First Defiance Financial Corp.
                    Audit Committee of the Board of Directors
Committee Role
The role of the audit committee of the board of directors of First Defiance
Financial Corp. ("The Company") is to act on behalf of the board of directors
and oversee all material aspects of the Company's accounting and financial
reporting processes and the audits of the financial statements of the Company.
The audit committee's role includes a particular focus on the qualitative
aspects of financial reporting to shareholders and on company processes for the
management of business/financial risk and for compliance with significant
applicable legal, ethical, and regulatory requirements.
The role also includes coordination with other board committees and maintenance
of strong, positive working relationships with management, external and internal
auditors, counsel, and other committee advisors.
The audit committee shall be comprised of three or more independent directors as
determined by the Board. Members of the audit committee shall be considered
independent if they meet the criteria for independence as defined by the Nasdaq
Stock Market, Inc. ("Nasdaq"). All audit committee members shall have (1)
knowledge of the financial services industry; (2) the ability to read and
understand fundamental financial statements, including a balance sheet, income
statement, statement of cash flows, and key performance indicators; and (3) the
ability to understand key business and financial risks and related controls and
control processes. The committee shall have access to its own counsel and other
advisors at the committee's sole discretion.
One member, preferably the chairperson, should be literate in business and
financial reporting and control, including basic knowledge of the regulatory
requirements. Preferably this person should have experience in finance or
accounting, experience in supervising a finance or accounting function or other
comparable experience or background. Committee appointments shall be approved
annually by the full board and the committee chairperson shall be selected and
approved by the full board.
Statement of Policy
The audit committee shall provide assistance to the directors in fulfilling
their responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting, reporting practices of the Company,
and the quality and integrity of financial reports of the Company. In so doing,
it is the responsibility of the audit committee to maintain free and open
between the directors, the external auditors, the internal auditors, and the
financial management of the Company.
The committee shall meet at least four times annually, or more frequently as
circumstances dictate. As part of its job to foster open communication, the
committee should meet at least semi-annually with management, the internal
auditors, and the external auditors in separate executive sessions to discuss
any matters the committee or each of these groups believe should be discussed
separately. The committee may ask members of management or others to attend
meetings and provide pertinent information as necessary.
Operating Principles
The committee shall fulfill its responsibilities within the context of the
following overriding principles:
Communications - The chairperson or others on the committee shall, to the extent
appropriate, have contact throughout the year with senior management, other
committee chairpersons, and other key committee advisors, external and internal
auditors, etc. to strengthen the committee's knowledge of relevant current and
prospective business issues.
Committee Education/Orientation - The committee, with management, shall develop
and participate in a process for review of important financial and operating
topics that present potential significant risk to the company. Additionally,
individual committee members are encouraged to participate in relevant and
appropriate self-study education to assure understanding of the business
environment in which the company operates.
Annual Plan - The committee, with input from management and other key committee
advisors, shall develop an annual plan responsive to the "primary committee
responsibilities" detailed herein. The annual plan shall be reviewed and
approved by the full board.
Meeting Agenda - Committee meeting agendas shall be the responsibility of the
committee chairperson, with input from committee members. It is expected that
the chairperson would also ask management and key committee advisors to
participate in this process.
Committee Expectations and Information Needs - The committee shall communicate
committee expectations and nature, timing, and extent of committee information
needs to management, internal audit and external audit and other external
parties. Written materials, including key performance indicators and measures
related to key business and financial risks, shall be received from management,
auditors and others at least four days in advance of meeting dates
External Resources - The committee shall be authorized to access internal and
external resources, as the committee requires, to carry out its
Reporting to the Board of Directors - The committee, through the committee
chairperson, shall report to the full board following each meeting of the
committee. In addition, minutes of the audit committee meetings shall be
available to each board member upon request.
Committee Self Assessment - The committee shall review, discuss and assess its
own performance as well as the committee role and responsibilities, seeking
input from senior management, the full board, and others. Changes in role and/or
responsibilities, if any, shall be recommended to the full board for approval.
Relationship with External and Internal Auditors
The external auditors, in their capacity as independent public accountants,
shall be responsible to the board of directors and the audit committee as
representatives of shareholders. The audit committee has the sole authority to
appoint, retain, determine funding for and oversee the Company's external
As the external auditors review financial reports, they will be reporting to the
audit committee. They shall report all relevant issues to the committee
responsive to agreed-on committee expectations. In executing its oversight role,
the committee should review the work of external auditors.
Annually, the audit committee should direct the external auditors to attend the
full board of directors meeting to assist in reporting the results of the annual
audit or to answer other directors' questions.
The committee shall annually review the performance (effectiveness, objectivity,
and independence) of the external and internal auditors. The committee shall
ensure receipt of a formal written statement from the external auditors
consistent with standards set by the Independence Standards Board. Additionally,
the committee shall discuss with the auditor relationships or services that may
affect auditor objectivity or independence. If the committee is not satisfied
with the auditors' assurances of independence, it shall take or recommend to the
full board appropriate action to assure the independence of the external
The internal audit function shall be responsible to the board of directors
through the committee.
If either the internal or the external auditors identify significant issues
relative to the overall board responsibility that have been communicated to
management but, in their judgment, have not been adequately addressed, they
should communicate these issues to the committee chairperson.
Changes in outsourced internal audit firms, or directors of internal audit
should the committee decide to establish the function in-house, shall be subject
to committee approval. Changes in the compliance officer shall also be subject
to committee approval.
In carrying out its responsibilities, the audit committee believes its policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the directors and shareholders that the corporate
accounting and reporting practices of the Company are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the audit committee will:
o     Obtain the full board of directors' approval of this Charter and review
      and reassess this Charter as conditions dictate (at least annually).
o     Review and recommend to the directors the external auditors to be selected
      to audit the financial statements of the Company and its divisions and
      subsidiaries and evaluate the performance of the external auditors on an
      on-going basis.
o     Approve all audit services and permitted non-audit services (as defined by
      the SEC) entered into with the external auditors prior to such services
      being performed. If it is necessary to engage the external auditors for
      permitted services prior to scheduled meetings of the committee, such
      services can be approved by the committee chairperson and reported after
      the fact to the committee. Such circumstances are expected to be
o     The committee approves the following de minimus exception to the
      pre-approval requirements for non-audit services. Such services:
      o     must not aggregate to more than 5% of the total revenues paid by
            First Defiance to the external auditor in the fiscal year in which
            such services are provided,
      o     were not recognized by First Defiance as non-audit services at the
            time of the engagement of the external auditor, and
      o     are promptly brought to the attention of the audit committee via
            timely communication with the audit committee chairperson and
            approved prior to the completion of the audit by the audit committee
o     Review and concur with management's approach to the internal audit
      function. Review internal auditor performance and changes in internal
      audit firms/leadership.
o     Review and approve the internal audit policy.
o     Review the independence and authority of internal audit's reporting
      obligations, the proposed audit plans for the coming year, and the
      coordination of such plans with the external auditors. Review the
      qualifications of the Internal Auditor to specific areas within the audit
o     Meet with the external auditors and financial management of the Company to
      review the scope of the proposed audit and timely quarterly reviews for
      the current year and the procedures to be utilized, the adequacy of the
      external auditor's compensation, and at the conclusion thereof review such
      audit or review, including any comments or recommendations of the external
o     Review with the external auditors, the Company's internal auditor, and
      financial and accounting personnel, the adequacy and effectiveness of the
      accounting and financial controls of the Company, and elicit any
      recommendations for the improvement of such internal controls or
      particular areas where new or more detailed controls or procedures are
      desirable. Particular emphasis should be given to the adequacy of internal
      controls to expose any payments, transactions, or procedures that might be
      deemed illegal or otherwise improper.
o     Review reports received from regulators and review other legal and
      regulatory matters that may have a material effect on the financial
      statements or related company compliance policies.
o     Inquire of management, the internal auditor, and the external auditors
      about significant risks or exposures and assess the steps management has
      taken to minimize such risks to the Company.
o     Receive prior to each meeting, a summary of findings from completed
      internal audits and a progress report on the proposed internal audit plan,
      with explanations for any deviations from the original plan.
o     Engage the external auditors to perform timely reviews of interim
      financial statements following procedures set forth in Statement of
      Auditing Standard (SAS) No. 71, or such other auditing standards that may
      in time modify, supplement or replace SAS 71. Such review should be
      completed prior to the Company filing its form 10-Q.
o     Review with management and the external auditors any changes in important
      accounting principles and the application thereof in both interim and
      annual financial reports.
o     Review the quarterly financial statements with financial management and
      the external auditors prior to the filling of the Form 10-Q (or prior to
      the press release of results, if possible) to determine that the external
      auditors do not take exception to the disclosure and content of the
      financial statements, and discuss any other matters required to be
      communicated to the committee by the auditors. The chair of the committee
      or his designee may represent the entire committee for purposes of this
o     Review the financial statements contained in the annual report to
      shareholders with management and the external auditors to determine that
      the external auditors are satisfied with the disclosure and content of the
      financial statements to be presented to the shareholders. Also review with
      financial management and the external auditors their judgements about the
      quality, not just acceptability, of accounting principles and the clarity,
      consistency, and completeness of the Company's accounting information
      contained in the financial statements and related disclosures. Discuss
      items that may have a significant impact on the representational
      faithfulness, verifiability, neutrality, and consistency of the accounting
      information. Review with financial management and the external auditors
      the results of their timely analysis of significant financial reporting
      issues and practices, including changes in, or adoptions of, accounting
      principles and disclosure practices, and discuss any other matters
      required to be communicated to the committee by the auditors.
o     The following communications are explicitly required to be made between
      the external auditors and the audit committee prior to the filing of any
      audit report with the SEC:
      o     critical accounting policies and practices used
      o     all alternative treatments within GAAP for policies and practices
            related to material items that have been discussed with management,
            including the ramifications of the use of such alternative
            treatments and disclosures and the treatment preferred by the
            accounting firm; and
      o     other material written communications, including but not limited to,
            the management representation letter, reports on observations and
            recommendations on internal controls, the schedule of adjusted audit
            differences and a listing of adjustments and reclassifications not
            recorded, the engagement letter, and the independence letter.
o     Disclose in the annual proxy statement in connection with the annual
      meeting of shareholders at which directors are to be elected a statement
      that audit committee members are independent.
o     Disclose in the annual proxy statement in connection with the annual
      meeting of shareholders at which directors are to be elected a statement
      which states: (1) the audit committee has reviewed and discussed the
      audited financial statements with management, (2) the audit committee has
      discussed with the independent auditors the matters required to be
      discussed by SAS 61, as may be modified or supplemented and (3) the audit
      committee has received the written disclosures and the letter from the
      independent auditors required by ISB Standard No. 1, as may be modified or
      supplemented, and has discussed with the auditors the auditors'
      independence. The audit committee should then state whether, based on the
      reviews and discussions referred to above, it recommended to the Board of
      Directors that the financial statements be included in the Annual Report
      on Form 10-K for the last fiscal year for filing with the SEC. This
      disclosure is to appear over the printed names of each voting member of
      the audit committee.
o     Review and recommend to the full board ratification of the code of ethical
o     Establish procedures for the receipt, retention and treatment of
      complaints received by the Company regarding accounting, internal
      accounting controls or auditing matters.
o     Establish procedures for the confidential and anonymous submission by
      employees of concerns regarding questionable accounting or auditing
o     Investigate any matter brought to its attention within the scope of its
o     Review all significant conflicts of interest and related party
o     Review with senior management any changes in key financial management.
o     Include a copy of this Charter in the proxy statement at least triennially
      or the year after any significant amendment to the Charter.