-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZDaSShrJLY8eKCd4XKn9mNTtLf8zZX4VlHszj+0CvX+YgheREXKp9ebZEbShkxZ 4k7Znb7KIXrEYXLF0hyiCw== 0000914317-02-001399.txt : 20021118 0000914317-02-001399.hdr.sgml : 20021118 20021114181128 ACCESSION NUMBER: 0000914317-02-001399 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST DEFIANCE FINANCIAL CORP CENTRAL INDEX KEY: 0000946647 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341803915 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26850 FILM NUMBER: 02827164 BUSINESS ADDRESS: STREET 1: 601 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 BUSINESS PHONE: 4107825015 MAIL ADDRESS: STREET 1: 601 CLINTON ST CITY: DEFIANCE STATE: OH ZIP: 43512 10-Q 1 form10q-47608_1102.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, 2002 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 - 6,577,010 shares outstanding at November 11, 2002. 1
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, 2002 and December 31, 2001 2 Consolidated Condensed Statements of Income - Three and nine months ended September 30, 2002 and 2001 4 Consolidated Condensed Statement of Changes in Stockholders' Equity - Nine months ended September 30, 2002 5 Consolidated Condensed Statements of Cash Flows - Nine months ended September 30, 2002 and 2001 7 Notes to Consolidated Condensed Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 32 Item 4. Controls and Procedures 32 PART II.-OTHER INFORMATION: Item 1. Legal Proceedings 33 Item 2. Changes in Securities 33 Item 3. Defaults upon Senior Securities 33 Item 4. Submission of Matters to a Vote of Security Holders 33 Item 5. Other Information 33 Item 6. Exhibits and Reports on Form 8-K 33 Signatures 34 Certifications Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 35
PART 1-FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Financial Condition (UNAUDITED) (Amounts in Thousands)
- ----------------------------------------------------------------------------------------- September 30, 2002 December 31, 2001 ------------------ ----------------- ASSETS Cash and cash equivalents: Cash and amounts due from depository institutions $ 19,809 $ 37,334 Interest-bearing deposits 27,561 766 -------- ---------- 47,370 38,100 Securities: Available-for-sale, carried at fair value 208,983 48,691 Held-to-maturity, carried at amortized cost (approximate fair value $4,568 and $5,678 at September 30, 2002 and December 31, 2001 respectively) 4,358 5,580 -------- ---------- 213,341 54,271 Loans held for sale 8,920 672 Loans receivable, net 537,289 499,141 Accrued interest receivable 4,924 2,940 Federal Home Loan Bank stock and other interest-earning assets 21,950 16,306 Office properties and equipment 20,308 20,067 Real estate and other assets held for sale 371 136 Goodwill, net 3,602 3,749 Deferred taxes -- 35 Mortgage servicing rights 1,680 1,821 Other assets 3,994 652 Assets held for sale -- 6,304 Assets of discontinued operations -- 488,454 -------- ---------- Total assets $863,749 $1,132,648 ======== ==========
See accompanying notes. 2
FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Financial Condition (UNAUDITED) (Amounts in Thousands) - -------------------------------------------------------------------------------------------------------- September 30, 2002 December 31, 2001 ------------------ ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest-bearing deposits $ 34,542 $ 25,428 Interest-bearing deposits 556,250 589,420 --------- ----------- Total deposits 590,792 614,848 Advances from Federal Home Loan Bank 131,184 196,302 Short-term borrowings and other interest-bearing liabilities 3,229 20,724 Advance payments by borrowers for taxes and insurance 226 390 Deferred taxes 2,353 -- Other liabilities 11,077 6,517 Liabilities associated with assets held for sale -- 6,242 Liabilities of discontinued operations -- 176,604 --------- ----------- Total liabilities 738,861 1,021,627 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; 6,737 and 6,854 shares outstanding, respectively 67 69 Additional paid-in capital 53,136 53,725 Stock acquired by ESOP (2,387) (2,813) Deferred compensation (43) (82) Accumulated other comprehensive income, net of income taxes of $3,497 and $410, respectively 6,493 763 Retained earnings 67,622 59,359 --------- ----------- Total stockholders' equity 124,888 111,021 --------- ----------- Total liabilities and stockholders' equity $ 863,749 $ 1,132,648 ========= ===========
3 See accompanying notes
FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Income (UNAUDITED) (Amounts in Thousands, except per share data) - -------------------------------------------------------------------------------------------------------------------------- For the Three Months Ended For the Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Interest Income Loans $ 9,281 $ 10,642 $ 27,322 $ 32,990 Investment securities 2,728 833 5,903 2,693 Interest-bearing deposits 192 17 619 227 ------- -------- -------- -------- Total interest income 12,201 11,492 33,844 35,910 Interest Expense Deposits 4,227 5,185 12,616 16,346 FHLB advances and other 1,702 721 3,476 3,265 Notes payable and warehouse loans 23 264 250 851 ------- -------- -------- -------- Total interest expense 5,952 6,170 16,342 20,462 ------- -------- -------- -------- Net interest income 6,249 5,322 17,502 15,448 Provision for loan losses 386 272 1,124 659 ------- -------- -------- -------- Net interest income after provision for loan losses 5,863 5,050 16,378 14,789 Non-interest Income Service fees and other charges 968 776 2,721 2,157 Insurance commission income 810 740 2,520 2,196 Dividends on stock and other interest income 234 279 700 833 Gain on sale of loans 1,179 667 2,254 1,969 Gain/(loss) on sale of securities 36 (45) 21 (103) Trust income 32 25 86 80 Other non-interest income 12 23 131 84 ------- -------- -------- -------- Total non-interest income 3,271 2,465 8,433 7,216 Non-interest Expense Compensation and benefits 3,630 3,043 10,428 9,006 Occupancy 671 670 2,084 2,031 SAIF deposit insurance premiums 32 32 97 92 State franchise tax 351 305 996 982 Data processing 362 344 1,053 1,030 Amortization and impairment of mortgage servicing rights 1,033 257 1,562 630 Amortization and impairment of goodwill and other intangibles -- 79 200 234 Other non-interest expense 1,105 912 3,069 2,547 ------- -------- -------- -------- Total non-interest expense 7,184 5,642 19,489 16,552 ------- -------- -------- -------- Income from continuing operations before income taxes 1,950 1,873 5,322 5,453 Federal income taxes 568 625 1,667 1,808 ------- -------- -------- -------- Income from continuing operations 1,382 1,248 3,655 3,645 Discontinued operations, net of tax -- 1,722 9,347 4,966 ------- -------- -------- -------- Income before cumulative effect of a change in accounting principle 1,382 2,970 13,002 8,611 Cumulative effect of change in method of accounting for goodwill, net of tax -- -- (194) -- ------- -------- -------- -------- Net income $ 1,382 $ 2,970 $ 12,808 $ 8,611 ======= ======== ======== ======== Earnings per share (Note 5) Basic: From continuing operations $ 0.22 $ 0.19 $ 0.57 $ 0.57 Discontinued operations, net of tax $ -- $ 0.27 $ 1.46 $ 0.78 Cumulative effect in method of accounting for goodwill $ -- -- $ (0.03) -- ------- -------- -------- -------- Net income $ 0.22 $ 0.46 $ 2.00 $ 1.35 ======= ======== ======== ======== Diluted: From continuing operations $ 0.21 $ 0.19 $ 0.55 $ 0.55 Discontinued operations, net of tax $ -- $ 0.26 $ 1.40 $ 0.76 Cumulative effect in method of accounting for goodwill $ -- -- $ (0.03) -- ------- -------- -------- -------- Net income $ 0.21 $ 0.45 $ 1.92 $ 1.31 ======= ======== ======== ======== Dividends declared per share (Note 4) $ 0.13 $ 0.12 $ 0.39 $ 0.36 ======= ======== ======== ======== Average shares outstanding (Note 5) Basic 6,400 6,405 6,416 6,389 ======= ======== ======== ======== Diluted 6,652 6,601 6,665 6,581 ======= ======== ======== ========
See accompanying notes 4
FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statement of Changes in Stockholders' Equity (UNAUDITED) (Amounts in Thousands) - ------------------------------------------------------------------------------------------------------- 2002 -------------------------------------------------------- Stock Acquired By Additional Management Common Paid-in Recognition Stock Capital ESOP Plan ----- ------- ---- ---- Balance at January 1 $ 69 $ 53,725 $(2,813) $(82) Comprehensive income: Net income Change in unrealized gains net of income taxes of ($3,110) Total comprehensive income ESOP shares released 358 426 Amortization of deferred compensation of Management Recognition Plan 39 Shares issued under stock option plan 763 Purchase of common stock for treasury (2) (1,710) Dividends declared (Note 5) ------------------------------------------------ Balance at September 30 $ 67 $ 53,136 $(2,387) $(43) ================================================
See accompanying notes 5
FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued) (UNAUDITED) (Amounts in Thousands) - -------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------------ ------------- Net Unrealized gains (losses) on Total Total available-for- Retained Stockholders' Stockholder's sale securities Earnings Equity Equity Balance at January 1 $ 763 $ 59,359 $ 111,021 $ 99,473 Comprehensive income: Net income 12,808 12,808 8,611 Change in unrealized gains (losses) net of income taxes of ($3,110) 5,730 5,730 1,017 Total comprehensive income 18,538 9,628 ESOP shares released 784 598 Amortization of deferred compensation of Management Recognition Plan 39 90 Shares issued under stock option plan 763 114 Purchase of common stock for treasury (2,015) (3,727) (748) Dividends declared (Note 5) (2,530) (2,530) (2,329) --------------------------------------------- -------- Balance at September 30 $ 6,493 $ 67,622 $ 124,888 $106,826 ============================================= ========
See accompanying notes 6
FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Cash Flows (UNAUDITED) (Amounts in Thousands) - ------------------------------------------------------------------------------------------ Nine Months Ended September 30, 2002 2001 ---- ---- Operating Activities Net income $ 12,808 $ 8,611 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,124 659 Provision for depreciation 1,176 1,172 Net securities amortization 496 23 Amortization of mortgage servicing rights 777 630 Net impairment of mortgage servicing rights 785 -- Amortization of goodwill -- 234 Net impairment of goodwill 438 -- Gain on sale of loans (2,254) (1,969) Gain on sale of discontinued operations (16,912) -- Amortization of Management Recognition Plan deferred compensation 39 90 Release of ESOP Shares 784 599 (Gains) losses on sales of securities (21) 103 Deferred federal income tax credit (313) (3) Proceeds from sale of loans 107,092 113,837 Origination of mortgage servicing rights, net (1,421) (1,125) Origination of loans held for sale (113,086) (111,900) Increase in interest receivable and other assets (5,411) (652) Increase (decrease) in other liabilities 361 (571) Decrease in assets held for sale 6,304 1,096 Decrease in liabilities held for sale (6,292) (230) Increase in assets of discontinued operations (5,418) (18,864) Decrease in liabilities of discontinued operations (35,166) (70,985) --------- --------- Net cash provided by operating activities (54,110) (79,245) Investing Activities Proceeds from maturities of held-to-maturity securities 1,197 1,494 Proceeds from maturities of available-for-sale securities 18,313 4,579 Proceeds from sale of available-for-sale securities 2,459 3,079 Proceeds from sales of real estate and other assets held for sale 439 222 Proceeds from sales of office properties and equipment -- 27 Proceeds from sale of discontinued operations 367,921 -- Purchases of available-for-sale securities (172,674) (2,535) Purchases of Federal Home Loan Bank stock (576) (832) Purchases of office properties and equipment (1,421) (1,133) Net (increase) decrease in loans receivable (39,946) 15,071 --------- --------- Net cash provided by investing activities 175,712 19,972 ========= =========
7
FIRST DEFIANCE FINANCIAL CORP. Consolidated Condensed Statements of Cash Flows (Continued) (UNAUDITED) (Amounts in Thousands) Nine Months Ended September 30, 2002 2001 ---- ---- Financing Activities Net increase (decrease) in deposits (24,220) 61,321 Repayment of Federal Home Loan Bank long-term advances (25,118) (353) Repayment of term notes payable (29) (27) Net decrease in Federal Home Loan Bank short-term advances (40,000) (96,000) Net increase (decrease) in short-term line of credit (18,250) 5,500 Proceeds from Federal Home Loan Bank long term advances -- 90,000 Increase in securities sold under repurchase agreements 779 -- Purchase of common stock for treasury (3,727) (748) Cash dividends paid (2,530) (2,329) Proceeds from exercise of stock options 763 114 --------- -------- Net cash used in financing activities (112,332) 57,478 --------- -------- Increase in cash and cash equivalents 9,270 (1,795) Cash and cash equivalents at beginning of period 38,100 22,002 --------- -------- Cash and cash equivalents at end of period $ 47,370 $ 20,207 ========= ======== Supplemental cash flow information: Interest paid $ 16,889 $ 20,533 ========= ======== Income taxes paid $ 9,451 $ 5,570 ========= ======== Transfers from loans to real estate and other assets held for sale $ 674 $ 243 ========= ======== Noncash operating activities: Change in deferred tax established on net unrealized gain or loss on available-for-sale securities $ (3,110) $ (612) ========= ======== Noncash investing activities: Increase (decrease) in net unrealized gain or loss on available-for-sale securities $ 8,840 $ 1,649 ========= ======== Noncash financing activities: Cash dividends declared but not paid $ 835 $ 769 ========= ======== See accompanying notes
8 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (Unaudited at September 30, 2002 and 2001) - -------------------------------------------------------------------------------- 1. Principles of Consolidation The consolidated condensed financial statements include the accounts of First Defiance Financial Corp. ("First Defiance" or "the Company"), its two wholly owned subsidiaries, First Federal Bank of the Midwest ("First Federal") and First Insurance and Investments, Inc. ("First Insurance"), and First Federal's wholly owned mortgage banking company, The Leader Mortgage Company, LLC ("The Leader"). Operations of The Leader were sold to US Bancorp in a transaction that was completed on April 1, 2002. 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, 2001 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, 2002 and for the nine-month period ending September 30, 2002 and 2001 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. For the purposes of these statements, operations of The Leader are reported in results of discontinued operations and all prior time periods presented have been restated to reflect The Leader's operations as discontinued operations. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2001 Annual Report on Form 10-K for the year ended December 31, 2001. 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 of continuing operations for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the entire year. FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) - -------------------------------------------------------------------------------- 3. Discontinued Operations On April 1, 2002, First Defiance completed the sale of The Leader to US Bancorp. Discontinued operations as reported include the operating results of The Leader for the periods owned, the gain realized by the Company from the sale of The Leader, net of all expenses of the sale, and the cost to the Company for early payment of certain Federal Home Loan Bank (FHLB) advances. The components of discontinued operations are as follows (all shown net of tax, in thousands):
Three Months Ended Nine months ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Operations of The Leader -- $1,722 $ 2,015 $4,966 Gain from sale of The Leader -- -- 7,682 -- Cost to terminate financing associated with discontinued operations -- -- (350) -- ------ ------ ------- ------ $ -- $1,722 $ 9,347 $4,966 ====== ====== ======= ======
4. Change in Accounting Method On January 1, 2002, First Defiance adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets. As required by FAS No. 142, goodwill is no longer amortized into the income statement over an estimated life but rather is tested at least annually for impairment based on specific guidance included in FAS No. 142. Based on an impairment test performed as of January 1, 2002, the Company determined that a portion of previously recorded goodwill related to its First Insurance business unit was impaired. The amount of impairment as of January 1, 2002, which was $238,000 or $194,000 after tax, is reflected in the financial statements as an adjustment for the cumulative effect of an accounting change. During the quarter ended March 31, 2002, management reached a settlement with the former shareholders of one of the agencies acquired to form First Insurance related to an earn-out provision of the original purchase agreement. The payment of $200,000 was recorded as additional goodwill for First Insurance and was considered impaired. This $200,000 impairment adjustment is reported as an operating cost by First Defiance in the 2002 first quarter. The balance of goodwill recorded at First Insurance totals $3.6 million at September 30, 2002. 10 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) - -------------------------------------------------------------------------------- 4. Change in Accounting Method (continued) Results from continuing operations for the three and nine months ended September 30, 2001 include goodwill amortization expense of $79,000 and $234,000, respectively. Had FAS No. 142 been in effect for that period, the Company would have reported income from continuing operations of $1.5 million for the three months ended September 30, 2001 and $2.5 million for the nine months ended September 30, 2001. This amount was determined as follows (in thousands, except for per share amounts):
Three months ended Nine months ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Reported income from continuing operations $ 1,382 $ 1,248 $ 3,655 $ 3,645 Add back: Goodwill amortization -- 79 -- 234 Deduct: Tax benefit from deductible goodwill -- (15) -- (45) ------ ------ ------ ------ Adjusted income from continuing operations 1,382 1,312 3,655 3,834 Basic earnings per share: Reported income from continuing operations $ .22 $ .19 $ .57 $ .57 Add back: Goodwill amortization -- .01 -- .04 Deduct: Tax benefit from deductible goodwill -- -- -- (.01) ------ ------ ------ ------ Adjusted income from continuing operations $ .22 $ .20 $ .57 $ .60 Diluted earnings per share: Reported income from continuing operations $ .21 $ .19 $ .55 $ .55 Add back: Goodwill amortization -- .01 -- .04 Deduct: Tax benefit from deductible goodwill -- -- -- (.01) ------ ------ ------ ------ Adjusted income from continuing operations $ .21 $ .20 $ .55 $ .58
5. Dividends on Common Stock As of September 30, 2002, First Defiance had declared a quarterly cash dividend of $.13 per share for the third quarter of 2002, payable October 25, 2002. 11 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) - -------------------------------------------------------------------------------- 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, 2002 and 2001. 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, 2002 and 2001, 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. 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, ------------- ------------- 2002 2001 2002 2001 ---- ---- ---- ---- Numerator for basic and diluted earnings per share - income from continuing operations $ 1,382 $ 1,248 $ 3,655 $ 3,645 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share - weighted average shares 6,400 6,405 6,416 6,389 Effect of dilutive securities: Employee stock options 242 175 234 154 Unvested Management Recognition Plan stock 10 21 15 38 ------- ------- ------- ------- Dilutive potential common shares 252 196 249 192 ------- ------- ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,652 6,601 6,665 6,581 ======= ======= ======= ======= Basic earnings per share from continuing operations $ .22 $ .19 $ .57 $ .57 ======= ======= ======= ======= Diluted earnings per share from continuing operations $ .21 $ .19 $ .55 $ .55 ======= ======= ======= =======
12
FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) - ----------------------------------------------------------------------------------------------------------- 7. Investment Securities The following is a summary of available-for-sale and held-to-maturity securities (in thousands): September 30, 2002 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available-for-Sale Securities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $106,317 $ 6,238 $ 4 $112,551 Corporate bonds 28,738 1,600 16 30,322 Adjustable rate mortgage-backed security mutual funds 2,109 -- 54 2,055 Adjustable rate mortgage-backed securities 5,371 174 -- 5,545 Collateralized mortgage obligations 26,943 527 20 27,450 Trust preferred stock 4,250 49 42 4,257 Equity securities 70 -- 12 58 Obligations of state and political subdivisions 25,195 1,552 2 26,745 -------- ------- ---- -------- Totals $198,993 $10,140 $150 $208,983 ======== ======= ==== ======== Held-to-Maturity Securities: FHLMC certificates $ 1,153 $ 31 $ 2 $ 1,182 FNMA certificates 1,896 27 14 1,909 GNMA certificates 679 28 -- 707 Obligations of state and political subdivisions 630 140 -- 770 -------- ------- ---- -------- Totals $ 4,358 $ 226 $ 16 $ 4,568 ======== ======= ==== ========
13
FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) - ---------------------------------------------------------------------------------------------------------- 7. Investment Securities (continued) December 31, 2002 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Available-for-Sale Securities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $17,708 $ 905 $ -- $18,613 Corporate bonds 9,322 294 -- 9,616 Adjustable rate mortgage-backed security mutual funds 2,548 -- 70 2,478 Adjustable rate mortgage-backed securities 4,134 52 71 4,115 Collateralized mortgage obligations 3,546 69 16 3,599 Trust preferred stock 2,000 12 80 1,932 Equity securities 70 17 -- 87 Obligations of state and political subdivisions 8,216 131 96 8,251 ------- ------ ---- ------- Totals $47,544 $1,480 $333 $48,691 ======= ====== ==== ======= Held-to-Maturity Securities: FHLMC certificates $ 1,690 $ 25 $ 25 $ 1,690 FNMA certificates 2,389 26 52 2,363 GNMA certificates 871 22 -- 893 Obligations of state and political subdivisions 630 102 -- 732 ------- ------ ---- ------- Totals $ 5,580 $ 175 $ 77 $ 5,678 ======= ====== ==== =======
14 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) 8. Loans Loans receivable and held for sale consist of the following (in thousands):
September 30 December 31, 2002 2001 ---- ---- Real Estate: One- to four-family residential $165,113 $167,738 Construction 11,646 7,875 Non-residential and multi-family real estate 202,069 174,052 -------- -------- 378,828 349,665 Other Loans: Commercial 96,537 83,690 Consumer finance 38,725 40,739 Home equity and improvement 46,558 36,179 -------- -------- 181,820 160,608 -------- -------- Total real estate and other loans 560,648 510,273 Deduct: Loans in process 6,049 2,888 Net deferred loan origination fees and costs 1,134 1,024 Allowance for loan loss 7,256 6,548 -------- -------- Totals $546,209 $499,813 ======== ========
Changes in the allowance for loan losses were as follows:
Three months ended Nine months ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Balance at beginning of period $7,028 $6,480 $6,548 $6,331 Provision for loan losses 386 272 1,124 659 Charge-offs: One to four-family residential real estate 18 7 82 33 Non-residential and multi-family real estate 110 92 184 123 Commercial 20 -- 20 -- Consumer finance 64 170 304 470 ------ ------ ------ ------ Total charge-offs 212 269 590 626 Recoveries 54 56 174 175 ------ ------ ------ ------ Net charge-offs 158 213 416 451 ------ ------ ------ ------ Ending allowance $7,256 $6,539 $7,256 $6,539 ====== ====== ====== ======
15 FIRST DEFIANCE FINANCIAL CORP. Notes to Consolidated Condensed Financial Statements (continued) (Unaudited at September 30, 2002 and 2001) - -------------------------------------------------------------------------------- 9. Deposits A summary of deposit balances is as follows (in thousands): September 30, December 31, 2002 2001 ---- ---- Non-interest-bearing checking accounts $ 34,542 $ 25,428 Interest-bearing checking accounts 35,842 35,304 Savings accounts 39,569 36,952 Money market demand accounts 129,563 114,253 Certificates of deposit 351,276 402,911 -------- -------- $590,792 $614,848 ======== ======== 16 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"). Effective April 1, 2002, The Leader Mortgage Company, LLC ("The Leader"), a mortgage banking subsidiary of First Federal, was sold to US Bancorp and its operating results are reported as discontinued operations. 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 areas in which its offices are located. First Federal's traditional banking activities include originating and servicing residential, commercial and consumer loans; providing a broad range of depository services; and providing trust services. First Federal is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. First Insurance is an insurance agency that does business in the Defiance, Ohio area. First Insurance offers property and casualty, life insurance, group and individual health insurance, and investment products. First Defiance also invests in U.S. Treasury and federal government agency obligations, obligations of municipal and other political subdivisions, mortgage-backed securities which are issued by federal agencies, corporate bonds, and collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"). Management determines the appropriate classification of all such securities at the time of purchase in accordance with FAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of $4.4 million at September 30, 2002. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of $209.0 million at September 30, 2002. The available-for-sale portfolio consists of U.S. Treasury securities and obligations of U.S. Government corporations and agencies ($112.6 million), corporate bonds ($30.3 million), certain municipal obligations ($26.7 million), CMOs and REMICs ($27.5 million), mortgage backed securities ($5.5 million), preferred stock and other equity investments ($4.3 million) and adjustable-rate mortgage backed security mutual funds ($2.1 million). In accordance with FAS No. 115, unrealized holding gains and losses deemed temporary on available-for-sale securities are reported in a separate component of stockholders' equity and are not reported in earnings until realized. Net unrealized holding gains on available-for-sale securities were $10.0 million at September 30, 2002, or $6.5 million after considering the related deferred tax liability. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- 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 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, 2002, First Defiance's total assets, deposits and stockholders' equity amounted to $863.7 million, $590.8 million and $124.9 million, respectively, compared to $1.133 billion, $614.8 million and $111.0 million, respectively, at December 31, 2001. Total assets of discontinued operations, included in total assets at December 31, 2001, were $488.5 million. The discussion below focuses only on assets and liabilities from continuing operations. Net loans receivable increased to $546.2 million at September 30, 2002 from $499.8 million at December 31, 2001. The increase in loans receivable occurred primarily in non-residential and multi-family real estate loans, which increased $28.0 million to $202.1 million, and home equity and improvement loans, which increased $10.4 million to $46.6 million. The increase was partially offset by a $2.6 million decline in one- to four-family residential loans to $165.1 million and a $2.0 million decline in consumer loans to $38.7 million. The investment securities portfolio increased to $213.3 million at September 30, 2002 from $54.3 million at December 31, 2001. The increase in the balance in the investment portfolio is the result of the investment of a portion of the net cash realized from the sale of The Leader after all liabilities were settled. At September 30, 2002 there were approximately $27.6 million of interest-bearing deposits held at other financial institutions. These funds will be redeployed into higher earning investments as interest rates rise or will be used to liquidate $31.5 million of brokered certificates of deposit which are scheduled to mature over the next 12 months and which will not be renewed. Deposits decreased from $614.8 million at December 31, 2001 to $590.8 million as of September 30, 2002. Certificates of deposit balances declined by $51.6 million to $351.3 million at September 30, 2002, from $402.9 million at December 31, 2001. This decrease was the result of a $57.4 million decrease in brokered certificates of deposit, which was partially offset by a $5.8 million increase in certificates of deposit originated through First Federal's branch network. The decline in certificate of deposit balances was partially offset by 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- a $15.3 million increase in money market demand accounts, to $129.6 million at September 30, 2002 from $114.3 million at December 31, 2001, and a $9.7 million increase in interest and non-interest bearing checking accounts, to $70.4 million at September 30, 2002 from $60.7 million at December 31, 2001. The Company has focused on increasing its lower cost core deposits, and at the same time has been less aggressive in retaining higher cost CDs during 2002 due to the sale of The Leader early in April, 2002. Additionally, FHLB advances and notes payable decreased to $131.2 million and $3.2 million, respectively, at September 30, 2002 from $196.3 million and $20.7 million, respectively, at December 31, 2001. The proceeds from the sale of The Leader were used to pay down all short term advances from the FHLB and notes payable as well as $25 million of fixed rate long term FHLB advances that were retired early. 19 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 does not reflect any effect of income taxes. All average balances are based upon daily balances. The average balance sheets and income statements have been adjusted to allocate interest expense associated with financing The Leader's operations to discontinued operations. The average balance of FHLB advances for this yield analysis does not include those advances which were used to finance The Leader's operations. The interest-bearing liabilities reflect only those funds attributable to First Defiance's continuing operations.
Three Months Ended September 30, ---------------------------------------------------------------------------- 2002 2001 ------------------------------------ ---------------------------------- Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate(1) ------- -------- ------- ------- -------- ------- Interest-earning assets: Loans receivable $535,149 $ 9,281 6.88% $521,165 $10,643 8.10% Securities 216,845 2,728 4.99 56,817 833 5.82 Interest-earning deposits 42,200 192 1.81 5,003 17 1.35 FHLB stock and other 21,730 234 4.27 15,807 279 7.00 -------- ---------- -------- ------ ----- Total interest-earning assets 815,924 12,435 6.05 598,792 11,772 7.80 Non-interest-earning assets (including assets of discontinued operations) 56,884 531,619 -------- ---------- Total assets $872,808 $1,130,411 ======== ========== Interest-bearing liabilities (3): Deposits $561,660 $ 4,227 2.99% $461,414 $ 5,185 4.46% FHLB advances and other 131,913 1,702 5.12 61,000 721 4.69 Notes payable 2,466 23 3.70 19,576 264 5.35 -------- ---------- -------- ------ ----- Total interest-bearing liabilities 696,039 5,952 3.39 541,990 6,170 4.52 Non-interest bearing deposits 32,120 -- 35,749 -- -------- ---------- -------- ------ Total including non-interest bearing demand deposits 728,159 5,952 3.24 577,739 6,170 4.24 Other non-interest-bearing liabilities (including liabilities of discontinued operations) 21,158 447,296 -------- --------- Total liabilities 749,317 1,025,035 Stockholders' equity 123,491 105,376 -------- --------- Total liabilities and stock- holders' equity $872,808 $1,130,411 Net interest income; interest rate spread $ 6,483 2.66% $ 5,602 3.28% ======== ==== ========== ==== Net interest margin (2) 3.15% 3.71% == ==== ==== Average interest-earning assets to average interest-bearing liabilities 117% 110% === ===
- ------------------------ (1) Annualized (2) Net interest margin is net interest income divided by average interest-earning assets. (3) This analysis does not reflect borrowings to fund discontinued operations. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - -------------------------
Nine Months Ended September 30, ---------------------------------------------------------------------------- 2002 2001 ------------------------------------ ---------------------------------- Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate(1) ------- -------- ------- ------- -------- ------- Interest-earning assets: Loans receivable $514,352 $ 27,322 7.10% $525,235 $32,990 8.40% Securities 152,902 5,903 5.16 58,847 2,693 6.12 Interest-earning deposits 50,715 619 1.63 8,211 227 3.70 FHLB stock and other 24,206 700 3.87 15,530 833 7.17 -------- ---------- -------- ------ ----- Total interest-earning assets 742,175 34,544 6.22 607,823 36,743 8.08 Non-interest-earning assets (including assets of discontinued operations) 227,174 473,840 -------- ---------- Total assets $969,349 $1,081,663 ======== ========== Interest-bearing liabilities (3): Deposits $544,206 $ 12,616 3.10% $449,766 $16,346 4.86% FHLB advances and other 90,361 3,476 5.14 84,835 3,265 5.15 Notes payable 8,775 250 3.81 18,414 851 6.18 -------- ---------- -------- ------ ----- Total interest-bearing liabilities 643,342 16,342 3.40 553,015 20,462 4.95 Non-interest bearing deposits 31,272 -- 34,168 -- -------- ---------- -------- ------ Total including non-interest bearing demand deposits 674,614 16,342 3.24 587,183 20,462 4.66 Other non-interest-bearing liabilities (including liabilities of discontinued operations) 176,488 391,483 -------- --------- Total liabilities 851,102 978,666 Stockholders' equity 118,247 102,997 -------- --------- Total liabilities and stock- holders' equity $969,349 $1,081,663 ======== ========== Net interest income; interest rate spread $ 18,202 2.82% $16,281 3.13% ======== ==== ======= ==== Net interest margin (2) 3.28% 3.58% == ==== ==== Average interest-earning assets to average interest-bearing liabilities 115% 110% === ===
- ------------------------- (1) Annualized (2) Net interest margin is net interest income divided by average interest-earning assets. (3) This analysis does not reflect borrowings to fund discontinued operations. 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- Results of Operations - --------------------- On April 1, 2002, First Defiance completed the sale of The Leader to US Bancorp. As a result of this sale, management has included the operating results for The Leader in discontinued operations for all periods presented. Also included in discontinued operations is the $7.7 million gain realized from the sale of The Leader and the cost associated with early payment penalties incurred in retiring certain FHLB advances which were used to fund operations of The Leader. See Note 3 to the Consolidated Condensed Financial Statements filed with this Form 10-Q. Three Months Ended September 30, 2002 compared to Three Months Ended September - -------------------------------------------------------------------------------- 30, 2001 - -------- On a consolidated basis, First Defiance had net income of $1.4 million or $.21 per share for the three months ended September 30, 2002 compared to $3.0 million or $0.45 per share in 2001. The 2001 net income included earnings from discontinued operations of $1.7 million or $0.26 per share. Income from continuing operations for the 2001 third quarter was $1.2 million or $0.19 per share. Net Interest Income. Net interest income from continuing operations for the quarter ended September 30, 2002 was $6.2 million compared to $5.3 million for the same period in 2001. Net interest margin for the 2002 third quarter was 3.15% compared to 3.71% for the same period in 2001. Total interest income from continuing operations increased by $709,000 to $12.2 million for the three months ended September 30, 2002 from $11.5 million for the three months ended September 30, 2001. Interest on loans decreased $1.4 million to $9.3 million in the third quarter of 2002 from $10.6 million in the third quarter of 2001. The decrease in interest from loans was due to a reduction in the yield on loans between the third quarter of 2001 and the third quarter of 2002. The yield on First Defiance's loan portfolio declined from 8.10% for the three months ended September 30, 2001 to 6.88% for the same period in 2002 because of falling interest rates over that time period. The Company also has experienced a change in the mix of its loan portfolio as commercial loans and non-residential real estate loans were $298.6 million at September 30, 2002, up from $257.7 million at December 31, 2001. During that same time one- to four-family residential loans, excluding loans held for sale, declined from $172.1 million to $161.8 million. The decline in the one- to four-family residential loan portfolio is the result of increased mortgage loan refinance activity. The Company sells most of its new mortgage loan originations into the secondary market. Interest earnings from the investment portfolio and interest-earning deposits increased $1.9 million to $2.7 million for the three months ended September 30, 2002 compared to $833,000 for the same period in 2001. The increase is due to the proceeds received from the sale of The Leader. The average balance of securities for the 2002 third quarter increased to $216.8 million from $56.8 million for the same period in 2001. In addition, First Defiance held an average of $42.2 million in overnight or interest-earning deposit accounts for the three months ended September 30, 2002 as The Leader sale proceeds were not fully invested. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- Interest expense from continuing operations decreased by $218,000, to $6.0 million for the third quarter of 2002 compared to $6.2 million for the same period in 2001. The decrease is due primarily to a 113 basis point decrease in the average cost of interest-bearing liabilities, from 4.52% for the third quarter of 2001 to 3.39% in the third quarter of 2002. The average balances of interest-bearing liabilities increased $154.0 million from $542.0 million third quarter of 2001 to $696.0 million in the third quarter of 2002. The average balance sheets and income statements have been adjusted to allocate interest expense associated with financing The Leader's operations to discontinued operations. Therefore, the average interest-bearing liabilities reflect only those funds attributable to First Defiance's continuing operations. Provision for Loan Losses. The provision for loan losses increased $114,000, to $386,000 for the three-months ended September 30, 2002 from $272,000 during the same period in 2001. 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 historical experience, the volume and type of lending conducted by First Defiance, industry standards, the amount of non-performing assets and loan charge-off activity, 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. Non-performing assets and asset quality ratios for First Defiance were as follows (in $000's):
September 30, December 31, 2002 2001 ---- ---- Non-accrual loans $ 3,287 $ 2,255 Loans over 90 days past due and still accruing -- -- --------- --------- Total non-performing loans 3,287 2,255 Real estate owned (REO) 371 136 --------- --------- Total non-performing assets $ 3,658 $ 2,391 ========= ========= Allowance for loan losses as a percentage of total loans 1.33% 1.29% Allowance for loan losses as a percentage of non-performing assets 198.36% 273.86% Allowance for loan losses as a percentage of non-performing loans 220.75% 290.38% Total non-performing assets as a percentage of total assets from continuing operations 0.42% 0.37% Total non-performing loans as a percentage of total loans 0.60% 0.45%
Of the $3.3 million in non-accrual loans, $2.7 million were commercial loans or non-residential real estate loans and $490,000 were residential mortgage loans. The allowance for loan losses at September 30, 2002 was $7.3 million compared to $6.5 million at both September 30, 2001 and December 31, 2001. For the quarter ended September 30, 2002, First Defiance charged off $212,000 of loans against its allowance and realized recoveries of $54,000 from 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- loans previously charged off. During the same quarter in 2001, First Defiance charged off $269,000 in loans and realized recoveries of $56,000. Non-Interest Income. Non-interest income increased $806,000 in the third quarter of 2002, to $3.3 million for the quarter ended September 30, 2002 from $2.5 million for the same period in 2001. Individual components of non-interest income are as follows: Gain on Sale of Loans. Gains realized from the sale of mortgage loans increased $512,000 to $1.2 million for the three months ended September 30, 2002 from $667,000 during the 2001 third quarter. The increase is due to high mortgage loan origination activity in the low interest rate environment. While the Company exited the mortgage banking business at the national level with the sale of The Leader, the origination and servicing of mortgage loans continues to be a core activity of First Federal in its local market areas. Service Fees. Loan and deposit fees increased $192,000 to $968,000 for the quarter ended September 30, 2002 from $776,000 for the quarter ended September 30, 2001. Increases occurred primarily in loan servicing fees on sold loans, debit card interchange fees, and checking NSF fees. Insurance and Investment Sales Commission. Insurance and investment sales commission income increased $70,000 to $810,000 in the third quarter of 2002 from $740,000 in the same period of 2001. Increases occurred in the property and casualty lines as well as income from the sale of securities and annuities. Other Non-Interest Income. Other non-interest income, including dividends on Federal Home Loan Bank stock and other miscellaneous charges, increased to $314,000 for the quarter ended September 30, 2002 from $282,000 for the same period in 2001. Non-Interest Expense. Total non-interest expense increased $1.6 million to $7.2 million for the quarter ended September 30, 2002 from $5.6 million for the same period in 2001. Significant individual components of the increase are as follows: Compensation and Benefits. Compensation and benefits increased $587,000 to $3.63 million for the quarter ended September 30, 2002 from $3.04 million for the same period in 2001. The increase was the result of an increase in staffing, including several support positions at central operations, staff increases at several banking centers due to growing volumes, and the addition of a commercial loan origination office in the Toledo, Ohio market which commenced operations in May of 2002. Compensation and benefits also increased due to cost of living and merit increases for existing employees which averaged approximately 4%, higher level of sales commissions at First Insurance due to higher commission premium income and a $231,000 increase in the estimated cost of First Defiance's self-insured group health insurance plan. Amortization and Impairment of Mortgage Servicing Rights. Amortization of mortgage servicing rights ("MSR's") totaled $512,000 in the 2002 third quarter compared to $257,000 in the 2001 third quarter, the result of significant refinancing activity in the First Federal loan servicing portfolio. Also, the Company recognized a $521,000 adjustment for impairment in the 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- value of its MSR portfolio during the 2002 third quarter, the result of the decline in the market value of MSRs in the face of falling interest rates and increased prepayment speeds on mortgage loans in general. There was no impairment recognized in the third quarter of 2001. First Defiance has a total impairment reserve of $1.6 million recorded against an asset with a book value before reserves of $3.3 million at September 30, 2002. That portfolio represents approximately 4,000 loans with unpaid balances of approximately $290.5 million. Amortization of Goodwill. First Defiance is no longer required to recognize goodwill amortization as an expense. Such amortization totaled $79,000 in the third quarter of 2001. (See Note 4 to the Consolidated Condensed Financial Statements). Other Non-Interest Expenses. Other non-interest expenses (including occupancy, state franchise tax, data processing, and deposit insurance premiums) increased to $2.5 million for the quarter ended September 30, 2002 from $2.3 million for the same period in 2001. First Defiance computes federal income tax expense in accordance with FASB Statement No. 109 which resulted in an effective tax rate of 29.13% for the quarter ended September 30, 2002 compared to 33.37% for the same period in 2001. The reduction in the effective tax rate is a result of investing approximately $26.5 million in municipal securities which are exempt from federal tax. At September 30, 2001, First Defiance had only $8.5 million invested in tax exempt securities. As a result of the above factors, income from continuing operations for the quarter ended September 30, 2002 was $1.4 million compared to $1.2 million for the comparable period in 2001. On a per share basis, basic and diluted earnings per share for the three months ended September 30, 2002 from continuing operations were each $0.22 and $.21, respectively, compared to $0.19 and $0.19, respectively, for the quarter ended September 30, 2001. Discontinued Operations. Discontinued operations for the 2001 third quarter period, which represents net income earned by The Leader's operations, were $1.7 million or $0.26 per share. There was no income from discontinued operations for the 2002 third quarter. Nine months ended September 30, 2002 compared to nine months ended September 30, - -------------------------------------------------------------------------------- 2001 - ---- On a consolidated basis, First Defiance had net income of $12.8 million or $1.92 per share for the nine months ended September 30, 2002 compared to $8.6 million or $1.31 per share in 2001. Income before the cumulative effect of a change in accounting for goodwill was $13.0 million, or $1.95 per share for the nine months ended September 30, 2002 and income from continuing operations totaled $3.7 million or $0.55 per share for the 2002 nine month period, compared to $3.6 million or $0.55 per share for the same period in 2001. Because the continuing operations of First Defiance do not reflect the reinvestment of any of the proceeds from the sale of The Leader for the first three months of 2002, management does not believe the results of continuing operations for the first nine months of 2002 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- accurately represent what the results of First Defiance will be on a going-forward basis. See the Pro Forma Income Statement section of Management's Discussion and Analysis. Net Interest Income. Net interest income from continuing operations for the nine months ended September 30, 2002 was $17.5 million compared to $15.4 million for the same period in 2001. Net interest margin for the first nine months of 2002 was 3.28% compared to 3.58% for the same period in 2001. Total interest income from continuing operations decreased $2.1 million from $35.9 million for the nine months ended September 30, 2001 to $33.8 million for the nine months ended September 30, 2002. Interest on loans decreased $5.7 million to $27.3 million in the first three quarters of 2002 from $33.0 million in the first three quarters of 2001. The decrease in interest from loans was due to a reduction in both the average balance of loans outstanding and the yields on those loans between the first nine months of 2001 and the first nine months of 2002. The year to date average balance of loans decreased $10.9 million to $514.4 million in the 2002 period from $525.2 in 2001. The decrease is due to the decrease in the year to date average balance of mortgage loans, a result of heavy refinance activity over the period. The yield on First Defiance's loan portfolio declined from 8.40% for the nine months ended September 30, 2001 to 7.10% for the same period in 2002 because of falling interest rates over that time period. Interest earnings from the investment portfolio and interest-earning deposits increased $3.2 million to $5.9 million for the nine months ended September 30, 2002 compared to $2.7 million for the same period in 2001. The increase is due to the reinvestment of the proceeds received from the sale of The Leader. The average balance of securities for the nine-month period in 2002 increased to $203.6 million from $67.1 million for the same period in 2001. Interest expense from continuing operations decreased by $4.2 million, to $16.3 million for the first nine months of 2002 compared to $20.5 million for the same period in 2001. The decrease is due primarily to a 155 basis point decrease in the average cost of interest-bearing liabilities, from 4.95% for the first nine months of 2001 to 3.40% in the first nine months of 2002. The average balances of interest-bearing liabilities increased $90.3 million from $553.0 million in the first nine months of 2001 to $643.3 million in the same period of 2002. The average balance sheet and income statement have been adjusted to allocate interest expense associated with financing The Leader's operations to discontinued operations. Therefore, the average interest-bearing liabilities reflect only those funds related to First Defiance's continuing operations. Provision for Loan Losses. The 2002 provision for loan losses totaled $1.1 million, an increase of $465,000 from the 2001 provision. That increase was due both to the continued change in mix in the loan portfolio from mortgage loans to commercial loans and non-residential real estate loans, and an increase in non-performing loans since December 31, 2001. First Defiance charged off $590,000 of loans against its allowance for loan losses for the nine-month period ended September 30, 2002 and realized recoveries of $174,000 from loans previously charged off. During the same period in 2001, First Defiance charged off $626,000 in loans and realized recoveries of $175,000. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- Non-Interest Income. Non-interest income increased $1.2 million in the first nine months of 2002, to $8.4 million from $7.2 million for the same period in 2001. Individual components of non-interest income are as follows: Service Fees. Loan and deposit fees increased $564,000 to $2.7 million for the nine months ended September 30, 2002 from $2.2 million for the nine months ended September 30, 2001. Increases occurred primarily in loan servicing fees on sold loans, commercial loan fees, debit card interchange fees, and NSF fees. Insurance and Investment Sales Commissions. Insurance and investment sales commission income increased $324,000 to $2.5 million in the first nine months of 2002 from $2.2 million in the same period of 2001. Increases occurred in the property and casualty lines as well as income from the sale of securities and annuities. Insurance commissions also include $84,000 related to the placement of force-placed insurance for The Leader. This portion of First Insurance's income is not recurring with the sale of The Leader. First Insurance also incurred $67,000 of related expense associated with the force-placed insurance which also will not be recurring. Gains on Sale of Loans. Gains from the sale of residential mortgage loans increased to $2.3 million during the first nine months of 2002 from $2.0 million during that period in 2001, an increase of $285,000 or 14.5%. This is due to significant mortgage origination activity. Other Non-Interest Income. Other non-interest income, including dividends on Federal Home Loan Bank stock and other miscellaneous charges, increased to $938,000 for the nine months ended September 30, 2002 from $894,000 million for the same period in 2001. Non-Interest Expense. Total non-interest expense increased $2.9 million to $19.5 million for the nine months ended September 30, 2002 from $16.6 million for the same period in 2001. Significant individual components of the increase are as follows: Compensation and Benefits. Compensation and benefits increased $1.4 million to $10.4 million year to date in 2002 from $9.0 million for the same period in 2001. This increase was due to an increase in the overall size of staff, merit and cost of living increases which were approximately 4% on average, higher sales commission expense at First Insurance and higher group health insurance costs. Amortization and Impairment of Mortgage Servicing Rights. Amortization of MSRs totaled $777,000 in the nine months ended September 30, 2002 compared to $630,000 in the same period of 2001. The Company also recorded adjustments totaling $785,000 during the first nine months of 2002 to reflect impairment in the value of MSRs. There was no impairment recognized in the first nine months of 2001. Impairment results from a decline in the market value of MSRs principally due to falling interest rates Amortization of Goodwill. During 2002, First Defiance adopted the provisions of FAS No. 142, Goodwill and Other Intangible Assets. As required under the standard, management evaluated goodwill recorded at First Insurance for the purpose of measuring impairment and determined that such goodwill was impaired by $238,000 ($194,000 or $0.03 per share after 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- tax) as of January 1, 2002. As permitted, this amount is reflected in the income statement as the cumulative effect of a change in accounting principle. In addition to the $238,000 of impaired goodwill, during the first quarter First Defiance paid additional consideration of $200,000 to settle a contingent payout clause under its agreement to acquire First Insurance. The impairment of the goodwill created by that settlement was recorded as an operating expense during the 2002 first quarter. Amortization expense recognized by First Defiance in the first half of 2001 totaled $234,000. Such amortization is no longer required. (See Note 4 to the Consolidated Condensed Financial Statements). Other Non-Interest Expenses. Other non-interest expenses (including occupancy, state franchise tax, data processing, and deposit insurance premiums) increased to $7.3 million for the nine months ended September 30, 2002 from $6.7 million for the same period in 2001. The effective tax rate for the nine months ended September 30, 2002 was 31.3% compared to 33.2% for the nine months ended September 30, 2001. The 2002 effective rate is lower because of an increase in tax exempt municipal securities in the investment portfolio. As a result of the above factors, income from continuing operations for the nine months ended September 30, 2002 was $3.66 million compared to $3.65 million for the comparable period in 2001. On a per share basis, basic and diluted earnings per share from continuing operations were $0.57 and $0.55, respectively, for both the 2002 and 2001 nine-month periods. Discontinued Operations. Income from discontinued operations for the nine months ended September 30, 2002 totaled $9.3 million or $1.46 per share. It was comprised of the $7.7 million after-tax gain recognized from the sale of The Leader, $2.0 million of net income earned by The Leader prior to the sale, and an after-tax charge of $350,000 relating to prepayment penalties incurred in the retirement of certain FHLB advances. Discontinued operations from the 2001 nine month period were $3.2 million or $0.49 per share which represents net income of The Leader for that period, net of inter-company financing charges. 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. With the completion of the sale of The Leader early in the second quarter, First Defiance has a significant amount of liquidity. First Defiance used $54.1 million of cash from operating activities during the first nine months of 2002. Excluding discontinued operations, First Defiance used $18.9 million of cash from operations during that same 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, goodwill write-offs, 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 28 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- existing loans, the sale of loans, proceeds from the sale or maturity of securities, borrowings from the FHLB, and customer deposits. At September 30, 2002, First Defiance had $77.1 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $83.2 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Defiance had commitments to sell $8.9 million of loans held-for-sale. Also as of September 30, 2002, the total amount of certificates of deposit that are scheduled to mature by September 30, 2003 is $223.8 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, advances from the FHLB of Cincinnati and other financial institutions are available. Upon the sale of The Leader, First Defiance had net investable funds of approximately $365 million. Of this, $81.5 million was used to pay off FHLB overnight advances and $19.6 million was used to pay off term debt. Management also elected to prepay $25 million of fixed rate FHLB advances, incurring a prepayment penalty of $539,000 in the 2002 second quarter discontinued operations. Approximately $170 million of the funds from the sale of The Leader were added to the investment portfolio, with $130 million of those funds invested long term to earn a yield of 5.65% and the balance invested in short-term or overnight securities in anticipation of rising rates. The balance of the proceeds from the sale of The Leader have been used to fund loan growth and brokered CD runoff. 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. Such investments are not classified as high risk at September 30, 2002 and do not present risk significantly different than other mortgage-backed or agency securities. 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, 2002. 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - -------------------------
Core Capital Risk-Based Capital Adequately Well Adequately Well Capitalized Capitalized Capitalized Capitalized Regulatory capital $110,544 $110,544 $117,523 $117,523 Minimum required regulatory capital 33,958 42,448 44,646 55,808 -------- -------- -------- -------- Excess regulatory capital $76,586 $68,096 $72,877 $ 61,715 Regulatory capital as a percentage of assets (1) 13.0% 13.0% 21.1% 21.1% Minimum capital required as a percentage of 4.0% 5.0% 8.0% 10.0% assets -------- -------- -------- -------- Excess regulatory capital as a percentage of 9.0% 8.0% 13.1% 11.1% assets -------- -------- -------- --------
(1) Core capital is computed as a percentage of adjusted total assets of $849.0 million. Risk-based capital is computed as a percentage of total risk-weighted assets of $558.1 million. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - Continued - ------------------------- Pro Forma Income Statement - -------------------------- Management does not believe that year-to-date income from continuing operations for the nine months ended September 30, 2002, as presented in the consolidated condensed financial statements, accurately represents what the results of operations for First Defiance will be on a going-forward basis because the continuing operations results for the first three months of 2002 do not reflect the reinvestment of any of the proceeds from the sale of The Leader. The following pro-forma income statement for the nine months ended September 30, 2002 attempts to present what First Defiance's results from continuing operations would have been had the sale of The Leader occurred as of January 1, 2002 and the proceeds from the sale fully invested for the entire quarter. Management has estimated that the additional assets added to the balance sheet as a result of the sale of The Leader would have been reinvested to yield a weighted average rate of 4.44% for the period from January 1, 2002 to April 1, 2002. Also, to the extent possible, management has assumed that proceeds of the sale have been used to prepay advances. Dollars are in thousands (except per share amounts). Continuing Operations Pro Forma As Reported Interest income $36,887 $33,844 Interest expense 18,858 16,342 ------- ------- Net interest income 18,029 17,502 Provision for loan losses 1,124 1,124 ------- ------- Net interest after provision 16,905 16,378 Non-interest income 8,433 8,433 Non-interest expense 19,489 19,489 ------- ------- Income before income taxes 5,849 5,322 Income taxes 1,852 1,667 ------- ------- Net income from continuing operations $3,997 $3,655 ======= ======= Net income per share from continuing operations $0.60 $0.55 ======= ======= FDIC Insurance - -------------- 31 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 2002 are approximately $0.017 per $100 of deposits. Item 3. Qualitative and Quantitative Disclosure About Market Risk - ----------------------------------------------------------------- As discussed in detail in the 2001 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 2002 amounts as a base case, First Defiance's net interest income would be impacted by less than the board mandated guidelines of 10%. Item 4. Controls and Procedures - ------------------------------- The Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) and 15d-14 as of a date within 90 days prior to the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. 32 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 Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K Exhibit 99.1 - Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 33 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 12, 2002 By: /s/ William J. Small ----------------- -------------------------------- William J. Small Chairman, President and Chief Executive Officer Date: November 12, 2002 By: /s/ John C. Wahl ----------------- -------------------------------- John C. Wahl Senior Vice President, Chief Financial Officer and Treasurer 34 First Defiance Financial Corp. CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION ------------- I, William J. Small, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Defiance Financial Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 ----------------- /s/ William J. Small ------------------- William J. Small Chief Executive Officer 35 CERTIFICATION ------------- I, John C. Wahl, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Defiance Financial Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 ----------------- /s/ John C. Wahl ------------------- John C. Wahl Chief Financial Officer 36 EX-99.1 3 exhibit99-1.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William J. Small, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William J. Small ----------------------- William J. Small Chief Executive Officer November 12, 2002 EX-99.2 4 exhibit99-2.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John C. Wahl, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John C. Wahl ----------------------- John C. Wahl Chief Financial Officer November 12, 2002 -----END PRIVACY-ENHANCED MESSAGE-----