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
June 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 -
6,317,658 shares outstanding at August 6, 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 - June 30, 2004 and December 31, 2003 2
Consolidated Condensed Statements of Income -
Three and six months ended June 30, 2004 and 2003 4
Consolidated Condensed Statement of Changes in
Stockholders' Equity - Six months ended
June 30, 2004 5
Consolidated Condensed Statements of Cash Flows
- Six months ended June 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 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 4. Controls and Procedures 34
PART II-OTHER INFORMATION:
Item 1. Legal Proceedings 35
Item 2. Changes in Securities 35
Item 3. Defaults upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
1
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands)
- ------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
------------- -----------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 19,414 $ 28,020
Interest-bearing deposits 1,125 9,763
----------- -----------
20,539 37,783
Securities:
Available-for-sale, carried at fair value 150,869 168,259
Held-to-maturity, carried at amortized cost
(approximate fair value $2,718 and $2,938
at June 30, 2004 and December 31,
2003 respectively) 2,582 2,776
----------- -----------
153,451 171,035
Loans held for sale 3,948 5,872
Loans receivable, net 809,232 735,255
Accrued interest receivable 4,725 4,742
Federal Home Loan Bank stock and other
interest-earning assets 13,095 17,766
Bank owned life insurance 18,337 17,952
Office properties and equipment 23,890 23,846
Real estate and other assets held for sale 206 404
Goodwill and other intangibles 19,310 20,544
Mortgage servicing rights 3,783 3,431
Other assets 2,650 1,969
----------- -----------
Total assets $ 1,073,166 $ 1,040,599
=========== ===========
See accompanying notes.
2
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Financial Condition
(UNAUDITED)
(Amounts in Thousands)
- ------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
------------- -----------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Non-interest-bearing deposits $ 56,659 $ 52,323
Interest-bearing deposits 696,731 676,673
----------- -----------
Total deposits 753,390 728,996
Advances from Federal Home Loan Bank 176,623 164,522
Short-term borrowings and other
interest-bearing liabilities 9,360 12,267
Advance payments by borrowers for
taxes and insurance 83 231
Deferred taxes 950 1,859
Other liabilities 8,308 8,455
----------- -----------
Total liabilities 948,714 916,330
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; 6,318
and 6,328 shares outstanding, respectively 63 63
Additional paid-in capital 51,761 51,144
Stock acquired by ESOP (1,585) (1,904)
Deferred compensation (8) (11)
Accumulated other comprehensive income,
net of income taxes of $1,164
and $2,163, respectively 1,865 4,017
Retained earnings 72,356 70,960
----------- -----------
Total stockholders' equity 124,452 124,269
----------- -----------
Total liabilities and stockholders' equity $ 1,073,166 $ 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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- -------- -------- --------
Interest Income
Loans $ 11,279 $ 9,974 $ 22,207 $ 19,312
Investment securities 1,727 2,108 3,592 4,532
Interest-bearing deposits 4 80 36 109
-------- ------- -------- --------
Total interest income 13,010 12,162 25,835 23,953
Interest Expense
Deposits 3,071 3,412 6,069 6,946
FHLB advances and other 1,790 1,895 3,575 3,709
Notes payable and warehouse loans 20 13 43 22
-------- ------- -------- --------
Total interest expense 4,881 5,320 9,687 10,677
-------- ------- -------- --------
Net interest Income 8,129 6,842 16,148 13,276
Provision for loan losses 490 353 868 688
-------- ------- -------- --------
Net interest income after provision for loan losses 7,639 6,489 15,280 12,588
Non-Interest Income
Service fees and other charges 1,373 1,133 2,578 2,149
Insurance and investment sales commission income 1,223 967 2,286 1,893
Dividends on stock 153 172 330 341
Gain on sale of loans 804 2,515 1,393 4,316
Gain on sale of securities 293 288 392 919
Trust income 50 38 98 70
Income from Bank Owned Life Insurance 192 204 385 405
Other non-interest income 43 20 92 35
-------- ------- -------- --------
Total non-interest income 4,131 5,337 7,554 10,128
Non-Interest Expense
Compensation and benefits 4,473 3,976 8,788 7,684
Occupancy 842 741 1,682 1,469
SAIF deposit insurance premiums (rebates) 28 31 (14) 55
State franchise tax 157 285 312 566
Data processing 579 427 1,122 859
Amortization of mortgage servicing rights 233 756 406 1,279
Impairment (recovery) of mortgage servicing rights (524) 366 (287) 606
Amortization and impairment of goodwill and other intangibles 27 8 55 8
Other non-interest expense 1,319 1,111 2,536 2,189
-------- ------- -------- --------
Total non-interest expense 7,134 7,701 14,600 14,715
-------- ------- -------- --------
Income before income taxes 4,636 4,125 8,234 8,001
Federal income taxes 1,492 1,246 2,597 2,403
-------- ------- -------- --------
Net Income $ 3,144 $ 2,879 $ 5,637 $ 5,598
======== ======= ======== ========
Earnings per share (Note 4)
Basic $ 0.51 $ 0.48 $ 0.92 $ 0.93
======== ======= ======== ========
Diluted $ 0.49 $ 0.46 $ 0.88 $ 0.89
======== ======= ======== ========
Dividends declared per share (Note 3) $ 0.20 $ 0.15 $ 0.40 $ 0.30
======== ======= ======== ========
Average shares outstanding (Note 4)
Basic 6,125 6,013 6,115 6,044
======== ======= ======== ========
Diluted 6,385 6,254 6,402 6,293
======== ======= ======== ========
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 $999
Total comprehensive income
ESOP shares released 658 319
Amortization of deferred compensation
of Management Recognition Plan 3
Shares issued under stock option plan 1 1,255
Purchase of common stock for
treasury (1) (1,296)
Dividends declared (Note 3)
---- -------- -------- -----
Balance at June 30 $ 63 $ 51,761 $ (1,585) $ (8)
==== ======== ======== =====
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 5,637 5,637 5,598
Change in unrealized gains (losses),
net of income taxes of $999 (2,152) (2,152) 240
--------- ---------
Total comprehensive income 3,485 5,838
ESOP shares released 977 693
Amortization of deferred compensation
of Management Recognition Plan 3 10
Shares issued under stock option plan 1,256 650
Purchase of common stock for
treasury (1,784) (3,081) (3,902)
Dividends declared (Note 3) (2,457) (2,457) (1,814)
-------- -------- ---------
Balance at June 30 $ 1,865 $ 72,356 $ 124,452 $ 121,585
======== ======== ========= =========
See accompanying notes
6
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows
(UNAUDITED)
(Amounts in Thousands)
- ------------------------------------------------------------------------------
Six Months
Ended June 30,
2004 2003
---- ----
Operating Activities
Net income $ 5,637 $ 5,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 868 688
Loss on sale of office properties and equipment 2 --
Provision for depreciation 905 810
Net securities amortization 228 468
Amortization of mortgage servicing rights 405 1,279
Net impairment (recovery) of mortgage servicing rights (287) 606
Amortization of core deposit intangible 54 8
Gain on sale of loans (1,393) (4,316)
Amortization of Management Recognition Plan
deferred compensation 3 10
Release of ESOP Shares 977 693
Gains on sales of securities (392) (919)
Deferred federal income tax expense (credit) 249 (310)
Proceeds from sale of loans 59,514 180,178
Origination of mortgage servicing rights, net (470) (1,656)
Origination of loans held for sale (56,197) (170,257)
Decrease in interest receivable and other assets (1,049) (988)
Increase (decrease) in other liabilities (202) 770
--------- ----------
Net cash provided by operating activities 8,852 12,662
Investing Activities
Proceeds from maturities of held-to-maturity securities 190 629
Proceeds from maturities of available-for-sale securities 29,056 45,488
Proceeds from sale of available-for-sale securities 5,293 9,958
Proceeds from sales of real estate and
other assets held for sale 729 241
Proceeds from sale of discontinued operations -- 1,228
Proceeds from sale of Federal Home Loan Bank stock 4,671 --
Purchases of available-for-sale securities (20,101) (22,195)
Purchases of Federal Home Loan Bank stock -- (340)
Purchases of office properties and equipment (951) (1,495)
Acquisition of branch offices -- 59,823
Net increase in loans receivable (74,141) (51,017)
--------- ----------
Net cash (used in) provided by investing activities (55,254) 42,320
7
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Condensed Statements of Cash Flows (Continued)
(UNAUDITED)
(Amounts in Thousands)
- ------------------------------------------------------------------------------
Six Months
Ended June 30,
2004 2003
--------- ---------
Financing Activities
Net increase (decrease) in deposits 24,246 (14,478)
Repayment of Federal Home Loan Bank long-term advances (899) (688)
Repayment of term notes payable -- (10)
Net increase (decrease) in Federal Home Loan Bank
short-term advances 13,000 (3,000)
Proceeds from Federal Home Loan Bank long term advances -- 9,000
Net increase (decrease) in securities sold under repurchase agreements (2,907) 3,189
Purchase of common stock for treasury (3,081) (3,902)
Cash dividends paid (2,457) (1,814)
Proceeds from exercise of stock options 1,256 650
--------- ---------
Net cash provided (used in) by financing activities 29,158 (11,053)
--------- ---------
(Decrease) increase in cash and cash equivalents (17,244) 43,929
Cash and cash equivalents at beginning of period 37,783 28,658
--------- ---------
Cash and cash equivalents at end of period $ 20,539 $ 72,587
========= =========
Supplemental Cash Flow Information:
Interest paid $ 9,843 $ 10,263
========= =========
Income taxes paid $ 2,078 $ 2,214
========= =========
Transfers from loans to real estate
and other assets held for sale $ 531 $ 98
========= =========
Noncash Operating Activities:
Change in deferred tax established on net unrealized
gain or loss on available-for-sale securities $ 999 $ (28)
========= =========
Noncash Investing Activities:
Increase (decrease) in net unrealized gain or loss on
available-for-sale securities $ (3,310) $ 212
========= =========
Noncash Financing Activities:
Cash dividends declared but not paid $ 1,218 $ 894
========= =========
See accompanying notes.
8
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements
(Unaudited at June 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"), 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 June 30,
2004 and for the three and six-month periods ending June 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 accounting
principles generally accepted in the United States. These consolidated
condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in First Defiance's 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 six-month period ended June
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
June 30, 2004 goodwill totaled $19.3 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.
9
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 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 June 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 June 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:
June 30
2004 2003
-------- -------
Risk free interest rate 5.54 % 5.66 %
Dividend yield 2.95 % 2.97 %
Volatility factors of expected market price
of stock 0.261% 0.266%
Weighted average expected life 8.89 years 8.70 years
Weighted average grant date fair value
of options granted $ 3.77 $ 3.51
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------- ------- ------- --------
Net income $ 3,144 $ 2,879 $ 5,637 $ 5,598
Stock-based compensation using the
fair value method, net of tax (59) (50) (104) (101)
------- ------- ------- -------
Pro forma net income from
continuing operations $ 3,085 $ 2,829 $ 5,533 $ 5,497
======= ======= ======= =======
Pro forma earnings per share:
Basic $ 0.50 $ 0.47 $ 0.90 $ 0.91
======= ======= ======= =======
Diluted $ 0.48 $ 0.45 $ 0.87 $ 0.87
======= ======= ======= =======
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 9.
11
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 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 June 30, 2004.
Other Than Temporary Impairments
In 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. The additional annual disclosures prescribed by the guidance are
required for First Defiance beginning with the year ended December 31, 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 June 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. Dividends on Common Stock
As of June 30, 2004, First Defiance had declared a quarterly cash dividend of
$.20 per share for the second quarter of 2004, payable July 23, 2004.
4. 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 six-month periods ended June 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 six-months ended June 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.
13
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
4. 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 Six Months Ended
June 30 June 30
2004 2003 2004 2003
------- ------- ------- -------
Numerator for basic and diluted earnings per share
- Net income $ 3,144 $ 2,879 $ 5,637 $ 5,598
Denominator:
Denominator for basic earnings per share -
weighted average shares 6,125 6,013 6,115 6,044
Effect of dilutive securities:
Employee stock options 258 235 285 241
Unvested management recognition plan stock 2 6 2 8
------- ------- ------- -------
Dilutive potential common shares 260 241 287 249
------- ------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 6,385 6,254 6,402 6,293
======= ======= ======= =======
Basic earnings per share $ 0.51 $ 0.48 $ 0.92 $ 0.93
======= ======= ======= =======
Diluted earnings per share $ 0.49 $ 0.46 $ 0.88 $ 0.89
======= ======= ======= =======
14
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
5. Investment Securities
The following is a summary of available-for-sale and held-to-maturity
securities (in thousands):
JUNE 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 $ 53,566 $ 2,073 $ 94 $ 55,545
Corporate bonds 6,186 347 -- 6,533
Mortgage-backed securities 18,656 93 161 18,588
REMICs 7,249 11 19 7,241
Collateralized mortgage obligations 20,907 48 182 20,773
Trust preferred stock 7,226 62 2 7,286
Equity securities 69 10 -- 79
Obligations of state and political
subdivisions 34,140 849 165 34,824
--------- ------- ----- ---------
Totals $ 147,999 $ 3,493 $ 623 $ 150,869
========= ======= ===== =========
Held-to-Maturity Securities:
FHLMC certificates $ 559 $ 23 $ 1 $ 581
FNMA certificates 1,087 21 2 1,106
GNMA certificates 346 1 -- 347
Obligations of state and political
subdivisions 590 94 -- 684
--------- ------- ----- ---------
Totals $ 2,582 $ 139 $ 3 $ 2,718
========= ======= ===== =========
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.
15
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
5. 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
========= ======= ===== =========
16
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
6. Loans
Loans receivable and held for sale consist of the following (in thousands):
June 30, December 31
2004 2003
--------- ------------
Real Estate:
One-to-four family residential $ 181,685 $ 167,983
Construction 15,472 16,830
Non-residential and multi-family 371,360 341,423
--------- ---------
568,517 526,236
Other Loans:
Commercial 140,178 120,677
Consumer finance 42,741 40,257
Home equity and improvement 80,312 70,038
--------- ---------
263,231 230,972
--------- ---------
Total real estate and other loans 831,748 757,208
Deduct:
Loans in process 7,925 6,079
Net deferred loan origination fees and costs 1,106 1,158
Allowance for loan loss 9,537 8,844
--------- ---------
Totals $ 813,180 $ 741,127
========= =========
Changes in the allowance for loan losses were as follows (in $000s):
Three Months Ended June 30 Six Months Ended June 30
2004 2003 2004 2003
------- ------- ------- -------
Balance at beginning of period $ 9,167 $ 7,924 $ 8,844 $ 7,496
Provision for loan losses 490 353 869 688
Charge-offs:
One-to-four family residential real estate -- 18 52 18
Non-residential and multi-family real estate 9 162 9 162
Commercial 125 38 139 63
Consumer finance 33 39 71 89
------- ------- ------- -------
Total charge-offs 167 257 271 332
Recoveries 47 85 95 253
------- ------- ------- -------
Net charge-offs 120 172 176 79
------- ------- ------- -------
Ending allowance $ 9,537 $ 8,105 $ 9,537 $ 8,105
======= ======= ======= =======
17
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
7. Deposits
A summary of deposit balances is as follows (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
Non-interest-bearing checking accounts $ 56,659 $ 52,323
Interest-bearing checking accounts 68,732 67,351
Savings accounts 53,965 51,767
Money market demand accounts 157,110 148,691
Certificates of deposit 416,924 408,864
--------- ---------
$ 753,390 $ 728,996
========= =========
8. Commitments, Guarantees and Contingent Liabilities
Loan commitments are made to accommodate the financial needs of First
Defiance's customers; however, there are no long-term, fixed-rate loan
commitments that result in market risk. Standby letters of credit obligate the
Company to pay a third party beneficiary when a customer fails to repay an
outstanding loan or debt instrument, or fails to perform some contractual non-
financial obligation. Standby letters of credit are issued to address
customers' financing needs and to facilitate customers' trade transactions. 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.
18
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
8. 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:
June 30, December 31,
2004 2003
--------- -----------
(In Thousands)
Commercial $ 120,392 $ 113,247
Real Estate 11,262 6,799
Consumer 58,559 56,823
Standby Letters of Credit 4,751 3,550
--------- ---------
Total $ 194,964 $ 180,419
========= =========
The remaining weighted average life for outstanding standby letters of credit
was less than one year at June 30, 2004. The Company had $140,000 of standby
letters of credit with a life longer than one year.
9. 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 six-month periods ended June 30, 2004 and 2003:
Three Months ended June 30 Six Months ended June 30
2004 2003 2004 2003
-------- ------- -------- --------
(In Thousands)
Service cost-benefits attributable to service
during the period $ 12 9 $ 24 $ 18
Interest cost on accumulated postretirement
benefit obligation 24 21 48 42
Net amortization and deferral 6 3 12 6
---- ---- ---- ----
Net periodic postretirement benefit cost $ 42 $ 33 $ 84 $ 66
==== ==== ==== ====
19
FIRST DEFIANCE FINANCIAL CORP.
Notes to Consolidated Condensed Financial Statements (continued)
(Unaudited at June 30, 2004 and 2003)
- ------------------------------------------------------------------------------
9.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.
10. Contingent Liabilities
On January 18, 2002, First Defiance entered into an agreement with U.S. Bank
National Association (USBank) to sell its Leader Mortgage Company subsidiary.
Leader and USBank have asserted certain claims for reimbursement under the terms
of that Purchase and Sale Agreement. Leader and USBank contend that First
Federal is obligated to repay them for "charges, advancements, and other
payments" that Leader made and for which it was not reimbursed. Management is in
the process of reviewing the claim and is unable to estimate with any certainty
the amount the Company may be liable for at this time. Such claims are subject
to a $5 million cap under the Purchase and Sale agreement.
11. Subsequent Event
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. Upon completion of the acquisition, on a pro
forma basis using June 30, 2004 data, First Defiance will have $1.278 billion in
total assets, $933.3 million in loans, $928.5 million in total deposits, and
$143.5 million in shareholders' equity. The acquisition is expected to result in
approximately $17.0 million in additional goodwill and other intangibles.
Management anticipates the transaction, which is subject to regulatory and
ComBanc shareholder approval, to close in the first quarter of 2005.
20
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 June 30, 2004, First Defiance's total assets, deposits and stockholders'
equity amounted to $1.07 billion, $753.4 million and $124.5 million,
respectively, compared to $1.04 billion, $729.0 million and $124.3 million,
respectively, at December 31, 2003.
Net loans receivable increased to $813.2 million at June 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 $30.0 million to $371.4 million, commercial loans, which increased by $19.5
million to $140.2 million, one-to-four family residential loans, which increased
by $13.7 million to $181.7 million, home equity and improvement loans, which
increased by $10.3 million to $80.3 million and consumer loans, which increased
by $2.4 million to $42.7 million.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
The investment securities portfolio decreased to $153.5 million at June 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 $24.4 million from $729.0 million at December 31, 2003 to
$753.4 million as of June 30, 2004. This increase resulted from an increase in
money market deposit accounts which increased $8.4 million to $157.1 million,
non-interest checking accounts, which increased $4.4 million to $56.7 million,
savings accounts, which increased $2.2 million to $54.0 million, and interest
bearing checking accounts, which increased $1.3 million to $68.7 million.
Certificates of deposit balances increased $8.0 million to $416.9 million.
$7.1 million of the increase resulted from an increase in brokered
certificates of deposit balances. Management uses brokered CDs as an
alternative source of funding.
Additionally, FHLB advances increased to $176.6 million at June 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 to $9.4
million at June 30, 2004 from $12.3 million at December 31, 2003. This is a
result of a decrease in the balance of securities sold under repurchase
agreements, which are a function of customer demand.
Stockholders' equity increased from $124.3 million at December 31, 2003 to
$124.5 million at June 30, 2004. The increase is a result of the $5.6
million of net income, the release of ESOP shares which increased equity by
$977,000 and $1.3 million from the exercise of stock options by First
Defiance employees. Those increases were offset by a decrease in unrealized
gains on available for sale securities (net of tax) of $2.1 million, $2.5
million of dividends declared and by $3.1 million due to the repurchase of
shares 122,848 shares for treasury at an average price of $25.08 per share.
22
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 June 30,
---------------------------------------------------------------------------
2004 2003
----------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
------- ----------- ------- ------- ----------- -------
Interest-earning assets:
Loans receivable $ 786,575 $ 11,283 5.77% $ 633,755 $ 10,030 6.35%
Securities 154,995 1,915 4.97 189,448 2,284 4.84
Interest-earning deposits 347 4 4.64 24,697 80 1.30
FHLB stock and other 15,256 153 4.03 17,244 172 4.00
---------- --------- --------- --------
Total interest-earning assets 957,173 13,355 5.61 865,144 12,566 5.83
Non-interest-earning assets 93,289 73,933
----------- ---------
Total assets $ 1,050,462 $ 939,077
=========== =========
Interest-bearing liabilities:
Deposits $ 687,293 $ 3,071 1.80% $ 603,045 $ 3,412 2.27%
FHLB advances and other 165,668 1,790 4.35 154,658 1,895 4.91
Notes payable 9,666 20 .83 4,225 13 1.23
----------- -------- --------- --------
Total interest-bearing liabilities 862,627 4,881 2.28 761,928 5,320 2.80
Non-interest bearing deposits 54,795 -- 46,505 --
----------- ---------- --------- --------
Total including non-interest bearing
demand deposits 917,422 4,881 2.14 808,433 5,320 2.64
Other non-interest-bearing liabilities 7,131 9,756
----------- ---------
Total liabilities 924,553 818,189
Stockholders' equity 125,909 120,888
----------- ---------
Total liabilities and stock-
holders' equity $ 1,050,462 $ 939,077
=========== =========
Net interest income; interest
rate spread $ 8,474 3.33% $ 7,246 3.03%
======== ==== ======== ====
Net interest margin (3) 3.56% 3.36%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 111% 114%
=== ===
(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%.
(1) Annualized
(2) Net interest margin is net interest income divided by average interest-
earning assets.
23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Six Months Ended June 30,
-------------------------------------------------------------------------
2004 2003
---------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
----------- ----------- ------- ---------- ----------- -------
Interest-earning assets:
Loans receivable $ 768,211 $ 22,215 5.82% $ 611,796 $ 19,428 6.40%
Securities 160,117 3,962 4.98 198,046 4,875 4.96
Interest-earning deposits 4,418 36 1.64 15,782 109 1.39
FHLB stock and other 16,512 330 4.02 17,602 341 3.91
----------- -------- --------- --------
Total interest-earning assets 949,258 26,543 5.62 843,226 24,753 5.92
Non-interest-earning assets 94,259 68,581
--------- ---------
Total assets $ 1,043,517 $ 911,807
=========== =========
Interest-bearing liabilities:
Deposits $ 680,243 $ 6,069 1.79% $ 579,285 $ 6,946 2.42%
FHLB advances and other 164,455 3,575 4.37 155,610 3,709 4.81
Notes payable 10,203 43 .85 3,618 22 1.23
----------- -------- --------- --------
Total interest-bearing liabilities 854,901 9,687 2.28 738,513 10,677 2.92
Non-interest bearing deposits 53,952 -- 42,421 --
----------- -------- --------- --------
Total including non-interest bearing
demand deposits 908,853 9,687 2.14 780,934 10,677 2.76
Other non-interest-bearing liabilities 8,774 10,307
----------- ---------
Total liabilities 917,627 791,241
Stockholders' equity 125,890 120,566
----------- ---------
Total liabilities and stock-
holders' equity $ 1,043,517 $ 911,807
=========== =========
Net interest income; interest
rate spread $ 16,856 3.34% $ 14,076 3.00%
======== === ======== ===
Net interest margin (3) 3.57% 3.37%
=== ====
Average interest-earning assets
to average interest-bearing
liabilities 111% 114%
=== ===
(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%.
(4) Annualized
(5) Net interest margin is net interest income divided by average interest-
earning assets.
24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Results of Operations
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
First Defiance had net income of $3.1 million or $.49 per share for the three
months ended June 30, 2004 compared to $2.9 million or $0.46 per share for the
same period in 2003.
Net Interest Income. Net interest income for the quarter ended June 30, 2004
was $8.1 million compared to $6.8 million for the same period in 2003. Net
interest margin for the 2004 first quarter was 3.56% compared to 3.36% for the
same period in 2003. On a tax-equivalent basis, net interest income for the
quarter ended June 30, 2004 was $8.5 million compared to $7.2 million for the
same period in 2003.
Total interest income increased by $848,000 to $13.0 million for the three
months ended June 30, 2004 from $12.2 million for the three months ended June
30, 2003. On a tax equivalent basis, total interest income increased by
$789,000 to $13.4 million for the three months ended June 30, 2004 from $12.6
million for the three months ended June 30, 2003. Interest on loans increased
$1.3 million to $11.3 million in the second quarter of 2004 from $10.0 million
in the second quarter of 2003. The increase in interest from loans was due to
a $152.8 million increase in average loan balances between the second quarter
of 2003 and the second quarter of 2004. A portion of the increase was
attributable to the $79.1 million of loans acquired in June 2003 as part of
the acquisition of banking center offices in Findlay, Ottawa and McComb Ohio
from RFC Banking Company. The balance of the increase is due to growth of the
Company's commercial and commercial real estate portfolios over the past
twelve months
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
6.35% for the three months ended June 30, 2003 to 5.77% for the same period in
2004 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 $511.5 million at June 30, 2004, up
from $462.1 million at December 31, 2003 and $432.2 million at June 30, 2003.
During that same time one-to-four family residential loans, excluding loans
held for sale, increased only $14.3 million to $193.2 million from $178.9
million (one-to-four family residential loans were $173.2 million at June 30,
2003). The Company sells most of its new mortgage loan originations into the
secondary market.
Interest earnings from the investment portfolio and interest-earning deposits,
on a tax equivalent basis, decreased $445,000 to $1.9 million for the three
months ended June 30, 2004 compared to $2.4 million for the same period in
2003. The decrease is due to the decline in the average balance by $58.8
million from $214.1 million at June 30, 2003 to $155.3 million at June 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%. The tax-equivalent adjustments to net interest income for 2004
and 2003 were $192,000 and $232,000 respectively.
The tax-equivalent yield on the investment portfolio was 4.97% for the three
months ended June 30, 2004, up from 4.84% for the second quarter of 2003.
25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Total interest expense decreased by $439,000 to $4.9 million for the second
quarter of 2004 compared to $5.3 million for the same period in 2003. Interest
expense on interest bearing deposits decreased by $341,000 to $3.1 million for
the quarter ended June 30, 2004 from $3.4 million for the quarter ended June
30, 2003. This happened despite growth in deposits because of the change in
the mix of deposits, from higher costing certificates of deposit to checking
and money market deposit accounts. The average cost of funds decreased from
2.64% for the second quarter of 2003 to 2.14% for the second quarter of 2004.
The average balances of interest-bearing liabilities increased $100.7 million
from $761.9 million in the second quarter of 2003 to $862.6 million in the
second quarter of 2004.
Provision For Loan Losses. The provision for loan losses was $490,000 in the
second quarter of 2004 compared to $353,000 for the second quarter of 2003
due in part to significant growth in loan balances. The increase in the
provision is the result of continued significant growth in loan balances,
particularly in the commercial and non-residential real estate categories.
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, First
Defiance asset quality ratios, including allowance for loan losses as a
percentage of total loans, and allowance for loan losses as a percentage of
non-performing assets remain relatively constant quarter to quarter and year
over year.
26
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):
June 30, December 31,
2004 2003
-------- --------
Non-accrual loans $ 2,863 $ 2,545
Loans over 90 days past due and still accruing -- --
-------- --------
Total non-performing loans $ 2,863 $ 2,545
Real estate owned (REO) 193 404
-------- --------
Total non-performing assets $ 3,056 $ 2,949
======== ========
Allowance for loans losses as a percentage
of total loans 1.16% 1.18%
Allowance for loan losses as a percentage
of non-performing assets 312.07% 299.90%
Allowance for loan losses as a percentage
of non-performing loans 333.11% 347.50%
Total non-performing assets as a percentage
of total assets 0.28% 0.28%
Total non-performing loans as a percentage
of total loans 0.35% 0.34%
Of the $2.9 million in non-accrual loans, $2.3 million were commercial loans
or non-residential real estate loans and $464,000 were residential mortgage
loans. The allowance for loan losses at June 30, 2004 was $9.5 million
compared to $8.1 million at both June 30, 2003 and $8.8 million at December
31, 2003. For the quarter ended June 30, 2004, First Defiance charged off
$167,000 of loans against its allowance and realized recoveries of $47,000
from loans previously charged off. During the same quarter in 2003, First
Defiance charged off $256,000 in loans and realized recoveries of $85,000.
Non-interest Income. Non-interest income decreased $1.2 million in the second
quarter of 2004, to $4.1 million for the quarter ended June 30, 2004 from $5.3
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 $1.7 million to $804,000 for the three months ended June 30, 2004
from $2.5 million during the 2003 second 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 six months of 2004 as interest rates
increased from their record low levels of mid-2003. The origination and
servicing of mortgage loans continues to be a core activity of First Federal
in its local market areas.
Gain on Sale of Securities. Gains realized from the sale of investment
securities was $293,000 in the second quarter of 2004. This was an increase
of $5,000 from a gain of $288,000 in the second quarter of 2003.
Service Fees. Loan and deposit fees increased $240,000 to $1.4 million for the
quarter ended June 30, 2004 from $1.1 million for the quarter ended June 30,
2003. Increases occurred primarily in loan servicing fees on sold loans, debit
card interchange fees, and checking NSF fees.
27
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 increased $256,000 to $1.2 million in the second quarter
of 2004 from $967,000 in the same period of 2003. Increases occurred
primarily in the sale of investment and annuity products.
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 $438,000 for the quarter ended June 30,
2004 from $434,000 for the same period in 2003.
Non-Interest Expense. Total non-interest expense decreased $567,000 to $7.1
million for the quarter ended June 30, 2004 from $7.7 million for the same
period in 2003. Significant individual components of the increase are as
follows:
Compensation and Benefits. Compensation and benefits increased $497,000 to
$4.5 million for the quarter ended June 30, 2004 from $4.0 million for the
same period in 2003. The increase was the result of an increase in staffing
due to the significant expansion in the Company's branch network. In addition
to the June 2003 acquisition of three banking centers, the Company opened a de
novo branch in Findlay, Ohio in December 2003 and in the Toledo suburb of
Maumee, Ohio in February 2004.
Amortization and Impairment of Mortgage Servicing Rights. Amortization of
mortgage servicing rights ("MSR's") totaled $233,000 in the 2004 second
quarter compared to $756,000 in the 2003 second 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 the recovery of $524,000 of previously recorded impairment in the
value of its MSR portfolio during the 2004 second quarter, the result of the
increase in the market value of MSRs in the face of rising interest rates
during the 2004 second quarter. There was a $366,000 adjustment to increase
the impairment reserve in the second quarter of 2003. First Defiance has a
total impairment reserve of $319,000 recorded against an asset with a book
value before reserves of $4.1 million at June 30, 2004. That portfolio
represents approximately 5,497 loans with unpaid balances of approximately
$443.9 million.
Other Non-Interest Expenses. Other non-interest expenses (including occupancy,
state franchise tax, data processing, and deposit insurance premiums)
increased to $3.0 million for the quarter ended June 30, 2004 from $2.6
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 32.18% for the
quarter ended June 30, 2004 compared to 30.20% for the same period in 2003.
The effective tax rate is lower than the Company's statutory 35% rate because
it has approximately $34.7 million invested in municipal securities, and $18.3
million of bank owned life insurance which are both exempt from federal tax.
28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
As a result of the above factors, income for the quarter ended June 30, 2004
was $3.1 million compared to income of $2.9 million for the comparable period
in 2003. On a per share basis, basic and diluted earnings per share for the
three months ended June 30, 2004 were each $0.51 and $.49, respectively,
compared to basic and diluted earnings per share of $0.48 and $0.46,
respectively, for the quarter ended June 30, 2003.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
On a consolidated basis, First Defiance had net income of $5.6 million or
$0.88 per share for the six months ended June 30, 2004 compared to $5.6
million or $0.89 per share in 2003.
Net Interest Income. Net interest income for the six months ended June 30,
2004 was $16.1 million compared to $13.3 million for the same period in 2003.
Net interest margin for the 2004 first half was 3.57% compared to 3.37% for
the same period in 2003. On a tax equivalent basis, net interest income for
the six months ended June 30, 2004 was $16.9 million compared to $14.1 million
for the same period in 2003.
Total interest income increased by $1.9 million to $25.8 million for the six
months ended June 30, 2004 from $23.9 million for the six months ended June
30, 2003. On a tax equivalent basis, total interest income increased by $1.8
million to $26.5 million for the six months ended June 30, 2004 from $24.7
million for the six months ended June 30, 2003. Interest on loans increased
$2.8 million to $22.2 million in the first half of 2004 from $19.4 million in
the first half of 2003. The increase in interest from loans was due to a
$156.4 million increase in average loan balances between the first half of
2003 and the first half 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 organic portfolio growth throughout the First
Defiance market.
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
6.40% for the six months ended June 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 $986,000 to $4.0 million for the six
months ended June 30, 2004 compared to $5.0 million for the same period in
2003. The decrease was due to the $49.3 million decline in average balances of
investments, to $164.5 million for the first half of 2004 compared to $213.8
million for the first half of 2003.
Total interest expense declined by $990,000 to $9.7 million for the first half
of 2004 compared to $10.7 million for the same period in 2003. Interest
expense on FHLB advances decreased $134,000 to $3.6 million for the first six
months of 2004 compared to the same period in 2003. This happened despite an
increase of $8.8 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 44 basis point decline in the average cost of those
borrowings from 4.81% for the first half of 2003 compared to 4.37% for the
first half of 2004. Interest expense on interest-bearing deposits decreased by
$877,000 to $6.1 million for the six months ended June 30, 2004 from $6.9
million for the six months ended June 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 2.42% for the six months ended June 30,
2003 to 1.79% for the same period in 2004. The average balances of
interest-bearing liabilities increased $116.4 million from $738.5 million in
the first half of 2003 to $854.9 million in the first half of 2004.
29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Provision for Loan Losses. The provision for loan losses was $868,000 for the
first half of 2004 compared to $688,000 for the first half of 2003. This
increase is a result of the significant loan growth that has occurred during
the first half of 2004. Net charge-offs for the 2004 first half were $176,000,
compared to $79,000 for the same period in 2003.
Non-Interest Income. Non-interest income decreased $2.6 million in the first
half of 2004, to $7.6 million for the six months ended June 30, 2004 from
$10.1 million for the same period in 2002. Individual components on
non-interest income are as follows:
Gain on Sale of Loans. Gains realized from the sale of mortgage loans
decreased $2.9 million to $1.4 million for the six months ended June 30,
2004 from $4.3 million during the first half of 2003.
Gain on Sale of Securities. Gains realized from the sale of investment
securities was $392,000 for the six months ended June 30, 2004 compared to
$919,000 in the first half of 2003.
Service Fees. Loan and deposit fees increased $429,000 to $2.6 million for
the six months ended June 30, 2004 from $2.1 million for the six months ended
June 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 $393,000 to $2.3 million in the first half of
2004 from $1.9 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 $20,000 to $385,000 in the first half of 2004 compared to $405,000
for the six months ended June 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.
Other Non-Interest Income. Other non-interest income, including dividends on
Federal Home Loan Bank stock and other miscellaneous charges, increased to
$520,000 for the six months ended June 30, 2004 from $446,000 for the same
period in 2003.
Non-Interest Expense. Total non-interest expense declined $115,000 to $14.6
million for the six months ended June 30, 2004 from $14.7 million for the same
period in 2003. Significant individual components of the increase are as
follows:
30
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
Amortization and Impairment of Mortgage Servicing Rights. Amortization of MSRs
totaled $406,000 in the first half of 2004 compared to $1.3 million in the
2003 first half, 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 positive adjustment of $287,000 from recapture of
previously recorded impairment reserves. That net adjustment is due to recent
increases in market interest rates and anticipated decreased prepayment speeds
on mortgage loans in general. There was a $606,000 charge to impairment
reserves recorded in the first half of 2003.
Compensation and Benefits. Compensation and benefits increased $1.1 million to
$8.8 million for the six months ended June 30, 2004 from $7.7 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 $5.7 million for the six months ended June
30, 2004 from $5.1 million for the six months ended June 30, 2003.
The effective federal income tax rate utilized for the six months ended June
30, 2004 was 31.5% compared to 30.0% for the six months ended June 30, 2003.
The increase in the effective tax rate is the result of tax exempt income
(primarily earnings on municipal securities and BOLI) being a smaller
percentage of total income in 2004 compared to the prior year.
As a result of the above factors, income for the six months ended June 30,
2004 was $5.6 million compared to $5.6 million for the comparable period in
2003. On a per share basis, basic and diluted earnings per share for the six
months ended June 30, 2004 were $0.92 and $0.88 respectively, compared to
basic and diluted earnings per share of $0.93 and $0.89, respectively, for the
six months ended June 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.
First Defiance generated $7.1 million of cash from operating activities during
the second three months of 2004 and $8.9 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.
31
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
At June 30, 2004, First Defiance had $69.1 million in outstanding loan
commitments and loans in process to be funded generally within the next six
months and an additional $133.4 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 $10.3 million of loans held-for-sale.
Also as of June 30, 2004, the total amount of certificates of deposit that are
scheduled to mature by June 30, 2005 is $172.6 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 June 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.
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 June 30, 2004.
Core Capital Risk-Based Capital
Adequately Well Adequately Well
Capitalized Capitalized Capitalized Capitalized
----------- ----------- ----------- -----------
Regulatory capital $ 96,450 $ 96,450 $ 105,881 $ 105,881
Minimum required regulatory capital 41,948 52,435 65,546 81,933
-------- -------- --------- ---------
Excess regulatory capital $ 54,502 $ 44,015 $ 40,335 $ 23,948
======== ======== ========= =========
Regulatory capital as a percentage of assets (1) 9.2% 9.2% 12.9% 12.9%
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% 4.9% 2.9%
-------- -------- --------- ---------
(1) Core capital is computed as a percentage of adjusted total assets of $1.05
billion. Risk-based capital is computed as a percentage of total risk-
weighted assets of $819.3 million.
32
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
SUBSEQUENT EVENT
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 June 30, 2004
data, First Defiance will have $1.278 billion in total assets, $933.3 million in
loans, $928.5 million in total deposits, and $143.5 million in shareholders'
equity. The acquisition is expected to result in approximately $17.0 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.
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 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 second
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.
33
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.
34
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
Shares Purchased as Shares that May Yet
Average Price Part of Publicly Be Purchased Under
Total Number of Paid Announced Plans or the Plans or
Period Shares Purchased Per Share Programs Programs (a)
- ------------------ -------------------- ---------------- ------------------- ----------------------
April 1, 2004 -
April 31, 2004 3,563 $ 25.72 3,563 611,274
May 1, 2004 -
May 31, 2004 47,138 $ 24.25 47,138 564,136
June 1, 2004 -
June 30, 2004 46,000 $ 24.45 46,000 518,136
Total for 2004
Second Quarter 96,701 $ 24.40 96,701 518,136
Year to Date
Total (b) 123,075 $ 25.08 123,075 518,136
(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 121,919 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.
35
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 July 21, 2004 which included a
copy of the Company's earnings release for the quarter ended June 30,
2004.
First Defiance Financial Corp. filed a report on Form 8-K with the
Securities and Exchange Commission on August 6, 2004 which included a
copy of the Press Release announcing the Agreement to acquire ComBanc,
Inc.
First Defiance Financial Corp. filed a report on Form 8-K with the
Securities and Exchange Commission on August 9, 2004 which included a
copy of the Agreement and Plan of Merger dated as of August 4, 2004 by
and among First Defiance Financial Corp., First Federal Bank of the
Midwest, ComBanc, Inc. and The Commercial Bank.
36
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: August 9, 2004 By: /s/ William J. Small
-------------- ---------------------------
William J. Small
Chairman, President and
Chief Executive Officer
Date: August 9, 2004 By: /s/ John C. Wahl
-------------- ---------------------------
John C. Wahl
Senior Vice President, Chief
Financial Officer and
Treasurer
37