10-Q 1 form10q-63843_fdfc.txt 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 September 30, 2004 ------------------ 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 or principal executive office) (Zip Code) Registrant's telephone number, including area code: (419) 782-5015 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| 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 - 6,292,763 shares outstanding at November 8, 2004 FIRST DEFIANCE FINANCIAL CORP. INDEX Page Number ----------- PART I.-FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements (Unaudited): Consolidated Condensed Statements of Financial Condition - September 30, 2004 and December 31, 2003 2 Consolidated Condensed Statements of Income - Three and nine months ended September 30, 2004 and 2003 4 Consolidated Condensed Statement of Changes in Stockholders' Equity - Nine months ended September 30, 2004 5 Consolidated Condensed Statements of Cash Flows - Nine months ended September 30, 2004 and 2003 7 Notes to Consolidated Condensed Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk 38 Item 4. Controls and Procedures 38 PART II-OTHER INFORMATION: Item 1. Legal Proceedings 39 Item 2. Changes in Securities 39 Item 3. Defaults upon Senior Securities 39 Item 4. Submission of Matters to a Vote of Security Holders 39 Item 5. Other Information 39 Item 6. Exhibits and Reports on Form 8-K 40 Signatures 41 1 PART 1-FINANCIAL INFORMATION Item 1. Financial Statements FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Financial Condition (Amounts in Thousands)
---------------------------------------------------------------------------------------------- September 30, 2004 December 31, 2003 ------------------ ----------------- (unaudited) ASSETS Cash and cash equivalents: Cash and amounts due from depository institutions $ 20,544 $ 28,020 Interest-bearing deposits 627 9,763 ---------- ---------- 21,171 37,783 Securities: Available-for-sale, carried at fair value 141,655 168,259 Held-to-maturity, carried at amortized cost (approximate fair value $2,565 and $2,938 at September 30, 2004 and December 31, 2003 respectively) 2,427 2,776 ---------- ---------- 144,082 171,035 Loans held for sale 6,812 5,872 Loans receivable, net of allowance for loan losses of $9,712 and $8,844 respectively 844,546 735,255 Accrued interest receivable 5,155 4,742 Federal Home Loan Bank stock and other interest-earning assets 13,235 17,766 Bank owned life insurance 18,532 17,952 Office properties and equipment 24,056 23,846 Real estate and other assets held for sale 61 404 Goodwill and other intangibles 18,961 20,544 Mortgage servicing rights 3,516 3,431 Other assets 2,243 1,969 ---------- ---------- Total assets $1,102,370 $1,040,599 ========== ==========
See accompanying notes. 2 FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Financial Condition (Amounts in Thousands) --------------------------------------------------------------------------------
September 30, 2004 December31, 2003 ------------------ ---------------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing deposits $ 55,321 $ 52,323 Interest-bearing deposits 723,935 676,673 ----------- ----------- Total deposits 779,256 728,996 Advances from Federal Home Loan Bank 173,670 164,522 Short-term borrowings and other interest-bearing liabilities 12,052 12,267 Advance payments by borrowers for taxes and insurance 179 231 Deferred taxes 1,074 1,859 Other liabilities 10,716 8,455 ----------- ----------- Total liabilities 976,947 916,330 STOCKHOLDERS' EQUITY Preferred stock, no par value per share: 5,000 shares authorized; no shares issued -- -- Common stock, $.01 par value per share: 20,000 shares authorized; 6,286 and 6,328 shares outstanding, respectively 63 63 Additional paid-in capital 51,593 51,144 Stock acquired by ESOP (1,478) (1,904) Deferred compensation (6) (11) Accumulated other comprehensive income, net of income taxes of $1,596 and $2,163, respectively 2,963 4,017 Retained earnings 72,288 70,960 ----------- ----------- Total stockholders' equity 125,423 124,269 ----------- ----------- Total liabilities and stockholders' equity $ 1,102,370 $ 1,040,599 =========== ===========
See accompanying notes 3 FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Income (UNAUDITED) (Amounts in Thousands, except per share data) --------------------------------------------------------------------------------
Three Months ended Nine Months ended September 30, September 30, 2004 2003 2004 2003 ------- -------- ------- -------- Interest Income Loans $12,205 $ 10,934 $34,412 $ 30,246 Investment securities 1,633 1,987 5,225 6,519 Interest-bearing deposits 1 107 37 216 ------- -------- ------- -------- Total interest income 13,839 13,028 39,674 36,981 Interest Expense Deposits 3,384 3,330 9,453 10,275 FHLB advances and other 1,843 1,843 5,418 5,553 Notes payable and warehouse loans 31 25 75 47 ------- -------- ------- -------- Total interest expense 5,258 5,198 14,946 15,875 ------- -------- ------- -------- Net interest income 8,581 7,830 24,728 21,106 Provision for loan losses 376 497 1,244 1,185 ------- -------- ------- -------- Net interest income after provision for loan losses 8,205 7,333 23,484 19,921 Non-interest Income Service fees and other charges 1,372 1,204 3,950 3,353 Insurance and investment sales commission income 906 924 3,192 2,817 Dividends on stock 140 176 471 518 Gain on sale of loans 518 2,274 1,910 6,590 Gain on sale of securities 302 -- 694 919 Trust income 69 46 167 116 Income from Bank Owned Life Insurance 194 211 579 616 Other non-interest income 49 4 140 23 ------- -------- ------- -------- Total non-interest income 3,550 4,839 11,103 14,952 Non-interest Expense Compensation and benefits 4,274 4,281 13,062 11,965 Occupancy 798 758 2,452 2,227 SAIF deposit insurance premiums (rebates) 26 30 12 85 State franchise tax 155 272 467 838 Data processing 595 498 1,717 1,357 Amortization of mortgage servicing rights 141 546 547 1,825 Impairment (recovery) of mortgage servicing rights 321 (987) 34 (381) Amortization and impairment of goodwill and other intangibles 28 31 82 39 Settlement of contingent liability 1,927 -- 1,927 -- Other non-interest expense 1,204 1,347 3,767 3,537 ------- -------- ------- -------- Total non-interest expense 9,469 6,776 24,067 21,492 ------- -------- ------- -------- Income before income taxes 2,286 5,396 10,520 13,381 Federal income taxes 606 1,715 3,203 4,118 ------- -------- ------- -------- Net Income $ 1,680 $ 3,681 $ 7,317 $ 9,263 ======= ======== ======= ======== Earnings per share (Note 6) Basic $ 0.28 $ 0.61 $ 1.20 $ 1.54 ======= ======== ======= ======== Diluted $ 0.27 $ 0.58 $ 1.15 $ 1.47 ======= ======== ======= ======== Dividends declared per share (Note 5) $ 0.20 $ 0.15 $ 0.60 $ 0.45 ======= ======== ======= ======== Average shares outstanding (Note 6) Basic 6,076 6,002 6,103 6,033 ======= ======== ======= ======== Diluted 6,332 6,293 6,380 6,296 ======= ======== ======= ========
See accompanying notes 4 FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statement of Changes in Stockholders' Equity (UNAUDITED) (Amounts in Thousands) --------------------------------------------------------------------------------
2004 --------------------------------------------------------------- Stock Acquired By ----------------- Additional Management Common Paid-in Recognition Stock Capital ESOP Plan ----- ------- ---- ---- Balance at January 1 $ 63 $ 51,144 $ (1,904) $ (11) Comprehensive income: Net income Change in unrealized gains (losses), net of income taxes of $566 Total comprehensive income ESOP shares released 845 426 Amortization of deferred compensation of Management Recognition Plan 5 Shares issued under stock option plan 1 1,302 Purchase of common stock for treasury (1) (1,698) Dividends declared (Note 5) ----------------------------------------------------------- Balance at September 30 $ 63 $ 51,593 $ (1,478) $ (6) ===========================================================
See accompanying notes 5 FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued) (UNAUDITED) (Amounts in Thousands)
------------------------------------------------------------------------------------------------------------------ 2004 2003 -------------------------------------------------- ------------- Net Unrealized gains (losses) on Total Total available-for- Retained Stockholders' Stockholder's sale securities Earnings Equity Equity --------------- -------- ------ ------ Balance at January 1 $ 4,017 $ 70,960 $ 124,269 $ 120,110 Comprehensive income: Net income 7,317 7,317 9,263 Change in unrealized gains (losses), net of income taxes of $566 (1,054) (1,054) (1,133) --------- ---------- Total comprehensive income 6,263 8,130 ESOP shares released 1,271 939 Amortization of deferred compensation of Management Recognition Plan 5 14 Shares issued under stock option plan 1,303 1,037 Purchase of common stock for treasury (2,321) (4,020) (4,336) Dividends declared (Note 5) (3,668) (3,668) (2,715) -------------------------------------------- ---------- Balance at September 30 $ 2,963 $ 72,288 $ 125,423 $ 123,179 ============================================ ==========
See accompanying notes 6 FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Cash Flows (UNAUDITED) (Amounts in Thousands)
------------------------------------------------------------------------------------------ Nine Months Ended September 30, 2004 2003 --------- --------- Operating Activities Net income $ 7,317 $ 9,263 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,244 1,185 Loss on sale of office properties and equipment 2 -- Provision for depreciation 1,335 1,218 Net securities amortization 301 721 Amortization of mortgage servicing rights 547 1,825 Net impairment (recovery) of mortgage servicing rights 34 (381) Amortization of core deposit intangible 82 39 Gain on sale of loans (1,910) (6,590) Amortization of Management Recognition Plan deferred compensation 5 14 Release of ESOP Shares 1,271 939 Gains on sales of securities (694) (919) Deferred federal income tax expense (credit) (219) 269 Proceeds from sale of loans 81,698 268,773 Origination of mortgage servicing rights, net (666) (2,395) Origination of loans held for sale (80,728) (258,441) Decrease in interest receivable and other assets (1,267) (1,060) Increase (decrease) in other liabilities 2,189 (657) --------- --------- Net cash provided by operating activities 10,541 13,803 Investing Activities Proceeds from maturities of held-to-maturity securities 343 951 Proceeds from maturities of available-for-sale securities 36,279 59,844 Proceeds from sale of available-for-sale securities 10,595 9,958 Proceeds from sales of real estate and other assets held for sale 978 317 Proceeds from sale of discontinued operations -- 1,228 Proceeds from sale of Federal Home Loan Bank stock 5,000 -- Purchases of available-for-sale securities (21,491) (36,745) Purchases of Federal Home Loan Bank stock (469) (515) Purchases of office properties and equipment (1,547) (2,337) Acquisition of branch offices -- 70,132 Net increase in loans receivable (109,935) (71,786) --------- --------- Net cash (used in) provided by investing activities (80,247) 31,047
7 FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Cash Flows (Continued) (UNAUDITED) (Amounts in Thousands)
--------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 2004 2003 -------- -------- Financing Activities Net increase (decrease) in deposits 50,546 (31,010) Repayment of Federal Home Loan Bank long-term advances (1,352) (1,129) Repayment of term notes payable -- (10) Net increase (decrease) in Federal Home Loan Bank short-term advances 10,500 (3,000) Proceeds from Federal Home Loan Bank long term advances -- 9,000 Net (decrease) increase in securities sold under repurchase agreements (215) 4,130 Purchase of common stock for treasury (4,020) (4,336) Cash dividends paid (3,668) (2,715) Proceeds from exercise of stock options 1,303 1,037 -------- -------- Net cash provided by (used in) financing activities 53,094 (28,033) -------- -------- (Decrease) increase in cash and cash equivalents (16,612) 16,817 Cash and cash equivalents at beginning of period 37,783 28,658 -------- -------- Cash and cash equivalents at end of period $ 21,171 $ 45,475 ======== ======== Supplemental cash flow information: Interest paid $ 14,875 $ 15,363 ======== ======== Income taxes paid $ 2,772 $ 3,868 ======== ======== Transfers from loans to real estate and other assets held for sale $ 635 $ 435 ======== ======== Noncash operating activities: Change in deferred taxes established on net unrealized gain or loss on available-for-sale securities $ 566 $ (613) ======== ======== Noncash investing activities: Decrease in net unrealized gain or loss on available-for-sale securities $ (1,620) $ (1,744) ======== ======== Noncash financing activities: Cash dividends declared but not paid $ 1,211 $ 901 ======== ========
See accompanying notes. 8 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 1. Principles of Consolidation The consolidated condensed financial statements include the accounts of First Defiance Financial Corp. ("First Defiance" or "the Company") and its two wholly owned subsidiaries, First Federal Bank of the Midwest ("First Federal") and First Insurance and Investments, Inc. ("First Insurance"). In the opinion of management, all significant intercompany accounts and transactions have been eliminated in consolidation. 2. Basis of Presentation The consolidated condensed statement of financial condition at December 31, 2003 has been derived from the audited financial statements at that date, which were included in First Defiance's Annual Report on Form 10-K. The accompanying consolidated condensed financial statements as of September 30, 2004 and for the three and nine-month periods ending September 30, 2004 and 2003 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 U.S. generally accounting principles. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2003 Annual Report on Form 10-K for the year ended December 31, 2003. 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 nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year. Goodwill Goodwill is the excess of the purchase price over the fair value of the assets and liabilities of companies acquired through business combinations accounted for under the purchase method. Goodwill is evaluated at the business unit level, which for First Defiance are First Federal Bank and First Insurance. At September 30, 2004 goodwill totaled $19.0 million, a reduction from the $20.5 million balance reported at December 31, 2003. The reduction in goodwill is the result of management reassessing the required discount adjustment necessary for the loan portfolio acquired in June 2003 from the RFC Banking Company. Based on early pay-offs of several large classified loans, management reduced the discount recorded in conjunction with the original purchase price allocation. The offsetting adjustment was a $1.2 million reduction in goodwill recorded during the 2004 first quarter. Also, in the 2004 third quarter, management determined that certain market value adjustments were posted incorrectly when the RFC branches were acquired in 2003, resulting in a $338,000 overstatement of goodwill and deposits. That item was corrected in the 2004 third quarter, resulting in a further goodwill reduction. Neither of those adjustments had any effect on reported net income. 9 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 2. Basis of Presentation (continued) Income Taxes The Company's effective tax rate differs from the statutory 35% federal tax rate primarily because of the existence of municipal securities and bank owned life insurance, the earnings of which are exempt from federal income taxes. Stock Compensation At September 30, 2004, the Company had three stock-based compensation plans, which are more fully described in Note 18 in the financial statements included in First Defiance's 2003 Annual Report on Form 10-K. The Company accounts for those plans under recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, Accounting for Stock-Based Compensation and has been determined as if First Defiance had accounted for its employee stock options under the fair value method of that Statement. Under the fair-value based method, compensation cost is measured at the grant date based upon the value of the award and recognized over the service period. For purposes of the pro forma disclosures, the estimated fair value of the option is amortized to expense over the options' vesting period. 10 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 2. Basis of Presentation (continued) The following pro forma results of operations use a fair value method of accounting for stock options in accordance with SFAS No. 123. The estimated fair value of the options are amortized to expense over the option and vesting period. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
September 30 2004 2003 --------------------------------------- Risk free interest rate 5.54% 5.66% Dividend yield 2.99% 2.97% Volatility factors of expected market price of stock 0.261% 0.267% Weighted average expected life 8.90 years 8.70 years Weighted average grant date fair value of options granted $3.77 $3.52
Based on the above assumptions, pro forma net income and earnings per share are computed as follows (in thousands, except per share amounts):
Three months ended Nine months ended September 30, September 30, 2004 2003 2004 2003 ------------------------------------------------- Net income $ 1,680 $ 3,681 $ 7,317 $ 9,263 Stock-based compensation using the fair value method, net of tax (62) (43) (166) (144) ------------------------------------------------- Pro forma net income from continuing operations $ 1,618 $ 3,638 $ 7,151 $ 9,119 ================================================= Pro forma earnings per share: Basic $ 0.27 $ 0.61 $ 1.17 $ 1.51 ================================================= Diluted $ 0.26 $ 0.58 $ 1.12 $ 1.45 =================================================
Medicare Prescription Law In May 2004, the FASB issued revised guidance that requires disclosure that acknowledges the issuance of this new law and the fact that it may affect a company's accumulated postretirement benefit obligation and net postretirement benefit cost. The required disclosure for First Defiance is presented in Note 11. 11 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 2. Basis of Presentation (continued) Recent Accounting Pronouncements Consolidation of Variable Interest Entities In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected loss and/or receive a majority of the entity's expected residual returns, if they occur. FIN No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. In December 2003, the FASB issued modifications to FIN No. 46 to provide additional scope exceptions, address certain implementation issues and promote a more consistent application of the provisions. Revised FIN No. 46 superceded FIN No. 46 and was adopted by the Company effective January 1, 2004. First Defiance is not a party to any VIEs as of September 30, 2004. Other Than Temporary ImpairmentsIn March 2004, the Emerging Issues Task Force ("EITF"), revised EITF No. 03-01, "The Meaning of Other than Temporary Impairment and its Application to Certain Investments." In the revised guidance, the EITF reached a consensus regarding the model to be used in determining whether an investment is other than temporarily impaired, and the required disclosures about unrealized losses on available for sale debt and equity securities. The other than temporary impairment evaluation guidance was effective for First Defiance on July 1, 2004. However, in September 2004 the FASB issued FSP 03-1-1, Effective Date of Paragraphs 10-20 of eitf 03-1, The Meaning of Other Than Temporary Impairment, delaying the effective date for the recognition and measurement guidance of EITF 03-1, as contained in paragraphs 10-20, until certain implementation issues are addressed and a final FSP providing implementation guidance is issued. The final FSP is expected to be issued in December 2004. Management is currently evaluating the effect of this guidance on First Defiance's financial condition and results of operations. 12 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 2. Basis of Presentation (continued) Recent Accounting Pronouncements (continued) Accounting for Certain Loans or Debt Securities Acquired in a Transfer In December 2003, the AICPA issued a Statement of Position that addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (structured as loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. The implementation of this guidance has been deferred to be effective after December 31, 2004. Adoption of this guidance is not expected to have any material effect on the Company's financial condition or results of operations. 3. Acquisitions On August 4, 2004, First Defiance entered into an Agreement and Plan of Merger with ComBanc, Inc. (ComBanc), a $205 million bank holding company headquartered in Delphos, Ohio. Under the terms of the agreement, First Defiance will acquire ComBanc and its wholly owned subsidiary, The Commercial Bank of Delphos Ohio (the Commercial Bank). First Defiance has agreed to purchase the outstanding shares of ComBanc for $17.20 per share for a transaction valued at $38.0 million. The shareholders of ComBanc have the right to select payment of the purchase price in either cash or shares of First Defiance common stock, subject to an aggregate consideration mix of 50% cash and 50% common stock. Following the merger, which is contingent on receipt of regulatory and ComBanc shareholder approvals, the Commercial Bank will be merged with and into First Federal Bank. Management anticipates the transaction to close in the first quarter of 2005. On October 13, 2004, First Defiance announced an agreement to acquire The Genoa Savings and Loan Company (Genoa Savings), headquartered in Genoa, Ohio. The purchase price for Genoa Savings is $11.0 million and will be paid in cash. Following the merger, which is contingent on Genoa shareholder and regulatory approvals, Genoa Savings will be merged with and into First Federal Bank. The transaction is expected to close early in the second quarter of 2005. 13 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 4. Settlement of Contingent Liabilities During the 2004 third quarter First Defiance resolved a contingent liability related to the 2002 sale of its Leader Mortgage subsidiary. After considering contingency reserves previously recorded by First Defiance, the settlement resulted in a pre-tax charge of $1.9 million which was recorded in the 2004 third quarter. After tax the charge amounted to $1.25 million or $0.20 per share. When it sold Leader Mortgage in 2002, First Defiance recognized an after-tax gain of $7.7 million or $1.16 per share. 5. Dividends on Common Stock As of September 30, 2004, First Defiance had declared a quarterly cash dividend of $.20 per share for the third quarter of 2004, payable October 22, 2004. 6. Earnings Per Share Basic earnings per share as disclosed under FAS No. 128 has been calculated by dividing net income by the weighted average number of shares of common stock outstanding for the three and nine-month periods ended September 30, 2004 and 2003. First Defiance accounts for the shares issued to its Employee Stock Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 of the American Institute of Certified Public Accountants ("AICPA"). As a result, shares controlled by the ESOP are not considered in the weighted average number of shares of common stock outstanding until the shares are committed for allocation to an employee's individual account. In the calculation of diluted earnings per share for the three and nine-months ended September 30, 2004 and 2003, the effect of shares issuable under stock option plans and unvested shares under the Management Recognition Plan have been accounted for using the Treasury Stock method. 14 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 6. Earnings Per Share (continued) The following table sets forth the computation of basic and diluted earning per share (in thousands except per share data):
Three Months Ended Nine Months Ended September 30 September 30 2004 2003 2004 2003 ------------------------------------------ Numerator for basic and diluted earnings per share - Net income $1,680 $3,681 $7,317 $9,263 Denominator: Denominator for basic earnings per share - weighted average shares 6,076 6,002 6,103 6,033 Effect of dilutive securities: Employee stock options 255 288 275 256 Unvested management recognition plan stock 1 3 2 7 ------------------------------------------ Dilutive potential common shares 256 291 277 263 ------------------------------------------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,332 6,293 6,380 6,296 ========================================== Basic earnings per share $ 0.28 $ 0.61 $ 1.20 $ 1.54 ========================================== Diluted earnings per share $ 0.27 $ 0.58 $ 1.15 $ 1.47 ==========================================
15 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 7. Investment Securities The following is a summary of available-for-sale and held-to-maturity securities (in thousands):
September 30, 2004 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------------------------------------------- Available-for-Sale Securities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 44,592 $2,202 $ 17 $ 46,777 Corporate bonds 6,172 385 -- 6,557 Mortgage-backed securities 17,641 180 15 17,806 REMICs 6,416 2 23 6,395 Collateralized mortgage obligations 19,974 150 59 20,065 Trust preferred stock 7,228 58 -- 7,286 Equity securities 69 -- 3 66 Obligations of state and political subdivisions 35,002 1,703 2 36,703 --------------------------------------------- Totals $137,094 $4,680 $119 $141,655 ============================================= Held-to-Maturity Securities: FHLMC certificates $ 472 $ 23 $ -- $ 495 FNMA certificates 1,046 17 2 1,061 GNMA certificates 319 3 1 321 Obligations of state and political subdivisions 590 98 -- 688 --------------------------------------------- Totals $ 2,427 $ 141 $ 3 $ 2,565 =============================================
Management has determined that unrealized losses on securities classified as available-for-sale are deemed temporary as the Company has the intent and ability to hold such securities until loss are recovered or until maturity. 16 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 7. Investment Securities (continued)
December 31, 2003 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------------------------------------------- Available-for-Sale Securities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 72,907 $3,980 $ 12 $ 76,875 Corporate bonds 7,210 506 -- 7,716 Mortgage-backed securities 19,621 169 38 19,752 REMICs 8,994 22 54 8,962 Collateralized mortgage obligations 14,687 53 21 14,719 Trust preferred stock 7,238 84 -- 7,322 Equity securities 69 9 -- 78 Obligations of state and political subdivisions 31,352 1,504 21 32,835 --------------------------------------------- Totals $162,078 $6,327 $146 $168,259 ============================================= Held-to-Maturity Securities: FHLMC certificates $ 603 $ 25 $ 1 $ 627 FNMA certificates 1,174 16 6 1,184 GNMA certificates 409 11 -- 420 Obligations of state and political subdivisions 590 117 -- 707 --------------------------------------------- Totals $ 2,776 $ 169 $ 7 $ 2,938 =============================================
17 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 7. Investment Securities (continued) The following table presents the age of gross unrealized losses and fair value by investment category at September 30, 2004 (in $000s):
Less than 12 Months 12 Months or More Total ---------------------------------------------------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ---------------------------------------------------------------------- Available-for-Sale Securities: U.S. Treasury securities and Obligations of U.S. Government corporations and agencies $ 2,982 $ 17 $ -- $ -- $ 2,982 $ 17 Mortgage-backed securities 3,479 5 804 10 4,283 15 REMICs 5,650 23 -- -- 5,650 23 Collateralized mortgage obligations 7,248 59 -- -- 7,248 59 Equity securities 66 3 -- -- 66 3 Obligations of state and Political subdivisions -- -- 177 2 177 2 -------------------------------------------------------------------- Total $19,425 $ 107 $ 981 $ 12 $20,406 $ 119 ==================================================================== Held-to-Maturity Securities: FNMA certificates $ -- $ -- $ 174 $ 2 $ 174 $ 2 GNMA certificates 30 1 -- -- 30 1 -------------------------------------------------------------------- Total $ 30 $ 1 $ 174 $ 2 $ 204 $ 3 ====================================================================
18 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 8. Loans Loans receivable and held for sale consist of the following (in thousands):
September 30, December 31 2004 2003 -------------------------- Real Estate: One-to-four family residential $186,688 $167,983 Construction 16,816 16,830 Non-residential and multi-family 392,610 341,423 ---------------------- 596,114 526,236 Other Loans: Commercial 141,264 120,677 Consumer finance 45,267 40,257 Home equity and improvement 87,755 70,038 ---------------------- 274,286 230,972 ---------------------- Total real estate and other loans 870,400 757,208 Deduct: Loans in process 8,155 6,079 Net deferred loan origination fees and costs 1,175 1,158 Allowance for loan loss 9,712 8,844 ---------------------- Totals $851,358 $741,127 ======================
Changes in the allowance for loan losses were as follows (in $000s):
Three Months ended Nine Months ended September 30 September 30 2004 2003 2004 2003 ------------------------------------------ Balance at beginning of period $9,537 $8,106 $8,844 $7,496 Provision for loan losses 376 497 1,245 1,185 Charge-offs: One-to-four family residential real estate -- -- 52 18 Non-residential and multi-family real estate 25 -- 34 162 Commercial 144 52 283 115 Consumer finance 78 45 149 133 ------------------------------------------ Total charge-offs 247 97 518 428 Recoveries 46 71 141 324 ------------------------------------------ Net charge-offs 201 26 377 104 ------------------------------------------ Ending allowance $9,712 $8,577 $9,712 $8,577 ==========================================
19 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 9. Deposits A summary of deposit balances is as follows (in thousands): September 30, December 31, 2004 2003 -------- -------- Non-interest-bearing checking accounts $ 55,321 $ 52,323 Interest-bearing checking accounts 68,513 67,351 Savings accounts 53,143 51,767 Money market demand accounts 171,011 148,691 Certificates of deposit 431,268 408,864 -------- -------- $779,256 $728,996 ======== ======== 10. Commitments, Guarantees and Contingent Liabilities Loan commitments are made to accommodate the financial needs of First Defiance's customers; however, there are no long-term, fixed-rate loan commitments that result in market risk because First Federal enters into a forward sales commitment at the same time it makes the commitment for a fixed rate loan that it is going to be put in the held-for-sale category. At September 30,2004 First Defiance had commitments to sell $7.8 million of loans held-for-sale. Standby letters of credit obligate the Company to pay a third party beneficiary when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual non-financial obligation. Standby letters of credit are issued to address customers' financing needs and to facilitate customers' trade transactions. In accordance with FASB interpretation No. 45, "Guarantor's Guarantees of Indebtedness of Others," certain guarantees issued or modified on or after January 1, 2003, require the recognition of a liability on First Defiance's balance sheet for the "stand ready" obligation with such guarantees. If amounts are drawn under standby letters of credit, such amounts are treated as loans. Both loan commitments and standby letters of credit have credit risk, essentially the same as that involved in extending loans to customers, and are subject to the Company's normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained based on management's credit assessment of the customer. 20 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 10. Commitments, Guarantees and Contingent Liabilities (continued) The Company's maximum obligation to extend credit for loan commitments (unfunded loan and unused lines of credit) and standby letters of credit was as follows: September 30, December 31, 2004 2003 ---------------------------- (In Thousands) Commercial $123,478 $113,247 Real Estate 9,256 6,799 Consumer 65,458 56,823 Standby Letters of Credit 5,119 3,550 ---------------------------- Total $203,311 $180,419 ============================ The remaining weighted average life for outstanding standby letters of credit was less than one year at September 30, 2004. The Company had $80,000 of standby letters of credit with a life longer than one year. 11. Postretirement Benefits First Defiance sponsors a defined benefit postretirement plan that is intended to supplement Medicare coverage for certain retirees who meet minimum age requirements. A description of employees or former employees eligible for coverage is included in Footnote 14 in the financial statements included in First Defiance's 2003 Annual Report on Form 10-K. Net periodic postretirement benefit costs include the following components for the three and nine-month periods ended September 30, 2004 and 2003:
Three Months ended Nine Months ended September 30 September 30 2004 2003 2004 2003 ---------------------------------------------- (In Thousands) Service cost-benefits attributable to service during the period $ 12 $ 9 $ 36 $ 27 Interest cost on accumulated postretirement benefit obligation 24 21 72 63 Net amortization and deferral 6 3 18 9 ---------------------------------------------- Net periodic postretirement benefit cost $ 42 $ 33 $ 126 $ 99 ==============================================
21 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (Unaudited at September 30, 2004 and 2003) -------------------------------------------------------------------------------- 11. Postretirement Benefits (continued) Prescription drug coverage was added to Medicare under the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act). As a result, net per capita claims cost and the costs borne by retirees have been assumed to decrease in 2006 due to this legislation. The enactment of the Act resulted in a decrease to the accrued postretirement benefit obligation in 2003 which is being amortized beginning in 2004. The Company has not yet determined whether its current plan is actuarially equivalent to Medicare Part D under the Act. Until such determination is made, the Company has assumed that it will opt for coverage under Medicare Part D rather than the Federal subsidy approach. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations ------------- General ------- First Defiance Financial Corp. ("First Defiance" of "the Company") is a holding company which conducts business through its two wholly owned subsidiaries, First Federal Bank of the Midwest ("First Federal") and First Insurance and Investments, Inc. ("First Insurance"). First Federal is a federally chartered savings bank that provides financial services to communities based in northwest Ohio where it operates 19 full service branches. First Federal provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust services. First Insurance sells a variety of property and casualty, group health and life, and individual health and life insurance products and investment and annuity products. Insurance products are sold through First Insurance's office in Defiance, Ohio while investment and annuity products are sold through registered investment representatives located at three First Federal banking center locations. The profitability of First Defiance is primarily dependent on its net interest income and non-interest income. Net interest income is the difference between interest income on interest-earning assets, principally loans and securities, and interest expense on interest-bearing deposits, Federal Home Loan Bank advances, and other borrowings. The Company's non-interest income includes deposit and loan servicing fees, gains on sales of mortgage loans, and insurance and investment sales commissions. First Defiance's earnings also depend on the provision for loan losses and non-interest expenses, such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums, amortization and impairment of mortgage servicing rights and miscellaneous other expenses, as well as federal income tax expense. Forward-Looking Information --------------------------- Certain statements contained in this quarterly report that are not historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as "may", "will", "expect", "anticipate", or "continue" or the negative thereof or other variations thereon or comparable terminology are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Act of 1934, as amended. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of market and other factors. Changes in Financial Condition ------------------------------ At September 30, 2004, First Defiance's total assets, deposits and stockholders' equity amounted to $1.1 billion, $779.3 million and $125.4 million, respectively, compared to $1.04 billion, $729.0 million and $124.3 million, respectively, at December 31, 2003. Net loans receivable increased to $851.4 million at September 30, 2004 from $741.1 million at December 31, 2003. The increase in loans receivable occurred primarily in non-residential and multi-family real estate loans, which increased by $51.2 million to $392.6 million, commercial loans, which increased by $20.6 million to $141.3 million, one-to-four family residential loans, which increased by $18.7 million to $186.7 million, home equity and improvement loans, which increased by $17.7 million to $87.8 million and consumer loans, which increased by $5.0 million to $45.3 million. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued The investment securities portfolio decreased to $144.1 million at September 30, 2004 from $171.0 million at December 31, 2003. The decrease in the balance in the investment portfolio is the result of redeploying funds from securities as they mature or get called to fund loan growth. Deposits increased $50.3 million from $729.0 million at December 31, 2003 to $779.3 million as of September 30, 2004. This increase resulted from an increase in money market deposit accounts which increased $22.3 million to $171.0 million, non-interest checking accounts, which increased $3.0 million to $55.3 million, savings accounts, which increased $1.4 million to $53.1 million, and interest bearing checking accounts, which increased $1.2 million to $68.5 million. Certificates of deposit balances increased $22.4 million to $431.3 million with $37.1 million of the increase resulting from an increase in brokered certificates of deposit balances. Management uses brokered CDs as an alternative source of funding. Additionally, FHLB advances increased to $173.7 million at September 30, 2004 from $164.5 million at December 31, 2003. These borrowings were used to fund loan growth and short-term funding needs. Short-term borrowings decreased slightly to $12.1 million at September 30, 2004 from $12.3 million at December 31, 2003. These borrowings are primarily securities sold under repurchase agreements. Stockholders' equity increased from $124.3 million at December 31, 2003 to $125.4 million at September 30, 2004. The increase is a result of the $7.3 million of net income, the release of ESOP shares which increased equity by $1.3 million and the exercise of stock options by First Defiance employees which also increased equity by $1.3 million. Those increases were offset by a decrease in unrealized gains on available for sale securities (net of tax) of $1.1 million, $3.7 million of dividends declared and $4.0 million from the repurchase of 158,905 shares of First Defiance stock for treasury at an average price of $25.30 per share. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Average Balances, Net Interest Income and Yields Earned and Rates Paid ---------------------------------------------------------------------- The following table presents for the periods indicated the total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in thousands of dollars and rates, and the net interest margin. Dividends received on FHLB stock are included as interest income. The table reports interest income from tax-exempt loans and investment on a tax-equivalent basis. All average balances are based upon daily balances.
Three Months Ended September 30, --------------------------------------------------------------------- 2004 2003 -------------------------------- --------------------------------- Average Yield/ Average Yield/ Balance Interest(1) Rate(2) Balance Interest(1) Rate(2) ------- ----------- ------- ------- ----------- ------- Interest-earning assets: Loans receivable $ 832,116 $ 12,209 5.84% $ 713,402 $ 10,989 6.11% Securities 147,358 1,839 4.96 177,730 2,165 4.83 Interest-earning deposits 835 1 0.48 36,884 107 1.15 FHLB stock and other 13,097 140 4.25 17,415 176 4.01 ----------- -------- ----------- -------- Total interest-earning assets 993,406 14,189 5.68 945,431 13,437 5.64 Non-interest-earning assets 93,799 92,757 ----------- ----------- Total assets $ 1,087,205 $ 1,038,188 =========== =========== Interest-bearing liabilities: Deposits $ 712,814 $ 3,384 1.89% $ 691,280 $ 3,330 1.91% FHLB advances and other 172,620 1,843 4.25 154,116 1,843 4.74 Notes payable 10,317 31 1.20 9,898 25 1.00 ----------- -------- ----------- -------- Total interest-bearing liabilities 895,751 5,258 2.34 855,294 5,198 2.41 Non-interest bearing deposits 55,641 -- 52,013 -- ----------- -------- ----------- -------- Total including non-interest bearing demand deposits 951,392 5,258 2.20 907,307 5,198 2.27 Other non-interest-bearing liabilities 10,013 10,345 ----------- ----------- Total liabilities 961,405 917,652 Stockholders' equity 125,800 120,536 ----------- ----------- Total liabilities and stock- holders' equity $ 1,087,205 $ 1,038,188 =========== =========== Net interest income; interest rate spread $ 8,931 3.34% $ 8,239 3.23% ======== ==== ======== ==== Net interest margin (3) 3.58% 3.46% ==== ==== Average interest-earning assets to average interest-bearing liabilities 111% 111% ==== ====
---------- (1) Interest on certain tax exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 35%. First Defiance believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. (2) Annualized (3) Net interest margin is net interest income divided by average interest-earning assets. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
Nine Months Ended September 30, ------------------------------------------------------------------ 2004 2003 ------------------------------ ------------------------------ Average Yield/ Average Yield/ Balance Interest(1) Rate(2) Balance Interest(1) Rate(2) ------- ----------- ------- ------- ----------- ------- Interest-earning assets: Loans receivable $ 789,513 $ 34,424 5.82% $ 645,665 $ 30,418 6.30% Securities 155,864 5,801 4.97 191,274 7,040 4.92 Interest-earning deposits 3,086 37 1.60 22,816 216 1.27 FHLB stock and other 15,374 471 4.09 17,540 518 3.95 ----------- -------- ----------- -------- Total interest-earning assets 963,837 40,733 5.65 877,295 38,192 5.82 Non-interest-earning assets 92,242 76,639 ----------- ----------- Total assets $ 1,058,079 $ 953,934 =========== =========== Interest-bearing liabilities: Deposits $ 691,100 $9,453 1.83% $ 616,617 $ 10,275 2.23% FHLB advances and other 167,177 5,418 4.33 155,112 5,553 4.79 Notes payable 10,241 75 .98 5,711 47 1.10 ----------- -------- ----------- -------- Total interest-bearing liabilities 868,518 14,946 2.30 777,440 15,875 2.73 Non-interest bearing deposits 54,515 -- 45,619 -- ----------- -------- ----------- -------- Total including non-interest bearing demand deposits 923,033 14,946 2.16 823,059 15,875 2.58 Other non-interest-bearing liabilities 9,186 10,319 ----------- ----------- Total liabilities 932,219 833,378 Stockholders' equity 125,860 120,556 ----------- ----------- Total liabilities and stock- holders' equity $ 1,058,079 $ 953,934 =========== =========== Net interest income; interest rate spread $ 25,787 3.35% $ 22,317 3.09% ======== ===== ======== ==== Net interest margin (3) 3.57% 3.40% ===== ==== Average interest-earning assets to average interest-bearing liabilities 111% 113% ===== ====
---------- (1) Interest on certain tax exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 35%. First Defiance believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. (2) Annualized (3) Net interest margin is net interest income divided by average interest-earning assets. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Results of Operations --------------------- Three Months Ended September 30, 2004 compared to Three Months Ended September -------------------------------------------------------------------------------- 30, 2003 -------- First Defiance had net income of $1.7 million or $.27 per share for the three months ended September 30, 2004 compared to $3.7 million or $0.58 per share for the same period in 2003. Net Interest Income. Net interest income for the quarter ended September 30, 2004 was $8.6 million compared to $7.8 million for the same period in 2003. Net interest margin for the 2004 first quarter was 3.58% compared to 3.46% for the same period in 2003. On a tax-equivalent basis, net interest income for the quarter ended September 30, 2004 was $8.9 million compared to $8.2 million for the same period in 2003. Total interest income increased by $811,000 to $13.8 million for the three months ended September 30, 2004 from $13.0 million for the three months ended September 30, 2003. On a tax equivalent basis, total interest income increased by $752,000 to $14.2 million for the three months ended September 30, 2004 from $13.4 million for the three months ended September 30, 2003. Interest on loans increased $1.3 million to $12.2 million in the third quarter of 2004 from $10.9 million in the third quarter of 2003. The increase in interest from loans was due to a $118.7 million increase in average loan balances between the third quarter of 2003 and the third quarter of 2004. The increase is due primarily to growth of the Company's commercial and commercial real estate loan portfolios over the past twelve months. The Company also has had growth in its mortgage, home equity and consumer loan portfolios in the last year as well. Some of the benefit of increased loan volumes has been offset by declining portfolio yields. The yield on First Defiance's loan portfolio declined from 6.11% for the three months ended September 30, 2003 to 5.84% for the same period in 2004 The rate reduction is primarily a result of a change in the mix of its loan portfolio as commercial loans and non-residential real estate loans were $533.9 million at September 30, 2004, up from $462.1 million at December 31, 2003 and $451.6 million at September 30, 2003. During that same time one-to-four family residential loans, excluding loans held for sale, increased just $17.8 million to $196.7 million from $178.9 million (one-to-four family residential loans were $170.8 million at September 30, 2003). The Company sells most of its new mortgage loan originations into the secondary market. Although interest rates have increased over the last year, especially the prime interest rate which has increased by 0.75%, first Defiance has not experienced a significant impact of the rate increase because of a concentration of 3-year and 5-year adjustable loans which have not adjusted. Also, a large amount of loans that are prime based are subject to interest rate floors that were higher than the current loan rates. Interest earnings from the investment portfolio and interest-earning deposits, on a tax equivalent basis, decreased $432,000 to $1.8 million for the three months ended September 30, 2004 compared to $2.3 million for the same period in 2003. The decrease is due to the decline in the average balance by $66.4 million from $214.6 million at September 30, 2003 to $148.2 million at September 30, 2004. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents based using a marginal corporate Federal tax rate of 35%. First 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Defiance believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. The tax-equivalent adjustments to net interest income for 2004 and 2003 were $210,000 and $108,000 respectively. The tax-equivalent yield on the investment portfolio was 4.96% for the three months ended September 30, 2004, up from 4.83% for the third quarter of 2003. Total interest expense increased by $60,000 to $5.3 million for the third quarter of 2004 compared to $5.2 million for the same period in 2003. Interest expense on interest bearing deposits increased by $54,000 to $3.4 million for the quarter ended September 30, 2004 from $3.3 million for the quarter ended September 30, 2003. The average balance of interest bearing deposits increased by $21.5 million, from $691.3 million for the quarter ended September 30, 2003, to $712.8 million for the quarter ended September 30, 2004. The average cost of funds decreased from 2.27% for the third quarter of 2003 to 2.20% for the third quarter of 2004. The average balances of interest-bearing liabilities increased $40.5 million from $855.3 million in the third quarter of 2003 to $895.8 million in the third quarter of 2004. Provision for Loan Losses. The provision for loan losses was $376,000 in the third quarter of 2004 compared to $497,000 for the third quarter of 2003. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to the level deemed appropriate by management based on the following factors: historical experience; the volume and type of lending conducted by First Defiance; the amount of non-performing assets, including loans which meet the FASB Statement No. 114 definition of impaired; the amount of assets graded by management as substandard, doubtful, or loss; industry standards; general economic conditions, particularly as they relate to First Defiance's market area; and other factors related to the collectibility of First Defiance's loan portfolio. Management believes the balance of the allowance for loan losses is appropriate. The growth in the allowance for loan losses is consistent with the growth in loan balances outstanding. While the balance of net charge-offs continues to be low, the allowance for loan losses as a percentage of total loans declined to 1.13% at September 30, 2004 from 1.18% at December 31, 2003 and 1.17% at September 30, 2003. 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Non-performing assets and asset quality ratios for First Defiance were as follows (in $000's):
September 30, December 31, 2004 2003 -------------------------------- Non-accrual loans $ 1,945 $ 2,545 Loans over 90 days past due and still accruing -- -- ----------------------------- Total non-performing loans $ 1,945 $ 2,545 Real estate owned (REO) 61 404 ----------------------------- Total non-performing assets $ 2,006 $ 2,949 ============================= Allowance for loans losses as a percentage of total loans 1.13% 1.18% Allowance for loan losses as a percentage of non-performing assets 484.15% 299.90% Allowance for loan losses as a percentage of non-performing loans 499.33% 347.50% Total non-performing assets as a percentage of total assets 0.18% 0.28% Total non-performing loans as a percentage of total loans 0.23% 0.34%
Of the $1.9 million in non-accrual loans, $1.4 million were commercial loans or non-residential real estate loans and $489,000 were residential mortgage loans. The allowance for loan losses at September 30, 2004 was $9.7 million compared to $8.6 million at both September 30, 2003 and $8.8 million at December 31, 2003. For the quarter ended September 30, 2004, First Defiance charged off $247,000 of loans against its allowance and realized recoveries of $46,000 from loans previously charged off. During the same quarter in 2003, First Defiance charged off $97,000 in loans and realized recoveries of $71,000. Non-Interest Income. Non-interest income decreased $1.3 million in the third quarter of 2004, to $3.6 million for the quarter ended September 30, 2004 from $4.8 million for the same period in 2003. Individual components of non-interest income are as follows: Gain on Sale of Loans. Gains realized from the sale of mortgage loans decreased $1.8 million to $518,000 for the three months ended September 30, 2004 from $2.3 million during the 2003 third quarter. The decrease is due to a decline in mortgage loan origination activity starting in the fourth quarter of 2003 and continuing through the first nine months of 2004 as interest rates increased from their record low levels of mid-2003. The origination and servicing of mortgage loans is a core activity of First Federal in its local market areas. Gain on Sale of Securities. Gains realized from the sale of investment securities were $302,000 in the third quarter of 2004. There were no gains from the sale of investment securities in the third quarter of 2003. Service Fees. Loan and deposit fees increased $168,000 to $1.4 million for the quarter ended September 30, 2004 from $1.2 million for the quarter ended September 30, 2003. Increases occurred primarily in loan servicing fees on sold loans, debit card interchange fees, and checking NSF fees. 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Insurance and Investment Sales Commission. Insurance and investment sales commission income was essentially flat, decreasing $18,000 to $906,000 in the third quarter of 2004 from $924,000 in the same period of 2003. Part of the reason for the decline was a change by First Insurance and Investments in the investment broker/dealer utilized to process trades during the third quarter. This change resulted in a temporary reduction in the amount of investment transactions during the time of the conversion. Other Non-Interest Income. Other non-interest income, including dividends on Federal Home Loan Bank stock, income from Bank Owned Life Insurance and other miscellaneous charges, increased to $452,000 for the quarter ended September 30, 2004 from $437,000 for the same period in 2003. Non-Interest Expense. Total non-interest expense increased $2.7 million to $9.5 million for the quarter ended September 30, 2004 from $6.8 million for the same period in 2003. Significant individual components of the increase are as follows: Settlement of Contingent Liability. Income for the 2004 third quarter was negatively impacted by a one-time $1.9 million charge recorded during the quarter to settle certain contingent liabilities related to the 2002 sale of the Leader Mortgage Company subsidiary. After tax, the charge amounted to $1.25 million or $0.20 per share. First Defiance recognized an after-tax gain from the sale of Leader Mortgage of $7.7 million or $1.16 per share in 2002. Compensation and Benefits. Compensation and benefits remained essentially flat at $4.3 million for both the quarter ended September 30, 2004 and for the same period in 2003. Amortization and Impairment of Mortgage Servicing Rights. Amortization of mortgage servicing rights ("MSR's") totaled $141,000 in the 2004 third quarter compared to $546,000 in the 2003 third quarter, the result of a decline in the significant refinancing activity in the First Federal loan servicing portfolio that was taking place a year ago. Also, the Company recognized a $321,000 adjustment for impairment in the value of its MSR portfolio during the 2004 third quarter, the result of the decrease in the market value of MSRs in the face of falling interest rates during the 2004 third quarter. There was a $987,000 favorable adjustment to recognize a recovery of previously recorded impairment reserves in the third quarter of 2003. First Defiance has a total impairment reserve of $640,000 recorded against an asset with a book value before reserves of $4.2 million at September 30, 2004. That portfolio represents approximately 5,522 loans with unpaid balances of approximately $456 million. Other Non-Interest Expenses. Other non-interest expenses (including occupancy, state franchise tax, data processing, and deposit insurance premiums) decreased to $2.8 million for the quarter ended September 30, 2004 from $2.9 million for the same period in 2003. First Defiance computes federal income tax expense in accordance with FASB Statement No. 109 which resulted in an effective tax rate of 26.51% for the quarter ended September 30, 2004 compared to 31.78% for the same period in 2003. The effective tax rate is lower than the Company's statutory 35% rate because it has approximately $35.6 million invested in municipal securities, and $18.5 million of bank owned life insurance which are both exempt from federal tax. The Company also adjusted its 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued tax accrual accounts following the filing of its 2003 Federal tax return during the 2004 third quarter. These adjustments had a favorable impact on its effective tax rate. As a result of the above factors, income for the quarter ended September 30, 2004 was $1.7 million compared to income of $3.7 million for the comparable period in 2003. On a per share basis, basic and diluted earnings per share for the three months ended September 30, 2004 were each $0.28 and $.27, respectively, compared to basic and diluted earnings per share of $0.61 and $0.58, respectively, for the quarter ended September 30, 2003. The recognition of the expense for the settlement of contingent liabilities reduced income in the 2004 third quarter by $0.20 per share and the impact of recognizing impairment reserves in the 2004 third quarter compared to an impairment recovery in the 2003 third quarter resulted in a $0.13 per share swing in earnings per share between the two quarterly periods Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30, -------------------------------------------------------------------------------- 2003 ---- On a consolidated basis, First Defiance had net income of $7.3 million or $1.15 per share for the nine months ended September 30, 2004 compared to $9.3 million or $1.47 per share in 2003. Net Interest Income. Net interest income for the nine months ended September 30, 2004 was $24.7 million compared to $21.1 million for the same period in 2003. Net interest margin for the first three quarters of 2004 was 3.57% compared to 3.40% for the same period in 2003. On a tax equivalent basis, net interest income for the nine months ended September 30, 2004 was $25.8 million compared to $22.3 million for the same period in 2003. Total interest income increased by $2.7 million to $39.7 million for the nine months ended September 30, 2004 from $37.0 million for the nine months ended September 30, 2003. On a tax equivalent basis, total interest income increased by $2.5 million to $40.7 million for the nine months ended September 30, 2004 from $38.2 million for the nine months ended September 30, 2003. Interest on loans increased $4.0 million to $34.4 million in the first three quarters of 2004 from $30.4 million in the first three quarters of 2003. The increase in interest from loans was due to a $143.8 million increase in average loan balances between the first three quarters of 2003 and the first three quarters of 2004. That increase is the result of the acquisition of three branch offices in June 2003, which added $79.1 million in loans, and due to continued portfolio growth throughout the First Defiance market, especially in the commercial and non-residential real estate loan categories Some of the benefit of increased loan volumes has been offset by declining portfolio yields. The yield on First Defiance's loan portfolio declined from 6.30% for the nine months ended September 30, 2003 to 5.82% for the same period in 2004 because of falling interest rates over that time period. Interest earnings from the investment portfolio and interest-earning deposits, on a tax equivalent basis, decreased $1.4 million to $5.8 million for the nine months ended September 30, 2004 compared to $7.2 million for the same period in 2003. The decrease was due to the $35.4 million decline in average balances of investments, to $155.9 million for the first three quarters of 2004 compared to $191.3 million for the first three quarters of 2003. Total interest expense declined by $929,000 to $15.0 million for the first three quarters of 2004 compared to $15.9 million for the same period in 2003. Interest expense on FHLB advances decreased 31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued $135,000 to $5.4 million for the first nine months of 2004 compared to the same period in 2003. This happened despite an increase of $12.1 million in the average balance of FHLB advances in 2004 compared to 2003. In the third quarter of 2003, the Company was able to re-negotiate the interest rate downward on $45 million of FHLB advances contributing to the 46 basis point decline in the average cost of those borrowings from 4.79% for the first three quarters of 2003 compared to 4.33% for the first three quarters of 2004. Interest expense on interest-bearing deposits decreased by $822,000 to $9.5 million for the nine months ended September 30, 2004 from $10.3 million for the nine months ended September 30, 2003. This decrease occurred despite growth in deposits because of the change in the mix of deposits from higher costing certificates of deposit to checking and money market accounts, as well as, decreasing market interest rates during the time period. The average cost of funds decreased from 2.23% for the nine months ended September 30, 2003 to 1.83% for the same period in 2004. The average balances of interest-bearing liabilities increased $91.1 million from $777.4 million in the first three quarters of 2003 to $868.5 million in the first three quarters of 2004. Provision for Loan Losses. The provision for loan losses was $1.24 million for the first three quarters of 2004 compared to $1.19 million for the first three quarters of 2003. This increase is a result of the significant loan growth that has occurred during the first three quarters of 2004. Net charge-offs for the 2004 first three quarters were $377,000, compared to $105,000 for the same period in 2003. Non-Interest Income. Non-interest income decreased $3.8 million in the first three quarters of 2004, to $11.1 million for the nine months ended September 30, 2004 from $14.9 million for the same period in 2003. Individual components on non-interest income are as follows: Gain on Sale of Loans. Gains realized from the sale of mortgage loans decreased $4.7 million to $1.9 million for the nine months ended September 30, 2004 from $6.6 million during the first three quarters of 2003. Gain on Sale of Securities. Gains realized from the sale of investment securities was $694,000 for the nine months ended September 30, 2004 compared to $919,000 in the first three quarters of 2003. Service Fees. Loan and deposit fees increased $597,000 to $4.0 million for the nine months ended September 30, 2004 from $3.4 million for the nine months ended September 30, 2003. Increases occurred primarily in loan servicing fees on mortgage loans serviced for others, checking NSF fees and debit card interchange fees. Insurance and Investment Sales Commission. Insurance and investment sales commission income increased $375,000 to $3.2 million in the first three quarters of 2004 from $2.8 million in the same period of 2003. Increases occurred primarily in the sale of investment and annuity products. Bank Owned Life Insurance. Income from bank owned life insurance ("BOLI") decreased $37,000 to $579,000 in the first three quarters of 2004 compared to $616,000 for the nine months ended September 30, 2003. This was a result of decreasing market interest rates over the last 12 months. First Defiance's BOLI investment is in general account contracts, whose rates generally lag the overall market. 32 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Other Non-Interest Income. Other non-interest income, including dividends on Federal Home Loan Bank stock and other miscellaneous charges, increased to $778,000 for the nine months ended September 30, 2004 from $657,000 for the same period in 2003. Non-Interest Expense. Total non-interest expense increased $2.6 million to $24.1 million for the nine months ended September 30, 2004 from $21.5 million for the same period in 2003. Significant individual components of the increase are as follows: Settlement of Contingent Liability. Income for the first nine months of 2004 was negatively impacted by the one-time $1.9 million charge recorded to settle certain contingent liabilities related to the 2002 sale of its Leader Mortgage Company subsidiary. The charge amounted to $1.25 million or $0.20 per share after tax. Amortization and Impairment of Mortgage Servicing Rights. Amortization of MSRs totaled $547,000 in the first three quarters of 2004 compared to $1.8 million in the 2003 first three quarters, the result of a significant decline in the level of refinancing activity in the First Federal loan servicing portfolio. Also, the Company recognized a net negative adjustment of $34,000 related to impairment of the value of MSRs. That net adjustment is due to recent decreases in market interest rates and anticipated increased prepayment speeds on mortgage loans in general. There was a net positive adjustment of $381,000 to impairment reserves recorded in the first nine months of 2003. Compensation and Benefits. Compensation and benefits increased $1.1 million to $13.1 million for the nine months ended September 30, 2004 from $12.0 million for the same period in 2003. The increase resulted from the additional staffing added with the June 2003 branch acquisition and the opening of de novo branches in December 2003 and February 2004. Other Non-Interest Expenses. Other non-interest expenses (including occupancy, state franchise tax, data processing, amortization of intangibles and deposit insurance premiums) increased to $8.5 million for the nine months ended September 30, 2004 from $8.1 million for the nine months ended September 30, 2003. The effective federal income tax rate utilized for the nine months ended September 30, 2004 was 30.5% compared to 30.8% for the nine months ended September 30, 2003. As a result of the above factors, income for the nine months ended September 30, 2004 was $7.3 million compared to $9.3 million for the comparable period in 2003. On a per share basis, basic and diluted earnings per share for the nine months ended September 30, 2004 were $1.20 and $1.15 respectively, compared to basic and diluted earnings per share of $1.54 and $1.47, respectively, for the nine months ended September 30, 2003. Liquidity and Capital Resources ------------------------------- As a regulated financial institution, First Federal is required to maintain appropriate levels of "liquid" assets to meet short-term funding requirements. 33 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued First Defiance generated $1.6 million of cash from operating activities during the third quarter of 2004 and $10.5 million for the 2004 year-to-date period. The Company's cash from operating activities resulted from net income for the period, adjusted for various non-cash items, including the provision for loan losses, depreciation and amortization of mortgage servicing rights, ESOP expense related to release of shares, and changes in loans available for sale, interest receivable and other assets, and other liabilities. The primary investing activity of First Defiance is the origination of loans (both for sale in the secondary market and to be held in portfolio), which is funded with cash provided by operations, proceeds from the amortization and prepayments of existing loans, the sale of loans, proceeds from the sale or maturity of securities, borrowings from the FHLB, and customer deposits. At September 30, 2004, First Defiance had $72.0 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $131.3 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Defiance had commitments to sell $7.8 million of loans held-for-sale. Also as of September 30, 2004, the total amount of certificates of deposit that are scheduled to mature by September 30, 2005 is $224.8 million. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, other sources of funding are available including the brokered Certificate of Deposit market, the FHLB, and other financial institutions. First Defiance utilizes forward purchase and forward sale agreements to meet the needs of its customers and manage its exposure to fluctuations in the fair value of mortgage loans held for sale and its pipeline. These forward purchase and forward sale agreements are considered to be derivatives as defined by FAS 133, Accounting for Derivatives and Hedging Instruments. The change in value in the forward purchase and forward sale agreements is approximately equal to the change in value in the loans held for sale and the effect of this accounting treatment is not material to the financial statements. First Defiance also invests in on-balance sheet derivative securities as part of the overall asset and liability management process. Such derivative securities include REMIC and CMO investments. As of September 30, 2004, all of these securities pass the FFIEC high risk security test, are not classified as high risk, and do not present risk significantly different than other mortgage-backed or agency securities. 34 First Federal is required to maintain specified amounts of capital pursuant to regulations promulgated by the OTS. The capital standards generally require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement, and a risk-based capital requirement. The following table sets forth First Federal's compliance with each of the capital requirements at September 30, 2004.
Core Capital Risk-Based Capital --------------------------------------------------------------- Adequately Well Adequately Well Capitalized Capitalized Capitalized Capitalized --------------------------------------------------------------- Regulatory capital $ 98,770 $ 98,770 $ 108,473 $ 108,473 Minimum required regulatory capital 43,070 53,837 68,429 85,536 ------------------------------------------------------------- Excess regulatory capital $ 55,700 $ 44,933 $ 40,044 $ 22,937 =============================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued ============================================================= Regulatory capital as a percentage of assets (1) 9.2% 9.2% 12.7% 12.7% Minimum capital required as a percentage of assets 4.0% 5.0% 8.0% 10.0% ------------------------------------------------------------- Excess regulatory capital as a percentage of assets 5.2% 4.2% 4.7% 2.7% =============================================================
(1) Core capital is computed as a percentage of adjusted total assets of $1.08 billion. Risk-based capital is computed as a percentage of total risk-weighted assets of $855.4 million. 35 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Pending Acquisition On August 4, 2004, First Defiance entered into an Agreement and Plan of Merger with ComBanc, Inc. Under the terms of the agreement, First Defiance will acquire ComBanc and its wholly owned subsidiary, The Commercial Bank of Delphos Ohio. First Defiance has agreed to purchase the outstanding shares of ComBanc for $17.20 per share for a transaction valued at $38.0 million. The shareholders of ComBanc have the right to select payment of the purchase price in either cash or shares of First Defiance common stock, subject to an aggregate consideration mix of 50% cash and 50% common stock. Management expects one-time costs, including acquisition-related and restructuring charges, will not exceed $1.75 million on a pre-tax basis over the integration period. The cash portion of the acquisition will be financed from existing sources of liquidity. Upon completion of the acquisition, on a pro forma basis using September 30, 2004 data, First Defiance will have $1.306 billion in total assets, $965.1 million in loans, $950.5 million in total deposits, and $144.4 million in shareholders' equity. The acquisition is expected to result in approximately $16.7 million in additional goodwill and other intangibles. Management expects the transaction, which is subject to regulatory and ComBanc shareholder approval, to close in the first quarter of 2005. Subsequent Event On October 13, 2004, First Defiance entered into an Agreement and Plan of Merger with The Genoa Savings and Loan Company. Under the terms of the agreement, First Defiance will acquire Genoa Savings. First Defiance has agreed to purchase the outstanding shares of Genoa Savings for $30.22 per share in cash for a transaction valued at $11.0 million. Management expects one-time costs, including acquisition-related and restructuring charges will not exceed $2.35 million on a pre-tax basis over the integration period. Management believes the financing of the acquisition can come from existing sources of liquidity. Upon completion of the acquisition and the previously announced ComBanc acquisition, on a pro forma basis using September 30, 2004 data, First Defiance will have $1.395 billion in total assets, $1.036 billion in loans, $1.038 billion in total deposits and $144.4 million in shareholders equity. The Genoa acquisition is expected to result in approximately $6.0 million in additional goodwill and other intangibles. Management expects the transaction, which is subject to regulatory and Genoa Savings shareholder approval, to close early in the second quarter of 2005. Critical Accounting Policies First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements included in the Company's Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company's Annual Report on Form 10-K include the Allowance for Loan Losses, the Valuation of 36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Mortgage Servicing Rights and the Deferral of Fees under SFAS 91. There have been no material changes in assumptions or judgments relative to those critical policies during the third quarter of 2004. FDIC Insurance The deposits of First Federal are currently insured by the Savings Association Insurance Fund ("SAIF") which is administered by the FDIC. The FDIC also administers the Bank Insurance Fund ("BIF") which generally provides insurance to commercial bank depositors. Both the SAIF and BIF are required by law to maintain a reserve ratio of 1.25% of insured deposits. First Federal's annual deposit insurance premiums for 2004 are approximately $0.015 per $100 of deposits. 37 Item 3. Qualitative and Quantitative Disclosure About Market Risk ----------------------------------------------------------------- As discussed in detail in the 2003 Annual Report on Form 10-K, First Defiance's ability to maximize net income is dependent on management's ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans. First Defiance monitors its exposure to interest rate risk on a monthly basis through simulation analysis which measures the impact changes in interest rates can have on net income. The simulation technique analyzes the effect of a presumed 100 basis point shift in interest rates (which is consistent with management's estimate of the range of potential interest rate fluctuations) and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, nonmaturity deposit assumptions and capital requirements. The results of the simulation indicate that in an environment where interest rates rise or fall 100 basis points over a 12 month period, using June 2004 amounts as a base case, First Defiance's net interest income would increase by approximately $300,000 in a rising rate environment and decline by approximately $800,000 in a declining rate environment. Both scenarios result in changes that are within the board mandated guidelines of 10%. Item 4. Controls and Procedures ------------------------------- Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 38 FIRST DEFIANCE FINANCIAL CORP. PART II-OTHER INFORMATION Item 1. Legal Proceedings First Defiance is not engaged in any legal proceedings of a material nature. Item 2. Changes in Securities
-------------------------------------------------------------------------------------------------------------------- Total Number of Maximum Number of Total Number of Shares Purchased as Shares that May Yet Shares Part of Publicly Be Purchased Under Purchased Average Price Paid Announced Plans or the Plans or Period Per Share Programs Programs (a) -------------------------------------------------------------------------------------------------------------------- July 1, 2004 - July 31, 2004 227 $22.73 227 517,909 -------------------------------------------------------------------------------------------------------------------- August 1, 2004 - August 31, 2004 3,660 $25.35 3,660 514,249 -------------------------------------------------------------------------------------------------------------------- September 1, 2004 - September 30, 2004 32,170 $26.13 32,170 482,079 -------------------------------------------------------------------------------------------------------------------- Total for 2004 Third Quarter 36,057 $26.03 36,057 482,079 -------------------------------------------------------------------------------------------------------------------- Year to Date Total (b) 158,905 $25.30 158,905 482,079 --------------------------------------------------------------------------------------------------------------------
(a) On July 18, 2003, the registrant announced that its Board of Directors had authorized management to repurchase up to 10% of the Registrant's common stock through the open market or in any private transaction. The authorization, which is for 639,828 shares, does not have an expiration date. (b) Year-to-date totals include 1,156 shares purchased to complete a previously announced share repurchase authorization and 157,749 shares purchased under the authorization announced on July 18, 2003. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Non applicable Item 5. Other Information Not applicable. 39 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (b) Reports on Form 8-K First Defiance Financial Corp. filed a report on Form 8-K with the Securities and Exchange Commission on October 15, 2004 which described the settlement of contingent liabilities related to the 2002 sale of the Company's Leader Mortgage Company subsidiary. The filing included a copy of the Company's press release dated October 14, 2004. First Defiance Financial Corp. filed a report on Form 8-K with the Securities and Exchange Commission on October 15, 2004 which included a copy of the Agreement and Plan of Merger dated as of October 13, 2004 by and among First Defiance Financial Corp., First Federal Bank of the Midwest and The Genoa Savings and Loan Company. The filing also included a copy of the Company's press release dated October 13, 2004. First Defiance Financial Corp. filed a report on Form 8-K with the Securities and Exchange Commission on October 20, 2004 which included a copy of the Company's earnings release for the quarter ended September 30, 2004. 40 FIRST DEFIANCE FINANCIAL CORP. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. First Defiance Financial Corp. (Registrant) Date: November 9, 2004 By: /s/ William J. Small ---------------- ------------------------------- William J. Small Chairman, President and Chief Executive Officer Date: November 9, 2004 By: /s/ John C. Wahl ---------------- ------------------------------- John C. Wahl Senior Vice President, Chief Financial Officer and Treasurer 41