||
Total assets | $ | 2,928,697 | $ | 2,477,597 |
(continued)
2 |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands, except share and per share data)
March 31, 2017 | December 31, 2016 | |||||||
Liabilities and stockholders’ equity | ||||||||
Liabilities: | ||||||||
Deposits | $ | 2,373,789 | $ | 1,981,628 | ||||
Advances from the Federal Home Loan Bank | 105,104 | 103,943 | ||||||
Subordinated debentures | 36,083 | 36,083 | ||||||
Securities sold under repurchase agreements | 24,891 | 31,816 | ||||||
Advance payments by borrowers | 1,840 | 2,650 | ||||||
Other liabilities | 32,799 | 28,459 | ||||||
Total liabilities | 2,574,506 | 2,184,579 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued | - | - | ||||||
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued | - | - | ||||||
Common stock, $.01 par value per share: 25,000,000 shares authorized; 12,713,385 and 12,720,347 shares issued and 10,143,052 and 8,983,206 shares outstanding, respectively | 127 | 127 | ||||||
Additional paid-in capital | 160,397 | 126,390 | ||||||
Accumulated other comprehensive income, net of tax of $670 and $117, respectively | 1,242 | 215 | ||||||
Retained earnings | 243,446 | 240,592 | ||||||
Treasury stock, at cost, 2,570,333 and 3,737,141 shares respectively | (51,021 | ) | (74,306 | ) | ||||
Total stockholders’ equity | 354,191 | 293,018 | ||||||
Total liabilities and stockholders’ equity | $ | 2,928,697 | $ | 2,477,597 |
See accompanying notes
3 |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Income
(UNAUDITED)
(Amounts in Thousands, except share and per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Interest Income | ||||||||
Loans | $ | 21,969 | $ | 19,312 | ||||
Investment securities: | ||||||||
Taxable | 979 | 843 | ||||||
Non-taxable | 777 | 787 | ||||||
Interest-bearing deposits | 145 | 49 | ||||||
FHLB stock dividends | 166 | 139 | ||||||
Total interest income | 24,036 | 21,130 | ||||||
Interest Expense | ||||||||
Deposits | 1,796 | 1,433 | ||||||
FHLB advances and other | 366 | 297 | ||||||
Subordinated debentures | 215 | 175 | ||||||
Securities sold under repurchase agreements | 14 | 37 | ||||||
Total interest expense | 2,391 | 1,942 | ||||||
Net interest income | 21,645 | 19,188 | ||||||
Provision for loan losses | 55 | 364 | ||||||
Net interest income after provision for loan losses | 21,590 | 18,824 | ||||||
Non-interest Income | ||||||||
Service fees and other charges | 2,760 | 2,644 | ||||||
Insurance commission income | 3,457 | 3,136 | ||||||
Mortgage banking income | 1,738 | 1,539 | ||||||
Gain on sale of non-mortgage loans | - | 45 | ||||||
Gain on sale of securities | - | 131 | ||||||
Trust income | 450 | 427 | ||||||
Income from Bank Owned Life Insurance | 1,823 | 231 | ||||||
Other non-interest income | 321 | 483 | ||||||
Total non-interest income | 10,549 | 8,636 | ||||||
Non-interest Expense | ||||||||
Compensation and benefits | 14,335 | 10,185 | ||||||
Occupancy | 1,837 | 1,785 | ||||||
FDIC insurance premium | 290 | 327 | ||||||
Financial institutions tax | 480 | 446 | ||||||
Data processing | 1,939 | 1,460 | ||||||
Amortization of intangibles | 232 | 157 | ||||||
Other non-interest expense | 4,029 | 2,914 | ||||||
Total non-interest expense | 23,142 | 17,274 | ||||||
Income before income taxes | 8,997 | 10,186 | ||||||
Federal income taxes | 3,857 | 3,017 | ||||||
Net Income | $ | 5,140 | $ | 7,169 | ||||
Earnings per common share (Note 6) | ||||||||
Basic | $ | 0.54 | $ | 0.80 | ||||
Diluted | $ | 0.54 | $ | 0.79 | ||||
Dividends declared per share (Note 5) | $ | 0.25 | $ | 0.22 | ||||
Average common shares outstanding (Note 6) | ||||||||
Basic | 9,441 | 8,994 | ||||||
Diluted | 9,497 | 9,064 |
See accompanying notes
4 |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Comprehensive Income
(UNAUDITED)
(Amounts in Thousands)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Net income | $ | 5,140 | $ | 7,169 | ||||
Other comprehensive income: | ||||||||
Unrealized gains on securities available for sale | 1,580 | 1,450 | ||||||
Reclassification adjustments for security (gains) losses included in net income(1) | - | (131 | ) | |||||
Income tax expense | (553 | ) | (462 | ) | ||||
Other comprehensive income | 1,027 | 857 | ||||||
Comprehensive income | $ | 6,167 | $ | 8,026 |
(1) Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended March 31, 2017 and 2016 was $0 and $46, respectively.
5 |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statement of Changes in Stockholders’ Equity
(UNAUDITED)
(Amounts in Thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
Common | Additional | Other | Total | |||||||||||||||||||||||||||||
Preferred | Stock | Common | Paid-In | Comprehensive | Retained | Treasury | Stockholders’ | |||||||||||||||||||||||||
Stock | Shares | Stock | Capital | Income | Earnings | Stock | Equity | |||||||||||||||||||||||||
Balance at January 1, 2017 | $ | - | 8,983,206 | $ | 127 | $ | 126,390 | $ | 215 | $ | 240,591 | $ | (74,306 | ) | $ | 293,017 | ||||||||||||||||
Net income | 5,140 | 5,140 | ||||||||||||||||||||||||||||||
Other comprehensive income | 1,027 | 1,027 | ||||||||||||||||||||||||||||||
Stock based compensation expenses | 45 | 45 | ||||||||||||||||||||||||||||||
Shares issued under stock option plan, net of 6,962 repurchased and retired | 588 | 22 | (39 | ) | 151 | 134 | ||||||||||||||||||||||||||
Capital stock issuance | 1,139,502 | 33,792 | 22,740 | 56,532 | ||||||||||||||||||||||||||||
Restricted share activity under stock incentive plans | 19,416 | 138 | 387 | 525 | ||||||||||||||||||||||||||||
Shares issued from direct stock sales | 340 | 10 | 7 | 17 | ||||||||||||||||||||||||||||
Common stock dividends declared | (2,246 | ) | (2,246 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2017 | $ | - | 10,143,052 | $ | 127 | $ | 160,397 | $ | 1,242 | $ | 243,446 | $ | (51,021 | ) | $ | 354,191 | ||||||||||||||||
Balance at January 1, 2016 | $ | - | 9,102,831 | $ | 127 | $ | 125,734 | $ | 3,622 | $ | 219,737 | $ | (69,023 | ) | $ | 280,197 | ||||||||||||||||
Net income | 7,169 | 7,169 | ||||||||||||||||||||||||||||||
Other comprehensive income | 857 | 857 | ||||||||||||||||||||||||||||||
Stock based compensation expenses | 119 | 119 | ||||||||||||||||||||||||||||||
Shares issued under stock option plan, net of 900 repurchased and retired | 16,770 | (91 | ) | 353 | 262 | |||||||||||||||||||||||||||
Restricted share activity under stock incentive plans | 9,033 | (124 | ) | 188 | 64 | |||||||||||||||||||||||||||
Shares issued from direct stock sales | 233 | 4 | 5 | 9 | ||||||||||||||||||||||||||||
Shares repurchased | (167,746 | ) | (6,293 | ) | (6,293 | ) | ||||||||||||||||||||||||||
Common stock dividends declared | (1,966 | ) | (1,966 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2016 | $ | - | 8,961,121 | $ | 127 | $ | 125,642 | $ | 4,479 | $ | 224,940 | $ | (74,770 | ) | $ | 280,418 |
6 |
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Operating Activities | ||||||||
Net income | $ | 5,140 | $ | 7,169 | ||||
Items not requiring (providing) cash | ||||||||
Provision for loan losses | 55 | 364 | ||||||
Depreciation | 867 | 818 | ||||||
Amortization of mortgage servicing rights, net of impairment recoveries | 279 | 332 | ||||||
Amortization of core deposit and other intangible assets | 232 | 157 | ||||||
Net amortization of premiums and discounts on loans and deposits | 27 | 88 | ||||||
Amortization of premiums and discounts on securities | 240 | 193 | ||||||
Change in deferred taxes | 777 | 264 | ||||||
Proceeds from the sale of loans held for sale | 48,356 | 40,341 | ||||||
Originations of loans held for sale | (45,977 | ) | (42,444 | ) | ||||
Gain from sale of loans | (1,083 | ) | (1,039 | ) | ||||
Gain from sale or call of securities | - | (131 | ) | |||||
(Gain) loss on sale / write-down of real estate and other assets held for sale | - | (265 | ) | |||||
Stock option expense | 45 | 119 | ||||||
Restricted stock expense | 525 | 64 | ||||||
Income from bank owned life insurance | (1,823 | ) | (231 | ) | ||||
Excess tax benefit (expense) on stock compensation plans | (162 | ) | (99 | ) | ||||
Changes in: | ||||||||
Accrued interest receivable | (790 | ) | (730 | ) | ||||
Other assets | (1,801 | ) | (793 | ) | ||||
Other liabilities | 3,364 | 672 | ||||||
Net cash provided by operating activities | 8,271 | 4,849 | ||||||
Investing Activities | ||||||||
Proceeds from maturities of held-to-maturity securities | 5 | 8 | ||||||
Proceeds from maturities, calls and pay-downs of available-for-sale securities | 5,960 | 7,903 | ||||||
Proceeds from sale of real estate and other assets held for sale | 9 | 884 | ||||||
Proceeds from the sale of available-for-sale securities | - | 5,360 | ||||||
Proceeds from sale of non-mortgage loans | 9,880 | 2,828 | ||||||
Purchases of available-for-sale securities | (8,815 | ) | (2,875 | ) | ||||
Proceeds from Federal Home Loan stock redemption | - | 1 | ||||||
Net cash received in acquisition | 25,840 | - | ||||||
Investment in bank owned life insurance | (20,000 | ) | - | |||||
Purchase of portfolio mortgage loans | (10,133 | ) | - | |||||
Purchases of premises and equipment, net | (1,278 | ) | (562 | ) | ||||
Net increase in loans receivable | (12,851 | ) | (26,127 | ) | ||||
Net cash used by investing activities | (11,383 | ) | (12,580 | ) | ||||
Financing Activities | ||||||||
Net increase in deposits and advance payments by borrowers | 83,369 | 34,124 | ||||||
Repayment of Federal Home Loan Bank advances | (242 | ) | (238 | ) | ||||
Proceeds from Federal Home Loan Bank advances | - | 25,000 | ||||||
Increase in securities sold under repurchase agreements | (6,925 | ) | 797 | |||||
Proceeds from exercise of stock options | 134 | 314 | ||||||
Proceeds from treasury stock sales | 17 | 9 | ||||||
Net cash paid for repurchase of common stock | - | (6,293 | ) | |||||
Cash dividends paid on common stock | (2,246 | ) | (1,966 | ) | ||||
Net cash provided by financing activities | 74,107 | 51,747 | ||||||
Increase (decrease) in cash and cash equivalents | 70,995 | 44,016 | ||||||
Cash and cash equivalents at beginning of period | 99,003 | 79,769 | ||||||
Cash and cash equivalents at end of period | $ | 169,998 | $ | 123,785 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 2,308 | $ | 1,889 | ||||
Income taxes paid | $ | - | $ | 300 | ||||
Transfers from loans to real estate and other assets held for sale | $ | 259 | $ | 409 | ||||
Securities purchased but not yet settled | $ | 1,668 | $ | 529 | ||||
Sale of bank owned life insurance not yet settled | $ | 17,840 | $ | - |
See accompanying notes.
7 |
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (UNAUDITED)
March 31, 2017 and 2016
1. | Basis of Presentation |
First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (“First Defiance Risk Management”). All significant intercompany transactions and balances are eliminated in consolidation.
First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and collateralized mortgage obligations (“CMOs”), and corporate bonds. First Insurance is an insurance agency that conducts business through offices located in the Defiance, Maumee, Oregon, Bryan, Lima and Bowling Green, Ohio areas. First Insurance offers property and casualty insurance, life insurance and group health insurance. First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.
The consolidated condensed statement of financial condition at December 31, 2016 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K for the year ended December 31,2016.
The accompanying consolidated condensed financial statements as of March 31, 2017 and for the three month periods ended March 31, 2017 and 2016 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 2016 Annual Report on Form 10-K for the year ended December 31, 2016. 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 month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the entire year.
8 |
2. | Significant Accounting Policies |
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, restricted stock awards and stock grants.
Goodwill and Other Intangibles
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s balance sheet.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10 to 20 years for core deposit and customer relationship intangibles.
Newly Issued Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
9 |
In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing a Company-wide implementation committee. The committee’s initial review indicates the Company has maintained sufficient historical loan data to support the requirement of this pronouncement and is currently evaluating the various loss methodologies to determine their correlations to the Company’s loan segments historical performance.
10 |
In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on its financial position and results of operations, though the Company expects that its real estate leases will be recognized on the consolidated balance sheet.
In January 2016, the FASB issued ASU No. 2016-01 — Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Management’s preliminary finding is that the new pronouncement will not have a significant impact on its results of operations. The pronouncement will require some revision to the Company’s disclosures within the consolidated financial statements and is currently evaluating the impact.
In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is currently performing an overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and insurance commission income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.
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3. | Fair Value |
FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
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· | Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
· | Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means. |
· | Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Available for sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 1 include federal agency preferred stock securities. Securities in Level 2 include U.S. Government agencies, mortgage-backed securities, corporate bonds and municipal securities.
Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.
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Real Estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then reviewed monthly by members of the asset review committee for valuation changes and are accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which may utilize a single valuation approach or a combination of approaches including cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 20% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.
Mortgage servicing rights – On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and are validated against available market data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date (Level 2).
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The following table summarizes the financial assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured on a Recurring Basis
March 31, 2017 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | ||||||||||||
(In Thousands) | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
Obligations of U.S. government corporations and agencies | $ | - | $ | 3,954 | $ | - | $ | 3,954 | ||||||||
Mortgage-backed - residential | - | 80,872 | - | 80,872 | ||||||||||||
REMICs | - | 1,260 | - | 1,260 | ||||||||||||
Collateralized mortgage obligations- residential | - | 66,291 | - | 66,291 | ||||||||||||
Preferred stock | 1 | - | - | 1 | ||||||||||||
Corporate bonds | 13,083 | - | 13,083 | |||||||||||||
Obligations of state and political subdivisions | - | 95,140 | - | 95,140 | ||||||||||||
Mortgage banking derivative - asset | - | 598 | - | 598 | ||||||||||||
Mortgage banking derivative - liability | - | 42 | - | 42 | ||||||||||||
December 31, 2016 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | ||||||||||||
(In Thousands) | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
Obligations of U.S. Government corporations and agencies | $ | - | $ | 3,915 | $ | - | $ | 3,915 | ||||||||
Mortgage-backed - residential | - | 81,707 | - | 81,707 | ||||||||||||
REMICs | - | 1,307 | - | 1,307 | ||||||||||||
Collateralized mortgage obligations-residential | - | 63,005 | - | 63,005 | ||||||||||||
Preferred stock | 2 | - | - | 2 | ||||||||||||
Corporate bonds | - | 13,013 | - | 13,013 | ||||||||||||
Obligations of state and political subdivisions | - | 88,043 | 88,043 | |||||||||||||
Mortgage banking derivative - asset | - | 491 | - | 491 |
The following table summarizes the financial assets measured at fair value on a non-recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
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Assets and Liabilities Measured on a Non-Recurring Basis
March 31, 2017 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | ||||||||||||
(In Thousands) | ||||||||||||||||
Impaired loans | ||||||||||||||||
Commercial Real Estate | $ | - | $ | - | $ | 1,252 | $ | 1,252 | ||||||||
Total Impaired loans | - | - | 1,252 | 1,252 | ||||||||||||
Mortgage servicing rights | - | 1,131 | 1,131 | |||||||||||||
December 31, 2016 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | ||||||||||||
(In Thousands) | ||||||||||||||||
Impaired loans | ||||||||||||||||
1-4 Family Residential Real Estate | $ | - | $ | - | $ | 316 | $ | 316 | ||||||||
Multi Family Residential | - | - | - | - | ||||||||||||
Commercial Real Estate | - | - | 848 | 848 | ||||||||||||
Commercial | 332 | 332 | ||||||||||||||
Home Equity and Improvement | - | - | - | - | ||||||||||||
Total impaired loans | - | - | 1,496 | 1,496 | ||||||||||||
Mortgage servicing rights | - | 657 | - | 657 | ||||||||||||
Real estate held for sale | ||||||||||||||||
Residential | - | - | - | - | ||||||||||||
Commercial Real Estate | - | - | 377 | 377 | ||||||||||||
Total Real Estate held for sale | - | - | 377 | 377 |
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted Average | ||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Impaired Loans- Applies to all loan classes | $ | 1,252 | Appraisals which utilize sales comparison, net income and cost approach | Discounts for collection issues and changes in market conditions | 10 | % | 10 | % |
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2016, the significant unobservable inputs used in the fair value measurements were as follows:
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Fair Value | Valuation Technique | Unobservable Inputs | Range of Inputs | Weighted Average | ||||||||||
(Dollars in Thousands) | ||||||||||||||
Impaired Loans- Applies to all loan classes | $ | 1,496 | Appraisals which utilize sales comparison, net income and cost approach | Discounts for collection issues and changes in market conditions | 10-30 | % | 11 | % | ||||||
Real estate held for sale – Applies to all classes | $ | 377 | Appraisals which utilize sales comparison, net income and cost approach | Discounts for changes in market conditions | 0-20 | % | 7 | % |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $1.3 million, with no valuation allowance and a fair value of $1.5 million, with a $1,000 valuation allowance at March 31, 2017 and December 31, 2016, respectively. A provision expense of $208,000 for the three months ended March 31, 2017 and a provision recovery of $119,000 for the three months ended March 31, 2016 was included in earnings.
Mortgage servicing rights which are carried at the lower of cost or fair value, had a fair value of $1.1 million with a valuation allowance of $489,000 and a fair value of $657,000 with a valuation allowance of $522,000 at March 31, 2017 and December 31, 2016, respectively. A recovery of $33,000 and a charge of $21,000 for the three months ended March 31, 2017 and March 31, 2016, respectively, were included in earnings.
Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The impact to earnings of the change in fair value of real estate held for sale was not material for the three months ended March 31, 2017. The change in fair value of real estate held for sale was $53,000 for the three months ended March 31, 2016, which was recorded directly as an adjustment to current earnings through non-interest expense.
In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of March 31, 2017 and December 31, 2016. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.
Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.
The carrying amount of cash and cash equivalents, term notes payable and advance payments by borrowers for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.
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It was not practicable to determine the fair value of Federal Home Loan Bank (“FHLB”) stock due to restrictions placed on its transferability.
The fair value of loans that reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on discounted cash flow analysis, using interest rates currently being offered for loans with similar terms, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based on binding contracts and quotes from third party investors resulting in a Level 2 classification.
The fair value of accrued interest receivable is equal to the carrying amounts resulting in a Level 2 or Level 3 classification which is consistent with its underlying value.
The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e. carrying value) and are classified as Level 1. The fair value of savings, NOW and certain money market accounts are equal to their carrying amounts and are a Level 2 classification. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 2 classification. The carrying value of subordinated debentures and deposits with fixed maturities is estimated based discounted cash flow analyses based on interest rates currently being offered on instruments with similar characteristics and maturities resulting in a Level 3 classification.
FHLB advances with maturities greater than 90 days are valued based on discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at March 31, 2017.
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Fair Value Measurements at March 31, 2017 (In Thousands) | ||||||||||||||||||||
Carrying Value | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 169,998 | $ | 169,998 | $ | 169,998 | $ | - | $ | - | ||||||||||
Investment securities | 261,372 | 261,374 | 1 | 261,373 | - | |||||||||||||||
Federal Home Loan Bank Stock | 15,992 | N/A | N/A | N/A | N/A | |||||||||||||||
Loans, net, including loans held for sale | 2,221,070 | 2,207,503 | - | 8,425 | 2,199,078 | |||||||||||||||
Accrued interest receivable | 8,872 | 8,872 | 5 | 1,465 | 7,402 | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Deposits | $ | 2,373,789 | $ | 2,380,541 | $ | 579,943 | $ | 1,800,598 | $ | - | ||||||||||
Advances from Federal Home Loan Bank | 105,104 | 104,500 | - | 104,500 | - | |||||||||||||||
Securities sold under repurchase agreements | 24,891 | 24,891 | - | 24,891 | - | |||||||||||||||
Subordinated debentures | 36,083 | 34,735 | - | - | 34,735 | |||||||||||||||
Fair Value Measurements at December 31, 2016 (In Thousands) | ||||||||||||||||||||
Carrying Value | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 99,003 | $ | 99,003 | $ | 99,003 | $ | - | $ | - | ||||||||||
Investment securities | 251,176 | 251,179 | 2 | 251,177 | - | |||||||||||||||
Federal Home Loan Bank Stock | 13,798 | N/A | N/A | N/A | N/A | |||||||||||||||
Loans, net, including loans held for sale | 1,924,210 | 1,911,280 | - | 9,917 | 1,901,363 | |||||||||||||||
Accrued interest receivable | 6,760 | 6,760 | 9 | 867 | 5,884 | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Deposits | $ | 1,981,628 | $ | 1,987,723 | $ | 487,663 | $ | 1,500,060 | $ | - | ||||||||||
Advances from Federal Home Loan Bank | 103,943 | 103,019 | - | 103,019 | - | |||||||||||||||
Securities sold under repurchase agreements | 31,816 | 31,816 | - | 31,816 | - | |||||||||||||||
Subordinated debentures | 36,083 | 34,718 | - | - | 34,718 |
4. | Stock Compensation Plans |
First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaced all existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.
As of March 31, 2017, 47,200 options had been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.
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In each of the years 2016-2017, the Company approved a Short-Term (“STIP”) Equity Incentive Plan and a Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.
Under the 2016 and 2017 STIPs, the participants could earn up to 10% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive such payment.
Under each LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 24,526 and 20,657 RSU’s to the participants in the 2016 and 2017 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive such payment.
A total of 19,219 RSU’s were issued to the participants of the 2014 LTIP in the first quarter of 2017 for the three year performance period ended December 31, 2016.
In the three months ended March 31, 2017, the Company also granted to employees 2,924 restricted shares, of which 2,727 were restricted stock units and 197 were restricted stock grants. All of these have a three year vesting period. The fair value of all granted restricted shares was determined by the stock price at the date of the grant.
The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
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The fair value of stock options granted during the three months ended March 31, 2016 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:
Three Months ended | ||||||||
March 31, 2017 | March 31, 2016 | |||||||
Expected average risk-free rate | - | 2.24 | % | |||||
Expected average life | - | 10.00 years | ||||||
Expected volatility | - | 41.00 | % | |||||
Expected dividend yield | - | 2.33 | % |
There were no options granted during the three months ended March 31, 2017. The weighted-average fair value of options granted was $13.95 for the three months ended March 31, 2016.
Following is stock option activity under the plans during the three months ended March 31, 2017:
Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in 000’s) | |||||||||||||
Options outstanding, January 1, 2017 | 54,750 | $ | 22.21 | |||||||||||||
Forfeited or cancelled | - | - | ||||||||||||||
Exercised | (7,550 | ) | 22.89 | |||||||||||||
Granted | - | - | ||||||||||||||
Options outstanding, March 31, 2017 | 47,200 | $ | 22.12 | 3.65 | $ | 1,300 | ||||||||||
Vested or expected to vest at March 31, 2017 | 47,200 | $ | 22.12 | 3.65 | $ | 1,300 | ||||||||||
Exercisable at March 31, 2017 | 35,100 | $ | 18.50 | 2.22 | $ | 1,096 |
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (in thousand’s):
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Proceeds of options exercised | $ | 134 | $ | 314 | ||||
Related tax benefit recognized | 44 | 75 | ||||||
Intrinsic value of options exercised | 200 | 326 |
As of March 31, 2017, there was $143,000 of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 2.93 years.
At March 31, 2017, 72,660 RSU’s and 4,569 stock grants were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. A total expense of $849,000 was recorded during the three months ended March 31, 2017 compared to an expense of $261,000 for the same period in 2016. The increase in expense is attributable to the Company’s better performance in comparison to its targets. There was approximately $188,000 included within other liabilities at March 31, 2017 related to the STIP.
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Restricted Stock Units | Stock Grants | |||||||||||||||
Weighted-Average | Weighted-Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Unvested Shares | Shares | Fair Value | Shares | Fair Value | ||||||||||||
Unvested at January 1, 2017 | 75,468 | $ | 32.31 | 11,161 | $ | 32.30 | ||||||||||
Granted | 23,384 | 50.56 | 19,416 | 26.02 | ||||||||||||
Vested | (19,219 | ) | 25.77 | (24,986 | ) | 25.82 | ||||||||||
Forfeited | (6,973 | ) | 25.77 | (1,022 | ) | 37.02 | ||||||||||
Unvested at March 31, 2017 | 72,660 | $ | 40.54 | 4,569 | $ | 40.01 |
The maximum amount of compensation expense that may be recorded for the 2017 STIP and the 2015, 2016 and 2017 LTIPs at March 31, 2017 is approximately $3.8 million. However, the estimated expense expected to be recorded as of March 31, 2017 based on the performance measures in the plans, is $3.5 million of which $2.2 million is unrecognized at March 31, 2017 and will be recognized over the remaining performance periods.
5. | Dividends on Common Stock |
First Defiance declared and paid a $0.25 per common stock dividend in the first quarter of 2017 and declared and paid a $0.22 per common stock dividend in the first quarter of 2016.
6. | Earnings Per Common Share |
Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures.
The following table sets forth the computation of basic and diluted earnings per common share:
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Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In Thousands, except per share data) | ||||||||
Basic Earnings Per Share: | ||||||||
Net income available to common shareholders | $ | 5,140 | $ | 7,169 | ||||
Less: Income allocated to participating securities | 1 | 3 | ||||||
Net income allocated to common shareholders | 5,139 | 7,166 | ||||||
Weighted average common shares outstanding Including participating securities | 9,446 | 9,006 | ||||||
Less: Participating securities | 5 | 12 | ||||||
Average common shares | 9,441 | 8,994 | ||||||
Basic earnings per common share | $ | 0.54 | $ | 0.80 | ||||
Diluted Earnings Per Share: | ||||||||
Net income allocated to common shareholders | $ | 5,139 | $ | 7,166 | ||||
Weighted average common shares outstanding for basic earnings per common share | 9,441 | 8,994 | ||||||
Add: Dilutive effects of stock options | 56 | 70 | ||||||
Average shares and dilutive potential common shares | 9,497 | 9,064 | ||||||
Diluted earnings per common share | $ | 0.54 | $ | 0.79 |
Shares subject to issue upon exercise of options of 4,569 in 2017 and 12,550 in 2016 were excluded from the diluted earnings per common share calculation as they were anti-dilutive.
7. | Investment Securities |
The following is a summary of available-for-sale and held-to-maturity securities:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
At March 31, 2017 | ||||||||||||||||
Available-for-Sale Securities: | ||||||||||||||||
Obligations of U.S. government corporations and agencies | $ | 4,000 | $ | - | $ | (46 | ) | $ | 3,954 | |||||||
Mortgage-backed securities – residential | 81,016 | 587 | (731 | ) | 80,872 | |||||||||||
REMICs | 1,258 | 2 | - | 1,260 | ||||||||||||
Collateralized mortgage obligations | 66,263 | 497 | (469 | ) | 66,291 | |||||||||||
Trust preferred securities and preferred stock | - | 1 | - | 1 | ||||||||||||
Corporate bonds | 12,917 | 171 | (5 | ) | 13,083 | |||||||||||
Obligations of state and political subdivisions | 92,791 | 2,800 | (451 | ) | 95,140 | |||||||||||
Totals | $ | 258,245 | $ | 4,058 | $ | (1,702 | ) | $ | 260,601 |
23 |
Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Held-to-Maturity Securities*: | ||||||||||||||||
FHLMC certificates | $ | 11 | $ | - | $ | - | $ | 11 | ||||||||
FNMA certificates | 54 | 1 | - | 55 | ||||||||||||
GNMA certificates | 21 | 1 | - | 22 | ||||||||||||
Obligations of state and political subdivisions | 685 | - | - | 685 | ||||||||||||
Totals | $ | 771 | $ | 2 | $ | - | $ | 773 |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
At December 31, 2016 | ||||||||||||||||
Available-for-sale | ||||||||||||||||
Obligations of U.S. government corporations and agencies | $ | 4,000 | $ | - | $ | (85 | ) | $ | 3,915 | |||||||
Mortgage-backed securities - residential | 82,619 | 390 | (1,302 | ) | 81,707 | |||||||||||
REMICs | 1,309 | - | (2 | ) | 1,307 | |||||||||||
Collateralized mortgage obligations | 63,204 | 422 | (621 | ) | 63,005 | |||||||||||
Preferred stock | - | 2 | - | 2 | ||||||||||||
Corporate bonds | 12,919 | 97 | (3 | ) | 13,013 | |||||||||||
Obligations of state and political subdivisions | 86,165 | 2,491 | (613 | ) | 88,043 | |||||||||||
Total Available-for-Sale | $ | 250,216 | $ | 3,402 | $ | (2,626 | ) | $ | 250,992 |
Gross | Gross | |||||||||||||||
Amortized | Unrecognized | Unrecognized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Held-to-Maturity | ||||||||||||||||
FHLMC certificates | $ | 12 | $ | - | $ | - | $ | 12 | ||||||||
FNMA certificates | 56 | 2 | - | 58 | ||||||||||||
GNMA certificates | 23 | 1 | - | 24 | ||||||||||||
Obligations of states and political subdivisions | 93 | - | - | 93 | ||||||||||||
Total Held-to-Maturity | $ | 184 | $ | 3 | $ | - | $ | 187 |
* FHLMC, FNMA, and GNMA
certificates are residential mortgage-backed securities.
The amortized cost and fair value of the investment securities portfolio at March 31, 2017 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.
24 |
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Due in one year or less | $ | 1,457 | $ | 1,463 | $ | - | $ | - | ||||||||
Due after one year through five years | 22,620 | 22,993 | 93 | 93 | ||||||||||||
Due after five years through ten years | 43,015 | 44,719 | 592 | 592 | ||||||||||||
Due after ten years | 42,616 | 43,003 | - | - | ||||||||||||
MBS/CMO/REMIC | 148,537 | 148,423 | 86 | 88 | ||||||||||||
$ | 258,245 | $ | 260,601 | $ | 771 | $ | 773 |
Investment securities with a carrying amount of $160.6 million at March 31, 2017 were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.
As of March 31, 2017, the Company’s investment portfolio consisted of 445 securities, 101 of which were in an unrealized loss position.
The following tables summarize First Defiance’s securities that were in an unrealized loss position at March 31, 2017 and December 31, 2016:
Duration of Unrealized Loss Position | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
At March 31, 2017 | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
Obligations of U.S. government corporations and agencies | $ | 3,954 | $ | (46 | ) | $ | - | $ | - | $ | 3,954 | $ | (46 | ) | ||||||||||
Mortgage-backed securities-residential | 38,918 | (731 | ) | - | - | 38,918 | (731 | ) | ||||||||||||||||
Collateralized mortgage obligations | 26,997 | (422 | ) | $ | 1,187 | $ | (47 | ) | 28,184 | (469 | ) | |||||||||||||
Obligations of state and political subdivisions | 13,501 | (451 | ) | - | - | 13,501 | (451 | ) | ||||||||||||||||
Corporate bonds | - | - | 995 | (5 | ) | 995 | (5 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 83,370 | $ | (1,650 | ) | $ | 2,182 | $ | (52 | ) | $ | 85,552 | $ | (1,702 | ) |
25 |
Duration of Unrealized Loss Position | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
At December 31, 2016 | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
Obligations of U.S. government corporations and agencies | $ | 3,915 | $ | (85 | ) | $ | - | $ | - | $ | 3,915 | $ | (85 | ) | ||||||||||
Mortgage-backed securities-residential | 63,736 | (1,302 | ) | - | - | 63,736 | (1,302 | ) | ||||||||||||||||
REMICs | 1,308 | (2 | ) | - | - | 1,308 | (2 | ) | ||||||||||||||||
Collateralized mortgage obligations | 28,882 | (566 | ) | 1,227 | (55 | ) | 30,110 | (621 | ) | |||||||||||||||
Corporate bonds | - | - | 997 | (3 | ) | 997 | (3 | ) | ||||||||||||||||
Obligations of state and political subdivisions | 19,172 | (613 | ) | - | - | 19,172 | (613 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 117,013 | $ | (2,568 | ) | $ | 2,224 | $ | (58 | ) | $ | 119,238 | $ | (2,626 | ) |
There were no realized gains from the sales and calls of investment securities in the first quarter of 2017, while there were realized gains of $131,000 ($92,000 after tax) in the first quarter of 2016.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC Topic 320. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.
When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.
26 |
With the exception of corporate bonds, the above securities all have fixed interest rates, and all securities have defined maturities. Their fair value is sensitive to movements in market interest rates. First Defiance has the ability and intent to hold these investments for a time necessary to recover the amortized cost without impacting its liquidity position and it is not more than likely that the Company will be required to sell the investments before anticipated recovery.
In the first quarter of 2017 and 2016, management determined there was no OTTI.
The proceeds from the sales and calls of securities and the associated gains and losses are listed below:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In Thousands) | ||||||||
Proceeds | $ | - | $ | 5,360 | ||||
Gross realized gains | - | 131 | ||||||
Gross realized losses | - | - |
27 |
8. | Loans |
Loans receivable consist of the following:
March 31, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
Real Estate: | ||||||||
Secured by 1-4 family residential | $ | 276,761 | $ | 207,550 | ||||
Secured by multi-family residential | 211,546 | 196,983 | ||||||
Secured by commercial real estate | 981,698 | 843,579 | ||||||
Construction | 199,724 | 182,886 | ||||||
1,669,729 | 1,430,998 | |||||||
Other Loans: | ||||||||
Commercial | 504,340 | 469,055 | ||||||
Home equity and improvement | 132,965 | 118,429 | ||||||
Consumer finance | 27,696 | 16,680 | ||||||
665,001 | 604,164 | |||||||
Total loans | 2,334,730 | 2,035,162 | ||||||
Deduct: | ||||||||
Undisbursed loan funds | (95,460 | ) | (93,355 | ) | ||||
Net deferred loan origination fees and costs | (1,264 | ) | (1,320 | ) | ||||
Allowance for loan loss | (25,749 | ) | (25,884 | ) | ||||
Totals | $ | 2,212,257 | $ | 1,914,603 |
The table above includes loans acquired during 2017 totaling $284.9 million as of February 24, 2017, which is net of purchase discount on the acquired loans of $6.0 million. The recorded investment of these loans as of March 31, 2107 was $281.8 million, net of the purchase discount of $5.9 million.
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
28 |
The following table discloses allowance for loan loss activity for the quarters ended March 31, 2017 and 2016 by portfolio segment (In Thousands):
Quarter
Ended March 31, 2017 | 1-4 Family
Residential Real Estate | Multi- Family Residential Real Estate | Commercial
Real Estate | Construction | Commercial | Home Equity
and Improvement | Consumer Finance | Total | ||||||||||||||||||||||||
Beginning Allowance | $ | 2,627 | $ | 2,228 | $ | 10,625 | $ | 450 | $ | 7,361 | $ | 2,386 | $ | 207 | $ | 25,884 | ||||||||||||||||
Charge-Offs | (49 | ) | 0 | (290 | ) | 0 | 0 | (54 | ) | (71 | ) | (464 | ) | |||||||||||||||||||
Recoveries | 56 | 32 | 34 | 0 | 115 | 33 | 4 | 274 | ||||||||||||||||||||||||
Provisions | (13 | ) | (138 | ) | (159 | ) | 8 | 333 | (65 | ) | 89 | 55 | ||||||||||||||||||||
Ending Allowance | $ | 2,621 | $ | 2,122 | $ | 10,210 | $ | 458 | $ | 7,809 | $ | 2,300 | $ | 229 | $ | 25,749 |
Quarter Ended March 31, 2016 | 1-4 Family Residential Real Estate | Multi- Family Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity and Improvement | Consumer Finance | Total | ||||||||||||||||||||||||
Beginning Allowance | $ | 3,212 | $ | 2,151 | $ | 11,772 | $ | 517 | $ | 5,255 | $ | 2,304 | $ | 171 | $ | 25,382 | ||||||||||||||||
Charge-Offs | (55 | ) | 0 | (13 | ) | 0 | (336 | ) | (30 | ) | 0 | (434 | ) | |||||||||||||||||||
Recoveries | 86 | 0 | 177 | 0 | 19 | 39 | 35 | 356 | ||||||||||||||||||||||||
Provisions | (134 | ) | 99 | (292 | ) | (28 | ) | 882 | (81 | ) | (82 | ) | 364 | |||||||||||||||||||
Ending Allowance | $ | 3,109 | $ | 2,250 | $ | 11,644 | $ | 489 | $ | 5,820 | $ | 2,232 | $ | 124 | $ | 25,668 |
29 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2017 (In Thousands):
1-4 Family | Multi Family | |||||||||||||||||||||||||||||||
Residential | Residential | Commercial | Home Equity | Consumer | ||||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Construction | Commercial | & Improvement | Finance | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 196 | $ | 4 | $ | 170 | $ | - | $ | 101 | $ | 300 | $ | 1 | $ | 772 | ||||||||||||||||
Collectively evaluated for impairment | 2,425 | 2,118 | 10,040 | 458 | 7,708 | 2,000 | 228 | 24,977 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total ending allowance balance | $ | 2,621 | $ | 2,122 | $ | 10,210 | $ | 458 | $ | 7,809 | $ | 2,300 | $ | 229 | $ | 25,749 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 6,725 | $ | 3,340 | $ | 13,162 | $ | - | $ | 4,111 | $ | 1,202 | $ | 70 | $ | 28,610 | ||||||||||||||||
Loans collectively evaluated for impairment | 269,194 | 208,437 | 969,583 | 104,036 | 501,349 | 132,404 | 27,662 | 2,212,665 | ||||||||||||||||||||||||
Loans acquired with deteriorated credit quality | 1,247 | - | 2,253 | - | 632 | - | - | 4,132 | ||||||||||||||||||||||||
Total ending loans balance | $ | 277,166 | $ | 211,777 | $ | 984,998 | $ | 104,036 | $ | 506,092 | $ | 133,606 | $ | 27,732 | $ | 2,245,407 |
30 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016 (In Thousands):
1-4 Family | Multi Family | |||||||||||||||||||||||||||||||
Residential | Residential | Commercial | Home Equity | Consumer | ||||||||||||||||||||||||||||
Real Estate | Real Estate | Real Estate | Construction | Commercial | & Improvement | Finance | Total | |||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 202 | $ | 4 | $ | 255 | $ | - | $ | 35 | $ | 313 | $ | - | $ | 809 | ||||||||||||||||
Collectively evaluated for impairment | 2,425 | 2,224 | 10,370 | 450 | 7,326 | 2,073 | 207 | 25,075 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total ending allowance balance | $ | 2,627 | $ | 2,228 | $ | 10,625 | $ | 450 | $ | 7,361 | $ | 2,386 | $ | 207 | $ | 25,884 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 6,898 | $ | 3,483 | $ | 13,570 | $ | - | $ | 2,154 | $ | 1,269 | $ | 59 | $ | 27,433 | ||||||||||||||||
Loans collectively evaluated for impairment | 200,907 | 193,714 | 832,446 | 89,244 | 468,246 | 117,744 | 16,625 | 1,918,926 | ||||||||||||||||||||||||
Loans acquired with deteriorated credit quality | - | - | - | - | 11 | - | - | 11 | ||||||||||||||||||||||||
Total ending loans balance | $ | 207,805 | $ | 197,197 | $ | 846,016 | $ | 89,244 | $ | 470,411 | $ | 119,013 | $ | 16,684 | $ | 1,946,370 |
31 |
The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):
Three Months Ended March 31, 2017 | ||||||||||||
Average Balance | Interest Income Recognized | Cash Basis Income Recognized | ||||||||||
Residential Owner Occupied | $ | 2,820 | $ | 28 | $ | 28 | ||||||
Residential Non Owner Occupied | 3,891 | 36 | 36 | |||||||||
Total Residential Real Estate | 6,711 | 64 | 64 | |||||||||
Multi-Family | 3,374 | 10 | 10 | |||||||||
CRE Owner Occupied | 4,614 | 22 | 22 | |||||||||
CRE Non Owner Occupied | 4,499 | 42 | 39 | |||||||||
Agriculture Land | 2,707 | 47 | 19 | |||||||||
Other CRE | 1,668 | 13 | 12 | |||||||||
Total Commercial Real Estate | 13,488 | 124 | 92 | |||||||||
Construction | - | - | - | |||||||||
Commercial Working Capital | 2,372 | 19 | 19 | |||||||||
Commercial Other | 1,722 | 21 | 16 | |||||||||
Total Commercial | 4,094 | 40 | 35 | |||||||||
Home Equity and Home Improvement | 1,254 | 10 | 10 | |||||||||
Consumer Finance | 74 | 1 | 1 | |||||||||
Total Impaired Loans | $ | 28,995 | $ | 249 | $ | 212 |
32 |
The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):
Three Months Ended March 31, 2016 | ||||||||||||
Average Balance | Interest Income Recognized | Cash Basis Income Recognized | ||||||||||
Residential Owner Occupied | $ | 4,025 | $ | 39 | $ | 39 | ||||||
Residential Non Owner Occupied | 3,557 | 35 | 34 | |||||||||
Total Residential Real Estate | 7,582 | 74 | 73 | |||||||||
Multi-Family | 4,593 | 30 | 30 | |||||||||
CRE Owner Occupied | 9,090 | 62 | 48 | |||||||||
CRE Non Owner Occupied | 4,418 | 53 | 49 | |||||||||
Agriculture Land | 3,593 | 35 | 12 | |||||||||
Other CRE | 1,422 | 4 | 4 | |||||||||
Total Commercial Real Estate | 18,523 | 154 | 113 | |||||||||
Construction | - | - | - | |||||||||
Commercial Working Capital | 1,513 | 15 | 15 | |||||||||
Commercial Other | 4,245 | 19 | 18 | |||||||||
Total Commercial | 5,758 | 34 | 33 | |||||||||
Home Equity and Home Improvement | 1,749 | 15 | 15 | |||||||||
Consumer Finance | 73 | 1 | 1 | |||||||||
Total Impaired Loans | $ | 38,278 | $ | 308 | $ | 265 |
33 |
The following table presents loans individually evaluated for impairment by class of loans (In Thousands):
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Unpaid Principal Balance* | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance* | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
With no allowance recorded: | ||||||||||||||||||||||||
Residential Owner Occupied | $ | 1,906 | $ | 1,760 | $ | - | $ | 1,912 | $ | 1,765 | $ | - | ||||||||||||
Residential Non Owner Occupied | 1,769 | 1,762 | - | 1,691 | 1,683 | - | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 3,675 | 3,522 | - | 3,603 | 3,448 | - | ||||||||||||||||||
Multi-Family Residential Real Estate | 3,288 | 3,288 | - | 3,578 | 3,430 | - | ||||||||||||||||||
CRE Owner Occupied | 3,048 | 2,611 | - | 2,652 | 2,353 | - | ||||||||||||||||||
CRE Non Owner Occupied | 4,114 | 3,896 | - | 4,372 | 4,240 | - | ||||||||||||||||||
Agriculture Land | 2,617 | 2,649 | - | 1,695 | 1,722 | - | ||||||||||||||||||
Other CRE | 1,020 | 950 | - | 1,225 | 1,115 | - | ||||||||||||||||||
Total Commercial Real Estate | 10,799 | 10,106 | - | 9,944 | 9,430 | - | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 2,228 | 2,183 | - | 838 | 786 | - | ||||||||||||||||||
Commercial Other | 1,782 | 1,620 | - | 1,179 | 967 | - | ||||||||||||||||||
Total Commercial | 4,010 | 3,803 | - | 2,017 | 1,753 | - | ||||||||||||||||||
- | ||||||||||||||||||||||||
Home Equity and Home Improvement | 621 | 575 | - | 631 | 585 | - | ||||||||||||||||||
Consumer Finance | 53 | 53 | - | 55 | 55 | $ | - | |||||||||||||||||
Total loans with no allowance recorded | $ | 22,446 | $ | 21,347 | $ | - | $ | 19,828 | $ | 8,701 | ||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Residential Owner Occupied | $ | 2,159 | $ | 2,132 | $ | 157 | $ | 2,348 | $ | 2,319 | $ | 157 | ||||||||||||
Residential Non Owner Occupied | 1,078 | 1,071 | 39 | 1,137 | 1,131 | 45 | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 3,237 | 3,203 | 196 | 3,485 | 3,450 | 202 | ||||||||||||||||||
Multi-Family Residential Real Estate | 51 | 52 | 4 | 53 | 53 | 4 | ||||||||||||||||||
CRE Owner Occupied | 2,291 | 1,831 | 96 | 2,362 | 1,894 | 102 | ||||||||||||||||||
CRE Non Owner Occupied | 414 | 417 | 25 | 1,618 | 1,479 | 108 | ||||||||||||||||||
Agriculture Land | 109 | 110 | 5 | 45 | 45 | 3 | ||||||||||||||||||
Other CRE | 1,116 | 698 | 44 | 1,144 | 722 | 42 | ||||||||||||||||||
Total Commercial Real Estate | 3,930 | 3,056 | 170 | 5,169 | 4,140 | 255 | ||||||||||||||||||
Construction | - | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 180 | 181 | 94 | 230 | 231 | 24 | ||||||||||||||||||
Commercial Other | 124 | 127 | 7 | 167 | 170 | 11 | ||||||||||||||||||
Total Commercial | 304 | 308 | 101 | 397 | 401 | 35 | ||||||||||||||||||
Home Equity and Home Improvement | 631 | 627 | 300 | 688 | 684 | 313 | ||||||||||||||||||
Consumer Finance | 18 | 17 | 1 | 4 | 4 | - | ||||||||||||||||||
Total loans with an allowance recorded | $ | 8,171 | $ | 7,263 | $ | 772 | $ | 9,796 | $ | 8,732 | $ | 809 |
* Presented gross of charge offs
34 |
The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned on the dates indicated:
March 31, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
Non-accrual loans | $ | 15,057 | $ | 14,348 | ||||
Loans over 90 days past due and still accruing | - | - | ||||||
Total non-performing loans | 15,057 | 14,348 | ||||||
Real estate and other assets held for sale | 705 | 455 | ||||||
Total non-performing assets | $ | 15,762 | $ | 14,803 | ||||
Troubled debt restructuring, still accruing | $ | 9,771 | $ | 10,544 |
The following table presents the aging of the recorded investment in past due and non- accrual loans as of March 31, 2017 by class of loans (In Thousands):
Current | 30-59 days | 60-89 days | 90+ days | Total Past Due | Total Non- Accrual | |||||||||||||||||||
Residential Owner Occupied | $ | 175,631 | $ | 95 | $ | 866 | $ | 333 | $ | 1,294 | $ | 1,579 | ||||||||||||
Residential Non Owner Occupied | 99,595 | 50 | 284 | 312 | 646 | 1,175 | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 275,226 | 145 | 1,150 | 645 | 1,940 | 2,754 | ||||||||||||||||||
Multi-Family Residential Real Estate | 211,777 | - | - | - | - | 2,576 | ||||||||||||||||||
CRE Owner Occupied | 384,192 | 710 | 45 | 1,337 | 2,092 | 3,172 | ||||||||||||||||||
CRE Non Owner Occupied | 395,410 | 328 | - | 442 | 770 | 1,626 | ||||||||||||||||||
Agriculture Land | 135,544 | 210 | - | 855 | 1,065 | 1,582 | ||||||||||||||||||
Other Commercial Real Estate | 65,925 | - | - | - | - | 866 | ||||||||||||||||||
Total Commercial Real Estate | 981,071 | 1,248 | 45 | 2,634 | 3,927 | 7,246 | ||||||||||||||||||
Construction | 104,036 | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 225,276 | 55 | 49 | - | 104 | 1,005 | ||||||||||||||||||
Commercial Other | 278,789 | 1,455 | 142 | 326 | 1,923 | 497 | ||||||||||||||||||
Total Commercial | 504,065 | 1,510 | 191 | 326 | 2,027 | 1,502 | ||||||||||||||||||
Home Equity/Home Improvement | 132,993 | 173 | 42 | 398 | 613 | 875 | ||||||||||||||||||
Consumer Finance | 27,417 | 108 | 130 | 77 | 315 | 101 | ||||||||||||||||||
Total Loans | $ | 2,236,585 | $ | 3,184 | $ | 1,558 | $ | 4,080 | $ | 8,822 | $ | 15,054 | ||||||||||||
Loans acquired with deteriorated credit quality (included in the totals above) | $ | 3,830 | $ | 110 | $ | 45 | $ | 147 | $ | 302 | $ | 472 | ||||||||||||
Loans acquired in current year (included in totals above) | $ | 279,502 | $ | 820 | $ | 341 | $ | 1,130 | $ | 2,291 | $ | 1,476 |
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The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2016 by class of loans (In Thousands):
Current | 30-59 days | 60-89 days | 90+ days | Total Past Due | Total Non- Accrual | |||||||||||||||||||
Residential Owner Occupied | $ | 139,015 | $ | 56 | $ | 842 | $ | 544 | $ | 1,442 | $ | 1,931 | ||||||||||||
Residential Non Owner Occupied | 66,811 | 166 | 308 | 63 | 537 | 992 | ||||||||||||||||||
Total 1-4 Family Residential Real Estate | 205,826 | 222 | 1,150 | 607 | 1,979 | 2,923 | ||||||||||||||||||
Multi-Family Residential Real Estate | 197,197 | - | - | - | - | 2,637 | ||||||||||||||||||
CRE Owner Occupied | 340,233 | 79 | - | 1,396 | 1,475 | 3,098 | ||||||||||||||||||
CRE Non Owner Occupied | 338,724 | 81 | 16 | 426 | 523 | 1,808 | ||||||||||||||||||
Agriculture Land | 102,397 | - | - | - | - | 755 | ||||||||||||||||||
Other Commercial Real Estate | 62,415 | - | - | 249 | 249 | 1,292 | ||||||||||||||||||
Total Commercial Real Estate | 843,769 | 160 | 16 | 2,071 | 2,247 | 6,953 | ||||||||||||||||||
Construction | 89,244 | - | - | - | - | - | ||||||||||||||||||
Commercial Working Capital | 202,786 | - | 10 | 38 | 48 | 435 | ||||||||||||||||||
Commercial Other | 267,189 | 23 | - | 365 | 388 | 577 | ||||||||||||||||||
Total Commercial | 469,975 | 23 | 10 | 403 | 436 | 1,012 | ||||||||||||||||||
Home Equity and Home Improvement | 117,458 | 1,125 | 176 | 254 | 1,555 | 730 | ||||||||||||||||||
Consumer Finance | 16,452 | 85 | 69 | 78 | 232 | 91 | ||||||||||||||||||
Total Loans | $ | 1,939,921 | $ | 1,615 | $ | 1,421 | $ | 3,413 | $ | 6,449 | $ | 14,346 |
Troubled Debt Restructurings
As of March 31, 2017 and December 31, 2016, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $15.5 million and $16.8 million, respectively. The Company allocated $688,000 and $809,000 of specific reserves to those loans at March 31, 2017 and December 31, 2016, and has committed to lend additional amounts totaling up to $19,000 and $20,000 at March 31, 2017 and December 31, 2016, respectively.
The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments, and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made.
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Of the loans modified in a TDR, $5.7 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.
The following table presents loans by class modified as troubled debt restructurings that occurred during the three month periods ending March 31, 2017 and March 31, 2016:
Loans Modified as a TDR for the ($ in thousands) | Loans Modified as a TDR for the ($ in thousands) | |||||||||||||
Troubled Debt Restructurings | Number of Loans | Recorded Investment (as of period end) | Number of Loans | Recorded Investment (as of period end) | ||||||||||
1-4 Family Owner Occupied | 4 | $ | 100 | 1 | $ | 9 | ||||||||
1-4 Family Non Owner Occupied | 2 | 84 | 2 | 127 | ||||||||||
CRE Owner Occupied | 1 | 119 | 0 | - | ||||||||||
CRE Non Owner Occupied | 0 | - | 0 | - | ||||||||||
Agriculture Land | 0 | - | 0 | - | ||||||||||
Other CRE | 0 | - | 0 | - | ||||||||||
Commercial Working Capital | 0 | - | 0 | - | ||||||||||
Commercial Other | 1 | 46 | 0 | - | ||||||||||
Home Equity and Improvement | 1 | 25 | 5 | 297 | ||||||||||
Consumer Finance | 2 | 15 | 2 | 5 | ||||||||||
Total | 11 | $ | 389 | 10 | $ | 438 |
The loans described above decreased the ALLL by $19,000 in the three month period ending March 31, 2017 and increased the ALLL by $15,000 in the three month period ending March 31, 2016.
Of the 2017 modifications, 4 were made TDRs due to the fact that the borrower is in bankruptcy, 4 were made TDR due to terming out lines of credit, 2 were made TDR due to advancing money to a watch list credit, and 1 was made a TDR because the current debt was refinanced for payment relief.
There were no loans modified as TDRs for which there was a payment default within twelve months following the modification during the quarters ending March 31, 2017 and March 31, 2016.
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In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):
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Class | Pass | Special Mention | Substandard | Doubtful | Not Graded | Total | ||||||||||||||||||
1-4 Family Owner Occupied | $ | 7,502 | $ | 483 | $ | 1,943 | $ | - | $ | 166,998 | $ | 176,926 | ||||||||||||
1-4 Family Non Owner Occupied | 89,432 | 2,287 | 3,575 | - | 4,946 | 100,240 | ||||||||||||||||||
Total 1-4 Family Real Estate | 96,934 | 2,770 | 5,518 | - | 171,944 | 277,166 | ||||||||||||||||||
Multi-Family Residential Real Estate | 207,071 | 837 | 3,756 | - | 113 | 211,777 | ||||||||||||||||||
CRE Owner Occupied | 360,693 | 20,388 | 4,890 | - | 314 | 386,285 | ||||||||||||||||||
CRE Non Owner Occupied | 386,323 | 3,390 | 6,467 | - | - | 396,180 | ||||||||||||||||||
Agriculture Land | 128,428 | 2,731 | 5,450 | - | - | 136,609 | ||||||||||||||||||
Other CRE | 62,997 | 59 | 2,063 | - | 805 | 65,924 | ||||||||||||||||||
Total Commercial Real Estate | 938,441 | 26,568 | 18,870 | - | 1,119 | 984,998 | ||||||||||||||||||
Construction | 82,950 | 1,198 | - | - | 19,888 | 104,036 | ||||||||||||||||||
Commercial Working Capital | 215,129 | 7,139 | 3,112 | - | - | 225,380 | ||||||||||||||||||
Commercial Other | 269,535 | 8,458 | 2,719 | - | - | 280,712 | ||||||||||||||||||
Total Commercial | 484,664 | 15,597 | 5,831 | - | - | 506,092 | ||||||||||||||||||
Home Equity and Home Improvement | - | - | 852 | - | 132,754 | 133,606 | ||||||||||||||||||
Consumer Finance | - | - | 177 | - | 27,555 | 27,732 | ||||||||||||||||||
Total Loans | $ | 1,810,060 | $ | 46,970 | $ | 35,004 | $ | - | $ | 353,373 | $ | 2,245,407 | ||||||||||||
Loans acquired with deteriorated credit quality (included in the totals above) | $ | 9 | $ | 1,173 | $ | 2,946 | - | $ | 4 | $ | 4,132 | |||||||||||||
Loans acquired in current year (included in totals above) | $ | 223,594 | $ | 1,711 | $ | 5,393 | - | $ | 51,095 | $ | 281,793 |
As of December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):
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Class | Pass | Special Mention | Substandard | Doubtful | Not Graded | Total | ||||||||||||||||||
Residential Owner Occupied | $ | 5,980 | $ | 402 | $ | 1,824 | $ | - | $ | 132,250 | $ | 140,456 | ||||||||||||
Residential Non Owner Occupied | 58,041 | 1,394 | 3,480 | - | 4,434 | 67,349 | ||||||||||||||||||
Total 1-4 Family Real Estate | 64,021 | 1,796 | 5,304 | - | 136,684 | 207,805 | ||||||||||||||||||
Multi-Family Residential Real Estate | 192,369 | 862 | 3,852 | - | 114 | 197,197 | ||||||||||||||||||
CRE Owner Occupied | 316,335 | 20,559 | 4,430 | - | 384 | 341,708 | ||||||||||||||||||
CRE Non Owner Occupied | 332,196 | 1,617 | 5,435 | - | - | 339,248 | ||||||||||||||||||
Agriculture Land | 98,039 | 2,355 | 2,002 | - | - | 102,396 | ||||||||||||||||||
Other CRE | 59,561 | 60 | 2,297 | - | 746 | 62,664 | ||||||||||||||||||
Total Commercial Real Estate | 806,131 | 24,591 | 14,164 | - | 1,130 | 846,016 | ||||||||||||||||||
Construction | 67,751 | 706 | - | - | 20,787 | 89,244 | ||||||||||||||||||
Commercial Working Capital | 193,043 | 8,301 | 1,490 | - | - | 202,834 | ||||||||||||||||||
Commercial Other | 262,076 | 3,749 | 1,752 | - | - | 267,577 | ||||||||||||||||||
Total Commercial | 455,119 | 12,050 | 3,242 | - | - | 470,411 | ||||||||||||||||||
Home Equity and Home Improvement | - | - | 696 | - | 118,317 | 119,013 | ||||||||||||||||||
Consumer Finance | - | - | 90 | - | 16,594 | 16,684 | ||||||||||||||||||
Total Loans | $ | 1,585,391 | $ | 40,005 | $ | 27,348 | $ | - | $ | 293,626 | $ | 1,946,370 |
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance of those loans is as follows (In Thousands):
March 31, 2017 | ||||
1-4 Family Residential Real Estate | $ | 1,541 | ||
Commercial Real Estate Loans | 3,837 | |||
Commercial | 742 | |||
Consumer | 3 | |||
Total Outstanding Balance | $ | 6,123 | ||
Recorded Investment, net of allowance of $0 | $ | 4,132 |
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Accretable yield, or income expected to be collected, is as follows
2017 | ||||
Balance at January 1 | $ | - | ||
New Loans Purchased | 1,034 | |||
Accretion of Income | - | |||
Reclassifications from Non-accretable Difference Charge-off of Accretable Yield | - | |||
Balance at March 31 | $ | 1,034 |
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2017. No allowances for loan losses were reversed during the same period.
Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended March 31, 2017 are included in the table below. There were no such loans purchased during the year ended December 31, 2016. (In Thousands)
1-4 Family Residential Real Estate | $ | 1,720 | ||
Commercial Real Estate | 3,781 | |||
Commercial | 785 | |||
Consumer | 4 | |||
Total | $ | 6,290 |
Cash Flows Expected to be Collected at Acquisition | $ | 5,157 | ||
Fair Value of Acquired Loans at Acquisition | $ | 4,123 |
Foreclosure Proceedings
Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $226,000 as of March 31, 2017.
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9. | Mortgage Banking |
Net revenues from the sales and servicing of mortgage loans consisted of the following:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In Thousands) | ||||||||
Gain from sale of mortgage loans | $ | 1,083 | $ | 994 | ||||
Mortgage loans servicing revenue (expense): | ||||||||
Mortgage loans servicing revenue | 934 | 877 | ||||||
Amortization of mortgage servicing rights | (312 | ) | (311 | ) | ||||
Mortgage servicing rights valuation adjustments | 33 | (21 | ) | |||||
655 | 545 | |||||||
Net revenue from sale and servicing of mortgage loans | $ | 1,738 | $ | 1,539 |
The unpaid principal balance of residential mortgage loans serviced for third parties was $1.38 billion at March 31, 2017 and $1.37 billion at December 31, 2016.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three months ended March 31, 2017 and 2016:
March 31, 2017 | March 31, 2016 | |||||||
(In Thousands) | ||||||||
Mortgage servicing assets: | ||||||||
Balance at beginning of period | $ | 10,117 | $ | 9,893 | ||||
Loans sold, servicing retained | 356 | 297 | ||||||
Amortization | (312 | ) | (311 | ) | ||||
Carrying value before valuation allowance at end of period | 10,161 | 9,879 | ||||||
Valuation allowance: | ||||||||
Balance at beginning of period | (522 | ) | (645 | ) | ||||
Impairment (expense) recovery | 33 | (21 | ) | |||||
Balance at end of period | (489 | ) | (666 | ) | ||||
Net carrying value of MSRs at end of period | $ | 9,672 | $ | 9,213 | ||||
Fair value of MSRs at end of period | $ | 10,013 | $ | 9,463 |
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced. Estimates of future amortization expense are not easily estimable.
The Company established an accrual for secondary market buy-back activity, a liability of $51,000 and $79,000 was accrued at March 31, 2017 and December 31, 2016, respectively. Expense (credit) recognized related to the accrual was ($28,000) and ($59,000) in the first quarter of 2017 and 2016, respectively. The reversals are mainly due to no actual losses being recorded in the first quarter of 2017 and 2016, respectively.
42 |
10. | Deposits |
A summary of deposit balances is as follows:
March 31, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
Non-interest-bearing checking accounts | $ | 579,943 | $ | 487,663 | ||||
Interest-bearing checking and money market accounts | 973,459 | 816,665 | ||||||
Savings deposits | 288,498 | 243,369 | ||||||
Retail certificates of deposit less than $250,000 | 490,953 | 400,080 | ||||||
Retail certificates of deposit greater than $250,000 | 40,936 | 33,851 | ||||||
$ | 2,373,789 | $ | 1,981,628 |
11. | Borrowings |
First Defiance’s debt, FHLB advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:
March 31, 2017 | December 31, 2016 | |||||||
(In Thousands) | ||||||||
FHLB Advances: | ||||||||
Single maturity fixed rate advances | $ | 92,000 | $ | 92,000 | ||||
Putable advances | 5,000 | 5,000 | ||||||
Amortizable mortgage advances | 8,104 | 6,943 | ||||||
Total | $ | 105,104 | $ | 103,943 | ||||
Junior subordinated debentures owed to unconsolidated subsidiary trusts | $ | 36,083 | $ | 36,083 |
The putable advance can be put back to the Company at the option of the FHLB on a quarterly basis. A $5.0 million putable advance with a weighted average rate of 2.35% was not yet callable by the FHLB at March 31, 2017. The call date for this advance is June 12, 2017 and the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.
43 |
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. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 2.65% as of March 31, 2017 and 2.46% as of December 31, 2016.
The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.
The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 2.53% and 2.34% on March 31, 2017 and December 31, 2016 respectively.
The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
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.
Repurchase Agreements. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.
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The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of March 31, 2017 and December 31, 2016 is presented in the following tables.
Overnight and Continuous | Up to 30 Days | 30-90 Days | Greater than 90 Days | Total | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
At March 31, 2017 | ||||||||||||||||||||
Repurchase agreements: | ||||||||||||||||||||
Mortgage-backed securities – residential | $ | 16,624 | $ | - | $ | - | $ | - | $ | 16,624 | ||||||||||
Collateralized mortgage obligations | 8,267 | - | - | - | 8,267 | |||||||||||||||
Total borrowings | $ | 24,891 | $ | - | $ | - | $ | - | $ | 24,891 | ||||||||||
Gross amount of recognized liabilities for repurchase agreements | $ | 24,891 |
Overnight and Continuous | Up to 30 Days | 30-90 Days | Greater than 90 Days |
Total | ||||||||||||||||
(In Thousands) | ||||||||||||||||||||
At December 31, 2016 | ||||||||||||||||||||
Repurchase agreements: | ||||||||||||||||||||
Mortgage-backed securities – residential | $ | 21,222 | $ | - | $ | - | $ | - | $ | 21,222 | ||||||||||
Collateralized mortgage obligations | 10,594 | - | - | - | 10,594 | |||||||||||||||
Total borrowings | $ | 31,816 | $ | - | $ | - | $ | - | $ | 31,816 | ||||||||||
Gross amount of recognized liabilities for repurchase agreements | $ | 31,816 |
12. | Commitments, Guarantees and Contingent Liabilities |
Loan commitments are made to accommodate the financial needs of First Federal’s customers; however, there are no long-term, fixed-rate loan commitments that result in market risk. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate customers’ trade transactions.
Both arrangements have credit risk, essentially the same as that involved in extending loans to customers, and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained based on Management’s credit assessment of the customer.
The Company’s maximum obligation to extend credit for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding as of the periods stated below were as follows (In Thousands):
March 31, 2017 | December 31, 2016 | |||||||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |||||||||||||
Commitments to make loans | $ | 49,810 | $ | 125,148 | $ | 34,432 | $ | 106,356 | ||||||||
Unused lines of credit | 25,487 | 420,597 | 14,384 | 400,542 | ||||||||||||
Standby letters of credit | - | 6,719 | - | 9,668 | ||||||||||||
Total | $ | 75,297 | $ | 552,464 | $ | 48,816 | $ | 516,566 |
45 |
Commitments to make loans are generally made for periods of 60 days or less.
In addition to the above commitments, First Defiance had commitments to sell $24.0 million and $22.5 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at March 31, 2017 and December 31, 2016, respectively.
13. | Income Taxes |
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2012. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.
14. | Derivative Financial Instruments |
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately $18.9 million and $14.1 million of interest rate lock commitments at March 31, 2017 and December 31, 2016, respectively. There were $24.0 million and $22.5 million of forward commitments for the future delivery of residential mortgage loans at March 31, 2017 and December 31, 2016, respectively.
The fair value of these mortgage banking derivatives are reflected by a derivative asset recorded in other assets in the Consolidated Statements of Condition. The table below provides data about the carrying values of these derivative instruments:
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
Derivative | Derivative | |||||||||||||||||||||||
Carrying | Carrying | Net Carrying | Carrying | Carrying | Net Carrying | |||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Mortgage Banking Derivatives | $ | 598 | $ | (42 | ) | $ | 556 | $ | 491 | $ | - | $ | 491 |
46 |
The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In Thousands) | ||||||||
Derivatives not designated as hedging instruments | ||||||||
Mortgage Banking Derivatives – Gain (Loss) | $ | 65 | $ | 438 |
The above amounts are included in mortgage banking income with gain on sale of mortgage loans.
15. | Other Comprehensive Income (Loss) |
The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below. Reclassification adjustments related to securities available for sale are included in gains on sale or call of securities in the accompanying consolidated condensed statements of income.
Before Tax Amount | Tax Expense (Benefit) | Net of Tax Amount | ||||||||||
(In Thousands) | ||||||||||||
Three months ended March 31, 2017: | ||||||||||||
Securities available for sale: | ||||||||||||
Change in net unrealized gain/loss during the period | $ | 1,580 | $ | (553 | ) | $ | 1,027 | |||||
Reclassification adjustment for net gains included in net income | - | - | - | |||||||||
Total other comprehensive loss | $ | 1,580 | $ | (553 | ) | $ | 1,027 | |||||
Three months ended March 31, 2016: | ||||||||||||
Securities available for sale: | ||||||||||||
Change in net unrealized gain/loss during the period | $ | 1,450 | $ | (508 | ) | $ | 942 | |||||
Reclassification adjustment for net gains included in net income | (131 | ) | 46 | (85 | ) | |||||||
Total other comprehensive loss | $ | 1,319 | $ | (462 | ) | $ | 857 |
Activity in accumulated other comprehensive income (loss), net of tax, was as follows: