0
6
A
N
N
U
A
L
R
E
P
O
R
T
06 ANNUAL
REPORT
FIRST DEFIANCE FINANCIAL CORP.
I
I
F
R
S
T
D
E
F
A
N
C
E
F
N
A
N
C
A
L
C
O
R
P.
I
I
First Defi ance Financial Corp.
601 Clinton Street
Defi ance, OH 43512
www.fdef.com
419-782-5015
First Federal Bank of the Midwest
601 Clinton Street
Defi ance, OH 43512
www.fi rst-fed.com
419-782-5015
First Insurance & Investments
419 Fifth Street, Suite 1200
Defi ance, OH 43512
www.fi rstii.com
419-784-5431
For investor relations information access www.fdef.com
FIRST DEFIANCE FINANCIAL CORP. PROFILE
First Defi ance Financial Corp., headquartered in Defi ance,
OH is the holding company for First Federal Bank of
the Midwest and First Insurance & Investments. First
Federal Bank operates 26 full service branches and
36 ATMs in twelve counties in northwest Ohio. First
Insurance & Investments is the largest property and
casualty insurance company in the Defi ance, Ohio area,
specializing in life and group health insurance as well
as fi nancial planning.
Chartered in 1935 as a mutual savings and loan
company, First Federal converted to a Mutual Holding
Company and issued its fi rst stock to the public and
employees in 1993. In September 1995, First Federal
converted to a full stock company, trading stock on the
NASDAQ under the ticker symbol FDEF. At the same
time, First Defi ance Financial Corp. was founded as
the holding company for First Federal. The bank’s
name was changed to First Federal Bank of the
Midwest in 1999, to refl ect our desire to provide more
comprehensive fi nancial products and services. In the
same year, First Insurance & Investments was added
to the growing list of fi nancial services.
Since 2003, First Defi ance has acquired three
banking offi ces, opened three de novo offi ces and
acquired ComBanc, Inc, based in Delphos, Ohio in
Allen County, and Genoa Savings and Loan, based
near Toledo in Genoa, Ohio.
TABLE OF CONTENTS
Financial Highlights
Chairman’s Letter to Shareholders
A High Performing Community Bank Strategy
Financial Information
Shareholder Information
We invite you to review the enclosed materials
highlighting the past successes and future plans of
First Defi ance Financial Corp.
Safe Harbor Statement
Statements contained in this Annual Report may not be based
on historical facts and are “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21B of the Securities Act of 1934, as
amended. Actual results could vary materially depending on
risks and uncertainties inherent in general and local banking and
insurance conditions, competitive factors specifi c to markets in
which the Company and its subsidiaries operate, future interest
rate levels, legislative and regulatory decisions or capital market
conditions. The Company assumes no responsibility to update
this information. For more details, please refer to the Company’s
SEC fi lings, including its most recent Annual Report on from
10-K and quarterly reports on Form 10-Q.
1
2
6
11
Inside Back Cover
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of First Defi ance
Financial Corp. will be held on Tuesday, April 17,
2007 at 1:00 p.m. at the offi ce of First Federal Bank,
601 Clinton Street, Defi ance, Ohio 43512.
INVESTOR INFORMATION
Shareholders, investors and analysts interested in
additional information about First Defi ance Financial
Corp. may contact John C. Wahl, Chief Financial
Offi cer, at the corporate offi ce, (419)782-5015.
FIRST DEFIANCE ON THE WEB
First Defi ance Financial Corp. is located on the
Internet at www.fdef.com
STOCK TRANSFER AGENT
Shareholders with questions concerning the transfer
of shares,
lost certifi cates, dividend payments,
dividend reinvestment, receipt of multiple dividend
checks, duplicate mailings or changes of address
should contact:
Registrar and Transfer Company
First Defi ance Financial Corp. Transfer Agent
10 Commerce Drive
Cranford, NJ 07016-3573
Telephone: 800-368-5948
SECURITIES LISTING
First Defi ance Financial Corp. common stock trades
on the National Market System of the NASDAQ Stock
Market under the symbol FDEF.
As of March 2, 2007, there were approximately
2,075 stockholders of
record and 7,155,562
shares outstanding.
PRICE RANGE
Year Ended December 31, 2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$28.88
$30.29
$28.69
$30.70
High
$29.90
$30.46
$31.44
$30.06
Low
$25.39
$25.09
$25.18
$26.87
Low
$26.00
$25.29
$26.21
$25.56
TOTAL RETURN PERFORMANCE
250
225
200
175
150
125
100
75
50
12/31/01
12/31/02
12/31/03
12/31/04
12/31/05
12/31/06
First Defi ance Financial Corp.
NASDAQ Composite
SNL NASDAQ Bank Index
SNL Midwest Thrift Index
DIVIDENDS POLICY
Cash dividends on the common stock are declared
quarterly and have been paid since First Defi ance
and
its predecessor, First Federal Savings and
Loan, went public in 1993. The company’s Board of
Directors has increased the quarterly rate annually
since 1993. The current annual dividend rate is
$1.00 per share.
DIVIDEND REINVESTMENT PLAN
Shareholders may automatically reinvest dividends in
additional First Defi ance Financial Corp. common stock
through the Dividend Reinvestment Plan, which also
provides for purchase by voluntary cash contributions.
For additional information, please contact the Registrar
and Transfer Company at 800-368-5948.
AUDITORS
Crowe Chizek and Company
330 East Jeff erson Boulevard
South Bend, Indiana 46624
GENERAL COUNSEL
Vorys, Sater, Seymour and Pease LLP
Suite 2100 Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45201
FIRST DEFIANCE FINANCIAL CORP
1
2006 FINANCIAL HIGHLIGHTS (In Thousands, Except Per Share Amounts)
Summary of operating results
Net interest income
Provision for loan losses
Non-interest income (excluding securities gains/losses)
Securities gains (losses)
Non-interest expense (excluding non-recurring items)
Net income
Acquisition-related and other signifi cant non-recurring items
Core operating earnings
2006
$49,022
1,756
19,626
(2)
43,839
15,600
-
15,600
2005 % Change
3.7%
21.8%
33.5%
NM
8.3%
30.3%
NM
9.6%
$47,282
1,442
14,703
1,222
40,466
11,970
3,476
14,229
Balance Sheet Data
Total Assets
Loans, net
Deposits
Stockholders’ equity
Allowance for loan losses
Key Ratios:
Return on average equity - core earnings
Return on average assets - core earnings
Average net interest margin
Effi ciency ratio - core earnings
Share information:
Basic earnings per share
Diluted earnings per share
Basic core earnings per share
Diluted core earnings per share
Dividends per common share
Book value per common share
Shares outstanding at end of period
$1,527,879
1,226,310
1,138,445
159,825
13,579
$1,461,082
1,164,481
1,069,501
151,216
13,673
10.03%
1.04%
3.68%
63.31%
$2.22
2.18
2.22
2.18
0.97
22.38
7,142
9.81%
1.04%
3.87%
64.63%
$1.75
1.69
2.08
2.01
0.90
21.31
7,085
4.6%
5.3%
6.4%
5.7%
-0.7%
2.2%
0.0%
-4.9%
2.0%
26.9%
29.0%
6.7%
8.5%
7.8%
5.0%
0.8%
Core earnings refl ect net income less the after-tax impact of acquisition-related and other signifi cant non-recurring transactions.
NM -- % not meaningful
TOTAL ASSETS
(in millions)
DEPOSITS
(in millions)
LOANS
(in millions)
CORE DILUTED
EARNINGS PER SHARE
1,800
1,600
1,400
1,200
1,000
800
600
400
200
1,200
1,000
800
600
400
200
1,400
1,200
1,000
800
600
400
200
02 03 04 05 06
02 03 04 05 06
02 03 04 05 06
$2.50
$2.00
$1.50
$1.00
$0.50
$ –
Discontinued
Operations
Core Net Income
per Diluted Share
TOTAL NON-INTEREST
INCOME
(excluding security
gains, in millions)
25.0
20.0
15.0
10.0
5.0
–
02 03 04 05 06
02 03 04 05 06
2 2006 ANNUAL REPORT
2006 CHAIRMAN’S LETTER
As I look back over 2006, I am extremely pleased with
the way First Defi ance Financial Corp. responded to
the unique economic conditions that developed over
the course of the year. The unprecedented interest
rate environment, which affected virtually the entire
banking industry, presented an arduous challenge and
I am happy to report that our eff orts resulted in another
successful and profi table year for our shareholders.
WILLIAM J. SMALL
CHAIRMAN, PRESIDENT & CEO
FIRST DEFIANCE FINANCIAL CORP.
3
As a result of ongoing infl ation fears, the Federal
Reserve Open Market Committee raised rates
through mid-year and continued to express
concerns about infl ation through the third quarter.
From a banking perspective, this type of rate
and monetary policy environment created new
dilemmas. Through the Fed’s 17 consecutive
interest rate increases, banks benefi ted from rising
yields on loan portfolios even as higher yields on
short term Treasury notes drove up deposit costs.
Once the Fed took a break from upward rate
adjustments, banks no longer had the ability to
off set the rising cost of funds, which continued to
climb as maturing certifi cates of deposits repriced
at higher rates. This put even more strain on
already compressed net interest margins.
FOCUS ON NON-INTEREST INCOME
As a result of this rate environment, the challenge
became fi nding ways to supplement net interest
income, the revenue lifeline for banks, with other
forms of revenue. Simply growing earning assets
was no longer the answer to growing overall
revenue. Companies that recognized this shift
early and were able to come up with new and
increased sources of non-interest income had the
advantage of off setting the impact of the falling net
interest margin with these other revenue sources.
Our team chose to address this challenge by
formulating our own High Performing Community
Bank strategy, a clear and concise business plan
that not only helps us address the current short-
term rate environment issues, but also guides
our decisions for long-term success. Using this
strategy helped us focus on new ways to build our
non-interest income in 2006:
• The single largest new contribution to non-
interest income last year was our overdraft
privilege service. Overdraft privilege is tied to
most of our retail checking account products
and protects customers from having checks
returned for non-sufficient funds. This
program, which was implemented in March
of 2006, resulted in an increase in pre-tax
income totaling $2.6 million, net of program
expenses and
related charge - offs.
We anticipate that this service will continue
to generate similar returns in the future.
its
• The Trust Department restructured
fee schedule early
in 2006 resulting
in approximately 12% more revenue for
that department.
• We completed a full service fee review
during the last half of the year and have
added some new fees to the schedule and
implemented several
that are
eff ective as of the beginning of 2007. These
changes keep us in line with fee schedules
used by banks throughout our market area.
increases
• We continue to see signifi cant growth in debit
card fee income, which increased by 25.1%
in 2006. We expect fees will continue to grow
in this area as we focus on getting more cards
in customers’ hands and increasing the
usage of those cards.
First Insurance & Investments, our insurance and
investment business unit, also grew revenue in a
very challenging premium environment. Property
and casualty premiums were fl at at best in 2006,
but thanks to new business booked and strong
quality performance related to loss control, we
were able to increase revenue within this business
unit. In February 2007, First Defi ance executed an
agreement to acquire Huber, Harger, Welt & Smith,
an insurance fi rm in the Bowling Green, Ohio area.
The addition of this new insurance territory to the
First Insurance & Investments market means we
are able to expand our reach and continue to grow
our non-interest income.
4 2006 ANNUAL REPORT
MARKET GROWTH AND PRODUCT
DEVELOPMENT—COMMUNITY BANK STYLE
As the largest independent community bank in
northwest Ohio, we believe it’s important to off er
banking services when and where customers need
them. In 2006, we divided our market into two
separate geographic market areas with their own
market presidents and retail administrators. This
change in our internal structure helps us protect
our reputation for true, local decision-making and
enables us to deliver faster, close-to-home service
to all of our customers throughout our 12-county
footprint. In April, we relocated our Napoleon
Woodlawn offi ce to the north side of Napoleon in a
high traffi c retail area, and began off ering extended
evening and weekend hours at that location and at
our Findlay East banking center, which is similarly
situated in a high traffi c retail location. In July we
opened our 26th offi ce in the Shawnee area of
Lima, giving us an excellent opportunity to grow
deposits in that developing market.
Innovative new product off erings were also a
signifi cant part of our success in 2006. Remote
Deposit Service, a product designed to attract
commercial checking accounts, was introduced
in November and has shown positive early results.
The commercial checking accounts are an integral
part of the funding plan for our loan growth and we
believe this new product will be an important tool
in helping us meet our aggressive deposit balance
growth targets in 2007. We also promoted our
CDARS (Certifi cate of Deposit Account Registry
Service) product, which allows our customers to
secure additional deposit
insurance coverage
through a pooling of their deposits with other
institutions. The CDARS program received an
additional boost in mid-year when the State of Ohio
approved it for public fund deposits.
These eff orts resulted in a year of earnings growth
for our shareholders, despite all of the obstacles
we faced. We are proud of that accomplishment,
especially since our market footprint is frequently
depicted as being part of the non-growth “rust belt”
region of the United States. I often tell people that
from an investment perspective, I feel we suff er
from “geographic discrimination.” We recognize
that northwest Ohio is not a high growth part of
the country, but we also know that there is good
economic diversity throughout our region and we
work with many solid, well-run businesses that
appreciate our banking philosophy. Our status
as the largest community bank franchise in our
market area and our reputation for putting our
customers fi rst are signifi cant advantages.
MOVING FORWARD —2007
Looking ahead, it will be imperative that we are
creative in our approach to off ering relationship
banking services that meet our customers’ needs
and produce the returns expected by our investors.
As part of our High Performing Community Bank
strategy, we are focusing on customer and product
profi tability measures to help guide our decisions.
We are working hard to reach the full potential of
our newer and larger markets such as Findlay,
Toledo and Lima. We will continue to evaluate
new market opportunities, including the possible
entry into markets across state lines, such as in
Fort Wayne, Indiana, where we already have a
solid base of loan clients. We are combining our
trust department and our investment services into
a new wealth management group that we believe
will better serve our customer base and be more
effi cient. Continuing our focus on effi ciency, we
have started construction of a new operations
center to bring together all four of our back offi ce
customer support service locations into one
centralized location. We anticipate this project will
be completed and become operational late in the
fourth quarter of 2007.
FIRST DEFIANCE FINANCIAL CORP.
5
We cannot control what happens in the overall
economic and interest rate environment. What we
can do, and will continue to do, is be prepared with
a solid business plan that gives us the direction we
need to face the economic forecast, as well as the
fl exibility to adapt to changes as they develop. We
have an outstanding team in place that understands
our High Performing Community Bank strategy and
what is needed to eff ectively implement it. I believe
we were successful at meeting the challenges in
2006 and we are well prepared and well positioned
for 2007 and beyond.
Thank you for your confi dence and investment in
First Defi ance Financial Corp.
Sincerely,
William J. Small
Chairman, President, and CEO
“ Our status as the largest community bank franchise
in our market area and our reputation for putting our
customers fi rst are signifi cant advantages.”
6 2006 ANNUAL REPORT
A HIGH PERFORMING COMMUNITY BANK STRATEGY
At First Federal Bank, we believe by employing the
“best and brightest” and following a clear, concise retail
and commercial business plan that builds on our core
values, we are on the path to becoming an even higher
performing community bank. In 2006, we presented
to all 400+ employees of our organization a strategic
plan that introduced our distinct defi nition of a High
Performing Community Bank and the steps we will take
to reach that pinnacle. We developed goals for the year
that were aligned with that vision, including effi ciency
and process improvement opportunities, enhancement
of our sales culture, and deposit growth strategies. With
those targets in mind, we set out to make 2006 another
rewarding year for the bank, for our shareholders, and
for our customers.
FIRST DEFIANCE FINANCIAL CORP.
7
ACHIEVING DEPOSIT GROWTH GOALS
As part of First Federal Bank’s goal of improving
the deposit mix while meeting the specifi c
fi nancial needs of our customers, we concentrated
on advantageous new relationship accounts
in 2006,
including Free PLUS and Premium
Checking Accounts for retail customers. These
accounts reward customers for multiple banking
relationships with First Federal, boost customer
loyalty and provide additional opportunities for
us to build a stronger demand deposit base. The
new products were promoted through corporate-
wide quarterly campaigns that helped take our
deposit balances to over $1.1 billion in 2006.
And because we realize that the success of new
products depends on how well our staff and
customers know and understand them, all of
our products and services are backed by newly-
developed comprehensive product and sales
training programs.
On the commercial deposit side, we rolled out
a revolutionary product that has the potential to
fundamentally alter a business customer’s banking
experience —Remote Deposit Service (RDS). RDS
allows a business to scan and send retail checks
directly to First Federal Bank without having to
physically make a trip to the bank. Six weeks after
the introduction of RDS, commercial cash deposits
related to RDS had already grown to $2 million.
RDS is another shining example of First Federal
Bank’s unique ability to off er the resources and
expertise of a larger bank, with the advantage of
a personalized approach typically found only in
smaller banks.
MAXIMIZING MARKET GROWTH POTENTIAL
First Federal Bank has expanded into new markets
in recent years, through both acquisitions and
organic growth initiatives. These new markets off er
exciting potential and we intend to capitalize on the
growing momentum there. In Lima, for example, we
opened a new offi ce in the Shawnee area in July of
2006. In less than six months, deposits grew to over
$5 million in that suburban location.
Representatives from First Federal Bank and the Lima Area Chamber
of Commerce celebrate the ribbon cutting of First Federal Bank’s Lima
Shawnee offi ce.
In Napoleon, we ushered in a new era of convenience
as we opened a larger, more customer-friendly
offi ce in a busy retail area of the community, and
began off ering extended weekend and evening
banking hours there and in our Findlay market,
much to the delight of our customers. In the
suburban Toledo market, we are viewed by our
customers as a welcomed alternative to the larger
regional banks, with faster turn-around times and
more personal customer service. We will continue
to tell the First Federal Bank story in our newest
locations and capture increased deposit market
share along the way.
Mark Ferris, AVP, Commercial Loans (left), and Ken Wenner, VP of
Commercial Deposit Sales assist Phillip Maag of Ayersville Telephone
Company with Remote Deposit Service.
Greg Wannemacher (left), President of Wannemacher Enterprises,
Inc. discusses commercial services with Ron Elwer, Commercial
Lender in Delphos.
8
2006 ANNUAL REPORT
PROCESS IMPROVEMENT
RESULTS IN HAPPY CUSTOMERS
Continual process improvement is critical to
achieving High Performing Bank status. Two of the
areas we scrutinized in 2006 were our mortgage
loan and new account opening processes. Through
the diligent eff orts of multi-disciplinary teams, we
dramatically reduced the paperwork required to
open a new account for a customer, and further
reduced the turn-around time for our mortgage
loans. We also implemented a customer satisfaction
survey, which identifi ed strengths and weaknesses
and allowed us to pinpoint training needs. These
changes translate to happier customers, happier
employees and a higher performing bank.
Laura Michalak, AVP, Retail Lender in Perrysburg (left) , Arlene Gerig,
Re/Max Preferred, Shannon Doughty, homeowner and Judy Gorun,
Re/Max Preferred gather on a chilly day to welcome Shannon into her
new home.
COMMUNITY BANK = COMMUNITY SUPPORT
Our employees, our customers, and our communities
know that First Federal Bank takes seriously its
obligation to “give back.” In 2006, we donated
over $350,000 to improve the lives of the citizens
in our markets, to promote community pride and
to educate students on fi nancial
issues. Our
employees have a reputation for rolling up their
sleeves, volunteering their time and helping to raise
funds for groups such as the American Cancer
Society, participating in capital campaigns for new
additions to youth centers and serving as members
of the board of local non-profi t organizations. It’s all
part of the enjoyment of working at First Federal,
and part of the satisfaction of being a genuine
community bank.
INSURANCE AND INVESTMENT SOLUTIONS
Insurance &
Investments, we
Through First
have built a collection of insurance products
that provide tailored solutions for individuals,
families and businesses in our market. Led by an
experienced team of professionals, the company
off ers a full range of individual and group coverage
options, property and casualty insurance, risk
management and employee benefi t programs.
Our ability to meet the varied needs of our
customers has helped us grow to be the largest
property and casualty insurance agency in the
Defi ance, Ohio area.
A robust line of investment products is also
critical to our success. With an eye toward the
thousands of Baby Boomers in our region nearing
retirement, we will be developing a fresh approach
to our fi nancial planning services by packaging all
of our trust, investment and asset management
options under one combined wealth management
program in 2007.
FIRST DEFIANCE FINANCIAL CORP.
9
Board of Directors: (L to R) Douglas A. Burgei, Samuel S. Strausbaugh,
John U. Fauster, Dwain I. Metzger, Stephen L. Boomer, William J. Small,
James L. Rohrs, Gerald W. Monnin, John L. Bookmyer, Peter A. Diehl,
Thomas A. Voigt
Executive Vice Presidents: (L to R): Jeff ery D. Vereecke, Gregory R.
Allen, Rachel L. Ulrich, John C. Wahl, Dennis E. Rose
FIRST DEFIANCE FINANCIAL CORP.
BOARD OF DIRECTORS
FIRST DEFIANCE FINANCIAL CORP.
CORPORATE OFFICERS
Dwain I. Metzger – 5,6
Farmer, Elida, Ohio
Age 65, Director Since 2005
Gerald W. Monnin – 4,5,6
Retired Business Owner
Defi ance, Ohio
Age 68, Director Since 1997
James L. Rohrs – 1,3,8
President and Chief
Operating Offi cer,
First Federal Bank,
Executive Vice President,
First Defi ance
Financial Corp.
Age 59, Joined Company
1999, Director Since 2002
Samuel S. Strausbaugh
– 2,3,8
Co-President,
Chief Financial Offi cer,
Defi ance Metal Products
Defi ance, Ohio
Age 43, Director Since 2006
Thomas A. Voigt – 4,5,6
Vice President, General
Manager, Bryan Publishing
Company, Bryan, Ohio
Age 64, Director Since 1995
William J. Small – 1,3,7,8
Chairman, President,
and Chief Executive Offi cer,
First Defi ance
Financial Corp.
Age 56, Joined Company in
1994, Director Since 1998
Stephen L. Boomer –
1,2,4,6,7,8
Vice Chairman,
First Defi ance
Financial Corp.
President, Arps Dairy,
Defi ance, Ohio
Age 56, Director Since 1994
John L. Bookmyer – 2,4
Executive Vice President,
Blanchard Valley
Health System,
Findlay, Ohio
Age 42, Director Since 2005
Douglas A. Burgei, D.V.M.
– 3,5,6
Veterinarian, Napoleon, Ohio
Age 52, Director Since 1995
Peter A. Diehl – 2,4,5
Retired Business Owner,
Defi ance, Ohio
Age 56, Director Since 1998
John U. Fauster, III, D.D.S.
– 3,5,6
Retired Dentist,
Defi ance, Ohio
Age 69, Director Since 1975
William J. Small
Chairman, President and
Chief Executive Offi cer
Joined Company in 1994
John C. Wahl
Executive Vice President,
Chief Financial Offi cer and
Corporate Treasurer
Age 46, Joined Company
in 1994
James L. Rohrs
President,
Chief Operating Offi cer
Joined Company in 1999
John W. Boesling
Senior Vice President,
Corporate Secretary
Age 59, Joined Company
in 1971
Rachel L. Ulrich
Executive Vice President
Age 41, Joined Company
in 1996
Richard J. Mitsdarfer
Senior Vice President,
Chief Risk Offi cer
Age 58, Joined Company
in 2006
KEY FOR BOARD OF DIRECTORS:
1. Permanent Member of Executive Committee
2. Audit Committee
3. Investment Committee
4. Compensation Committee
5. Long Range Planning Committee
6. Corporate Governance Committee
7. Trust Committee
8. First Insurance & Investments Board of Directors
10
2006 ANNUAL REPORT
FIRST FEDERAL BANK OF THE MIDWEST
William J. Small
Chairman and Chief
Executive Offi cer
James L. Rohrs
President and COO
Gregory R. Allen
Executive Vice President,
Southern Market Area President
Dennis E. Rose, Jr.
Executive Vice President,
Operations
Rachel L. Ulrich
Executive Vice President,
Human Resources
Jeff ery D. Vereecke
Executive Vice President,
Retail Banking
John C. Wahl
Executive Vice President,
Finance
Chief Financial Offi cer
John W. Boesling
Senior Vice President, Secretary
Patricia A. Cooper
Senior Vice President, BSA,
Security
Lisa R. Christy
Senior Vice President, Trust
Timothy K. Harris
Senior Vice President,
Commercial Lending
Nancy K. Kistler
Senior Vice President,
Loan Operations
David J. Kondas
Senior Vice President,
Wealth Management
Kathleen A. Miller
Senior Vice President,
Information Technology
Richard J. Mitsdarfer
Senior Vice President,
Risk Management
Eric A. Morman
Senior Vice President,
Commercial Lending
Michael D. Mulford
Senior Vice President,
Credit Administration
Patrick S. Rothgery
Senior Vice President,
Residential Lending
Mary Beth K. Weisenburger
Senior Vice President,
Marketing
Paul N. Windisch
Senior Vice President,
Business Development
FIRST INSURANCE & INVESTMENTS, INC.
Steven P. Grosenbacher
President
Kenneth G. Keller
Executive Vice President,
Group Health & Life
Timothy S. Whetstone
Executive Vice President,
Secretary
Lawrence H. Woods
Executive Vice President,
Property & Casualty
COMMUNITY ADVISORY BOARDS
DEFIANCE, OHIO
FOSTORIA, OHIO
Jean Hubbard
The Hubbard Company
Bryan Keller
Keller Trucking
Brad Mangas
B.E. Mangas Construction
Mike Koester
Koester Corporation
Rick Weaver
Poggemeyer Design
DELPHOS, OHIO
Richard Thompson
Thompson Seed Farm
Robert J. Schulte, Jr.
HR Services
Timothy DeHaven
DeHaven Garden Center
FINDLAY, OHIO
James Koehler
Country Club Acres, Inc.
Paul Kramer
Kramer Enterprises, Inc.
M. Michael Roberts
dmh Toyota-Lift
Dr. Alan Tong
Cascade Women’s Health
Steve Dandurand
Corporate One Benefi t
Agency, Inc.
Peggy Frankart
Fostoria Community Hospital
Frank Kinn
Business/Financial Consultant
Lynn Radabaugh
Maple Grove Quarry, Inc.
Tom Reineke
Reineke Ford
HICKSVILLE, OHIO
Larry Haver
Mayor of Hicksville
NAPOLEON, OHIO
Greg Beck
Beck Construction
WAUSEON, OHIO
Kerry Ackerman
J and B Feed Company
Jeff ery Spangler
Holgate Metal Fab, Inc.
Bill Fortier
Aquatek Water Conditioning
Kay Wesche
Henry County Development
Services
Bradley Westhoven
Midwest Wood Trim, Inc.
Susan Witt
Engineer, Gerken Paving
OTTAWA, OHIO
Leon Mann
Trailite Sales, Inc.
Steven McElrath
BMW Services
WILLIAMS COUNTY, OHIO
Stacey Bock
Midwest Community Health
Associates
Kevin Ellerbrock
Kevin Ellerbrock Construction
Walter Bumb
D.D.S.
Michael Headley
H & W Automotive Parts, Inc.
Kenneth Konst
Farmer
Robert Ramus
Robert Ramus D.D.S.
Mike Ruhe
Ret. Supt., O-G Schools
Dean Walther
Optometrist
PAULDING, OHIO
Joseph Burkard
Paulding County Prosecutor
William Shugars
Paulding School Administration
LeRoy Feather
Community Hospitals of
Williams County
Renee Isaac
Educator
Martin Sostoi
Attorney
James (Chip) Wood
Bryan Ford Lincoln Mercury
FIRST DEFIANCE FINANCIAL CORP.
11
FINANCIAL INFORMATION
TABLE OF CONTENTS
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Management’s Discussion and Analysis
of Financial Conditions and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Management’s Report on Internal Control
Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Reports of Independent Registered Public Accounting Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12 2006 ANNUAL REPORT
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated fi nancial data at or for the periods indicated. In 2002, results of
operations associated with First Defi ance’s former Leader Mortgage Subsidiary, including certain inter-company fi nancing
transactions, are refl ected as discontinued operations. Continuing operations refl ect the results of First Federal, First
Insurance and First Defi ance holding company expenses for all periods presented. This information should be read in
conjunction with the Consolidated Financial Statements and notes thereto, and Management’s Discussion and Analysis and
Results of Operations and Financial Condition. The Consolidated Balance Sheets as of December 31, 2006 and 2005 and
the Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004, are included elsewhere
in this Annual Report.
Financial Condition:
Total assets
Investment securities
Loans held-to maturity, net
Allowance for loan losses
Nonperforming assets (1)
Deposits and borrowers’ escrow balances
FHLB advances
Stockholders’ equity
Share Information:
Basic earnings per share, continuing ops.
Basic earnings per share
Diluted earnings per share, continuing ops.
Diluted earnings per share
Book value per common share
Tangible book value per common share
Cash Dividends per common share
Weighted average diluted shares outstanding
Shares outstanding end of period
Operations:
Interest income from continuing operations
Interest expense from continuing operations
Net interest income from continuing operations
Provision for loan losses
Non-interest income
Non-interest expense
Income before tax
Federal income tax
Income from continuing operations
Discontinued operations, net of tax
Cumulative eff ect of change in method of
accounting for goodwill
Net income
As of and For the Year Ended December 31,
2006
2005
2004
2003
2002
(Dollars in Thousands, Except Per Share Amounts)
$1,527,879
112,123
1,226,310
13,579
9,902
1,139,112
162,228
159,825
$1,461,082
114,854
1,164,481
13,673
5,356
1,070,106
180,960
151,216
$1,126,667
139,258
878,912
9,956
1,990
797,979
178,213
126,874
$1,040,599
171,035
735,255
8,844
2,949
729,227
164,522
124,269
$2.22
2.22
2.18
2.18
22.38
16.99
0.97
7,168
7,142
$93,065
44,043
49,022
1,756
19,624
43,839
23,051
7,451
15,600
–
–
15,600
$1.75
1.75
1.69
1.69
21.34
15.81
0.90
7,096
7,085
$76,174
28,892
47,282
1,442
15,925
43,942
17,823
5,853
11,970
–
–
11,970
$1.77
1.77
1.69
1.69
20.20
17.19
0.82
6,371
6,280
$54,731
20,381
34,350
1,548
13,996
31,200
15,598
4,802
10,796
–
–
10,796
$2.00
2.00
1.91
1.91
19.64
16.39
0.65
6,319
6,328
$50,629
20,855
29,774
1,719
16,843
27,126
17,772
5,690
12,082
–
–
12,082
$884,245
213,525
561,041
7,496
2,731
599,889
149,096
120,110
$1.01
2.37
0.97
2.28
18.73
18.17
0.54
6,609
6,412
$46,908
22,044
24,864
1,451
10,401
24,408
9,406
2,986
6,420
8,853
(194)
15,079
FIRST DEFIANCE FINANCIAL CORP.
13
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread (2)
Net interest margin (2)
Ratio of operating expense from continuing
operations to average total assets
Effi ciency ratio – continuing operations
Capital Ratios:
Equity to total assets at end of period
Tangible equity to tangible assets
at end of period
Average equity to average assets
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period (1)
Allowance for loan losses to total
loans receivable
Net charge-off s to average loans
As of and For the Year Ended December 31,
2006
2005
2004
2003
2002
(Dollars in Thousands, Except Per Share Amounts)
1.04%
10.03%
3.37%
3.68%
2.93%
63.31%
0.88%
8.26%
3.63%
3.87%
3.22%
70.18%
1.01%
8.57%
3.37%
3.60%
2.98%
65.91%
1.24%
9.97%
3.13%
3.42%
2.91%
60.31%
0.77%
5.39%
2.92%
3.38%
3.16%
69.40%
10.46%
10.35%
11.26%
11.94%
13.58%
8.15%
10.40%
7.88%
10.62%
9.74%
11.76%
10.17%
12.43%
13.23%
14.36%
0.63%
1.10%
0.15%
0.37%
1.16%
0.07%
0.18%
1.13%
0.05%
0.28%
1.19%
0.06%
0.31%
1.32%
0.10%
(1) Nonperforming assets consist of non-accrual loans that are contractually past due 90 days or more; loans that are deemed impaired under the
criteria of FASB Statement No. 114; and real estate, mobile homes and other assets acquired by foreclosure or deed-in-lieu thereof.
(2) Interest rate spread represents the diff erence between the weighted average yield on interest-earnings assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earnings assets. Interest
income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%.
14 2006 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of fi nancial condition and results of operations contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could diff er materially from those
projected in such forward-looking statements.
The following section presents information to assess the fi nancial condition and results of operations of First Defi ance
Financial Corp. This section should be read in conjunction with the consolidated fi nancial statements and the supplemental
fi nancial data contained elsewhere in this Annual Report.
OVERVIEW
First Defi ance is a unitary thrift holding company which conducts business through its subsidiaries, First Federal Bank
of the Midwest and First Insurance & Investments.
First Federal is a federally chartered savings bank that provides fi nancial services to communities based in northwest Ohio
where it operates 26 full service banking centers in 12 northwest Ohio counties.
On January 21, 2005, First Defi ance acquired ComBanc, Inc., headquartered in Delphos, Ohio in a transaction valued at
$38.3 million including acquisition costs. ComBanc’s subsidiary, the Commercial Bank, operated four banking offi ces in
Delphos, Lima and Elida, Ohio. On April 8, 2005, First Defi ance acquired The Genoa Savings and Loan Company (Genoa),
in an $11.2 million transaction. Genoa operated offi ces in Genoa, Oregon, Perrysburg and Maumee Ohio. The acquired
Maumee offi ce was merged with First Federal’s existing Maumee offi ce. First Defi ance acquired $117.5 million of loans
and $163.7 million of deposits in the ComBanc acquisition and $66.9 million of loans and $76.8 million of deposits in the
Genoa transaction. For more details on the ComBanc and Genoa acquisitions, see Note 3 – Acquisitions in the Notes to
the Financial Statements.
First Federal provides a broad range of fi nancial services including checking accounts, savings accounts, certifi cates of
deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust services through its
extensive branch network.
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 offi ce in Defi ance,
Ohio while investment and annuity products are sold through registered investment representatives located at four of First
Federal’s banking center locations.
FINANCIAL CONDITION
Assets at December 31, 2006 totaled $1.53 billion compared to $1.46 billion at December 31, 2005, an increase of $66.8
million or 4.6%. The majority of First Defi ance’s asset growth was in loans, which increased by $61.8 million, or 5.3% to
$1.23 billion at December 31, 2006 after allowance for loan losses, from $1.16 billion at December 31, 2005. The increase
in assets was primarily funded through growth in deposits, which increased by $68.9 million or 6.4%, to $1.14 billion at
December 31, 2006 from $1.07 billion at December 31, 2005.
SECURITIES
The securities portfolio declined $2.7 million to $112.1 million at December 31, 2006. The activity in the portfolio in
2006 included $17.6 million of purchases, $17.0 million of amortization and maturities, $3.1 million of sales and a net
decrease of $112,000 in market value. The decline in market value in 2006 was attributable primarily to rising interest
rates and that decline is believed to be temporary. Management utilizes its securities portfolio for liquidity purposes. The
investment portfolio has declined from a high of $213.5 million at the end of 2002 as maturing securities have been
used to fund loan growth. Management does not believe the securities portfolio will decline further from the level it was
at on December 31, 2006.
FIRST DEFIANCE FINANCIAL CORP.
15
LOANS
Gross Loans receivable increased by $61.7 million or 5.2% to $1.24 billion at December 31, 2006 from $1.18 billion at
December 31, 2005. The most signifi cant growth occurred in commercial loans, which increased by $61.6 million between
December 31, 2005 and December 31, 2006, and in commercial real estate loans, which increased by $27.9 million. First
Defi ance also experienced $9.8 million of growth in its home equity and improvement loans. One-to-four family residential
loans and construction loans declined by $26.1 million between the end of 2005 and the end of 2006 and consumer
fi nance loans declined by $11.5 million.
The majority of First Defi ance’s lending activity that is retained in the loan portfolio is to small and mid-sized businesses in
the form of commercial and commercial real estate loans. The combined commercial and commercial real estate portfolios
totaled $812.8 million and $799.6 million at December 31, 2006 and 2005 respectively and accounted for approximately
65.5% and 61.3% of First Defi ance’s loan portfolio at the end of those respective periods. First Defi ance believes it has been
able to establish itself as a leader in its market area in the commercial and commercial lending area by hiring experienced
lenders and providing a high level of customer service to its commercial lending clients.
The one-to-four family residential portfolio, including residential construction loans, totaled $261.7 million at December
31, 2006, down from $287.9 million at the end of 2005. At the end of 2006 those loans comprised 21.1% of the total loan
portfolio, down from 24.4% at December 31, 2005. The decline in the mortgage portfolio refl ects the Company’s strategy of
selling the majority of its fi xed rate mortgage production in the secondary market, most of it with servicing retained. During
2006 a signifi cant number of loans in the portfolio were refi nanced with loans that were sold. The level of residential loan
production did not change signifi cantly between 2005 and 2006.
Home equity and home improvement loans grew to $122.8 million at December 31, 2006, or 9.9% of the portfolio, up from
$113.0 million at the end of 2005, or 9.6% of total loans. The growth in this portion of the portfolio is the result of customers
utilizing existing lines of credit as well as focused marketing eff orts of this product.
Consumer fi nance loans were just $43.8 million at December 31, 2006, down from $55.3 million at the end of 2005. These
loans comprised just 3.5% and 4.7% of the total portfolio at December 31, 2006 and 2005 respectively. A portion of the
decline in balances is the result of First Defi ance selling its $2.1 million credit card portfolio late in the 2006 second quarter.
The balance of the decline refl ects the Company’s strategy of not pricing aggressively in this highly competitive segment of
the market.
16 2006 ANNUAL REPORT
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management’s assessment of the estimated probable credit losses in the loan
portfolio at each balance sheet date. Lending activities contain risks of loan losses. Management analyzes the adequacy
of the allowance for loan losses regularly through reviews of the performance of the loan portfolio. Consideration is given to
economic conditions, changes in interest rates and the eff ect of such changes on collateral values and borrower’s ability
to pay, changes in the composition of the loan portfolio, and trends in past due and non-performing loan balances. The
allowance for loan losses is a material estimate that is susceptible to signifi cant fl uctuation and is established through a
provision for loan losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive
in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of all
commercial loan and commercial real estate loan relationships that exceed $250,000 of aggregate exposure. Management
utilizes the results of this outside loan review to assess the eff ectiveness of its internal loan grading system as well as to
assist in the assessment of the overall adequacy of the allowance for loan losses associated with this type of loan.
At December 31, 2006, the allowance for loan losses was $13.6 million compared to $13.7 million at December 31, 2005.
The reduction of the allowance in 2006 is the result of a higher than normal level of loan charge-off s as management
attempted to resolve credit issues that were previously identifi ed in the portfolio and reserved for. Those balances
represented 1.10% and 1.16% of outstanding loans as of December 31, 2006 and December 31, 2005 respectively.
In determining the appropriate level for the allowance for loan losses, First Defi ance evaluates all loans in its portfolio.
While allowances are frequently required for loans classifi ed as substandard, it is possible for a relationship to be graded as
substandard based on the fi nancial performance of the credit for which no allowance is required because of other factors
such as value of collateral or creditworthiness of guarantors. At December 31, 2006, a total of $10.4 million of loans are
classifi ed as substandard for which some level of reserve ranging between 20% and 50% of the outstanding balance is
required. A total of $25.7 million in additional credits were classifi ed as substandard at December 31, 2006 for which no
reserve is required. First Defi ance also has classifi ed $379,000 as doubtful at December 31, 2006. First Defi ance also
utilizes a general reserve percentage for loans not otherwise classifi ed which ranges from 0.062% for mortgage loans to
1.50% for consumer loans. General reserves for commercial and commercial real estate loans, the largest category in First
Defi ance’s portfolio, are established at 1.10% of the outstanding balance. The reserve percentage utilized for these loans
is based on both historical losses in the Company’s portfolio, national statistics on loss percentages and empirical evidence
regarding the strength of the economy in First Defi ance’s general market area.
First Defi ance’s ratio of allowance for loan losses to non-performing loans dropped from 276.1% at the end of 2005 to
186.4% at December 31, 2006. Through its due diligence prior to making the 2005 acquisitions, management was aware
of the existence of non-performing loans in both portfolios. At December 31, 2006, First Defi ance had total non-performing
assets of $9.7 million, compared to $5.4 million at December 31, 2005. Non-performing assets include loans that are 90
days past due and all real estate owned and other foreclosed assets. Non-performing assets at December 31, 2006 and
2005 by category were as follows:
Non-performing loans:
Single-family residential
Non-residential and multi-family residential real estate
Commercial
Consumer fi nance
Total non-performing loans
Real estate owned and repossessed assets
Total non-performing assets
December 31,
2006
2005
(In Thousands)
$2,029
5,206
-
48
7,283
2,392
$9,675
$2,648
1,917
287
100
4,952
404
$5,356
FIRST DEFIANCE FINANCIAL CORP.
17
The 2006 total non-performing assets included $3.8 million related to either the ComBanc or Genoa acquisitions. The
balance of non-performing assets which were either originated by First Defi ance or acquired in the 2003 RFC branch
acquisition were $5.9 million compared to $2.1 million of non-performing assets at December 31, 2005. While the level of
classifi ed loans has increased, year over year, management believes that the current allowance for loan losses is appropriate
and that the provision for loan losses recorded in 2006 is consistent with both charge-off experience and the strength of
the overall credits in the portfolio.
Non-performing loans in the single-family residential, non-residential and multi-family residential real estate and commercial
loan categories represent .81%, .90% and 0% of the total loans in those categories respectively at December 31, 2006
compared to 0.94%, 0.35% and 0.17% respectively for the same categories at December 31, 2005.
LOANS ACQUIRED WITH IMPAIRMENT
Certain loans acquired in the ComBanc and Genoa acquisitions had evidence that the credit quality of the loan had
deteriorated since its origination and in management’s assessment at the acquisition date it was probable that First Defi ance
would be unable to collect all contractually required payments due. In accordance with American Institute of Certifi ed Public
Accountants Statement of Position 03-3 – Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP
03-3), these loans were recorded based on management’s estimate of the fair value of the loans. At the acquisition date of
January 21, 2005, loans with a contractual receivable of $3.4 million were acquired from Combanc which were deemed
impaired. Those loans were recorded at a net realizable value of $2.1 million. On April 8, 2005, loans with contractual
receivable totals of $1.5 million were acquired from Genoa which were deemed impaired. Those loans were recorded at a
net realizable value of $735,000. As of December 31, 2006, the total contractual receivable for those loans was $4.1 million
and the recorded value was $2.4 million.
HIGH LOAN-TO-VALUE MORTGAGE LOANS
The majority of First Defi ance’s mortgage loans are collateralized by one-to-four-family residential real estate, have loan-to-
value ratios of 80% or less, and are made to borrowers in good credit standing. First Federal usually requires residential
mortgage loan borrowers whose loan-to-value is greater than 80% to purchase private mortgage insurance (PMI). First
Federal does originate and retain a limited number of residential mortgage loans with loan-to-value ratios that exceed 80%
where PMI is not required if the borrower possesses other demonstrable strengths. The loan-to-value ratios on these loans
are generally limited to 85% and exceptions must be approved by First Federal’s senior loan committee. Management
monitors the balance of one-to-four family residential loans, including home equity loans and committed lines of credit,
that exceed certain loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences
and one-to-four family construction loans, 75% for developed land and 65% for raw land). Total loans that exceed those
standards at December 31, 2006 totaled $33.1 million. These loans are generally paying as agreed.
First Defi ance does not make interest-only fi rst-mortgage residential loans, nor does it have residential mortgage loan
products, or other consumer products that allow negative amortization.
GOODWILL AND INTANGIBLE ASSETS
Goodwill remained fl at at $35.0 million at December 31, 2006 after the ComBanc and Genoa acquisitions added $12.4
million and $4.3 million respectively to Goodwill in 2005. No impairment of goodwill was recorded in 2006. Core deposit
intangibles and other intangible assets decreased $720,000 during 2006 to $3.4 million from $4.1 million at the end of
2005, due to the amortization.
18 2006 ANNUAL REPORT
DEPOSITS
Total deposits at December 31, 2006 were $1.14 billion compared to $1.07 billion at December 31, 2005, an increase of
$68.9 million or 6.4%. Non-interest bearing checking grew by $2.8 million, money market and interest bearing checking
accounts grew by $29.4 million, certifi cates of deposit increased by $44.9 million while savings declined by $8.3 million.
Management periodically utilizes brokered certifi cates of deposit to supplement its funding needs. At December 31, 2006
the balance of brokered CDs totaled $17.6 million, down from $37.0 million at December 31, 2005. During that same
period, retail deposits greater than $100,000 also declined, to $140.4 million from $161.3 million.
BORROWINGS
FHLB advances totaled $162.2 million at December 31, 2006 compared to $180.1 million at December 31, 2005. The
balance at the end of 2006 includes $90.0 million of convertible advances with rates ranging from 4.71% to 5.84%. These
advances are all callable by the FHLB, at which point they would convert to a three-month LIBOR advance if not paid off .
Those advances have fi nal maturity dates ranging from 2010 to 2013. In addition, First Defi ance has advances totaling $27
million that are callable by the FHLB only if the three-month LIBOR rate exceeds a strike rate ranging from 7.5% to 8.0%.
The rate on those advances ranges from 3.48% to 5.14%. First Defi ance also has $12.1 million outstanding at the FHLB
under a series of fi xed-rate loans and $33.1 million borrowed on an overnight basis at December 31, 2006.
First Defi ance also has $30.4 million of securities that have been sold at December 31, 2006 with agreements to repurchase,
an increase of this type of funding of $4.7 million over December 31, 2005.
In October 2005, the Company issued $20.6 million of Subordinated Debentures. These debentures were issued to
an unconsolidated affi liated trust that purchased them with the proceeds from a $20 million issue of trust preferred
securities to an outside party. The proceeds of the Subordinated Debentures were used for general corporate purposes.
The Subordinated Debentures have a rate equal to three-month LIBOR plus 1.38%, or 6.74% at December 31, 2006.
CAPITAL RESOURCES
Total shareholders’ equity increased $8.6 million to $159.8 million at December 31, 2006. This increase is primarily the
result of the Company’s $15.6 million of net income. The increase was off set by $6.8 million of dividends ($0.97 per share
declared) and a $576,000 net of tax adjustment to initially apply FAS No. 158, Employers Accounting for Defi ned Benefi t
Pension Plans and other Post Retirement Plans, which is included in other comprehensive income. In 2003 the Company’s
board of directors authorized the repurchase of 640,000 shares. A total of 106,020 shares were repurchased in 2006
under that program at an average cost of $26.06, thus reducing shareholders equity by $2.8 million. A total of 310,758
shares remain to be purchased under the authorization. Also during 2006, a total of 203,595 stock options were exercised
by employees, resulting in a $2.3 million increase in shareholders equity. In exercising those options, certain employees
paid their option exercise price by returning shares to the Company, which reduced equity by approximately $1.1 million.
A total of 41,381 shares were returned to the Company in conjunction with option exercises at an average price of $26.38
per share.
FIRST DEFIANCE FINANCIAL CORP.
19
RESULTS OF OPERATIONS
SUMMARY
First Defi ance reported net income of $15.6 million for the year ended December 31, 2006 compared to $12.0 million and
$10.8 million for the years ended December 31, 2005 and 2004 respectively. On a diluted per share basis, First Defi ance
earned $2.18 in 2006, $1.69 in 2005 and $1.69 in 2004.
The 2005 net income amount includes $3.5 million of acquisition related costs that were incurred as part of the ComBanc
and Genoa acquisitions. These costs included such items as the expense to terminate data processing contracts, severance
agreements with employees who were not retained, and other costs resulting from the acquisition or related transition
eff orts. After tax, these costs amounted to $2.3 million, or $.32 per share. The 2004 results included a $1.9 million pretax
charge to refl ect fi nal settlement of certain contingent liabilities related to the 2002 sale of the Company’s former Leader
Mortgage subsidiary to US Bancorp. After tax, that amount was $1.25 million or $0.20 per diluted share. Excluding these
non-operating items, core earnings were $15.6 million, $14.2 million and $12.0 million for the years ended December 31,
2006, 2005 and 2004 respectively. On a diluted per share basis, core earnings amounted to $2.18, $2.01 and $1.89 for
those three periods. A reconciliation of GAAP earnings to core earnings is as follows:
GAAP Net Income
One-time acquisition related charges
Settlement of contingent liability
Tax eff ect
Core Operating Earnings
Basic earnings per share:
GAAP
Core Operating Earnings
Diluted earnings per share:
GAAP
Core Operating Earnings
Year Ended December 31,
2006
2005
2004
(In Thousands, Except Per Share Amounts)
$15,600
−
−
−
$15,600
$2.22
$2.22
$2.18
$2.18
$11,970
3,476
−
(1,217)
$14,229
$1.75
$2.08
$1.69
$2.01
$10,796
−
1,927
(674)
$12,049
$1.77
$2.07
$1.69
$1.89
20 2006 ANNUAL REPORT
NET INTEREST INCOME
First Defi ance’s net interest income is determined by its interest rate spread (i.e. the diff erence between the yields on its
interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning
assets and interest-bearing liabilities.
Net interest income was $49.0 million for the year ended December 31, 2006 compared to $47.3 million and $34.4 million
for the years ended December 31, 2005 and 2004 respectively. The tax-equivalent net interest margin was 3.68%, 3.87%
and 3.62% for the years ended December 31, 2006, 2005 and 2004 respectively. The decrease in margin between 2006
and 2005 is due to a declining interest rate spread, which decreased to 3.37% for the year ended December 31, 2006
compared to 3.63% for 2005. The decline in spread between 2005 and 2006 occurred due to interest-earning asset
yields increasing by just 75 basis points (to 6.95% in 2006 from 6.20% in 2005) while the cost of interest bearing liabilities
between the two periods increased by 101 basis points (to 3.58% in 2006 from 2.57% in 2005). The margin compression
resulting from narrowing spreads was slightly off set by an $8.3 million increase in non-interest bearing deposits and an
$18.9 million increase in average equity. Management anticipates the margin compression will continue into 2007 as they
expect the cost of funding will continue to rise as certifi cates of deposit continue to reprice at higher rates, while asset yields
have appeared to have peaked since the Federal Reserve Open Market Committee stopped raising rates in mid 2006.
The increase in margin between 2004 and 2005 was due to an improved interest rate spread, which increased to 3.63%
for the year ended December 31, 2005 compared to 3.39% for 2004. The improved spread resulted from a 51 basis point
improvement in the yield on interest-earning assets (to 6.20% in 2005 from 5.71% in 2004) while the cost of interest bearing
liabilities between the two periods increased by just 26 basis points (to 2.58% in 2005 from 2.32% in 2004). Margin also
improved in 2005 as a result of the improved mix between loans and investment securities, the $30.5 million increase in the
average balance of non-interest bearing deposits and a $19.1 million increase in average equity for the year.
Total interest income increased by $16.9 million, or 22.1% to $93.1 million for the year ended December 31, 2006 from
$76.2 million for the year ended December 31, 2005. The increase in interest income was due to an increase in the
average balance in loans receivable, to $1.21 billion for the twelve months of 2006 compared to $1.09 billion for 2005. In
addition to the increase in loan balances, the average yield on loans increased to 7.13% for 2006 compared to 6.40% in
2005, a 73 basis point improvement. Interest income from loans increased to $86.2 million for 2006 compared to $69.7
million in 2005 which represented growth of 23.7%.
During the same period the average balance of investment securities dropped to $116.7 million for 2006 from $121.5 million
for the year ended December 31, 2005. Interest income from the investment portfolio increased $372,000 to $5.6 million
in 2006 from $5.3 million in 2005. The increase is due to the 42 basis point increase in the yield as lower yielding securities
matured in 2006. The tax equivalent yield on the investment portfolio was 5.30% in 2006 compared to 4.88% in 2005.
Interest expense increased by $15.2 million in 2006 compared to 2005, to $44.0 million from $28.9 million. This increase
was due to a $106.8 million increase in the average balance of interest bearing liabilities in 2006 compared to 2005 as
well as a 101 basis point increase in the average cost of those liabilities. The balance of interest-bearing deposits increased
by $66.1 million between December 31, 2005 and December 31, 2006. Of that growth, $44.9 million was in certifi cates
of deposit, which have a higher cost than transaction accounts. Interest expense related to these interest-bearing deposits
was $33.3 million in 2006 and $20.6 million in 2005. Expenses on FHLB advances and other interest bearing funding
sources were $8.9 million in 2006 and $7.6 million in 2005. First Defi ance issued $20.6 million of junior subordinated
debentures in the fourth quarter of 2005 in conjunction with a trust preferred off ering by an unconsolidated affi liated
subsidiary. Interest expense recognized by the Company related to those subordinated debentures was $1.3 million in
2006 compared to just $201,000 in 2005.
Total interest income increased by $21.4 million, or 39.2% to $76.2 million for the year ended December 31, 2005 from
$54.7 million for the year ended December 31, 2004. The increase in income was due to an increase in the average
balance in loans receivable, to $1.09 billion for the twelve months of 2005 compared to $806.9 million for 2004. During
the same period the average balance of investment securities dropped to $121.5 million for 2005 from $152.3 million for
the year ended December 31, 2004. In addition to the increase in loan balances, the average yield on loans increased to
6.40% for 2005 compared to 5.87% for 2004, a 53 basis point improvement.
FIRST DEFIANCE FINANCIAL CORP.
21
Interest expense increased by $8.5 million in 2005 compared to 2004, to $28.9 million from $20.4 million. This increase
was due to a $232.9 million increase in the average balance of interest bearing deposits in 2005 compared to 2004 as well
as a 36 basis point increase in the cost of those deposits. Total interest bearing deposits acquired in the acquisitions was
$217.8 million. For the year, the balance of interest-bearing deposits increased by $230.8 between December 31, 2004
and December 31, 2005. Of that growth, $182.4 million was in certifi cates of deposit. Interest expense on interest-bearing
deposits was $20.6 million in 2005 and $12.9 million in 2004. Expenses on FHLB advances and other interest bearing
funding sources were not signifi cantly diff erent between 2004 and 2005. First Defi ance issued $20.6 million of junior
subordinated debentures in conjunction with a trust preferred off ering by an unconsolidated affi liated subsidiary. Interest
expense recognized by the Company related to those subordinated debentures was $201,000 in 2005.
The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31,
2006, 2005 and 2004:
Year Ended December 31,
2006
2005
2004
Average
Balance
Interest
(1)
Yield/
Rate (2)
Average
Balance
Interest
(1)
Yield/
Rate (2)
Average
Balance
Interest
(1)
Yield/
Rate (2)
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable
Securities
Interest-earning deposits
Dividends on FHLB stock
$1,209,498
116,718
3,483
17,926
Total interest-earning assets
Non-interest-earning assets
1,347,625
148,136
Total Assets
$1,495,761
86,237 7.13%
6,217 5.30%
165 4.74%
1,042 5.81%
93,661 6.95%
$1,089,942
121,510
10,410
16,352
1,238,214
126,583
$1,364,797
69,732
5,873
364
829
76,798
6.40%
4.88%
3.50%
5.07%
6.20%
47,360
7,499
43
612
55,514
5.87%
4.92%
1.76%
4.12%
5.69%
$806,880
152,316
2,447
14,839
976,482
94,321
$1,070,803
$1,006,468
181,869
20,398
20,619
$33,273 3.31%
8,878 4.88%
584 2.86%
1,308 6.34%
$ 932,036
167,427
19,639
3,441
$20,615
7,602
474
201
2.21%
4.54%
2.41%
5.84%
$699,087
169,463
10,608
−
$12,950
7,317
114
−
1.85%
4.32%
1.07%
−
1,229,354
44,043 3.58%
1,122,543
28,892
2.57%
879,158
20,381
2.32%
95,044
−
86,741
−
56,241
−
44,043 3.33%
1,324,398
15,815
1,340,213
155,548
28,892
2.39%
1,209,284
10,530
1,219,814
144,983
$1,364,797
20,381
2.18%
935,399
9,484
935,399
125,920
$1,070,803
$49,618 3.37%
$47,906
3.68%
109.6%
3.63%
3.87%
110.3%
$35,133
3.37%
3.60%
111.1%
stockholders’ equity
$1,495,761
Net interest income;
interest rate spread (3)
Net interest margin (4)
Average interest-earning
assets to average interest-
bearing liabilities
(1) Interest on certain tax exempt loans (amounting to $48,000, $47,000 and $29,000 in 2006, 2005 and 2004 respectively) and tax-exempt
securities ($1.1 million, $1.2 million and $1.5 million in 2006, 2005 and 2004) is not taxable for Federal income tax purposes. The average
balance of such loans was $1.0 million, $1.0 million and $722,000 in 2006, 2005 and 2004 while the average balance of such securities
was $25.2 million, $25.1 million and $32.8 million in 2006, 2005 and 2004 respectively. 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%.
(2) At December 31, 2006, the yields earned and rates paid were as follows: loans receivable, 6.84%; securities, 5.09%; FHLB stock, 6.05%; total
interest-earning assets, 6.69%; deposits, 3.24%; FHLB advances, 5.05%; other borrowings, 2.98%; total interest-bearing liabilities, 3.46%;
and interest rate spread, 3.23%.
(3) Interest rate spread is the diff erence in the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-earning assets.
Interest-Bearing Liabilities:
Interest-bearing deposits
FHLB advances
Other borrowings
Subordinated debentures
Total interest-bearing
liabilities
Non-interest bearing
demand deposits
Total including non-
interest- bearing
demand deposits
Other non-interest liabilities
Total Liabilities
Stockholders’ equity
Total liabilities and
22 2006 ANNUAL REPORT
The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets
and liabilities have aff ected First Defi ance’s interest income and expense during the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) change in rate (change in rate multiplied by prior year volume),
and (iii) total change in rate and volume. The combined eff ect of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
Year Ended December 31,
Increase
(decrease)
due to
rate
2006 vs. 2005
Increase
(decrease)
due to
volume
Increase
(decrease)
due to
rate
2005 vs. 2004
Increase
(decrease)
due to
volume
Total
increase
(decrease)
(In Thousands)
$8,428
561
227
129
$9,345
$10,898
594
91
19
$11,602
$8,077
(217)
(426)
84
$7,518
$1,760
682
19
1,088
$3,549
$16,505
344
(199)
213
$16,863
$12,658
1,276
110
1,107
$15,151
$1,712
$4,567
(135)
75
150
$4,657
$2,821
372
214
−
$3,407
$17,805
(1,491)
246
67
$16,627
$4,844
(87)
146
201
$5,104
Total
increase
(decrease)
$22,372
(1,626)
321
217
$21,284
$7,665
285
360
201
$8,511
$12,773
Interest-Earning Assets
Loans
Securities
Interest-earning deposits
FHLB stock
Total interest-earning assets
Interest-Bearing Liabilities
Deposits
FHLB advances
Term notes
Subordinated Debentures
Total interest-bearing liabilities
Increase in net interest income
Provision for Loan Losses – First Defi ance’s provision for loan losses was $1.8 million for the year ended December 31,
2006 compared to $1.4 million and $1.5 million for the years ended December 31, 2005 and 2004 respectively.
Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate
by management to absorb probable losses in the loan portfolio. Factors considered by management include identifi able
risk in the portfolios; historical experience; the volume and type of lending conducted by First Defi ance; the amount of non-
performing assets, including loans which meet the FASB Statement No. 114 defi nition of impaired; the amount of assets
graded by management as substandard, doubtful, or loss; general economic conditions, particularly as they relate to First
Defi ance’s market areas; and other factors related to the collectability of First Defi ance’s loan portfolio. See also Allowance
for Loan Losses in Management’s Discussion and Analysis and Note 7 to the audited fi nancial statements.
Non-interest Income – Non-interest income increased by $3.7 million or 23.2% in 2006 to $19.6 million from $15.9
million for the year ended December 31, 2005. In 2004, $14.0 million of non-interest income was recognized. Most of
the increase in 2006 was in service fees and other charges, which increased to $9.3 million for the year ended December
31, 2006 from $5.6 million for 2005, an increase of $3.7 million or 66.0%. The implementation of an overdraft privilege
product in 2006 was the primary reason for the increase in service fees. Service fee income was $4.2 million in 2004.
Non-interest income also includes investment securities gains or losses. In 2006, First Defi ance realized a $2,000 loss
on securities compared to $1.2 million and $1.4 million of gains in 2005 and 2004 respectively. In 2005 and 2004,
management took advantage of favorable prices in the bond portfolio resulting from lower long-term interest rates. Generally
in those years, as investments were sold out of the investment portfolio, the related proceeds were used to fund loan growth
or they were reinvested in shorter-term securities in order to position the Company for an eventual overall rate increase.
There was only a minor amount of sales activity in the investment portfolio in 2006.
FIRST DEFIANCE FINANCIAL CORP.
23
Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing mortgage loans for others, and
an off set for amortization of mortgage servicing rights, and adjustments for impairment in the value of mortgage servicing
rights. Mortgage banking income totaled $3.4 million, $3.3 million and $2.8 million in 2006, 2005 and 2004 respectively.
The modest growth in 2006 over 2005 was primarily attributable to a $154,000 increase in mortgage servicing fees resulting
from a $63 million increase in the portfolio of mortgage loans serviced for others and gains from sale of mortgage loans,
which increased $133,000 in 2006 from 2005. Those increases were off set by a reduction in the recovery of previously
recorded mortgage servicing rights impairment reserves, which resulted in $417,000 of income in 2005 compared with
just $2,000 in 2006. The $574,000 of growth in 2005 compared with 2004 was primarily attributable to that recapture
of $417,000 of previously recorded mortgage servicing rights impairment and a $295,000 increase in mortgage servicing
fees, the result of a $139 million increase in the portfolio of mortgage loans serviced. Gains from the sale of mortgage
loans totaled $2.3 million for both 2005 and 2004. Mortgage servicing rights impairment adjustments in 2004 resulted in
impairment expense of $1,000. The balance of the impairment allowance stands at just $80,000 at the end of 2006. See
Note 8 to the fi nancial statements.
Non-interest Expense – Total non-interest expense for 2006 was $43.8 million compared to $43.9 million for the year
ended December 31, 2005 and $31.2 million for the year ended December 31, 2004. The 2005 total includes $3.5 million
of acquisition related charges while the 2004 amount includes a charge of $1.9 million related to the fi nal settlement of a
contingent liability related to First Defi ance’s 2002 sale of its Leader Mortgage subsidiary. Non-interest expense, excluding
the acquisition related charges in 2005 and the settlement of the contingency in 2004, was $40.4 million and $29.3 million
respectively for those two years.
Compensation and benefi ts increased by $706,000 in 2006 compared to 2005, to $24.2 million in 2006 from $23.4
million in 2005. A portion of the increase in compensation was due to having a full year of compensation and benefi ts costs
associated with the Genoa acquisition compared to just under nine months in 2005 and $268,000 related to the expensing
of stock options in accordance with FAS No. 123R, Share-Based Payment which is a new item in 2006. The balance of
the increase in compensation and benefi ts resulted from general staffi ng increases and cost of living pay increases. Also
in 2006, occupancy costs increased to $5.1 million from $4.7 million in 2005, and data processing increased to $3.7
million from $3.2 million. The majority of these increases were a result of the acquisitions and other growth initiatives. First
Defi ance’s other non-interest expense category also increased to $8.9 million in 2006 from $7.1 million in 2005. Increases
in that category resulted from higher levels of advertising (up $235,000), printing and offi ce supplies (up $134,000),
postage (up $136,000) and bad check charge-off s and other related deposit account losses (up $94,000). Overdraft
protection fees were $372,000 in 2006, which was a new expense related to the overdraft privilege product.
The increase in non-interest expense in 2005 from 2004 was primarily due to a $6.0 million increase in compensation and
benefi ts expense, mostly due to staffi ng increases from the acquisitions, the addition of staff in central operations to service
the larger branch network and increases to the cost of First Defi ance’s health insurance. Occupancy costs, data processing
costs, state franchise tax and amortization of intangibles including core deposit intangibles and customer relationship
intangibles increased $1.4 million, $800,000, $400,000 and $600,000, respectively. The majority of these increases were
a result of the growth due to the acquisitions.
The 2005 non-interest expense included $3.5 million of acquisition related costs. Of these costs, $1.05 million related to
the ComBanc acquisition and $2.45 related to the Genoa acquisition. For ComBanc, the most signifi cant costs included
$471,000 in severance and other termination payments to employees not retained and $222,000 related to the cancellation
of certain contracts. For Genoa, the most signifi cant costs included $1.3 million for the termination of a long-term data
processing contract and other long-term contracts and lease arrangements and $364,000 for severance and other payments
to employees not retained.
Income Taxes – Income taxes amounted to $7.5 million in 2006 compared to $5.9 million in 2005 and $4.8 million in 2004.
The eff ective tax rates for those years were 32.3%, 32.8%, and 30.8% respectively. The tax rate is lower than the statutory
35% tax rate for the Company because of investments in tax-exempt securities and in Bank Owned Life Insurance (BOLI).
The earnings on such investments are not subject to federal income tax. The increase in the eff ective tax rate in 2005
compared to 2004 is primarily the result of lower levels of interest income from tax-exempt securities in 2005 compared to
2004 and a reduction in earnings from BOLI. See note 17 to the fi nancial statements.
24 2006 ANNUAL REPORT
CONCENTRATIONS OF CREDIT RISK
Financial institutions such as First Defi ance generate income primarily through lending and investing activities. The risk of
loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to
perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.
Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single
occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of
risks is one manner a fi nancial institution can reduce potential losses due to credit risk. Examples of asset concentrations
would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization
of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure
to concentrations of credit risk at acceptable levels. First Defi ance’s loan portfolio is concentrated geographically in its
northwest Ohio market area. There are no industry concentrations that exceed 10% of the Company’s loan portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary source of liquidity is its core deposit base, raised through First Federal’s branch network, along
with unused wholesale sources of funding and its capital base. These funds, along with investment securities, provide the
ability to meet the needs of depositors while funding new loan demand and existing commitments.
Cash generated from operating activities was $22.7 million, $16.6 million and $16.3 million in 2006, 2005 and 2004
respectively. The adjustments to reconcile net income to cash provided by or used in operations during the periods
presented consist primarily of proceeds from the sale of loans (less the origination of loans held for sale), the provision
for loan losses, depreciation expense, the origination, amortization and impairment of mortgage servicing rights, ESOP
expense related to the release of ESOP shares in accordance with AICPA SOP 93-6 and increases and decreases in other
assets and liabilities.
In a typical year, the primary investing activity of First Defi ance is lending, which is funded with cash provided from operating
and fi nancing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment
securities. In 2005, First Defi ance completed the acquisitions of ComBanc and Genoa. In the case of the ComBanc acquisition,
which was purchased with a combination of stock and cash, First Defi ance realized an increase in cash of $52.7 million after
netting the cash that was acquired from ComBanc. ComBanc’s cash level was high because they liquidated their investment
portfolio in advance of the acquisition closing date. In the case of the Genoa acquisition, the acquisition resulted in a net
reduction in cash of $612,000 after netting Genoa’s cash balances against the purchase price.
In considering the more typical investing activities, during 2006, $16.6 million and $3.1 million was generated from the
maturity or sale of available-for-sale investment securities, respectively, while $68.7 million was used to fund loan growth
and $17.6 million was used to purchase available-for-sale investment securities. During 2005, $27.9 million and $24.2
million was generated from the maturity or sale of available-for-sale investment securities, respectively, while $104.1 million
was used fund loan growth and $30.3 million was used to purchase available-for-sale investment securities. During 2004,
$42.8 million and $20.7 million was generated from the maturity of investment securities and sale of available-for-sale
investment securities, respectively, while $144.7 million was used to fund loan growth and $34.3 million was used to
purchase available-for-sale investment securities.
FIRST DEFIANCE FINANCIAL CORP.
25
Principal fi nancing activities include the gathering of deposits, the utilization of FHLB advances, and the sale of securities
under agreements to repurchase such securities and borrowings from other banks. In addition, First Defi ance also
purchased common stock for its treasury. For 2006, total deposits increased by $69.3 million, including $88.3 million of
growth in retail deposit balances. The amount of deposits acquired from CD brokers or other out of market sources declined
in 2006 by $19.4 million. For 2005, total deposits (excluding deposits acquired in the acquisitions) increased by $31.9
million, including $44.4 million of growth in retail deposit balances. The amount of deposits acquired from CD brokers or
other out of market sources declined in 2005 by $12.5 million. For the year ended December 31, 2004, deposits increased
by $69.1 million, including $58.6 million of growth in retail deposits generated by the First Federal Bank branch network,
and $10.5 million in net growth in deposits acquired from CD brokers or other out of market sources. Also in 2006, Short-
term advances from the FHLB increased by $4.6 million and there were no borrowings on lines of credit from other banks.
Also securities sold under repurchase arrangements increased by $4.7 million. In 2005, First Defi ance issued $20.6 million
of subordinated debentures to an unconsolidated affi liated trust and that trust issued $20 million of trust preferred stock to
outside investors. The result of obtaining the trust preferred funding was that borrowings on lines of credit from other banks
of $3 million were paid off . Short-term advances from the FHLB did increase by $2 million in 2005. Also securities sold
under repurchase arrangements increased by $7.3 million. In 2004, First Defi ance borrowed $15.5 million in short-term
advances from the FHLB and $3.0 million on from other fi nancial institutions under short-term lines of credit. The Company
repurchased $3.9 million, $1.5 million, $4.7 million of common stock for treasury in 2006, 2005 and 2004 respectively.
For additional information about cash fl ows from First Defi ance’s operating, investing and fi nancing activities, see the
Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
At December 31, 2006, First Defi ance had the following commitments to fund deposit, advance and borrowing obligations:
Contractual Obligations
Savings, checking and demand accounts
Certifi cates of deposit
FHLB overnight advances
FHLB fi xed advances including interest (1)
Subordinated debentures
Securities sold under repurchase agreements
Lease obligations
Total
$486,822
651,623
33,100
159,589
20,619
30,424
4,258
Maturity Dates by Period at December 31, 2006
Less than
1 year
$486,822
571,963
33,100
7,331
−
30,424
320
1-3 years
4-5 years
(In Thousands)
$ −
75,756
−
22,658
−
−
457
$ −
3,447
−
73,591
−
−
362
After 5
years
$ −
457
−
56,009
20,619
−
3,119
Total contractual cash obligations
$1,386,435
$1,129,960
$98,871
$ 77,400
$80,204
(1) Includes principal payments of $129,092 and interest payments of $30,497
26 2006 ANNUAL REPORT
At December 31, 2006, First Defi ance had the following commitments to fund loan or line of credit obligations:
Commitments
Residential real estate loans in process
Commercial loans in process
One-to-four family mortgage loan originations
Multifamily originations
Other real estate originations
Nonmortgage loan originations
Consumer lines of credit
Commercial lines of credit
Total loan commitments
Standby letters of credit
Total Commitments
Amount of Commitment Expiration by Period
Total Amounts
Committed
Less than
1 year
1-3 years
4-5 years
$43,910
8,518
5,329
3,693
25,725
10,235
93,536
69,403
260,349
$43,910
8,518
2,405
3,693
2,868
3,124
3,443
68,573
136,534
16,869
13,005
(In Thousands)
$ −
−
615
−
4,603
−
20,036
58
25,312
3,864
$ −
−
133
−
1,358
4,743
15,222
−
21,456
−
After 5
years
$ −
−
2,176
−
16,896
2,368
54,835
772
77,047
−
$277,218
$149,539
$29,176
$21,456
$77,047
In addition to the above commitments, at December 31, 2006 First Defi ance had commitments to sell $7.2 million of loans
held for sale to Freddie Mac.
To meet its obligations, management can adjust the rate of savings certifi cates to retain deposits in changing interest rate
environments; it can sell or securitize mortgage and non-mortgage loans; and it can turn to other sources of fi nancing
including FHLB advances, the Federal Reserve Bank, bank lines and brokered certifi cates of deposit. At December 31,
2006 First Defi ance had $50.8 million capacity under its agreements with the FHLB and other banks.
First Defi ance is subject to various capital requirements of the Offi ce of Thrift Supervision. At December 31, 2006, First
Federal had capital ratios that exceeded the standard to be considered “well capitalized”. For additional information about
First Federal’s capital requirements, see Note 16 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
First Defi ance has established various accounting policies which govern the application of accounting principles generally
accepted in the United States in the preparation of its fi nancial statements. The signifi cant accounting policies of First
Defi ance are described in the footnotes to the consolidated fi nancial statements. Certain accounting policies involve
signifi cant 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. The judgments
and assumptions used by management are based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management,
actual results could diff er from these judgments and estimates, which could have a material impact on the carrying value
of assets and liabilities and the results of operations of First Defi ance.
Allowance for Loan Losses: First Defi ance believes the allowance for loan losses is a critical accounting policy that requires
the most signifi cant judgments and estimates used in preparation of its consolidated fi nancial statements. In determining
the appropriate estimate for the allowance for loan losses, management considers a number of factors relative to both
specifi c credits in the loan portfolio and macro-economic factors relative to the economy of the United States as a whole
and the economy of the northwest Ohio region in which the Company does business.
FIRST DEFIANCE FINANCIAL CORP.
27
Factors relative to specifi c credits that are considered include a customer’s payment history, a customer’s recent fi nancial
performance, an assessment of the value of collateral held, knowledge of the customer’s character, the fi nancial strength
and commitment of any guarantors, the existence of any customer or industry concentrations, changes in a customer’s
competitive environment, and any other issues that may impact a customer’s ability to meet his obligations.
Economic factors that are considered include levels of unemployment and infl ation, specifi c plant or business closings in the
Company’s market area, the impact of strikes or other work stoppages, the impact of weather or environmental conditions,
especially relative to agricultural borrowers and other matters that may have an impact on the economy as a whole.
In addition to the identifi cation of specifi c customers who may be potential credit problems, management considers its
historical losses, the results of independent loan reviews, an assessment of the adherence to underwriting standards, the
loss experience being reported by other fi nancial institutions operating in the Company’s market area, and other factors in
providing for loan losses that have not been specifi cally classifi ed. While management believes its allowance for loan losses
is conservatively determined based on the above factors, it does not believe the allowances to be excessive or unnecessary.
Refer to the section titled “Allowance for Loan Losses” and Note 2, Statement of Accounting Policies for a further description
of the Company’s estimation process and methodology related to the allowance for loan losses.
Valuation of Mortgage Servicing Rights: First Defi ance believes the valuation of mortgage servicing rights is a critical
accounting policy that requires signifi cant estimates in preparation of its consolidated fi nancial statements. First Defi ance
recognizes as separate assets the value of mortgage servicing rights, which are acquired through loan origination activities.
First Defi ance does not purchase any mortgage servicing rights.
Key assumptions made by management relative to the valuation of mortgage servicing rights include the stratifi cation policy
used in valuing servicing, assumptions relative to future prepayments of mortgages, the potential value of any escrow deposits
maintained or ancillary income received as a result of the servicing activity and discount rates used to value the present
value of a future cash fl ow stream. In assessing the value of the mortgage servicing rights portfolio, management utilizes a
third party that specializes in valuing servicing portfolios. That third party reviews key assumptions with management prior to
completing the valuation. Prepayment speeds are determined based on projected median prepayment speeds for 15 and 30
year mortgage backed securities. Those speeds are then adjusted up or down based on the size of the loan. The discount
rate used in this analysis is the pretax yield generally required by purchasers of bulk servicing rights as of the valuation date.
The value of mortgage servicing rights is especially vulnerable in a falling interest rate environment. Refer also to the section
entitled Mortgage Servicing Rights and Note 2, Statement of Accounting Policies, and Note 8, Mortgage Banking, for a further
description of First Defi ance’s valuation process, methodology and assumptions along with sensitivity analyses.
28 2006 ANNUAL REPORT
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
A signifi cant portion of the Company’s revenues and net income is derived from net interest income and, accordingly, the
Company strives to manage its interest-earning assets and interest-bearing liabilities to generate an appropriate contribution
from net interest income. Asset and liability management seeks to control the volatility of the Company’s performance due to
changes in interest rates. The Company attempts to achieve an appropriate relationship between rate sensitive assets and rate
sensitive liabilities. First Defi ance does not presently use off balance sheet derivatives to enhance its risk management.
First Defi ance monitors interest rate risk on a monthly basis through simulation analysis that measures the impact changes
in interest rates can have on net interest income. The simulation technique analyzes the eff ect of a presumed 100 basis point
shift in interest rates (which is consistent with management’s estimate of the range of potential interest rate fl uctuations)
and takes into account prepayment speeds on amortizing fi nancial instruments, loan and deposit volumes and rates,
non-maturity deposit assumptions and capital requirements. The results of the simulation indicate that in an environment
where interest rates rise 100 basis points over a 12 month period, First Defi ance’s net interest income would increase by
just 1.19% over the base case scenario. Were interest rates to fall by 100 basis points during the same 12-month period,
the simulation indicates that net interest income would decrease by only 0.30%. It should be noted that other areas of First
Defi ance’s income statement, such as gains from sales of mortgage loans and amortization of mortgage servicing rights are
also impacted by fl uctuations in interest rates but are not considered in the simulation of net interest income.
The majority of First Defi ance’s lending activities are in the non-residential real estate and commercial loan areas. While
such loans carry higher credit risk than residential mortgage lending, they tend to be more rate sensitive than residential
mortgage loans. The balance of First Defi ance’s non-residential and multi-family real estate loan portfolio was $579.9
million, which is split between $105.1 million of fi xed-rate loans and $474.8 million of adjustable-rate loans at December
31, 2006. The commercial loan portfolio increased to $232.9 million, which is split between $82.4 million of fi xed-rate
loans and $150.5 million of adjustable-rate loans at December 31, 2006. Certain of the loans classifi ed as adjustable have
fi xed rates for an initial term that may be as long as fi ve years. The maturities on fi xed-rate loans are generally less than 7
years. First Defi ance also has signifi cant balances of home equity and improvement loans ($122.8 million at December
31, 2006) which fl uctuate with changes in the prime lending rate; and consumer loans ($43.8 million at December 31,
2006) which tend to have a shorter duration than residential mortgage loans. Also, to limit its interest rate risk, (as well as
to provide liquidity) First Federal sells a majority of its fi xed-rate mortgage originations into the secondary market.
In addition to the simulation analysis, First Federal also prepares an “economic value of equity” (“EVE”) analysis. This
analysis calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from
–300 basis points to +300 basis points. The results of this analysis are refl ected in the following table.
Change in Rates
$ Amount
$ Change
% Change
Ratio
Change
December 31, 2006
Economic Value of Equity
Economic Value of Equity as %
of Present Value of Assets
+ 300 bp
+ 200 bp
+ 100 bp
0 bp
-100 bp
-200 bp
-300 bp
(Dollars in Thousands)
172,982
183,727
195,048
205,286
213,078
218,372
223,151
(32,304)
(21,559)
(10,238)
–
7,792
13,086
17,865
(15.74%)
(10.50%)
(4.99%)
–
3.80%
6.37%
8.70%
12.04%
12.57%
13.11%
13.56%
13.86%
14.01%
14.13%
(152) bp
(99) bp
(45) bp
–
30 bp
45 bp
57 bp
FIRST DEFIANCE FINANCIAL CORP.
29
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of December 31, 2006, First
Federal would experience a 10.50% decrease in its economic value of equity. If rates would fall by 200 basis points its
economic value of equity would increase by 6.37%. During periods of rising rates, the value of monetary assets declines.
Conversely, during periods of falling rates, the value of monetary assets increases. It should be noted that the amount of
change in value of specifi c assets and liabilities due to changes in rates is not the same in a rising rate environment as in
a falling rate environment. Based on the EVE analysis, the change in the economic value of equity in both rising and falling
rate environments is relatively low because both its assets and liabilities have relatively short durations and the durations are
fairly closely matched. The average duration of its assets at December 31, 2006 was 1.66 years while the average duration
of its liabilities was 1.18 years.
In evaluating First Federal’s exposure to interest rate risk, certain shortcomings inherent in each of the methods of analysis
presented must be considered. For example, although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in diff erent degrees to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fl uctuate in advance of changes in market rates while interest rates on other types of fi nancial
instruments may lag behind current changes in market rates. Furthermore, in the event of changes in rates, prepayments
and early withdrawal levels could diff er signifi cantly from the assumptions in calculating the table and the results therefore
may diff er from those presented.
FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as amended. It is intended that such forward-looking statements are
covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995.
This statement is included for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations are generally identifi able by use of the words believe,
expect, intend, anticipate, estimate, project, may or similar expressions. The presentation and discussion of the provision
and allowance for loan losses, statements concerning future profi tability or future growth and projections about interest rate
simulations included in the Asset/Liability Management section are examples of inherently forward-looking statements in that
they involve judgements and statements of belief as to the outcome of future events. The ability of management to predict
results or the actual eff ect of future strategies is inherently uncertain. Factors which could have a material adverse aff ect on
operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, both
nationally and within the region that First Defi ance operates, legislative or regulatory changes, monetary and fi scal policy of
the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or make-up of the
loan and investment portfolios, demand for loan and deposit products, competition, demand for fi nancial products in the First
Defi ance market areas and accounting principles, policies and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information
concerning First Defi ance and its business, including additional factors that could materially aff ect its fi nancial results and
fi nancial condition are included in its fi lings with the Securities and Exchange Commission.
30 2006 ANNUAL REPORT
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of First Defi ance Financial Corp. is responsible for establishing and maintaining adequate internal
control over fi nancial reporting. First Defi ance’s internal control over fi nancial reporting is a process designed under the
supervision of First Defi ance’s chief executive offi cer and chief fi nancial offi cer to provide reasonable assurance regarding
the reliability of fi nancial reporting and the preparation of First Defi ance’s fi nancial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles.
First Defi ance’s management assessed the eff ectiveness of its internal control over fi nancial reporting as of December 31,
2006 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal
Control–Integrated Framework.” Based on the assessment, management determined that, as of December 31, 2006, First
Defi ance’s internal control over fi nancial reporting is eff ective based on those criteria. Management’s assessment of the
eff ectiveness of First Defi ance’s internal control over fi nancial reporting as of December 31, 2006 has been audited by Crowe
Chizek and Company LLC, an independent registered public accounting fi rm, as stated in their report which follows under the
heading Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.
WILLIAM J. SMALL
Chairman, President and
Chief Executive Offi cer
JOHN C. WAHL
Executive Vice President and
Chief Financial Offi cer
FIRST DEFIANCE FINANCIAL CORP.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders
First Defi ance Financial Corp.
Defi ance, Ohio
We have audited management’s assertion, included in the accompanying Management’s Report on Internal Control over
Financial Reporting, that First Defi ance Financial Corp. (the Company) maintained eff ective internal control over fi nancial
reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining eff ective internal control over fi nancial reporting and for its assessment of the eff ectiveness of internal
control over fi nancial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on
the eff ectiveness of the Company’s internal control over fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
eff ective internal control over fi nancial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over fi nancial reporting, evaluating management’s assessment, testing and evaluating the
design and operating eff ectiveness of internal control, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over fi nancial reporting is a process designed to provide reasonable assurance regarding
the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of fi nancial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material eff ect on the fi nancial statements.
Because of its inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of eff ectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that First Defi ance Financial Corp. maintained eff ective internal control over
fi nancial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also in our opinion, First Defi ance Financial Corp. maintained, in all material respects, eff ective internal control
over fi nancial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated statement of fi nancial condition of First Defi ance Financial Corp. as of December 31, 2006, and
the related consolidated statements of income, stockholders’ equity and cash fl ows for the year then ended and our report
dated March 12, 2007 expressed an unqualifi ed opinion on those consolidated fi nancial statements.
Cleveland, Ohio
March 12, 2007
32 2006 ANNUAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
First Defi ance Financial Corp.
Defi ance, Ohio
We have audited the accompanying consolidated statements of fi nancial condition of First Defi ance Financial Corp. as of
December 31, 2006 and 2005 and the related consolidated statements of income, stockholders’ equity and cash fl ows for
the years then ended. These consolidated fi nancial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated fi nancial statements based on our audits. The consolidated
fi nancial statements of First Defi ance Financial Corp. for the year ended December 31, 2004 were audited by other
auditors whose report dated March 8, 2005 expressed an unqualifi ed opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated fi nancial statements. An audit also includes assessing the
accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material respects, the fi nancial
position of First Defi ance Financial Corp. as of December 31, 2006 and 2005, and the results of its operations and its
cash fl ows for the years then ended in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the eff ectiveness of the Company’s internal control over fi nancial reporting as of December 31, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 12, 2007 expressed an unqualifi ed opinion thereon.
As disclosed in Note 2, during 2006 the Company adopted new accounting guidance for post-retirement benefi ts.
Cleveland, Ohio
March 12, 2007
FIRST DEFIANCE FINANCIAL CORP.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors
First Defi ance Financial Corp.
We have audited the accompanying consolidated statements of income, changes in stockholders’ equity, and cash fl ows
of First Defiance Financial Corp. and subsidiaries for the year ended December 31, 2004. These fi nancial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fi nancial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used
and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the fi nancial statements referred to above present fairly, in all material respects, the consolidated results of
operations and cash fl ows of First Defiance Financial Corp. and subsidiaries for the year ended December 31, 2004,
in conformity with U.S. generally accepted accounting principles.
Cleveland, Ohio
March 8, 2005
34 2006 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions
Interest-bearing deposits
Securities available-for-sale, carried at fair value
Securities held-to-maturity, carried at amortized cost (fair value $1,492
and $1,845 at December 31, 2006 and 2005 respectively)
Loans receivable, net of allowance of $13,579 and
$13,673 at December 31, 2006 and 2005, respectively
Loans held for sale
Mortgage servicing rights
Accrued interest receivable
Federal Home Loan Bank stock
Bank owned life insurance
Premises and equipment
Real estate and other assets held for sale
Goodwill
Core deposit and other intangibles
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing
Interest-bearing
Total
Advances from the Federal Home Loan Bank
Short term borrowings and other interest-bearing liabilities
Subordinated debentures
Advance payments by borrowers
Deferred taxes
Other liabilities
Total liabilities
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; 11,703 and 11,701 shares issued
and 7,142 and 7,085 shares outstanding, respectively
Additional paid-in capital
Stock acquired by ESOP
Accumulated other comprehensive income (loss),
net of tax of $(362) and $(13), respectively
Retained earnings
Treasury stock, at cost, 4,561 and 4,616 shares respectively
Total stockholders’ equity
December 31,
2006
2005
(In Thousands)
$47,668
2,355
50,023
110,682
1,441
1,226,310
3,426
5,529
6,984
18,586
25,326
34,899
2,392
35,090
3,397
3,794
$44,066
5,190
49,256
113,079
1,775
1,164,481
5,282
5,063
6,207
17,544
24,346
32,429
404
35,084
4,117
2,015
$1,527,879
$1,461,082
$106,328
1,032,117
1,138,445
162,228
30,424
20,619
667
1,295
14,376
1,368,054
117
110,285
(628)
(671)
120,112
(69,390)
159,825
$103,498
966,003
1,069,501
180,960
25,748
20,619
605
795
11,638
1,309,866
117
108,626
(1,053)
(22)
112,041
(68,493)
151,216
Total liabilities and stockholders’ equity
$1,527,879
$1,461,082
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
35
Years Ended December 31,
2006
2005
2004
(In Thousands, Except Per Share Amount)
$86,213
$69,708
$47,345
4,511
1,134
165
1,042
4,081
1,192
364
829
5,205
1,526
43
612
93,065
76,174
54,731
33,273
8,885
1,308
577
44,043
49,022
1,756
47,266
9,303
3,389
4,531
526
(2)
312
980
585
20,615
7,625
201
451
28,892
12,950
7,317
–
114
20,381
47,282
34,350
1,442
45,840
1,548
32,802
5,603
3,345
4,185
–
1,222
282
765
523
4,215
2,771
4,052
–
1,426
225
947
360
19,624
15,925
13,996
24,152
5,103
3,689
–
–
10,895
43,839
23,051
7,451
$15,600
$ 2.22
$ 2.18
$ 0.97
23,446
4,651
3,247
3,476
–
9,122
17,422
3,294
2,363
–
1,927
6,194
43,942
31,200
17,823
5,853
15,598
4,802
$11,970
$10,796
$ 1.75
$ 1.69
$ 0.90
$ 1.77
$ 1.69
$ 0.82
CONSOLIDATED STATEMENTS OF INCOME
Interest income
Loans
Investment securities:
Taxable
Tax-exempt
Interest-bearing deposits
FHLB stock dividends
Total interest income
Interest expense
Deposits
Federal Home Loan Bank advances and other
Subordinated debentures
Notes payable
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service fees and other charges
Mortgage banking income
Insurance commissions
Gain on sale of non-mortgage loans
Gain (loss) on sale or write-down of securities
Trust income
Income from bank owned life insurance
Other noninterest income
Total noninterest income
Noninterest expense
Compensation and benefi ts
Occupancy
Data processing
Acquisition related charges
Settlement of contingent liability
Other noninterest expense
Total noninterest expense
Income before income taxes
Federal income taxes
Net income
Earnings per share:
Basic
Diluted
Dividends declared per share
See accompanying notes.
36 2006 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
Stock
Treasury
Stock
Additional
Paid-In
Capital
Stock
Accumulated
Other
Acquired by Comprehensive
Income (Loss)
ESOP
Total
Retained Stockholders
Equity
Earnings
Balance at January 1, 2004
Comprehensive income:
Net income
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of $(1,015) (a)
Total comprehensive income
ESOP shares released
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefi t of $12
Shares issued under stock option plan,
including income tax benefi t of $553
Acquisition of common stock for treasury
Dividends declared
Balance at December 31, 2004
Comprehensive income:
Net income
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of ($1,160) (a)
Total comprehensive income
ESOP shares released
Shares issued to acquire ComBanc, Inc.
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefi t of $4
Shares issued under stock option plan,
including income tax benefi t of $261
Acquisition of common stock for treasury
Dividends declared
Balance at December 31, 2005
Comprehensive income:
Net income
Change in net unrealized gains and
losses on available-for-sale securities,
net of income taxes of ($39) (a)
Total comprehensive income
Adjustment to initially apply SFAS
No. 158, net of tax of ($310)
ESOP shares released
Stock option expense
Amortization of deferred compensation
of Management Recognition Plan,
including income tax benefi t of $4
Shares issued under stock option plan,
including income tax benefi t of $481
Acquisition of common stock for treasury
Dividends declared
$110
$(66,257)
$87,107
$(1,904)
$4,017
$101,196
$124,269
(In Thousands)
–
–
–
–
–
–
–
–
–
–
–
1,938
(4,691)
–
–
–
–
–
845
425
19
553
–
–
–
–
–
–
–
10,796
10,796
(1,886)
–
–
–
–
–
–
–
–
(383)
–
(5,011)
(1,886)
8,910
1,270
19
2,108
(4,691)
(5,011)
110
(69,010)
88,524
(1,479)
2,131
106,598
126,874
–
–
–
7
–
–
–
–
–
–
–
–
–
186
924
18,911
–
1,878
(1,547)
–
6
261
–
–
–
–
426
–
–
–
–
–
–
11,970
11,970
(2,153)
–
–
–
–
–
–
–
–
–
–
(317)
–
(6,210)
(2,153)
9,817
1,350
19,104
6
1,822
(1,547)
(6,210)
117
(68,493)
108,626
(1,053)
(22)
112,041
151,216
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,046
(3,943)
–
–
–
–
901
268
4
486
–
–
–
–
–
425
–
–
–
–
–
–
15,600
15,600
(73)
(576)
–
–
–
–
–
–
–
–
–
–
–
(703)
–
(6,826)
(73)
15,527
(576)
1,326
268
4
2,829
(3,943)
(6,826)
Balance at December 31, 2006
$117
$(69,390)
$110,285
$(628)
$(671)
$120,112
$159,825
(a) Net of reclassifi cation adjustments. Reclassifi cation adjustments represent net unrealized gains (losses) as of December 31 of the prior year on
securities available-for-sale that were sold during the current year. The reclassifi cation adjustment was -0- in 2006, $1.3 million ($884,000 after
tax) in 2005 and $1.82 million ($1.18 after tax) in 2004.
See accompanying notes.
FIRST DEFIANCE FINANCIAL CORP.
37
Years Ended December 31,
2006
2005
2004
(In Thousands)
$15,600
$11,970
$10,796
1,756
2,738
532
612
(2)
720
(2,950)
–
(104)
(1,042)
1,326
2
870
140,828
268
(137,624)
(980)
(2,616)
1,804
21,738
358
16,649
3,073
2,229
213
(17,551)
–
(5,317)
–
–
–
–
4,929
(73,060)
(68,477)
1,442
2,396
1,152
784
(417)
755
(2,426)
6
(116)
(835)
1,350
(1,222)
249
112,731
–
(114,332)
(765)
1,285
2,574
16,581
357
27,882
24,160
475
1,286
(30,271)
–
(5,296)
(5,000)
–
52,687
(612)
–
(104,103)
1,548
1,798
564
704
1
110
(2,523)
19
–
(610)
1,270
(1,426)
90
106,620
–
(101,391)
(947)
(136)
(234)
16,253
403
42,850
20,747
996
2
(34,262)
5,000
(2,202)
–
318
–
–
–
(144,660)
(38,435)
(110,808)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Provision for depreciation
Net amortization of premium and discounts on loans,
securities, deposits and debt obligations
Amortization of mortgage servicing rights
Net impairment (recovery) of mortgage servicing rights
Amortization of intangibles
Gain on sale of loans
Amortization of Management Recognition Plan
deferred compensation
Gain on sale of property, plant and equipment
FHLB stock dividends
Release of ESOP shares
(Gains) loss on sales or write-down of securities
Deferred federal income tax
Proceeds from sale of loans
Stock option expense
Origination of loans held for sale
Income from bank owned life insurance
Change in interest receivable and other assets
Change in accrued interest and other liabilities
Net cash provided by operating activities
Investing activities
Proceeds from maturities of held-to-maturity securities
Proceeds from maturities of available-for-sale securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of real estate and other assets held for sale
Proceeds from sale of offi ce properties and equipment
Purchases of available-for-sale securities
Proceeds from sale of Federal Home Loan Bank stock
Purchases of offi ce properties and equipment
Investment in bank owned life insurance
Proceed from insurance death benefi t
Net cash received for acquisition of ComBanc, Inc.
Net cash paid for acquisition of Genoa Savings and Loan Co.
Proceeds from sale of non-mortgage loans
Net increase in loans receivable
Net cash used in investing activities
(CONTINUED)
38 2006 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Financing activities
Net increase in deposits
Repayment of Federal Home Loan Bank long-term advances
Net increase in Federal Home Loan Bank short-term advances
Net increase (decrease) in short-term line of credit
Proceeds from Federal Home Loan Bank long-term advances
Increase (decrease) in securities sold under repurchase agreements
Proceeds from issuance of subordinated debentures
Purchase of common stock for treasury
Cash dividends paid
Proceeds from exercise of stock options
Excess tax benefi t from exercise of stock options
Net cash provided by fi nancing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash fl ow information
Interest paid
Income taxes paid
Stock options exercised using common stock for treasury
Transfers from loans to other real estate owned
and other assets held for sale
Years Ended December 31,
2006
2005
2004
69,291
(68,206)
4,600
–
45,000
4,676
–
(2,852)
(6,741)
1,257
481
47,506
767
49,256
$50,023
$43,197
$5,956
$1,091
31,931
(2,457)
2,000
(3,000)
–
7,334
20,619
(1,547)
(5,852)
1,561
-
69,090
(1,809)
15,500
3,000
–
(463)
–
(4,691)
(4,889)
1,555
-
50,589
77,293
28,735
20,521
(17,262)
37,783
$49,256
$20,521
$28,327
$5,053
–
$20,432
$4,149
–
$4,217
$605
$690
First Defi ance acquired all of the capital stock ComBanc Inc. and the Genoa Savings and Loan Company for $38.3 million and $11.2 million
respectively in 2005. In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired
Purchase price
Liabilities assumed
See accompanying notes.
ComBanc
$213,927
(38,339)
$175,588
Genoa
$88,077
(11,212)
Total
$302,004
(49,551)
$76,865
$252,453
FIRST DEFIANCE FINANCIAL CORP.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
First Defi ance Financial Corp. (First Defi ance) is a holding company that conducts business through its two wholly owned
subsidiaries, First Federal Bank of the Midwest, Defi ance Ohio (First Federal) and First Insurance & Investments (First
Insurance). All signifi cant intercompany transactions and balances are eliminated in consolidation.
First Federal is primarily engaged in attracting deposits from the general public through its offi ces and using those
and other available sources of funds to originate loans primarily in the counties in which its offi ces are located. First
Federal’s traditional banking activities include originating and servicing residential, commercial and consumer loans
and providing a broad range of depository and trust services. First Insurance & Investments is an insurance agency that
does business in the Defi ance, Ohio area off ering property and casualty, group health, and life insurance and investment
and annuity products.
2. STATEMENT OF ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated fi nancial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that aff ect the amounts reported in the consolidated fi nancial
statements and accompanying notes. Actual results could diff er from those estimates. Signifi cant areas where First
Defi ance uses estimates are the determination of the allowance for loan losses, the valuation of mortgage servicing rights
and goodwill, and the determination of post-retirement benefi ts.
Earnings Per Share
Basic earnings per share is net income divided by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per common share include the dilutive eff ect of additional potential common shares
issuable under stock options and stock grants. Unreleased shares held by the Company’s Employee Stock Ownership Plan
are not included in average shares for purposes of calculating earnings per share. As shares are released for allocation,
they are included in the average shares outstanding. Also see note 18.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes
unrealized gains and losses on available for sale investment securities and the net unrecognized actuarial losses and
unrecognized prior service costs associated with the Company’s Defi ned Benefi t Postretirement Medical Plan. All items
included in other comprehensive income are reported net of tax. See also notes 5 and 15.
Cash and Cash Equivalents
Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home Loan Bank
(FHLB). Cash and amounts due from depository institutions includes required balances at the FHLB and Federal Reserve
of approximately $130,000 and $100,000, respectively, at December 31, 2006. Net cash fl ows are reported for customer
loan and deposit transactions, interest bearing deposits in other fi nancial institutions, and repurchase agreements.
Investment Securities
Management determines the appropriate classifi cation of debt securities at the time of purchase and evaluates such
designation as of each balance sheet date. Debt securities are classifi ed as held-to-maturity when First Defi ance has the
positive intent and ability to hold the securities to maturity and are reported at cost, adjusted for premiums and discounts
that are recognized in interest income using the interest method over the period to maturity.
Debt securities not classifi ed as held-to-maturity and equity securities are classifi ed as available for sale. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income
until realized. Realized gains and losses, and unrealized losses judged to be other-than-temporary, are included in gains
(losses) on securities. Realized gains and losses on securities sold are based on the specifi c identifi cation method.
40 2006 ANNUAL REPORT
FHLB Stock
As a member of the FHLB System, First Federal is required to own stock of the FHLB of Cincinnati in an amount principally
equal to 0.15% of total assets plus an amount of at least 2% but no more than 4% of its non-grandfathered mission
asset activity (as defi ned in the FHLB’s regulations). First Federal is permitted to own stock in excess of the minimum
requirement. FHLB stock is a restricted equity security that does not have a readily determinable fair value and is carried
at cost. It is evaluated for impairment based upon the ultimate recovery of par value. Both cash and stock dividends are
reported as income.
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported
at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. Deferred fees
net of deferred incremental loan origination costs, are amortized to interest income generally over the contractual life of the
loan using the interest method.
Mortgage loans originated and intended for sale in the secondary market are classifi ed as loans held for sale and are carried
at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses,
if any, are recorded as a valuation allowance and charged to earnings.
Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90 days
delinquent or impaired is discontinued when, in management’s opinion, the borrower may be unable to meet payments
as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. The accrual of interest on these loans is generally
resumed after a pattern of repayment has been established and the collection of principal and interest is reasonably
assured.
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred
losses in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of
individual problem loans, actual loss experience, current economic events in specifi c industries and geographical areas,
and other pertinent factors including general economic conditions. Determination of the allowance is inherently subjective
as it requires signifi cant estimates, including the amounts and timing of expected future cash fl ows on impaired loans,
estimated losses on pools of homogeneous loans based on historical loss experience and consideration of economic trends,
all of which may be susceptible to signifi cant change. Allocations of the allowance may be made for specifi c loans, but the
entire allowance is available for any loan that, in management’s judgment, should be charged off .
Loan losses are charged off against the allowance when in management’s estimation it is unlikely that the loan will be
collected, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is
charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other
pertinent factors in order to maintain the allowance for loan losses at the level deemed adequate by management. The
determination of whether a loan is considered past due or delinquent is based on the contractual payment terms.
A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans
are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan
is reported, net, at the present value of estimated future cash fl ows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such
as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not
separately identifi ed for impairment disclosures.
Acquired Loans
Valuation allowances for all acquired loans subject to SOP 03-3 refl ect only those losses incurred after acquisition—that is,
the present value of cash fl ows expected at acquisition that are not expected to be collected.
FIRST DEFIANCE FINANCIAL CORP.
41
The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews each loan
to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that it will
be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company
determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools
of loans based on common risk characteristics (credit score, loan type, and date of origination). The Company considers
expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other
cash fl ows (expected at acquisition) for each loan and subsequently aggregated pool of loans. The Company determines
the excess of the loan’s or pool’s scheduled contractual principal and contractual interest payments over all cash fl ows
expected at acquisition as an amount that should not be accreted (nonaccretable diff erence). The remaining amount—
representing the excess of the loan’s cash fl ows expected to be collected over the amount paid—is accreted into interest
income over the remaining life of the loan or pool (accretable yield).
Over the life of the loan or pool, the Company continues to estimate cash fl ows expected to be collected, and evaluates
whether the present value of its loans determined using the eff ective interest rates has decreased and if so, recognizes a
loss. The present value of any subsequent increase in the loan’s or pool’s actual cash fl ows or cash fl ows expected to be
collected is used fi rst to reverse any existing valuation allowance for that loan or pool. For any remaining increases in cash
fl ows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over
the loan’s or pool’s remaining life.
Loan Commitments and Related Financial Instruments
Financial instruments include off balance sheet credit instruments, such as commitments to make loans and commercial
letters of credit, issued to meet customer fi nancing needs. The face amount for these items represents the exposure to loss,
before considering customer collateral or ability to repay. Such fi nancial instruments are recorded when they are funded.
Marketing Costs
Marketing costs are expensed as incurred.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not
believe there now are such matters that will have a material eff ect on the fi nancial statements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding
company. These restrictions pose no practical limit on the ability of the bank or holding company to pay dividends at
historical levels. See Note 20.
Mortgage Servicing Rights
The total cost of loans originated or purchased is allocated between loans and servicing rights based on the relative fair
values of each at the time of sale. The servicing rights capitalized are amortized in proportion to and over the period of
estimated servicing income.
Mortgage servicing rights are periodically evaluated for impairment. For purposes of measuring impairment, mortgage
servicing rights are stratifi ed based on predominant risk characteristics of the underlying serviced loans. These
risk characteristics include loan type (fi xed or adjustable rate) and interest rate. Impairment represents the excess
of amortized cost of an individual mortgage servicing rights stratum over its fair value, and is recognized through a
valuation allowance.
Fair values for individual stratum are based on the present value of estimated future cash fl ows using a discount rate
commensurate with the risks involved. Estimates of fair value include assumptions about prepayment, default and interest
rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the
fair value of mortgage servicing rights, and the related valuation allowance, to change signifi cantly in the future.
42 2006 ANNUAL REPORT
Servicing fee income is recorded for fees earned for serviced loans. The fees are based on a contractual percentage of the
outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted with
loan servicing fee income and along with mortgage loans gain on sale are reported collectively as mortgage banking income
on the consolidated statements of income.
Real Estate and Other Assets Held for Sale
Other assets held for sale are comprised of properties acquired through foreclosure proceedings or acceptance of a deed
in lieu of foreclosure. These properties are carried at the lower of cost or fair value, less estimated costs to dispose, at the
time of foreclosure or insubstance foreclosure. Losses arising from the acquisition of such property are charged against the
allowance for loan losses at the time of acquisition. If fair value declines subsequent to foreclosure, the property is written
down against expense. Costs after acquisition are expensed.
Premises and Equipment and Long Lived Assets
Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the
straight-line method over the following estimated useful lives:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 to 50 years
Furniture, fi xtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles are evaluated for impairment using the
guidance provided by Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Long-Lived Assets to
be Disposed of, relative to accounting for long-lived assets and accounting for long-lived assets to be disposed of either
through sale, abandonment, exchange or a distribution to owners.
Income Taxes
Deferred income taxes refl ect the temporary tax consequences on future years of diff erences between the tax basis and
fi nancial statement amounts of assets and liabilities at each year-end.
Deferred tax assets and liabilities are refl ected at currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.
An eff ective tax rate of 35% is used to determine after-tax components of other comprehensive income (loss) included in
the statements of stockholders’ equity.
Business Combinations
Business combinations, which have been accounted for under the purchase method of accounting, include the results of
operations of the acquired business from the date of acquisition. Net assets of companies acquired are recorded at their
estimated fair value as of the date of acquisition.
Goodwill and Other Intangibles
Core deposit intangibles are a measure of the value of checking and savings deposits acquired in business combinations
accounted for under the purchase method. Core deposit intangibles are amortized on an accelerated basis over the estimated
lives of the existing deposit relationships acquired, but not exceeding 10 years. Customer Relationship Intangibles are a
measure of the value of customer relationships accounted for under the purchase method. The Customer Relationship
Intangible is amortized over the estimated contractual life of the existing relationship and is limited to 10 years. Goodwill
is the excess of the purchase price over the fair value of the assets and liabilities and identifi able intangible assets of
companies acquired through business combinations accounted for under the purchase method. Goodwill is evaluated
at the business unit level, which for First Defi ance are First Federal Bank and First Insurance. At both December 31,
2006 and December 31, 2005, goodwill at First Federal totaled $31.3 million. At December 31, 2006 and 2005, core
deposit intangibles had a gross carrying value of $4.5 million and accumulated amorization of $1.5 million and $873,000
respectively. At December 31, 2006 and 2005, customer relationship intangibles had a gross carrying value of $574,000
and accumulated amoization of $154,000 and $62,000 respectively. At both December 31, 2006 and 2005 goodwill
totaled $3.8 million at First Insurance.
FIRST DEFIANCE FINANCIAL CORP.
43
Core deposit intangibles are amortized over the life of the related deposits, not to exceed ten years. Amortization expense
for core deposit intangibles was $627,000, $693,000 and $110,000 in 2006, 2005 and 2004 respectively. Customer
relationship intangibles are amortized over the estimated life of the customer relationship, not to exceed 10 years.
Amortization expense for customer relationship intangibles was $92,000 and $62,000 in 2006 and 2005. Amortization
of intangibles is expected to total, $573,000, $469,000, $410,000, $402,000 and $402,000 in 2007, 2008, 2009, 2010
and 2011 respectively. Goodwill is not subject to amortization but its value is assessed annually to determine if there is any
impairment of value.
Settlement of Contingent Liability
First Defi ance sold its former Leader Mortgage subsidiary in 2002. During 2004, the Purchaser of that unit asserted certain
claims against First Defi ance under the Purchase and Sale Agreement. First Defi ance settled all matters related to the sale
of Leader Mortgage in the 2004 third quarter and it recognized a pre-tax charge of $1.9 million, which is included in the
2004 Consolidated Statement of Income.
Stock Compensation Plans
Eff ective January 1, 2006, First Defi ance adopted Statement of Financial Accounting Standard (SFAS) No. 123(R), Share-
based Payment, which requires recognition of compensation cost for all stock-based awards to be based on the grant-date
fair value over the service period of stock-based awards, which is usually the same as the vesting period. The fair value of
stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation
methodology previously utilized for options in footnote disclosures required under SFAS No. 123. The exercise price of
stock grants has been and will continue to be based on the market value of the stock at the date of grant. The Company
has adopted SFAS No. 123(R) using the modifi ed prospective method, which provides for no retroactive application to
prior periods and no cumulative eff ect adjustment to equity accounts. It also provides for expense recognition, for both
new and existing stock-based awards, as the required services are rendered. SFAS No. 123(R) also amends SFAS No.
95, Statement of Cash Flows and requires tax benefi ts relating to excess stock-based compensation deductions to be
presented in the statement of cash fl ows as fi nancing cash infl ows. In accordance with Staff Accounting Bulletin No. 107
(SAB 107) issued by the Securities and Exchange Commission, stock-based compensation has been classifi ed in the same
expense category as cash compensation and has been included in the Compensation and Benefi ts line of the Consolidated
Statements of Income for 2006.
Prior to January 1, 2006, the Company accounted for stock-based compensation expense using the intrinsic method as
required by Accounting Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued to Employees as permitted
by SFAS No. 123 Accounting for Stock-Based Compensation. No compensation cost for stock options was refl ected in net
income for the years ended December 31, 2005 and 2004, as all options granted had an exercise price equal to the market
price of the underlying common stock at the date of grant.
The adoption of SFAS No. 123(R) had the following impact on reported amounts compared with amounts that would have
been reported using the intrinsic value method under previous accounting.
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Cash fl ow from operating activities
Cash fl ow from fi nancing activities
Using Previous
Accounting
2006
SFAS 123(R)
Adjustments
As Reported
(In Thousands, Except Per Share Amounts)
$23,322
7,454
$15,868
$2.26
$2.22
$22,219
$47,025
$(271)
(3)
(268)
$(.04)
$(.04)
$(481)
$481
$23,051
7,451
$15,600
$2.22
$2.18
$21,738
$47,506
44 2006 ANNUAL REPORT
The following tables illustrate the eff ect on net income and earnings per share if expense had been measured using the fair
value recognition provisions of SFAS 123(R) for the years ended December 31, 2005 and 2004:
2005
2004
(In Thousands, Except Per Share Amounts)
As Reported
Pro Forma
Adjustments
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
$17,823
5,853
$11,970
$1.75
$1.69
$(272)
(4)
$(268)
$(.04)
$(.04)
Pro Forma
as if Under
SFAS 123(R)
$17,551
5,848
$11,703
$1.71
$1.65
As Reported
Pro Forma
Adjustments
$15,598
4,802
$10,796
$1.77
$1.69
$(221)
(5)
$(216)
$(.03)
$(.03)
Pro Forma
as if Under
SFAS 123(R)
$15,377
4,797
$10,580
$1.74
$1.66
The fair value of stock options granted during 2006, 2005 and 2004 was determined at the date of grant using the Black-
Scholes option-pricing model and utilized the following assumptions:
Risk free interest rate
Weighted average expected life
Volatility factors of expected market price of stock
Dividend yield
2006
5.16%
6.5 years
22.4%
3.62%
December 31,
2005
4.40%
10 years
22.4%
3.39%
2004
4.73%
10 years
22.9%
2.96%
The expected average risk-free rate is based on the U.S. Treasury yield curve in eff ect at the time of grant for periods
corresponding with the expected life of the option. The expected average life represents the period of time that options
granted are expected to be outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns.
Expected volatility is based on historical price fl uctuations of the Company’s common stock. The expected dividend yield is
based on historical dividend payments and stock prices.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain executives and senior managers. Company owned life
insurance is recorded at its cash surrender value, or the amount that can be realized.
Postretirement Benefi ts
The Company sponsors a defi ned benefi t postretirement plan that provides medical benefi ts to eligible retirees. Postretirement
benefi t expense is accrued based on the expected future cost of providing benefi ts during the years service is rendered by
the employee.
Fair Value of Financial Instruments
Fair values of fi nancial instruments are estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and matters of signifi cant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could signifi cantly aff ect the estimates.
Operating Segments
While the chief decision-makers monitor the revenue streams of the various products and services, there is one identifi able
segment and the remaining identifi able segments are not material and operations are managed and fi nancial performance
is evaluated on a Company-wide basis. Accordingly, all of the fi nancial service operations are considered by management
to be aggregated in one reportable segment.
Reclassifi cations
Some items in the prior year fi nancial statements were reclassifi ed to conform to the current presentation.
FIRST DEFIANCE FINANCIAL CORP.
45
Adoption of New Accounting Standards
Accounting for Defi ned Benefi t Pension and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defi ned Benefi t Pension and Other
Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106, and 132(R) (“Statement 158”). Statement 158 requires
plan sponsors of defi ned benefi t pension and other postretirement benefi t plans (collectively, “postretirement benefi t
plans”) to recognize the funded status of their postretirement benefi t plans in the statement of fi nancial position, measure
the fair value of plan assets and benefi t obligations as of the date of the fi scal year-end statement of fi nancial position, and
provide additional disclosures. On December 31, 2006, the Company adopted the recognition and disclosure provisions
of Statement 158. The eff ect of adopting Statement 158 on the Company’s fi nancial condition at December 31, 2006
has been included in the accompanying consolidated fi nancial statements. Statement 158 did not have an eff ect on
the Company’s consolidated fi nancial condition at December 31, 2005 and 2004. Statement 158’s provisions regarding
the change in the measurement date of postretirement benefi t plans are not applicable as the Company already uses a
measurement date of December 31 for its postretirement medical plan. See Note 15 for further discussion of the eff ect of
adopting Statement 158 on the Company’s consolidated fi nancial statements.
Eff ect of Newly Issued but Not Yet Eff ective Accounting Standards
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140. This Statement provides: 1) revised guidance on when a servicing asset and servicing liability should
be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at
fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at exercise price
each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial
adoption, permits a onetime reclassifi cation of available-for-sale securities to trading securities for securities which are
identifi ed as off setting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer
elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of fi nancial position and additional footnote disclosures. This
standard is eff ective as of the beginning of an entity’s fi rst fi scal year that begins after September 15, 2006 with the eff ects
of initial adoption being reported as a cumulative-eff ect adjustment to retained earnings. The adoption of this statement
will not have a material impact on consolidated fi nancial position or results of operation.
Fair Value Measurements
In September 2006, FASB issued Statement No. 157, Fair Value Measurements. This Statement defi nes fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair value and clarifi es assumptions about
risk and the eff ect of a restriction on the sale or use of an asset. The standard is eff ective for fi scal years beginning after
November 15, 2007. The Company has not yet completed its evaluation of the impact of the adoption of this standard.
Accounting for Uncertainty in Income Taxes
In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No, 109 (“FIN 48”), which prescribes a recognition threshold and measurement attribute for a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classifi cation,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is eff ective for fi scal years beginning
after December 15, 2006. The Company has adopted FIN 48 eff ective January 1, 2007. The eff ect of adoption of FIN 48
was not material.
46 2006 ANNUAL REPORT
Accounting for Deferred Compensation and Postretirement Benefi t Aspects
of Endorsement Split-Dollar Life Insurance Arrangements
In September 2006, the FASB Emerging Issues Task Force (“EITF”) fi nalized Issue No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefi t Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue
requires that a liability be recorded during the service period when a spilt-dollar life insurance agreement continues after
participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefi t
cost for the continuing life insurance or based on the future death benefi t depending on the contractual terms of the
underlying agreement. This issue is eff ective for fi scal years beginning after December 15, 2007. The Company does not
have any split-dollar life insurance agreements that continue after participants’ employment.
Accounting for Purchases of Life Insurance
In September 2006, the FASB EITF fi nalized Issue No. 06-5, Accounting for Purchases of Life Insurance – Determining
the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of
Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining
the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater
surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined
based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the
cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy.
This issue is eff ective for fi scal years beginning after December 15, 2006. The adoption of this issue will not have a material
impact on the fi nancial statements.
3. ACQUISITIONS
On April 8, 2005, The Company acquired the Genoa Savings and Loan Company (“Genoa”), a savings and loan
headquartered in Genoa, Ohio for a total purchase price of $11.2 million including direct acquisition costs of $220,000.
Genoa shareholders received cash of $11.0 million in the all-cash transaction.
On January 21, 2005, First Defi ance acquired ComBanc, Inc. (“ComBanc”), a bank-holding company and its wholly-
owned subsidiary, the Commercial Bank by acquiring all of the outstanding capital stock of ComBanc for an aggregate
purchase price of $38.3 million, including direct acquisition costs of $542,000. ComBanc shareholders received 733,775
shares of First Defi ance stock and cash of $18.7 million.
The acquisitions enhanced First Defi ance’s community bank operations by giving them a larger presence in the Toledo,
Ohio market area following the Genoa acquisition and allowing them to expand into the Allen County, Ohio area, which
was adjacent to existing markets, following the ComBanc acquisition. The value of the common stock issued for the
ComBanc acquisition was determined based on an average of the closing price for two days before and after the date
the fi nal exchange terms were determined. The following table presents the allocation of the purchase price, including
direct acquisition costs, for the Genoa and ComBanc acquisitions to assets acquired and liabilities assumed, based on
their fair values:
Cash and cash equivalents
Investment securities
Loans, net of allowances for loan losses
Premises and equipment
Goodwill and other intangibles
Other assets
Total assets acquired
Deposits
Borrowings
Other liabilities
Total liabilities acquired
Net assets acquired
Genoa
ComBanc
(In Thousands)
$10,600
15
66,905
2,345
5,501
2,711
88,077
76,786
-
79
76,865
$11,212
$71,915
502
117,494
4,106
15,522
4,388
213,927
163,668
9,863
2,057
175,588
$38,339
FIRST DEFIANCE FINANCIAL CORP.
47
The following (unaudited) pro forma consolidated results of operations for 2005 have been prepared as if the acquisitions
of ComBanc and Genoa occurred as of the beginning of that year.
Net interest income
Net income
Net income per share – basic
Net income per share – Diluted
Year Ended December 31,
2005
2004
(In Thousands, Except Per Share Amounts)
$44,085
$10,057
$1.47
$1.42
$48,542
$13,775
$2.00
$1.93
The pro forma results include amortization of fair value adjustments on loans, deposits and FHLB advances, amortization
of newly created intangibles, and post-merger acquisition related charges. The pro forma average common shares
outstanding used to compute the pro forma basic and diluted income per share includes adjustments for shares issued for
the ComBanc acquisition. The pro forma results presented do not include $3.5 million of acquisition related costs included
in First Defi ance’s 2005 income statement, nor do they refl ect cost savings or revenue enhancements anticipated from the
acquisitions. These pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions
had been completed as of the beginning of each period presented, nor are they necessarily indicative of future results.
On February 28, 2007 The Company completed the acquisition of Huber, Harger, Welt & Smith Insurance Agency, Inc., a
property and casualty insurance agency located in Bowling Green, OH for approximately 77,000 shares of First Defi ance
Financial Corp. common stock. Disclosure of pro forma results of this aquisition is immaterial to the Company’s consolidated
fi nancial statements.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Numerator for basic and diluted earnings per share net income
Denominator:
Denominator for basic earnings per share weighted-average shares
Eff ect of dilutive securities:
Employee stock options
Unvested Management Recognition Plan stock
Dilutive potential common shares
Denominator for diluted earnings per share adjusted weighted-average shares
Basic earnings per share
Diluted earnings per share
2006
2005
2004
(In Thousands, Except Per Share Amounts)
$15,600
$11,970
$10,796
7,028
135
-
135
7,163
$2.22
$2.18
6,843
252
1
253
7,096
$1.75
$1.69
6,094
275
2
277
6,371
$1.77
$1.69
Shares under option of 149,053 in 2006, 3,000 in 2005 and 3,000 in 2004 were excluded from the diluted earnings per
share calculation as they were anti-dilutive.
48 2006 ANNUAL REPORT
5. INVESTMENT SECURITIES
The following fair value of available for sale securities and the related unrealized gains and losses recognized in accumulated
other comprehensive income (loss) were as follows:
At December 31, 2006
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
REMICs
Collateralized mortgage obligations
Trust preferred stock
Obligations of state and political subdivisions
Totals
At December 31, 2005
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
REMICs
Collateralized mortgage obligations
Trust preferred stock
Obligations of state and political subdivisions
Totals
Amortized
Cost
$36,108
18,595
3,071
20,099
8,116
24,840
$110,829
$41,173
19,959
998
20,002
7,725
23,257
$113,114
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
$106
23
–
52
82
418
$681
$217
35
–
1
76
574
$903
$(171)
(276)
(11)
(346)
(20)
(4)
$(828)
$(325)
(263)
(7)
(330)
–
(13)
$(938)
The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
At December 31, 2006
FHLMC certifi cates
FNMA certifi cates
GNMA certifi cates
Obligations of states and political subdivisions
Totals
At December 31, 2005
FHLMC certifi cates
FNMA certifi cates
GNMA certifi cates
Obligations of states and political subdivisions
Totals
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
(In Thousands)
$272
614
195
360
$1,441
$333
756
241
445
$1,775
$8
5
1
41
$55
$11
4
–
59
$74
$ –
(4)
–
–
$(4)
$ –
(3)
(1)
–
$(4)
Fair
Value
$36,043
18,342
3,060
19,805
8,178
25,254
$110,682
$41,065
19,731
991
19,673
7,801
23,818
$113,079
Fair
Value
$280
615
196
401
$1,492
$344
757
240
504
$1,845
FIRST DEFIANCE FINANCIAL CORP.
49
The amortized cost and fair value of securities at December 31, 2006 by contractual maturity are shown below. Expected
maturities will diff er from contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at
a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities
of the underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual
maturities because of principal prepayments.
Due in one year or less
Due after one year through fi ve years
Due after fi ve years through ten years
Due after ten years
Available-for-Sale
Held-to-Maturity
Amortized
Cost
$17,968
51,804
18,270
22,787
$110,829
Fair
Value
Amortized
Cost
(In Thousands)
$17,791
51,571
18,288
23,032
$110,682
$382
809
226
24
$1,441
Fair
Value
$388
842
238
24
$1,492
Investment securities with carrying amounts of $85.0 million and $82.3 million at December 31, 2006 and 2005, respectively,
were pledged as collateral on public deposits, securities sold under repurchase agreements and FHLB advances and for
other purposes required or permitted by law.
The following table summarizes First Defi ance’s securities that were in an unrealized loss position at December 31, 2006
and December 31, 2005:
Duration of Unrealized Loss Position
Less than 12 Months
12 Month or Longer
Total
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
(In Thousands)
Fair
Value
Unrealized
Loses
At December 31, 2006
Available-for-sale securities:
$2,484
Obligations of U.S. govt. corps. and agencies
1,936
Mortgage-backed securities
Collateralized mortgage obligations and REMICs 3,545
1,630
Obligations of state and political subdivisions
1,906
Trust Preferred stock
Held to maturity securities:
Mortgage-backed securities
157
$(7)
(12)
(12)
(4)
(20)
(3)
$15,403
11,471
16,320
39
−
$ (164)
(264)
(345)
−
−
$17,887
13,407
19,865
1,669
1,906
207
(1)
364
Total temporarily impaired securities
$11,658
$(58)
$43,440
$(774)
$55,098
At December 31, 2005
Available-for-sale securities:
$16,873
Obligations of U.S. govt. corps. and agencies
Mortgage-backed securities
9,488
Collateralized mortgage obligations and REMICs 5,780
Obligations of state and political subdivisions
1,368
Held to maturity securities:
Mortgage-backed securities
320
$(173)
(151)
(62)
(13)
$8,845
4,352
11,687
20
$ (152)
(112)
(275)
−
$25,718
13,840
17,467
1,388
(1)
177
(3)
497
Total temporarily impaired securities
$33,829
$(400)
$25,081
$(542)
$58,910
$(171)
(276)
(357)
(4)
(20)
(4)
$(832)
$(325)
(263)
(337)
(13)
(4)
$(942)
The above securities all have fi xed interest rates and defi ned maturities. Their fair value is sensitive to movements in
market interest rates. First Defi ance has the ability and intent to hold these investments for a time necessary to recover the
amortized cost without impacting its liquidity position. Realized gains from the sale of investment securities totaled $73,000,
$1.2 million and $1.4 million ($47,000, $798,000 and $927,000 after tax) in 2006, 2005 and 2004 respectively. Realized
losses from securities transactions were $5,000 ($3,000 after tax) in 2005. There were no realized losses during 2006 and
2004. Management deemed that the value of certain investments in trust preferred stock was impaired in 2006 and wrote
the investment down by $75,000 ($49,000 after tax).
50 2006 ANNUAL REPORT
6. COMMITMENTS AND CONTINGENT LIABILITIES
Loan Commitments
Loan commitments are made to accommodate the fi nancial needs of First Federal’s customers; however, there are
no long-term, fi xed-rate loan commitments that result in market risk. Standby letters of credit commit the Company to
make payments on behalf of customers when certain specifi ed future events occur. They primarily are issued to facilitate
customers’ trade transactions.
Both arrangements have credit risk, essentially the same as that involved in extending loans to customers, and are subject
to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained
based on Management’s credit assessment of the customer.
The Company’s maximum obligation to extend credit for loan commitments (unfunded loans and unused lines of credit)
and standby letters of credit outstanding on December 31 was as follows (in thousands):
Loan commitments
Standby letters of credit
Total
2006
$260,349
16,869
$277,218
2005
$275,982
8,785
$284,767
Lease Agreements
The Company has entered into lease agreements covering First Insurance’s main offi ce, one banking center location and
the land on which one banking center was constructed and numerous stand-alone Automated Teller Machine sites with
varying terms and options to renew.
Future minimum commitments under non-cancelable operating leases are as follows (in thousands):
2007
2008
2009
2010
2011
Thereafter
Total
$312
217
224
196
150
3,114
$4,213
Rentals under operating
respectively.
leases amounted to $353,000, $329,000, and $237,000,
in 2006, 2005, and 2004,
7. LOANS RECEIVABLE
Loans receivable consist of the following at December 31:
Real estate loans:
Secured by single family residential
Secured by multi-family residential
Secured by non-residential real estate
Construction
Other loans:
Automobile
Commercial
Home equity and improvement
Other
Total loans
Deduct:
Undisbursed loan funds
Net deferred loan origination fees and costs
Allowance for loan losses
Totals
FIRST DEFIANCE FINANCIAL CORP.
51
December 31,
2006
2005
(In Thousands)
$250,808
57,263
522,597
17,339
848,007
33,093
232,914
122,789
10,677
399,473
$275,497
50,040
501,943
21,173
848,653
37,584
171,289
113,000
17,713
339,586
1,247,480
1,188,239
(6,409)
(1,182)
(13,579)
(8,782)
(1,303)
(13,673)
$1,226,310
$1,164,481
Changes in the allowance for loan losses were as follows:
Allowance at beginning of year
Provision for credit losses
Acquired in acquisitions
Charge-off s
Recoveries
Net charge-off s
Ending allowance
Years Ended December 31,
2006
2005
2004
$13,673
1,756
−
2,276
426
1,850
$13,579
(In Thousands)
$9,956
1,442
3,027
1,054
302
752
$13,673
$8,844
1,548
−
685
249
436
$9,956
Unpaid balances of loans with contractual payments delinquent 90 days or more totaled $7.3 million at December 31,
2006 and $5.0 million at December 31, 2005.
52 2006 ANNUAL REPORT
Impaired loans having recorded investments of $4.2 million at December 31, 2006 and $822,000 at December 31,
2005, have been recognized in conformity with FASB Statement No. 114, as amended by FASB Statement No. 118. The
average recorded investment in impaired loans during 2006, 2005 and 2004 was $4.4 million, 1.1 million, and $732,000
respectively. The total allowance for loan losses related to these loans was $969,000 and $380,000 at December 31,
2006 and 2005. There was $111,000, $61,000 and $36,000 of interest received and recorded in income during 2006,
2005 and 2004 respectively on impaired loans during the impairment period. Loans having carrying values of $4.2 million
and $605,000 were transferred to real estate and other assets held for sale in 2006 and 2005, respectively. At December
31, 2006 and December 31, 2005, non-performing loans were $7.3 million and $5.0 million respectively. There was no
accrued interest recorded on impaired or non-performing loans at December 31, 2006 or 2005. Also there was $562,000
of loans deemed impaired for which there was no allowance for loan loss allocation at December 31, 2006. There were no
loans impaired for which there was no allowance for loan loss allocation at December 31, 2005.
First Defi ance is not committed to lend additional funds to debtors whose loans have been modifi ed.
Certain loans acquired in the ComBanc and Genoa acquisitions had evidence that the credit quality of the loan had
deteriorated since its origination and in management’s assessment at the acquisition date it was probable that First
Defi ance would be unable to collect all contractually required payments due. In accordance with American Institute of
Certifi ed Public Accountants Statement of Position 03-3 – Accounting for Certain Loans or Debt Securities Acquired in a
Transfer (SOP 03-3), these loans have been recorded based on management’s estimate of the fair value of the loans. Detail
of these loans are as follows:
Amounts recorded in 2005 acquisitions:
Genoa
ComBanc
Total acquired
Principal payments received
Loans charged off
Loan accretion recorded
Balance at December 31, 2005
Principal payments received
Loans charged off
Additional provision for loan loss
Loan accretion recorded
Balance at December 31, 2006
Contractual
Amount
Receivable
Impairment
Discount
(In Thousands)
Recorded
Loan
Receivable
$1,547
3,387
4,934
(139)
(169)
−
$4,626
(129)
(198)
(189)
−
$4,110
$826
1,362
2,188
−
(169)
−
$2,019
−
(198)
−
(138)
$1,683
$721
2,025
2,746
(139)
−
−
$2,607
(129)
−
(189)
138
$2,427
FIRST DEFIANCE FINANCIAL CORP.
53
Interest income on loans is as follows:
Commercial and non-residential real-estate loans
Mortgage loans
Other loans
Totals
Years Ended December 31,
2006
2005
2004
$63,140
10,526
12,547
$86,213
(In Thousands)
$49,869
9,549
10,290
$69,708
$34,506
6,272
6,567
$47,345
There are no industry concentrations (exceeding 10% of gross loans) in First Federal’s non-residential real estate and
commercial loan portfolios. The Company’s loans receivable are primarily to borrowers in the Northwest Ohio, Northeast
Indiana or Southeast Michigan areas.
Loans to executive offi cers and directors and their affi liates during 2006 were as follows (in thousands):
Beginning balance
New loans
Eff ect of change in composition of related parties
Repayments
Ending balance
All such loans are paying as agreed.
$3,213
5,204
(2)
(4,077)
$4,338
54 2006 ANNUAL REPORT
8. MORTGAGE BANKING
Net revenues from the sales and servicing of mortgage loans consisted of the following:
Gain from sale of mortgage loans
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue
Amortization of mortgage servicing rights
Mortgage servicing rights valuation adjustments
Net revenue from sale and servicing of mortgage loans
Years Ended December 31,
2005
2006
2004
$2,424
1,575
(612)
2
966
$3,389
(In Thousands)
$2,291
1,421
(784)
417
1,054
$3,345
$2,350
1,126
(704)
(1)
421
$2,771
The unpaid principal balance of residential mortgage loans serviced for third parties was $665.4 million at December 31,
2006 compared to $602.5 million at December 31, 2005.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows:
Mortgage servicing assets:
Balance at beginning of period
Loans sold, servicing retained
NBV of servicing assets acquired
Impairment deemed permanent
Amortization
Carrying value before valuation allowance at end of period
Valuation allowance:
Balance at beginning of period
Impairment recovery (charges)
Impairment deemed permanent
Balance at end of period
Net carrying value of MSRs at end of period
Fair value of MSRs at end of period
Years Ended December 31,
2006
2005
2004
(In Thousands)
$5,145
1,076
-
-
(612)
5,609
(82)
2
-
(80)
$5,529
$6,684
$4,205
906
926
(108)
(784)
5,145
(607)
417
108
(82)
$5,063
$6,471
$4,037
872
−
−
(704)
4,205
(606)
(1)
−
(607)
$3,598
$3,743
Amortization of mortgage servicing rights is computed based on payments and payoff s of the related mortgage loans
serviced. Estimates of future amortization expense are not easily estimable.
FIRST DEFIANCE FINANCIAL CORP.
55
The Company’s servicing portfolio is comprised of the following:
Investor
Fannie Mae
Freddie Mac
Other
Totals
December 31,
2006
2005
Number of
Loans
Principal
Outstanding
Number of
Loans
Principal
Outstanding
(Dollars In Thousands)
724
7,345
28
8,097
$52,807
612,024
608
$665,439
601
6,858
52
7,511
$39,094
562,199
1,218
$602,511
Signifi cant assumptions at December 31, 2006 used in determining the value of MSRs include a weighted average
prepayment rate of 230 PSA and a weighted average discount rate of 8.90%.
A sensitivity analysis of the current fair value to immediate 10% and 20% adverse changes in those assumptions as of
December 31, 2006 is presented below. These sensitivities are hypothetical. Changes in fair value based on a 10% variation
in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change
in fair value may not be linear. Also, the eff ect of a variation in a particular assumption on the fair value of the MSR is
calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in
another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result
in changes in the discount rates), which might magnify or counteract the sensitivities.
Assumption:
Decline in fair value from increase in prepayment rate
Declines in fair value from increase in discount rate
10% Adverse
Change
20% Adverse
Change
(In Thousands)
$287
190
$551
370
56 2006 ANNUAL REPORT
9. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Cost:
Land
Buildings
Leasehold improvements
Furniture, fi xtures and equipment
Construction in process
Less allowances for depreciation and amortization
December 31,
2006
2005
(In Thousands)
$5,337
28,663
416
17,313
896
52,625
17,726
$34,899
$5,071
25,764
416
15,649
1,020
47,920
15,491
$32,429
Depreciation expense was $2.7 million, $2.4 million and $1.8 million for the years ended December 31, 2006, 2005 and
2004 respectively.
The Company has entered into commitments to construct an operations center with a total estimated cost of $8.5 million.
At December 31, 2006, $510,000 of costs were incurred and included in the construction in process and $282,000 of
costs were incurred for the acquisition of land associated with this project.
FIRST DEFIANCE FINANCIAL CORP.
57
10. DEPOSITS
The following schedule sets forth interest expense by type of savings deposit:
Years Ended December 31,
2005
2006
Checking and money market accounts
Savings accounts
Certifi cates of deposit
Less interest capitalized
Totals
$7,052
276
25,974
33,302
(29)
$33,273
(In Thousands)
$3,264
239
17,119
20,622
(7)
$20,615
2004
$1,722
134
11,100
12,956
(6)
$12,950
At December 31, 2006, accrued interest payable on deposit accounts amounted to $1,867,000, which was comprised of
$1,651,000 and $216,000 for certifi cates of deposit and checking and money market accounts respectively.
A summary of deposit balances is as follows:
Non-interest bearing checking accounts
Interest bearing checking and money market accounts
Savings deposits
Retail certifi cates of deposit less than $100,000
Retail certifi cates of deposit greater than $100,000
Brokered or national certifi cates of deposit
December 31,
2006
2005
(In Thousands)
$106,328
306,003
74,491
493,594
140,392
17,637
$103,498
276,558
82,766
408,384
161,305
36,990
$1,138,445
$1,069,501
Scheduled maturities of certifi cates of deposit at December 31, 2006 are as follows (in thousands):
2007
2008
2009
2010
2011
2012 and thereafter
Total
$571,964
70,242
5,513
2,258
1,189
457
$651,623
At December 31, 2006 and 2005, deposits of $274.1 million and $303.3 million, respectively, were in excess of the
$100,000 Federal Deposit Insurance Corporation insurance limit. At December 31, 2006 and 2005, $39.1 million and
$42.4 million, respectively, in investment securities were pledged as collateral against public deposits for certifi cates in
excess of $100,000 and an additional $39.7 million and $38.7 million of securities were pledged at December 31, 2006
and December 31, 2005, respectively as collateral against deposits from private entities in excess of $100,000. Also, First
Federal holds $10.8 million in depository bonds at December 31, 2006 with governmental entities, which can be pledged
as collateral against public deposits in excess of $100,000.
58 2006 ANNUAL REPORT
11. ADVANCES FROM FEDERAL HOME LOAN BANK
First Federal has the ability to borrow funds from the FHLB. First Federal pledges its single-family residential mortgage
loan portfolio, certain investment securities and certain multi-family or non-residential real estate loans as security for these
advances. Advances secured by investment securities must have collateral of at least 105% of the borrowing. Advances
secured by residential mortgages must have collateral of at least 125% of the borrowings. Advances secured by multi-
family or non-residential real estate loans securities must have 300% collateral coverage. The total level of borrowing
is also limited to 50% of total assets and at least 50% of the borrowings must be secured by either one-to-four family
residential mortgages or investment securities. Total loans pledged to the FHLB at December 31, 2006 and December 31,
2005 were $472.2 million and $465.9 million respectively. First Federal has a maximum potential to acquire advances of
approximately $212.9 million from the FHLB at December 31, 2006.
At year-end, advances from the FHLB were as follows:
Principal Terms
Advance Amount
(In Thousands)
Range of Maturities
Weighted Average Interest Rate
December 31, 2006
Short-term borrowings
Single maturity fi xed rate advances
Single maturity LIBOR based advances
Putable advances
Strike-rate advances
Amortizable mortgage advances
December 31, 2005
Short-term borrowings
Single maturity fi xed rate advances
Putable advances
Strike-rate advances
Amortizable mortgage advances
$33,100
Overnight
10,000
45,000
45,000
27,000
2,128
$162,228
$28,500
10,000
111,000
27,000
4,460
$180,960
December 2008
March 2011 to November 2011
September 2010 to November 2013
March 2011 to February 2013
March 2008 to December 2015
Overnight
December 2008
December 2008 to November 2013
March 2011 to February 2013
March 2008 to December 2015
4.10%
4.94%
5.36%
5.25%
4.18%
3.28%
4.12%
4.94%
4.77%
4.18%
3.94%
Putable advances are callable at the option of the FHLB on a quarterly basis. Strike rate advances are callable at the
option of the FHLB only when three-month LIBOR rates exceed the agreed upon strike rate in the advance contract.
Such strike rates range from 7.5% to 8.0%. When called, First Defi ance has the option of paying off these advances, or
converting them to variable rate advances at the three month LIBOR rate. First Defi ance has three advances totaling $45
million outstanding at December 31, 2006 that were converted from callable advances. These advances can be paid in full
without penalty at any quarterly repricing date.
FIRST DEFIANCE FINANCIAL CORP.
59
Estimated future minimum payments by fi scal year based on maturity date and current interest rates are as follows
(in thousands):
2007
2008
2009
2010
2011
Thereafter
Total minimum payments
Less amounts representing interest
Totals
$7,420
16,780
6,065
15,869
67,384
45,931
159,449
30,357
$129,092
First Defi ance also utilizes short-term advances from the FHLB to meet cash fl ow needs and for short-term investment
purposes. First Defi ance borrows short-term advances under a variety of programs at FHLB. At December 31, 2006,
$33.1 million was outstanding under First Defi ance’s REPO Advance line of credit. The total available under the REPO
Advance line is $100.0 million. In addition, First Defi ance has $15.0 million available under a Cash Management
Advance line of credit and there were no borrowings against that line at December 31, 2006 or 2005. Amounts are
generally borrowed under the Cash Management and REPO lines on an overnight basis. Amounts available under
the various lines are also subject to the Company’s overall borrowing limitations. Information concerning short-term
advances is summarized as follows:
Average daily balance during the year
Maximum month-end balance during the year
Average interest rate during the year
Years Ended December 31,
2006
2005
(Dollars In Thousands)
$40,104
57,500
5.10%
$14,313
45,000
3.79%
12. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY TRUST
As of December 31, 2006, the Company sponsored an affi liated trust, First Defi ance Statutory Trust I (the Trust Affi liate), that
issued $20 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction,
the Company issued $20.6 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to
the Trust Affi liate. The Trust Affi liate was formed for the purpose of issuing Trust Preferred Securities to third-party investors
and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The
Junior Debentures held by the Trust Affi liate are the sole assets of the trust.
Distributions on the Trust Preferred Securities issued by the Trust Affi liate are payable quarterly at a variable rate equal to
the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by the Trust was
6.74% and 5.87% as of December 31, 2006 and 2005 respectively.
The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated
Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred
Securities subject to the terms of the guarantee. The Trust Preferred Securities and Junior Debentures may be redeemed
by the issuer at par after October 28, 2010. The Junior Debentures mature on December 15, 2035.
60 2006 ANNUAL REPORT
13. NOTES PAYABLE AND OTHER SHORT-TERM BORROWINGS
Total short term borrowings, revolving and term debt is summarized as follows:
Securities sold under agreement to repurchase
Amounts outstanding at year-end
Year-end interest rate
Average daily balance during year
Maximum month-end balance during the year
Average interest rate during the year
Revolving line of credit facilities to fi nancial institutions
Average daily balance during year
Maximum month-end balance during the year
Average interest rate during the year
Years Ended December 31,
2006
2005
(Dollars In Thousands)
$30,424
2.98%
20,318
30,424
2.84%
$80
−
5.13%
$25,748
2.68%
17,718
25,748
2.18%
$301
43,799
2.25%
As of December 31, 2006, First Defi ance had the following line of credit facilities available for short-term borrowing purposes:
A $15 million revolving line of credit facility with a fi nancial institution. The facility is unsecured and has an interest rate of
fed funds rate plus 0.45%. There were no amounts outstanding on the line at December 31, 2006 or 2005. The maximum
borrowed at any point in time under the line was $0 and $4.0 million in 2006 and 2005, respectively. The average balance
outstanding for the year was $0 and $67,000 in 2006 and 2005, respectively.
A $20 million fed funds line of credit with a fi nancial institution. The line is unsecured and has an interest rate of the
institution’s fed funds rate. There were no amounts outstanding on the line at December 31, 2006 and 2005. The
maximum borrowed at any point in time under the line was $20.0 million in both 2006 and 2005, and the average balance
outstanding was $80,000 and $554,000 in 2006 and 2005, respectively.
A $15 million fed funds line of credit with a fi nancial institution. The line is unsecured and has an interest rate of the
institution’s fed funds rate. There were no amounts outstanding on the line at December 31, 2006. This line of credit was
established in 2006 and was not used.
A $5.0 million revolving line of credit with a fi nancial institution. There was no amount outstanding on the line at December
31, 2006 and 2005. The line is secured by the stock of First Federal Bank and the interest rate is either the lender’s
prime rate or LIBOR plus 1.75%, whichever is selected by First Defi ance. The maximum borrowed at any point in time
under the line was $0 and $3.0 million in 2006 and 2005, and the average balance outstanding was $0 and $1.3 million
in 2006 and 2005, respectively.
14. OTHER NON-INTEREST EXPENSE
The following is a summary of other non-interest expense:
Legal and other professional fees
Marketing
State franchise taxes
Printing and offi ce supplies
Postage
Amortization of intangibles
Other
Total other non-interest expense
Years Ended December 31,
2006
2005
$1,732
1,330
1,288
879
781
719
4,166
(In Thousands)
$1,366
1,095
1,285
745
645
755
3,231
$10,895
$9,122
2004
$1,343
592
868
577
422
110
2,282
$6,194
FIRST DEFIANCE FINANCIAL CORP.
61
15. POSTRETIREMENT BENEFITS
First Defi ance sponsors a defi ned benefi t postretirement plan that is intended to supplement Medicare coverage for certain
retirees who meet minimum age requirements. First Federal employees who retired prior to April 1, 1997 who completed
20 years of service after age 40 receive full medical coverage at no cost. Such coverage continues for surviving spouses of
those participants for one year, after which coverage may be continued provided the spouse pays 50% of the average cost.
First Federal employees retiring after April 1, 1997 are provided medical benefi ts at a cost based on their combined age
and years of service at retirement. Surviving spouses are also eligible for continued coverage after the retiree is deceased
at a subsidy level that is 10% less than what the retiree is eligible for. First Federal employees retiring before July 1, 1997
receive dental and vision care in addition to medical coverage. First Federal employees who retire after July 1, 1997 are
not eligible for dental or vision care, but those retirees and their spouses each receive up to $200 annually in a medical
spending account. Funds in that account may be used for payment of uninsured medical expenses.
First Federal employees who were born after December 31, 1950 are not eligible for the medical coverage described above
at retirement. Rather, a medical spending account of up to $10,000 (based on the participant’s age and years of service)
will be established to reimburse medical expenses for those individuals. First Insurance employees who were born before
December 31, 1950 can continue coverage until they reach age 65, or in lieu of continuing coverage, can elect the medical
spending account option, subject to eligibility requirements. Employees hired or acquired after January 1, 2003 are eligible
only for the medical spending account option.
Adoption of Statement 158
On December 31, 2006, the Company adopted the recognition and disclosure provisions of FASB Statement No. 158,
Employers’ Accounting for Defi ned Benefi t Pension and Other Postretirement Plans, an amendment of FASB Statements
No 87, 88, 106 and 132(R) (“Statement 158”). Statement 158 required the Company to recognize the funded status
(i.e., the diff erence between the fair value of plan assets and the projected benefi t obligations) of its defi ned benefi t
postretirement medical plan in the December 31, 2006 statement of fi nancial position, with a corresponding adjustment
to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income
at adoption represents the net unrecognized actuarial losses and unrecognized prior service costs, which were previously
netted against the plan’s funded status in the Company’s statement of fi nancial position pursuant to the provisions of
Statement 106. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s
historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent
periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other
comprehensive income. Those amounts will be subsequently recognized as a component of net periodic cost on the same
basis as the amounts recognized in accumulated other comprehensive income at adoption of Statement 158.
The incremental eff ects of adopting the provisions of Statement 158 on the Company’s statement of fi nancial position at
December 31, 2006 are presented in the following table. The adoption of Statement 158 had no eff ect on the Company’s
consolidated statement of income for the year ended December 31, 2006, or for any prior period presented, and it will not
eff ect the Company’s operating results in future periods.
Accrued Postretirement Liability
Deferred income tax liability
Accumulated other comprehensive income (loss)
At December 31, 2006
Prior to Adopting
Statement 158
Eff ect of Adopting
Statement 158
As Reported at
December 31, 2006
(In Thousands)
$1,232
(1,605)
(95)
$886
310
(576)
$2,118
(1,295)
(671)
62 2006 ANNUAL REPORT
Included in accumulated other comprehensive income at December 31, 2006 are the following amounts that have not
yet been recognized in net periodic pension cost: unrecognized prior service costs of $69,000 ($45,000 net of tax) and
unrecognized actuarial losses of $817,000 ($531,000 net of tax). The prior service cost and actuarial loss included in
other comprehensive income and expected to be recognized in net postretirement benefi t cost during the fi scal year-ended
December 31, 2007 is $8,000 ($5,000 net of tax) and $30,000 ($19,000 net of tax), respectively.
Reconciliation of Funded Status and Accumulated Benefi t Obligation
The plan is not currently funded. The following table summarizes benefi t obligation and plan asset activity for the plan
measured as of December 31 each year:
Change in benefi t obligation:
Benefi t obligation at beginning of year
Service cost
Interest cost
Participant contribution
Plan amendments
Actuarial (gains)/losses
Benefi ts paid
Benefi t obligation at end of year
Change in fair value of plan assets:
Balance at beginning of year
Employer contribution
Participant contribution
Benefi ts paid
Balance at end of year
Funded status at end of year
December 31,
2006
2005
(In Thousands)
$1,581
40
107
38
–
524
(172)
2,118
–
134
38
(172)
–
$1,630
49
97
34
38
(141)
(126)
1,581
–
92
34
(126)
–
$(2,118)
$(1,581)
At December 31, 2005, unrecognized prior service cost and net losses totaled $77,000 and $317,000 respectively.
Net periodic postretirement benefi t cost includes the following components:
Service cost-benefi ts attributable to service during the period
Interest cost on accumulated postretirement benefi t obligation
Net amortization and deferral
Net periodic postretirement benefi t cost
Years Ended December 31,
2006
$40
107
32
$179
2005
(In Thousands)
$49
97
25
$171
2004
$48
97
23
$168
FIRST DEFIANCE FINANCIAL CORP.
63
The following assumptions were used in determining the components of the postretirement benefi t obligation:
Weighted average discount rates:
Used to determine benefi t obligations at December 31
Used to determine net periodic postretirement benefi t cost for years ended December 31
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that rate reaches ultimate trend rate
2006
5.75%
5.75%
10.00%
4.00%
2019
2005
5.75%
6.00%
8.00%
4.00%
2014
The following benefi ts are expected to be paid over the next fi ve years and in aggregate for the next fi ve years thereafter.
Because the plan is unfunded, the expected net benefi ts to be paid and the estimated Company contributions are the
same amount. The Company has elected to opt for the Federal subsidy approach in lieu of coverage under Medicare
Part D. These amounts include an estimate of that tax-free Federal subsidy:
2007
2008
2009
2010
2011
2012 through 2016
Before Refl ecting
Medicate Part D Subsidy
Impact of Medicare
Part D Subsidy
After Refl ecting Medicare
Part D Subsidy
$118
130
140
154
165
1,014
(In Thousands)
$(22)
(25)
(29)
(31)
(34)
(257)
$96
105
111
123
131
757
Assumed health care cost trend rates have a signifi cant eff ect on the amounts reported for the health care plans. A one-
percentage-point change in assumed health care cost trend rates would have the following eff ect (in thousands):
Eff ect on total of service and interest cost
Eff ect on postretirement benefi t obligation
One-Percentage-Point Increase
One-Percentage-Point Decrease
Year Ended December 31
Year Ended December 31
2006
$25
262
(In Thousands)
2005
$19
197
2006
$(21)
(221)
2005
$(16)
(166)
64 2006 ANNUAL REPORT
16. REGULATORY MATTERS
First Federal is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material eff ect on the consolidated fi nancial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, First Federal must meet specifi c capital
guidelines that involve quantitative measures of First Federal’s assets, liabilities and certain off -balance-sheet items as
calculated under regulatory accounting practices. First Federal’s capital amounts and classifi cation are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require First Federal to maintain minimum
amounts and ratios of Tier I and total capital to risk-weighted assets and of Tier I capital to average assets. As of December
31, 2006 and 2005, First Federal meets all capital adequacy requirements to which it is subject and the most recent
notifi cation from the Offi ce of Thrift Supervision (OTS) categorized First Federal as well capitalized under the regulatory
framework. There are no conditions or events since these notifi cations that management believes have changed any of the
well-capitalized categorizations of First Federal. The following schedule presents First Federal’s regulatory capital ratios:
Actual
Required for Capital
Adequacy Purposes
Required to be
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2006
Tangible Capital
Tier 1 (Core) Capital
Tier 1 Capital to risk-weighted assets
Risk-Based Capital
As of December 31, 2005
Tangible Capital
Tier 1 (Core) Capital
Tier 1 Capital to risk-weighted assets
Risk-Based Capital
(Dollars In Thousands)
$140,017
140,017
140,017
153,596
$120,072
120,072
120,072
133,679
9.42%
9.42%
10.80%
11.85%
8.47%
8.47%
10.63%
11.84%
$22,293
59,448
51,859
103,716
$21,276
56,736
45,161
90,323
1.50%
4.00%
4.00%
8.00%
1.50%
4.00%
4.00%
8.00%
N/A
$74,311
77,787
129,645
N/A
$70,920
67,742
112,904
N/A
5.00%
6.00%
10.00%
N/A
5.00%
6.00%
10.00%
First Defi ance is a unitary thrift holding company and is regulated by the OTS. The OTS does not have defi ned capital
requirements for unitary thrift holding companies.
FIRST DEFIANCE FINANCIAL CORP.
65
17. INCOME TAXES
The components of income tax expense are as follows:
Current:
Federal
State and local
Deferred
Years Ended December 31,
2006
2005
2004
$6,579
2
870
$7,451
(In Thousands)
$5,367
7
479
$5,853
$4,677
35
90
$4,802
The provision for income taxes diff ers from that computed at the statutory corporate tax rate as follows:
Tax expense at statutory rate (35%)
Increases (decreases) in taxes from:
ESOP adjustments
State income tax – net of federal tax benefi t
Tax exempt interest income
Bank owned life insurance
Stock option expense under FAS 123(R)
Other
Totals
Years Ended December 31,
2006
2005
$8,068
163
–
(414)
(367)
90
(89)
(In Thousands)
$6,238
193
–
(394)
(268)
–
84
2004
$5,457
83
23
(498)
(332)
–
69
$7,451
$5,853
$4,802
Deferred federal income taxes refl ect the net tax eff ects of temporary diff erences between the carrying amounts of assets
and liabilities for fi nancial reporting purposes and the amounts used for income tax purposes.
66 2006 ANNUAL REPORT
Signifi cant components of First Defi ance’s deferred federal income tax assets and liabilities are as follows:
Deferred federal income tax assets:
Allowance for loan losses
Postretirement benefi t costs
Deferred compensation
Impaired loans
Accrued vacation
Deferred loan origination fees and costs
Employee Stock Ownership Plan
Deposit and FHLB advance mark to market
Net unrealized losses on available-for-sale securities
Other
Total deferred federal income tax assets
Deferred federal income tax liabilities:
FHLB stock dividends
Goodwill
Mortgage servicing rights
Fixed assets
Core deposit intangible
Loan mark to market
Other
Total deferred federal income tax liabilities
Net deferred federal income tax liability
December 31,
2006
2005
(In Thousands)
$4,584
741
669
589
291
134
123
59
52
143
7,385
2,949
1,484
1,478
1,321
1,039
315
94
8,680
$(1,295)
$4,565
415
547
706
259
51
185
150
13
296
7,187
2,585
1,084
1,207
1,277
1,265
564
–
7,982
$(795)
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in
future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available
evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be
realized and thus no valuation allowance was required at December 31, 2006.
Retained earnings at December 31, 2006 include approximately $11.0 million for which no tax provision for federal
income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end
of the Company’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained
earnings is used in the future for any purpose other than to absorb bad debts, the amount used will be added to future
taxable income. The unrecorded deferred tax liability on the above amount at December 31, 2006 was approximately
$3.85 million.
FIRST DEFIANCE FINANCIAL CORP.
67
18. EMPLOYEE BENEFIT PLANS
ESOP Plan
First Defi ance has an Employee Stock Ownership Plan (ESOP) covering all employees of First Defi ance age 21 or older who
have at least one year of credited service. Contributions to the ESOP are made by First Defi ance and are determined by
First Defi ance’s Board of Directors at their discretion. The contributions may be made in the form of cash or First Defi ance
common stock. The annual contributions may not be greater than the amount deductible for federal income tax purposes
and cannot cause First Federal to violate regulatory capital requirements.
To fund the plan, the ESOP borrowed funds from First Defi ance for the purpose of purchasing shares of First Defi ance
common stock. The ESOP acquired a total of 863,596 shares in 1993 and 1995. The loan outstanding at December 31,
2006 and 2005 was $1,134,000 and $1,722,000 respectively. Principal and interest payments on the loan are due in
equal quarterly installments through June of 2008. The loan is collateralized by the shares of First Defi ance’s common
stock and is repaid by the ESOP with funds from the Company’s contributions to the ESOP, dividends on unallocated shares
and earnings on ESOP assets.
As principal and interest payments on the loan are paid, shares are released from collateral and committed for allocation to
active employees, based on the proportion of debt service paid in the year. Shares held by the ESOP which have not been
released for allocation are reported as stock acquired by the ESOP plan in the statement of fi nancial condition. As shares
are released, First Defi ance records compensation expense equal to the average fair value of the shares over the period
in which the shares were earned. Also, the shares released for allocation are included in the average shares outstanding
for earnings per share computations. Dividends on allocated shares are recorded as a reduction of retained earnings and
dividends on unallocated shares are recorded as additional ESOP expense. ESOP compensation expense was $891,000,
$976,000, and $956,000, for 2006, 2005 and 2004, respectively.
Shares held by the ESOP at December 31 were as follows:
Year Ended December 31, 2006
Year Ended December 31, 2005
Beginning Balance
Allocation of shares to participants
Distribution of shares to former participants
Ending Balance
474,200
48,790
(24,741)
498,249
132,408
(48,790)
-
606,608
-
(24,741)
435,174
48,791
(9,765)
181,199
(48,791)
-
83,618
581,867
474,200
132,408
606,608
Allocated Unallocated
Total
Allocated
Unallocated
Total
616,373
-
(9,765)
Of the 83,618 unallocated shares at December 31, 2006, 12,197 were released during the 2006 fourth quarter for
allocation in 2007. The 71,421 unreleased shares have a fair value of $2.2 million at December 31, 2006, while the
fair value of 120,211 unreleased shares at December 31, 2005 was $3.3 million. A total of $553,000 and $532,000 of
dividends in 2006 and 2005, respectively, were used for debt service.
401(k) Plan
Employees of First Defi ance are eligible to participate in the First Defi ance Financial Corp. 401(k) Employee Savings
Plan (First Defi ance 401(k)) if they meet certain age and service requirements. Under the First Defi ance 401(k), First
Defi ance matches 50% of the participants’ contributions, to a maximum of 3% of compensation. The First Defi ance 401(k)
also provides for a discretionary First Defi ance contribution in addition to the First Defi ance matching contribution. First
Defi ance matching contributions totaled $355,000, $333,000 and $293,000 for the years ended December 31, 2006,
2005 and 2004 respectively. There were no discretionary contributions in any of those years.
68 2006 ANNUAL REPORT
19. STOCK OPTION PLANS
First Defi ance has established incentive stock option plans for its directors and its employees and has reserved 1,727,485
shares of common stock for issuance under the plans. A total of 1,467,204 shares are reserved for employees and
260,281 shares are reserved for directors. As of December 31, 2006, 404,154 options (394,439 for employees and 9,715
for directors) have been granted and remain outstanding at option prices based on the market value of the underlying
shares on the date the options were granted. There are 20,836 options granted under the 1993 plan that are currently
exercisable, 82,218 options granted under the 1996 plan that vest at 20% per year beginning in 1997 of which 77,776 are
fully vested and currently exercisable, 216,300 options granted under the 2001 plan which vest at 20% per year beginning
in 2002, of which 157,030 are fully vested and currently exercisable and 84,800 options granted under the 2005 plan
which vest at 20% per year beginning in 2006, of which 7,160 are fully vested and currently exercisable. All options expire
ten years from date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or fi ve years
after the retirement date for the 1993, 2001 and 2005 plans and on the earlier of the scheduled expiration date or twelve
months after the retirement date for the 1996 plan.
The following table summarizes stock option activity for 2006:
Balance at January 1, 2006
Granted
Exercised
Forfeited
Balance at December 31, 2006
Options Weighted Average
Option Prices
Outstanding
569,099
50,250
(203,595)
(11,600)
404,154
$16.00
26.58
11.54
23.26
$19.36
The weighted-average fair value of options granted during the years ended December 31, 2006, 2005 and 2004 were
$5.96, $5.67 and $6.85 respectively.
Proceeds, related tax benefi ts realized from options exercised and intrinsic value of options exercised were as follows:
Proceeds of options exercised
Related tax benefi t recognized
Intrinsic value of options exercised
Year ended December 31,
2006
$2,348
481
3,092
2005
$1,561
261
1,906
As of December 31, 2006 and 2005, 275,400 and 314,050 shares, respectively, were available for grant under the Company’s
stock option plans.
The aggregate intrinsic value of all options outstanding at December 31, 2006 was $4.40 million. The aggregate intrinsic
value of all options that were exercisable at December 31, 2006 was $3.73 million.
Information about stock options outstanding is as follows:
Outstanding
Exercisable
Range of
Exercise Prices
$10.52 - $12.99
$13.00 - $17.99
$18.00 - $23.99
$24.00 - $28.75
Total at December 31, 2006
Weighted Average
Exercise Price
Shares
Weighted Average
Remaining
Contractual
Life (in years)
Weighted Average
Exercise Price
Shares
26,000
174,951
48,150
155,053
404,154
$11.54
14.20
19.41
26.11
$19.36
2.69
3.34
6.16
8.34
5.56
26,000
174,951
28,650
33,201
262,802
$11.54
14.20
19.36
26.61
$16.03
FIRST DEFIANCE FINANCIAL CORP.
69
20. PARENT COMPANY AND REGULATORY RESTRICTIONS
Dividends paid by First Federal to First Defi ance are subject to various regulatory restrictions. In accordance with these
restrictions, First Federal must submit a request to the Offi ce of Thrift Supervision to initiate dividend payments.
Condensed parent company fi nancial statements, which include transactions with subsidiaries, follow:
Statements of Financial Condition
Assets
Cash and cash equivalents
Investment securities, available for sale, carried at fair value
Investment in subsidiaries
Loan receivable from First Defi ance Employee Stock Ownership Plan
Other assets
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Accrued liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2006
2005
(In Thousands)
$1,317
1,916
177,691
1,134
667
$9,406
1,494
160,035
1,722
706
$182,725
$173,363
$20,619
2,281
159,825
$20,619
1,528
151,216
$182,725
$173,363
Statements of Income
Dividends from subsidiaries
Interest on loan to ESOP
Interest expense
Other income
Noninterest expense
Loss before income taxes and equity in earnings of subsidiaries
Income tax (credit)
Loss before equity in earnings of subsidiaries
Undistributed equity in (distributions in excess of) earnings of subsidiaries
Net income
Years Ended December 31,
2006
2005
2004
$1,000
$119
(1,310)
140
(653)
(704)
(577)
(127)
15,727
$15,600
(In Thousands)
$34,415
$169
(275)
102
(637)
33,774
(212)
33,986
(22,016)
$11,970
$5,500
$214
(3)
45
(470)
5,286
(56)
5,342
5,454
$10,796
70 2006 ANNUAL REPORT
Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Distribution in excess of (undistributed equity in) earnings of subsidiaries
Security impairment loss
Change in other assets and liabilities
Net cash provided by operating activities
Investing activities:
Investment in unconsolidated trust subsidiary
Cash paid for ComBanc, Inc.,
Cash paid for Genoa Savings and Loan Company
Principal payments received on ESOP loan
Purchase of available-for-sale securities
Maturities of available-for-sale securities
Sale of available-for-sale securities
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from issuance of subordinated debt securities
Capital contribution to subsidiary
Stock options exercised
Excess tax benefi t from exercise of stock options
Purchase of common stock for treasury
Cash dividends paid
Net cash used in fi nancing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Years Ended December 31,
2006
2005
2004
(In Thousands)
$15,600
$11,970
$10,796
(15,727)
75
695
643
–
–
–
588
(500)
35
–
123
–
(1,000)
1,257
481
(2,852)
(6,741)
(8,855)
(8,089)
9,406
$1,317
22,016
–
232
34,218
(619)
(18,693)
(10,869)
552
(500)
–
70
(30,059)
20,619
(10,000)
1,561
–
(1,547)
(5,852)
4,781
8,940
466
$9,406
(5,454)
–
699
6,041
–
–
–
505
–
–
–
505
–
–
1,556
–
(4,691)
(5,011)
(8,146)
(1,600)
2,066
$466
FIRST DEFIANCE FINANCIAL CORP.
71
21. FAIR VALUE STATEMENT OF CONSOLIDATED FINANCIAL CONDITION
The following is a comparative condensed consolidated statement of fi nancial condition based on carrying amount and
estimated fair values of fi nancial instruments as of December 31, 2006 and 2005. Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments excludes certain fi nancial instruments
and all nonfi nancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of First Defi ance Financial Corp.
Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results
may not be precise. Subjective factors include, among other things, estimated cash fl ows, risk characteristics and interest
rates, all of which are subject to change. With the exception of investment securities, the Company’s fi nancial instruments
are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily
marketable depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per
settlement or maturity of these instruments could be signifi cantly diff erent.
The carrying amount of cash and cash equivalents, warehouse and term notes payable and advance payments by borrowers
for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value.
For investment securities, fair value has been based or current market quotations. If market prices are not available, fair
value has been estimated based upon the quoted price of similar instruments.
The fair value of loans which reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair
value is calculated based on discounted cash fl ow analysis, using interest rates currently being off ered for loans with similar
terms. The allowance for loan losses is considered to be a reasonable adjustment for credit risk.
SFAS No. 107 requires that the fair value of demand, savings, NOW and certain money market accounts be equal to their
carrying amount. The Company believes that the fair value of these deposits may be greater or less than that prescribed
by SFAS No. 107.
The carrying value of Subordinated Debentures and deposits with fi xed maturities is estimated based on interest rates
currently being off ered on instruments with similar characteristics and maturities. FHLB advances with maturities greater
than 90 days are valued based on discounted cash fl ow analysis, using interest rates currently being quoted for similar
characteristics and maturities. The cost or value of any call or put options is based on the estimated cost to settle the option
at December 31, 2006.
December 31, 2006
December 31, 2005
Carrying
Value
Estimated
Fair Values
Carrying
Value
Estimated
Fair Values
(In Thousands)
Assets:
Cash and cash equivalents
Investment securities
Loans, net, including loans held for sale
Other assets
Total assets
Liabilities and stockholders’ equity:
Deposits
Advances from Federal Home Loan Bank
Subordinated debentures
Short term borrowings and other interest bearing liabilities
Advance payments by borrowers for taxes and insurance
135,997
$1,527,879
$1,138,445
162,228
20,619
30,424
667
$50,023
112,123
1,229,736
$50,023
112,174
1,223,886
1,391,882
$1,386,083
$49,256
114,924
1,165,508
$1,329,688
$49,256
114,854
1,169,763
1,333,873
127,209
$1,461,082
$1,137,904
160,403
19,967
30,424
667
$1,069,501
180,960
20,619
25,748
605
$1,067,279
179,435
20,619
25,748
605
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
15,671
1,368,054
159,825
$1,527,879
12,433
1,309,866
151,216
$1,461,082
1,352,383
$1,349,365
1,297,433
$1,293,686
72 2006 ANNUAL REPORT
22. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly consolidated results of operations:
2006
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Gain (loss) on sale or write-down of securities
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic $0.55
Diluted
Average shares outstanding:
Basic 7,005
Diluted
2005
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Gain on sale of securities
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic $0.43
Diluted
Average shares outstanding:
Basic 6,668
Diluted
Three Months Ended
March 31*
June 30*
September 30
December 31
(In Thousands, Except Per Share Amounts)
$21,709
9,400
$22,953
10,694
12,309
383
11,926
-
4,515
10,742
5,699
1,848
$3,851
$0.56
$0.54
7,029
7,182
$16,436
5,826
10,610
347
10,263
621
3,640
10,244
4,280
1,409
12,259
683
11,576
-
5,127
10,795
5,908
1,955
$3,953
$0.54
$0.55
7,032
7,162
$18,669
6,816
11,853
349
11,504
515
3,365
12,518
2,866
838
$24,092
11,883
12,209
373
11,836
-
5,060
11,091
5,805
1,982
$3,823
$0.56
$0.53
7,051
7,146
$19,932
7,715
12,217
368
11,849
86
3,930
10,496
5,369
1,742
$24,311
12,066
12,245
317
11,928
(2)
4,924
11,211
5,639
1,666
$3,973
$0.55
7,168
$21,137
8,535
12,602
378
12,224
-
3,768
10,684
5,308
1,864
$2,871
$2,028
$3,627
$3,444
$0.30
$0.41
6,869
6,945
$0.53
$0.28
6,908
7,119
$0.50
$0.51
6,927
7,159
$0.48
7,161
* - The signifi cant increase in noninterest expense and resulting decline in net income for the quarters ended March 31 and June 30, 2005 was
primarily due to $884,000 and $2.5 million in those quarters respectively of acquisition related charges associated with the previously disclosed
2005 acquisitions.