FIRST DEFIANCE FINANCIAL CORP (Form: 10-Q, Received: 08/07/2018 11:22:49)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Quarterly Period Ended June 30, 2018

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition Period from ___________to__________

Commission file number 0-26850

First Defiance Financial Corp.

(Exact name of registrant as specified in its charter)

Ohio		34-1803915
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

601 Clinton Street, Defiance, Ohio		43512
(Address of principal executive office)		(Zip Code)

Registrant's telephone number, including area code: (419) 782-5015

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 20,400,965 shares outstanding at July 31, 2018.

FIRST DEFIANCE FINANCIAL CORP.

INDEX

		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):

	Consolidated Condensed Statements of Financial Condition – June 30, 2018 and December 31, 2017	2

	Consolidated Condensed Statements of Income - Three and six months ended June 30, 2018 and 2017	4

	Consolidated Condensed Statements of Comprehensive Income – Three and six months ended June 30, 2018 and 2017	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – Six months ended June 30, 2018 and 2017	6

	Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 2018 and 2017	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	55

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	78

Item 4.	Controls and Procedures	79

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	81

Item 1A.	Risk Factors	81

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81

Item 3.	Defaults upon Senior Securities	81

Item 4.	Mine Safety Disclosures	81

Item 5.	Other Information	81

Item 6.	Exhibits	82

	Signatures	83

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

	June 30, 2018		December 31, 2017

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	53,885	$	58,693
Federal funds sold		53,000		55,000
		106,885		113,693
Securities:
Available-for-sale, carried at fair value		286,350		260,650
Held-to-maturity, carried at amortized cost (fair value $607 and $649 at June 30, 2018 and December 31, 2017, respectively)		607		648
		286,957		261,298
Loans held for sale		15,422		10,435
Loans receivable, net of allowance of $27,321 at June 30, 2018 and $26,683 at December 31, 2017, respectively		2,358,023		2,322,030
Mortgage servicing rights		9,948		9,808
Accrued interest receivable		9,475		8,706
Federal Home Loan Bank stock		15,989		15,992
Bank owned life insurance		66,860		66,230
Premises and equipment		40,444		40,217
Real estate and other assets held for sale		1,795		1,532
Goodwill		98,569		98,569
Core deposit and other intangibles		5,024		5,703
Deferred taxes		1,091		231
Other assets		23,092		38,959
Total assets	$	3,039,574	$	2,993,403

(continued)

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

	June 30, 2018			December 31, 2017

Liabilities and stockholders’ equity
Liabilities:
Deposits	$	2,489,128		$	2,437,656
Advances from the Federal Home Loan Bank		85,722			84,279
Subordinated debentures		36,083			36,083
Securities sold under repurchase agreements		6,899			26,019
Advance payments by borrowers		5,207			2,925
Other liabilities		29,615			33,155
Total liabilities		2,652,654			2,620,117

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued		–			–
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued		–			–
Common stock, $.01 par value per share: 50,000,000 shares authorized; 25,398,992 and 25,425,682 shares issued and 20,396,178 and 20,312,082 shares outstanding at June 30, 2018 and December 31, 2017, respectively ⁽¹⁾		127			127
Additional paid-in capital		160,847			160,940
Accumulated other comprehensive income (loss), net of tax of $(860) and $117, respectively		(3,235	)		217
Retained earnings		279,122			262,900
Treasury stock, at cost, 5,002,814 shares at June 30, 2018 and 5,113,600 shares at December 31, 2017 ⁽¹⁾		(49,941	)		(50,898	)
Total stockholders’ equity		386,920			373,286
Total liabilities and stockholders’ equity	$	3,039,574		$	2,993,403

(1)

Share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018 .

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018			2017
Interest Income
Loans	$	27,660	$	25,318	$	54,186		$	47,288
Investment securities:
Taxable		1,189		943		2,238			1,921
Non-taxable		850		809		1,652			1,586
Interest-bearing deposits		373		201		670			346
FHLB stock dividends		227		187		458			353
Total interest income		30,299		27,458		59,204			51,494
Interest Expense
Deposits		3,144		2,170		5,755			3,966
FHLB advances and other		282		414		601			780
Subordinated debentures		320		229		600			443
Notes payable		6		13		14			28
Total interest expense		3,752		2,826		6,970			5,217
Net interest income		26,547		24,632		52,234			46,277
Provision for loan losses		423		2,118		(672	)		2,172
Net interest income after provision for loan losses		26,124		22,514		52,906			44,105
Non-interest Income
Service fees and other charges		3,296		3,161		6,427			5,920
Insurance commissions		3,493		3,294		7,770			6,752
Mortgage banking income		2,013		1,830		3,755			3,568
Gain on sale of non-mortgage loans		43		90		267			90
Gain on sale or call of securities		-		267		-			267
Trust income		522		464		1,074			914
Income from Bank Owned Life Insurance		566		422		966			2,245
Other non-interest income		281		612		658			933
Total non-interest income		10,214		10,140		20,917			20,689
Non-interest Expense
Compensation and benefits		12,885		11,473		26,134			25,808
Occupancy		2,026		1,954		4,097			3,791
FDIC insurance premium		202		353		562			643
Financial institutions tax		531		535		1,062			1,014
Data processing		2,083		2,019		4,188			3,958
Amortization of intangibles		332		334		679			567
Other non-interest expense		4,606		3,962		9,194			7,991
Total non-interest expense		22,665		20,630		45,916			43,772
Income before income taxes		13,673		12,024		27,907			21,022
Federal income taxes		2,564		3,677		5,061			7,534
Net Income	$	11,109	$	8,347	$	22,846		$	13,488

Earnings per common share ⁽¹⁾
Basic	$	0.54	$	0.41	$	1.12		$	0.69
Diluted	$	0.54	$	0.41	$	1.12		$	0.68
Dividends declared per share ⁽¹⁾	$	0.15	$	0.125	$	0.30		$	0.25
Average common shares outstanding ⁽¹⁾
Basic		20,388		20,294		20,359			19,586
Diluted		20,492		20,408		20,466			19,696

(1)

Share and per share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018.

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Net income	$	11,109		$	8,347		$	22,846		$	13,488

Other comprehensive income:
Unrealized gains (losses) on securities available for sale		(872	)		2,579			(4,429	)		4,158
Reclassification adjustment for security gains included in net income ⁽¹⁾		-			(267	)		-			(267	)
Income tax expense		183			(808	)		930			(1,361	)
Other comprehensive income		(689	)		1,504			(3,499	)		2,530

Comprehensive income	$	10,420		$	9,851		$	19,347		$	16,018

(1) Amounts are included in gains on sale or call of securities on the consolidated condensed statements of income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended June 30, 2018 and 2017 was $0 and $93, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the six months ended June 30, 2018 and 2017 was $0 and $93, respectively.

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statement of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands, except share data)

										Accumulated
			Common				Additional			Other									Total
	Preferred		Stock		Common		Paid-In			Comprehensive			Retained			Treasury			Stockholders’
	Stock		Shares ⁽¹⁾		Stock		Capital			Income			Earnings			Stock			Equity

Balance at January 1, 2018	$	-		20,312,082	$	127	$	160,940		$	217		$	262,900		$	(50,898	)	$	373,286
Net income														22,846						22,846
Other comprehensive loss											(3,499	)								(3,499	)
Adoption of ASU 2018-02 – See Note 2											47			(47	)					-
Stock based compensation expenses								172												172
Shares issued under stock option plan, net of 8,872 repurchased and retired				38,628				(93	)					(270	)		474			111
Restricted share activity under stock incentive plans net of 17,818 repurchased and retired				43,800				(205	)					(201	)		466			60
Shares issued from direct stock sales				1,668				33									17			50
Common stock dividends declared														(6,106	)					(6,106	)
Balance at June 30, 2018	$	-		20,396,178	$	127	$	160,847		$	(3,235	)	$	279,122		$	(49,941	)	$	386,920

Balance at January 1, 2017	$	-		17,966,412	$	127	$	126,390		$	215		$	240,592		$	(74,306	)	$	293,018
Net income														13,488						13,488
Other comprehensive income											2,530									2,530
Stock based compensation expenses								85												85
Shares issued under stock option plan, net of 15,014 repurchased and retired				8,086				51						(83	)		230			198
Capital stock issuance				2,279,004				33,792									22,740			56,532
Restricted share activity under stock incentive plans				42,754				64						(17	)		280			327
Shares issued from direct stock sales				1,384				22									14			36
Common stock dividends declared														(4,784	)					(4,784	)
Balance at June 30, 2017	$	-		20,297,640	$	127	$	160,404		$	2,745		$	249,196		$	(51,042	)	$	361,430

(1)

Share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018.

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

	Six Months Ended
	June 30,
	2018			2017
Operating Activities
Net income	$	22,846		$	13,488
Items not requiring (providing) cash:
Provision for loan losses		(672	)		2,172
Depreciation		1,719			1,770
Amortization of mortgage servicing rights, net of impairment recoveries		586			667
Amortization of core deposit and other intangible assets		679			567
Net amortization (accretion)of premiums and discounts on loans and deposits		(192	)		(190	)
Amortization of premiums and discounts on securities		588			538
Change in deferred taxes		70			621
Proceeds from the sale of loans held for sale		100,481			102,111
Originations of loans held for sale		(103,730	)		(98,818	)
Gain from sale of loans		(2,731	)		(2,467	)
Gain from sale or call of securities		-			(267	)
Loss on sale or disposal of premises and equipment		-			52
Gain / loss on sale / write-down of real estate and other assets held for sale		529			(53	)
Stock option expense		172			85
Restricted stock expense		60			327
Income from bank owned life insurance		(966	)		(2,245	)
Excess tax benefit on stock compensation plans		(158	)		(162	)
Changes in:
Accrued interest receivable		(769	)		(294	)
Other assets		(2,219	)		(53	)
Other liabilities		(3,382	)		(3,144	)
Net cash provided by operating activities		12,911			14,705

Investing Activities
Proceeds from maturities of held-to-maturity securities		41			43
Proceeds from maturities, calls and pay-downs of available-for-sale securities		12,519			13,244
Proceeds from sale of premises and equipment, real estate and other assets held for sale		343			214
Proceeds from the sale of available-for-sale securities		-			7,727
Proceeds from sale of non-mortgage loans		14,086			15,167
Purchases of available-for-sale securities		(42,839	)		(20,187	)
Proceeds from Federal Home Loan stock redemption		3			-
Net cash received in acquisitions		-			19,359
Investment in bank owned life insurance		-			(20,000	)
Proceeds from bank owned life insurance death benefit		336			-
Proceeds from sale of bank owned life insurance		17,689			-
Purchase of portfolio mortgage loans		-			(11,476	)
Purchases of premises and equipment, net		(1,946	)		(1,992	)
Net increase in loans receivable		(49,941	)		(34,266	)
Net cash used by investing activities		(49,709	)		(32,167	)

Financing Activities
Net increase in deposits and advance payments by borrowers		53,612			36,677
Repayment of Federal Home Loan Bank advances		(28,557	)		(517	)
Proceeds from Federal Home Loan Bank advances		30,000			-
Increase in notes payable		-			6,500
Decrease in securities sold under repurchase agreements		(19,120	)		(7,710	)
Proceeds from exercise of stock options		111			198
Proceeds from direct stock sales		50			36
Cash dividends paid on common stock		(6,106	)		(4,784	)
Net cash provided by financing activities		29,990			30,400
Increase in cash and cash equivalents		(6,808	)		12,938
Cash and cash equivalents at beginning of period		113,693			99,003
Cash and cash equivalents at end of period	$	106,885		$	111,941

Supplemental cash flow information:
Interest paid	$	6,901		$	5,123
Income taxes paid	$	5,250		$	6,800
Transfers from loans to real estate and other assets held for sale	$	930		$	309
Securities purchased but not yet settled	$	397		$	-
Sale of bank owned life insurance not yet settled	$	-		$	17,840

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

June 30, 2018 and 2017

Basis of Presentation

First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal” or the “Bank”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (“First Defiance Risk Management”). All significant intercompany transactions and balances are eliminated in consolidation.

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential real estate, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and collateralized mortgage obligations (“CMOs”), and corporate bonds.

First Insurance is an insurance agency that conducts business through offices located in the Defiance, Sylvania, Bryan, Lima, Archbold, Fostoria, Tiffin, Findlay and Bowling Green, Ohio areas. First Insurance offers property and casualty insurance, life insurance and group health insurance.

First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

The consolidated condensed statement of financial condition at December 31, 2017, has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

The accompanying consolidated condensed financial statements as of June 30, 2018, and for the three and six month periods ended June 30, 2018 and 2017 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2017 Form 10-K. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three and six month period ended June 30, 2018, are not necessarily indicative of the results that may be expected for the entire year.

On June 22, 2018, the Company announced a stock split in the form of a share distribution of one common share for each outstanding common share. The stock split was distributed on July 12, 2018 to shareholders of record as of July 2, 2018. All share and per share data in this Quarterly Report on Form 10-Q has been adjusted and is reflective of the stock split.

2 .

Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, restricted stock awards and stock grants.

Goodwill and Other Intangibles

Goodwill resulting from business combinations prior to January 1, 2009, represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s balance sheet.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10 to 20 years for core deposit and customer relationship intangibles.

Accounting Standards Adopted in 2018

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” This standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Subsequent to the issuance of ASU 2014-09, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” For financial reporting purposes, this standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018, utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See below for additional information related to revenue generated from contracts with customers.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans receivable) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements. Also in conjunction with the adoption, the Company’s fair value measurement of financial instruments was based upon an exit price notion as required in ASU 2016-01. The guidance was applied on a prospective approach resulting in prior-periods no longer being comparable.

In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of public law No. 115-97, known as the Tax Cuts and Jobs Act (“Tax Act”). Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected. The Company adopted ASU No. 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. The reclassification increased AOCI and decreased retained earnings by $47,000, with zero net effect on total shareholders’ equity.

Accounting Standards Pending Adoption

In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet selected a transition method as it is in the process of determining the effect of the ASU on its consolidated financial statements and disclosures. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated condensed statements of financial condition. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated condensed statements of financial condition, along with our regulatory capital ratios. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements. At June 30, 2018, the Company had contractual operating lease commitments of approximately $11.0 million, before considering renewal options that are generally present.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing a Company-wide implementation committee along with engaging a third-party software vendor to assist in the implementation process. The committee’s initial review indicates the Company has maintained sufficient historical loan data to support the requirement of this pronouncement and is currently evaluating the various loss methodologies to determine their correlations to the Company’s loan segments historical performance. Early adoption is permitted, however, the Company does not currently plan to early adopt this ASU.

Revenue Recognition

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are presented in the Company’s statement of income as components of non-interest income are as follows:

Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Service charges on deposit accounts that are within the scope of ASC 606 were $1.9 million in the second quarter of 2018 and $3.7 million for the six months ended June 30, 2018. Income from services charges on deposit accounts is included in service fees and other charges in non-interest income.

Interchange income - this represents fees earned from debit cardholder transactions. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrent with the transaction processing services provided to the cardholder. Interchange fees in the second quarter of 2018 and for the six months ended June 30, 2018, which are reported net of network related charges, were $1.1 million and $2.0 million, respectively. Interchange income is included in service fees and other charges in non-interest income.

Wealth management and trust fee income - this represents monthly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received. Also included are fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that we refer to the third party. These fees are paid to us by the third party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied. Revenue from wealth management and trust services were $215,000 and $522,000, respectively, in the second quarter of 2018 and $429,000 and $1.1 million, respectively, for the six months ended June 30, 2018. Income from wealth management services is included in other non-interest income in total non-interest income.

Gain/loss on sales of other real estate owned (“OREO”) - the Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present. Income from the gain/loss on sales of OREO was $8,000 in the second quarter of 2018 and $18,000 for the six months ended June 30, 2018. Income from the gain or loss on sales of OREO is included in other non-interest income in total non-interest income.

Insurance commissions - this represents new commissions that are recognized when the Company sells insurance policies to customers. The Company is also entitled to renewal commissions and, in some cases, contingent commissions in the form of profit sharing which are recognized in subsequent periods. The initial commission is recognized when the insurance policy is sold to a customer. Renewal commission is variable consideration and is recognized in subsequent periods when the uncertainty around variable consideration is subsequently resolved (i.e., when customer renews the policy). Contingent commission is also a variable consideration that is not recognized until the variability surrounding realization of revenue is resolved. Another source of variability is the ability of the policy holder to cancel the policy anytime and in such cases, the Company may be required, under the terms of the contract, to return part of the commission received. The variability related to cancellation of the policy is not deemed significant and thus, does not impact the amount of revenue recognized. In the event the policyholder chooses to cancel the policy at any time, the revenue for amounts which qualify for claw-back are reversed in the period the cancellation occurs. Management views the income sources from insurance commissions in two categories: (i) new/renewal commissions and (ii) contingent commissions. Insurance commissions, new and renewal was $3.5 million in the second quarter of 2018. Insurance commissions were $7.8 million for the six months ended June 30, 2018 of which, $6.8 million were new/renewal commissions and $1.0 million were contingent commissions.

Fair Value

FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with the methodologies disclosed in Note 22 of the Company’s 2017 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU 2016-01 as discussed in Note 2 above. Prior to adopting the amendments included in the standard, the Company was permitted to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of June 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. In that regard, ASC 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 : Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 : Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means.

Level 3 : Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Available for sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 2 include U.S. federal government agencies, mortgage-backed securities, corporate bonds and municipal securities.

Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor’s required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Real estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then reviewed monthly by members of the asset review committee for valuation changes and are accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which may utilize a single valuation approach or a combination of approaches including cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include but are not limited to: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

Mortgage servicing rights - On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and are validated against available market data (Level 2).

Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date (Level 2).

The following table summarizes the financial assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets and Liabilities Measured on a Recurring Basis

June 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:

Obligations of U.S. federal government corporations and agencies	$	-	$	2,488	$	-	$	2,488
Mortgage-backed - residential		-		67,578		-		67,578
REMICs		-		2,952		-		2,952
Collateralized mortgage obligations- residential		-		98,929		-		98,929
Corporate bonds		-		13,074		-		13,074
Obligations of state and political subdivisions		-		101,329		-		101,329
Mortgage banking derivative - asset		-		803		-		803
Mortgage banking derivative -liability		-		27		-		27

December 31, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:

Obligations of U.S. federal government corporations and agencies	$	-	$	508	$	-	$	508
Mortgage-backed - residential		-		59,269		-		59,269
REMICs		-		1,065		-		1,065
Collateralized mortgage obligations-residential		-		93,876		-		93,876
Preferred stock		1		-		-		1
Corporate bonds		-		13,103		-		13,103
Obligations of state and political subdivisions		-		92,828				92,828
Mortgage banking derivative - asset		-		609		-		609
Mortgage banking derivative -liability		-		11		-		11

The following table summarizes the financial assets measured at fair value on a non-recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets and Liabilities Measured on a Non-Recurring Basis

June 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial real estate	$	-	$	-	$	121	$	121
Commercial		-		-		1,593		1,593
Total impaired loans		-		-		1,714		1,714
Mortgage servicing rights		-		564		-		564
Real estate held for sale
Commercial real estate		-		-		705		705
Total real estate held for sale		-		-		705		705

December 31, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial real estate	$	-		-	$	1,787	$	1,787
Commercial						2,817		2,817
Total impaired loans		-		-		4,604		4,604
Mortgage servicing rights		-		534		-		534
Real estate held for sale
Commercial real estate		-		-		227		227
Total real estate held for sale		-		-		227		227

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs			Weighted Average
			(Dollars in Thousands)
Impaired Loans- Applies to all loan classes	$	1,714	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-20%			10.2	%

Real estate held for sale – Applies to all classes	$	705	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		20	%		20	%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs			Weighted Average
				(Dollars in Thousands)

Impaired Loans- Applies to all loan classes	$	4,604	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-20	%		10	%

Real estate held for sale – Applies to all classes	$	227	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		0	%		0	%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $1.7 million, with a valuation allowance of $182,000 and a fair value of $4.6 million, with a no valuation allowance at June 30, 2018 and December 31, 2017, respectively. A provision recovery of $72,000 for the three months ended June 30, 2018, a provision expense of $61,000 for the six months ended June 30, 2018, and a provision expense of $605,000 and $813,000 for the three months and six months ended June 30, 2017, were included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value, had a fair value of $564,000 with a valuation allowance of $349,000 and a fair value of $534,000 with a valuation allowance of $432,000 at June 30, 2018 and December 31, 2017, respectively. A recovery of $47,000 and $83,000 for the three and six months ended June 30, 2018, respectively, and a recovery of $16,000 and $48,000 for the three and six months ended June 30, 2017 respectively, was included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The change in fair value of real estate held for sale was $0 and $544,000 for the three and six months ended June 30, 2018, respectively, which was recorded directly as an adjustment to current earnings through non-interest expense. The change in fair value of real estate held for sale was $20,000 for the three and six months ended June 30, 2017.

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of June 30, 2018, and December 31, 2017. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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 flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial 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 significantly different.

The carrying amount of cash and cash equivalents and notes payable, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

It was not practicable to determine the fair value of Federal Home Loan Bank of Cincinnati (“FHLB”) stock due to restrictions placed on its transferability.

The Company adopted the amendments to ASU 2016-01 relating to the loan portfolio in the first quarter of 2018 and an exit price income approach is now used to determine the fair value. The loans were valued on an individual basis, with consideration given to the loans underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow approach to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. As of December 31, 2017, the fair value was estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities or an entry price income approach. The market rates used were based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions. For all periods presented, the estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 within the valuation hierarchy.

The fair value of accrued interest receivable is equal to the carrying amounts resulting in a Level 2 or Level 3 classification which is consistent with its underlying value.

The fair value of non-interest bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e. carrying value) and are classified as Level 1. The fair value of savings, checking and certain money market accounts are equal to their carrying amounts and are a Level 2 classification. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 2 classification. The carrying value of subordinated debentures and deposits with fixed maturities is estimated based discounted cash flow analyses based on interest rates currently being offered on instruments with similar characteristics and maturities resulting in a Level 3 classification.

FHLB advances with maturities greater than 90 days are valued based on a discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at June 30, 2018.

			Fair Value Measurements at June 30, 2018 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	106,885	$	106,885	$	106,885	$	-	$	-
Investment securities		286,957		286,957		-		286,957		-
Federal Home Loan Bank Stock		15,989		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,373,445		2,346,350		-		15,879		2,330,471
Accrued interest receivable		9,475		9,475		18		1,106		8,351

Financial Liabilities:
Deposits	$	2,489,128	$	2,481,367	$	548,147	$	1,933,220	$	-
Advances from Federal Home Loan Bank		85,722		84,524		-		84,524		-
Securities sold under repurchase agreements		6,899		6,899		-		6,899		-
Subordinated debentures		36,083		35,670		-		-		35,670

			Fair Value Measurements at December 31, 2017 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	113,693	$	113,693	$	113,693	$	-	$	-
Investment securities		261,298		261,299		1		261,298		-
Federal Home Loan Bank Stock		15,992		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,332,465		2,315,791		-		10,830		2,304,961
Accrued interest receivable		8,706		8,706		13		917		7,776

Financial Liabilities:
Deposits	$	2,437,656	$	2,444,683	$	571,360	$	1,873,323	$	-
Advances from Federal Home Loan Bank		84,279		83,261		-		83,261		-
Securities sold under repurchase agreements		26,019		26,019		-		26,019		-
Subordinated debentures		36,083		35,385		-		-		35,385

Stock Compensation Plans

First Defiance has established equity based compensation plans for its directors and employees. On February 27, 2018, the Board adopted, and the shareholders approved at the 2018 Annual Shareholders Meeting, the First Defiance Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018 Equity Plan replaced all existing plans although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2018 Equity Plan. The 2018 Equity Plan allows for issuance of up to 900,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of June 30, 2018, 39,400 options remained outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted vest 20% per year. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

Annually, the Company approves a Short-Term (“STIP”) Equity Incentive Plan and a Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

Under the 2017 and 2018 STIPs, the participants could earn up to 10% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive such payment.

Under each LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 49,052, 41,314 and 41,676 RSU’s to the participants in the 2016, 2017 and 2018 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive such payment.

A total of 49,514 RSU’s were issued to the participants of the 2015 LTIP in the first quarter of 2018 for the three year performance period ended December 31, 2017.

In the six months ended June 30, 2018, the Company also granted to employees 19,452 restricted shares, of which 7,348 were RSUs and 12,104 were restricted stock grants. Of the 12,104 restricted shares granted, 4,104 were issued to directors and have a one-year vesting period. The remaining 8,000 were issued to employees and have a three-year vesting period. The fair value of all granted restricted shares was determined by the stock price at the date of the grant.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

There were no options granted during the three or six months ended June 30, 2018, or June 30, 2017.

Following is stock option activity under the plans during the three months ended June 30, 2018:

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2018		86,900		$	10.81
Forfeited or cancelled		-			-
Exercised		(47,500	)		8.15
Granted		-			-
Options outstanding, June 30, 2018		39,400		$	14.00		5.46	$	770
Vested or expected to vest at June 30, 2018		39,400		$	14.00		5.46	$	770
Exercisable at June 30, 2018		23,900		$	12.22		4.64	$	509

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Proceeds of options exercised	$	55	$	65	$	111	$	198
Related tax benefit recognized		6		10		28		54
Intrinsic value of options exercised		781		101		1,034		301

As of June 30, 2018, there was $77,000 of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 1.9 years .

At June 30, 2018, 144,606 RSU’s and 29,872 restricted stock grants were unvested. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. A total expense of $343,000 and $907,000 was recorded during the three and six months ended June 30, 2018 compared to an expense of $266,000 and $1.1 million for the three and six months ended June 30, 2017. There was approximately $384,000 and $774,000 included within other liabilities at June 30, 2018 and December 31, 2017, respectively, related to the STIP.

				Restricted Stock Units					Stock Grants
				Weighted-Average					Weighted-Average
				Grant Date					Grant Date
Unvested Shares	Shares			Fair Value		Shares			Fair Value

Unvested at January 1, 2018		145,076		$	20.26		21,072		$	25.28
Granted		49,024			26.97		61,618			18.66
Vested		(49,514	)		16.15		(52,818	)		16.81
Forfeited		-			-		-			-
Unvested at June 30, 2018		144,586		$	23.94		29,872		$	26.59

The maximum amount of compensation expense that may be recorded for the 2018 STIP and the 2016, 2017 and 2018 LTIPs at June 30, 2018, is approximately $4.3 million. However, the estimated expense expected to be recorded as of June 30, 2018, based on the performance measures in the plans, is $3.5 million of which $1.8 million is unrecognized at June 30, 2018, and will be recognized over the remaining performance periods.

Dividends on Common Stock

First Defiance declared and paid a $0.15 per common stock dividend in the first and second quarters of 2018 and declared and paid a $0.125 per common stock dividend in the first and second quarters of 2017.

Earnings Per Common Share

Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e., unvested restricted stock), not subject to performance based measures.

The following table sets forth the computation of basic and diluted earnings per common share:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In Thousands, except per share data)
Basic Earnings Per Share:
Net income available to common shareholders	$	11,109	$	8,347	$	22,846	$	13,488
Less: Income allocated to participating securities		1		1		2		2
Net income allocated to common shareholders		11,108		8,346		22,844		13,486

Weighted average common shares outstanding including participating securities ⁽¹⁾		20,399		20,304		20,370		19,596
Less: Participating securities		11		10		11		10
Average common shares ⁽¹⁾		20,388		20,294		20,359		19,586

Basic earnings per common share	$	0.54	$	0.41		1.12		0.69

Diluted Earnings Per Share:
Net income allocated to common shareholders	$	11,108	$	8,346	$	22,844	$	13,486
Weighted average common shares outstanding for basic earnings per common share ⁽¹⁾		20,388		20,294		20,359		19,586
Add: Dilutive effects of stock options		104		114		107		110
Average shares and dilutive potential common shares ⁽¹⁾		20,492		20,408		20,466		19,696

Diluted earnings per common share	$	0.54	$	0.41		1.12		0,68

(1) Share and per share data has been adjusted for a 2-for-1 stock split on July 12, 2018.

There were no anti-dilutive shares for both the three and six month periods in 2018 excluded subject to issue upon exercise of options. There were 4,536 shares for both the three and six month periods in 2017 that were excluded from the diluted earnings per common share calculation as they were anti-dilutive.

Investment Securities

The following is a summary of available-for-sale and held-to-maturity securities:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
At June 30, 2018
Available-for-Sale Securities:
Obligations of U.S. federal government corporations and agencies	$	2,519	$	-	$	(31	)	$	2,488
Mortgage-backed securities – residential		69,610		31		(2,063	)		67,578
REMICs		2,964		-		(12	)		2,952
Collateralized mortgage obligations		101,272		28		(2,371	)		98,929
Corporate bonds		12,912		162		-			13,074
Obligations of state and political subdivisions		100,577		1,570		(818	)		101,329
Total Available-for-Sale	$	289,854	$	1,791	$	(5,295	)	$	286,350

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	9	$	-	$	-	$	9
FNMA certificates		35		-		-		35
GNMA certificates		14		-		-		14
Obligations of state and political subdivisions		549		-		-		549
Total Held-to Maturity	$	607	$	-	$	-	$	607

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
At December 31, 2017
Available-for-sale
Obligations of U.S. federal government corporations and agencies	$	518	$	-	$	(10	)	$	508
Mortgage-backed securities - residential		59,942		90		(763	)		59,269
REMICs		1,072		-		(7	)		1,065
Collateralized mortgage obligations		94,588		180		(892	)		93,876
Preferred stock		-		1		-			1
Corporate bonds		12,914		189		-			13,103
Obligations of state and political subdivisions		90,692		2,426		(290	)		92,828
Total Available-for-Sale	$	259,726	$	2,886	$	(1,962	)	$	260,650

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
Held-to-Maturity*
FHLMC certificates	$	10	$	-	$	-	$	10
FNMA certificates		41		1		-		42
GNMA certificates		17		-		-		17
Obligations of states and political subdivisions		580		-		-		580
Total Held-to-Maturity	$	648	$	1	$	-	$	649

* FHLMC, FNMA, and GNMA certificates are residential mortgage-backed securities.

The amortized cost and fair value of the investment securities portfolio at June 30, 2018, are shown below by contractual maturity. Expected maturities will differ 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 (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	1,408	$	1,417	$	-	$	-
Due after one year through five years		22,378		22,696		31		31
Due after five years through ten years		41,239		42,174		518		518
Due after ten years		50,983		50,604		-		-
MBS/CMO/REMIC		173,846		169,459		58		58
	$	289,854	$	286,350	$	607	$	607

Investment securities with a carrying amount of $139.5 million at June 30, 2018, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

As of June 30, 2018, the Company’s investment portfolio consisted of 436 securities, 181 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at June 30, 2018, and December 31, 2017:

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At June 30, 2018
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	1,990	$	(10	)	$	498	$	(21	)	$	2,488	$	(31	)
Mortgage-backed securities-residential		46,958		(1,093	)		17,413		(970	)		64,371		(2,063	)
REMICs		2,952		(12	)		-		-			2,952		(12	)
Collateralized mortgage obligations		79,785		(1,522	)		16,590		(849	)		96,375		(2,371	)
Obligations of state and political subdivisions		24,211		(615	)		3,296		(203	)		27,507		(818	)
Total temporarily impaired securities	$	155,896	$	(3,252	)	$	37,797	$	(2,043	)	$	193,693	$	(5,295	)

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At December 31, 2017
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	-	$	-		$	508	$	(10	)	$	508	$	(10	)
Mortgage-backed securities-residential		27,881		(215	)		19,038		(548	)		46,919		(763	)
REMICs		1,065		(7	)		-		-			1,065		(7	)
Collateralized mortgage obligations		49,107		(320	)		20,804		(572	)		69,911		(892	)
Obligations of state and political subdivisions		14,249		(163	)		3,370		(127	)		17,619		(290	)
Held to maturity securities:		12		-			9		-			21		-
Total temporarily impaired securities	$	92,314	$	(705	)	$	43,729	$	(1,257	)	$	136,043	$	(1,962	)

There were no realized gains or losses from the sales and calls of investment securities in the second quarter of 2018 while there were net realized gains of $267,000 ($174,000 after tax) in the second quarter of 2017.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC Topic 320, Investments-Debt and Equity Securities. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

With the exception of corporate bonds, the above securities all have fixed interest rates, and all securities have defined maturities. Their fair value is sensitive to movements in market interest rates. First Defiance has the ability and intent to hold these investments for a time necessary to recover the amortized cost without impacting its liquidity position and it is not more than likely that the Company will be required to sell the investments before anticipated recovery.

In the second quarter of 2018 and 2017, management determined there was no OTTI.

	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
	(In Thousands)
Proceeds	$	-	$	7,727		$	-	$	7,727
Gross realized gains		-		271			-		271
Gross realized losses		-		(4	)		-		(4	)

Loans

Loans receivable consist of the following:

	June 30, 2018			December 31, 2017
	(In Thousands)
Real Estate:
Secured by 1-4 family residential	$	307,480		$	274,862
Secured by multi-family residential		257,418			248,092
Secured by commercial real estate		1,026,280			987,129
Construction		283,911			265,476
		1,875,089			1,775,559
Other Loans:
Commercial		489,296			526,142
Home equity and improvement		129,868			135,457
Consumer finance		29,724			29,109
		648,888			690,708
Total loans		2,523,977			2,466,267
Deduct:
Undisbursed loan funds		(136,563	)		(115,972	)
Net deferred loan origination fees and costs		(2,070	)		(1,582	)
Allowance for loan loss		(27,321	)		(26,683	)
Totals	$	2,358,023		$	2,322,030

Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.

The following table discloses allowance for loan loss activity for the quarters ended June 30, 2018 and 2017 by portfolio segment (In Thousands):

Quarter Ended June 30, 2018	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,534		$	2,983		$	10,773		$	667	$	7,838		$	2,209		$	263		$	27,267
Charge-Offs		(78	)		0			(254	)		0		(84	)		(41	)		(72	)		(529	)
Recoveries		34			2			26			0		30			57			11			160
Provisions		192			(72	)		708			70		(329	)		(193	)		47			423
Ending Allowance	$	2,682		$	2,913		$	11,253		$	737	$	7,455		$	2,032		$	249		$	27,321

Quarter Ended June 30, 2017	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,621		$	2,122	$	10,210		$	458	$	7,809		$	2,300		$	229		$	25,749
Charge-Offs		0			0		(110	)		0		(2,027	)		(100	)		(21	)		(2,258	)
Recoveries		33			0		83			0		94			26			70			306
Provisions		(13	)		71		(47	)		82		2,097			(27	)		(45	)		2,118
Ending Allowance	$	2,641		$	2,193	$	10,136		$	540	$	7,973		$	2,199		$	233		$	25,915

The following table discloses allowance for loan loss activity for the year-to-date periods ended June 30, 2018 and June 30, 2017 by portfolio segment (In Thousands):

Year-to-date Period Ended June 30, 2018	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,532		$	2,702	$	10,354		$	647	$	7,965		$	2,255		$	228		$	26,683
Charge-Offs		(94	)		0		(309	)		0		(181	)		(158	)		(103	)		(845	)
Recoveries		58			2		210			0		1,787			85			13			2,155
Provisions		186			209		998			90		(2,116	)		(150	)		111			(672	)
Ending Allowance	$	2,682		$	2,913	$	11,253		$	737	$	7,455		$	2,032		$	249		$	27,321

Year-to-date Period Ended June 30, 2017	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,627		$	2,228		$	10,625		$	450	$	7,361		$	2,386		$	207		$	25,884
Charge-Offs		(49	)		0			(400	)		0		(2,027	)		(154	)		(92	)		(2,722	)
Recoveries		89			32			117			0		210			59			74			581
Provisions		(26	)		(67	)		(206	)		90		2,429			(92	)		44			2,172
Ending Allowance	$	2,641		$	2,193		$	10,136		$	540	$	7,973		$	2,199		$	233		$	25,915

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2018 (In Thousands):

	1-4 Family		Multi Family
	Residential		Residential		Commercial						Home Equity		Consumer
	Real Estate		Real Estate		Real Estate		Construction		Commercial		& Improvement		Finance		Total
Allowance for loan losses:

Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	192	$	2	$	246	$	-	$	136	$	240	$	-	$	816
Collectively evaluated for impairment		2,490		2,911		11,007		737		7,319		1,792		249		26,505
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,682	$	2,913	$	11,253	$	737	$	7,455	$	2,032	$	249	$	27,321

Loans:
Loans individually evaluated for impairment	$	7,094	$	1,597	$	26,452	$	-	$	12,171	$	1,012	$	33	$	48,359
Loans collectively evaluated for impairment		299,838		255,819		1,001,227		146,794		478,614		129,697		29,773		2,341,762
Loans acquired with deteriorated credit quality		1,028		299		2,001		-		243		-		-		3,571
Total ending loans balance	$	307,960	$	257,715	$	1,029,680	$	146,794	$	491,028	$	130,709	$	29,806	$	2,393,692

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2017 (In Thousands):

	1-4 Family		Multi Family
	Residential		Residential		Commercial						Home Equity		Consumer
	Real Estate		Real Estate		Real Estate		Construction		Commercial		& Improvement		Finance		Total
Allowance for loan losses:

Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	167	$	7	$	118	$	-	$	187	$	279	$	-	$	758
Collectively evaluated for impairment		2,365		2,695		10,236		647		7,778		1,976		228		25,925
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,532	$	2,702	$	10,354	$	647	$	7,965	$	2,255	$	228	$	26,683

Loans:
Loans individually evaluated for impairment	$	6,910	$	2,278	$	31,821	$	-	$	14,373	$	1,176	$	50	$	56,608
Loans collectively evaluated for impairment		267,377		245,823		956,238		149,174		513,218		135,098		29,125		2,296,053
Loans acquired with deteriorated credit quality		1,069		301		2,121		-		337		-		-		3,828
Total ending loans balance	$	275,356	$	248,402	$	990,180	$	149,174	$	527,928	$	136,274	$	29,175	$	2,356,489

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):

	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,598	$	40	$	38	$	4,619	$	72	$	69
Residential Non Owner Occupied		2,392		30		30		2,450		74		71
Total Residential Real Estate		6,990		70		68		7,069		146		140
Construction		-		-		-		-		-		-
Multi-Family		1,600		22		22		1,825		49		48
CRE Owner Occupied		8,352		78		72		10,789		122		107
CRE Non Owner Occupied		2,642		23		23		3,062		57		57
Agriculture Land		14,478		155		110		12,997		250		152
Other CRE		1,329		25		22		1,407		50		42
Total Commercial Real Estate		26,801		281		227		28,255		479		358
Commercial Working Capital		8,788		81		72		6,998		105		96
Commercial Other		3,046		29		29		4,073		54		52
Total Commercial		11,834		110		101		11,071		159		148
Home Equity and Improvement		1,019		9		9		1,247		20		20
Consumer Finance		35		1		1		37		2		2
Total Impaired Loans	$	48,279	$	493	$	428	$	49,504	$	855	$	716

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):

	Three Months Ended June 30, 2017						Six Months Ended June 30, 2017
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,088	$	34	$	34	$	3,454	$	62	$	62
Residential Non Owner Occupied		2,813		35		35		3,352		71		71
Total Residential Real Estate		6,901		69		69		6,806		133		133
Construction		-		-		-		-		-		-
Multi-Family		2,144		9		9		2,759		19		19
CRE Owner Occupied		12,098		24		24		8,356		46		48
CRE Non Owner Occupied		3,552		31		30		4,026		73		67
Agriculture Land		9,903		140		63		6,305		187		82
Other CRE		1,654		10		8		1,661		23		20
Total Commercial Real Estate		27,207		205		125		20,348		329		217
Commercial Working Capital		5,939		29		29		4,156		48		52
Commercial Other		7,731		30		21		4,726		51		33
Total Commercial		13,670		59		50		8,882		99		85
Home Equity and Improvement		1,223		11		11		1,239		21		21
Consumer Finance		58		1		1		66		2		3
Total Impaired Loans	$	51,203	$	354	$	265	$	40,100	$	603	$	478

The following table presents loans individually evaluated for impairment by class of loans (In Thousands):

	June 30, 2018						December 31, 2017
	Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	765	$	640	$	-	$	2,507	$	2,364	$	-
Residential Non Owner Occupied		1,011		1,015		-		1,711		1,708		-
Total 1-4 Family Residential Real Estate		1,776		1,655		-		4,218		4,072		-
Multi-Family Residential Real Estate		1,547		1,552		-		2,095		2,102		-
CRE Owner Occupied		6,618		6,353		-		12,273		11,804		-
CRE Non Owner Occupied		2,203		2,039		-		3,085		2,925		-
Agriculture Land		12,370		12,493		-		13,029		13,185		-
Other CRE		482		488		-		981		768		-
Total Commercial Real Estate		21,673		21,373		-		29,368		28,682		-
Construction		-		-		-		-		-		-
Commercial Working Capital		7,957		7,986		-		5,462		5,422		-
Commercial Other		2,743		2,754		-		9,916		7,644		-
Total Commercial		10,700		10,740		-		15,378		13,066		-
Home Equity and Home Improvement		-		-		-		630		584		-
Consumer Finance		33		33		-		42		42		-
Total loans with no allowance recorded	$	35,729	$	35,353	$	-	$	51,731	$	48,548	$	-

With an allowance recorded:
Residential Owner Occupied	$	4,142	$	4,104	$	166	$	1,841	$	1,814	$	137
Residential Non Owner Occupied		1,330		1,335		26		1,031		1,024		30
Total 1-4 Family Residential Real Estate		5,472		5,439		192		2,872		2,838		167
Multi-Family Residential Real Estate		45		45		2		175		176		7
CRE Owner Occupied		2,326		1,842		29		2,007		1,546		44
CRE Non Owner Occupied		632		572		24		651		593		28
Agriculture Land		1,877		1,914		160		293		292		14
Other CRE		1,164		751		33		909		708		32
Total Commercial Real Estate		5,999		5,079		246		3,860		3,139		118
Construction		-		-		-		-		-		-
Commercial Working Capital		1,080		1,000		65		447		449		77
Commercial Other		428		431		71		854		858		110
Total Commercial		1,508		1,431		136		1,301		1,307		187
Home Equity and Home Improvement		1,089		1,012		240		596		592		279
Consumer Finance		-		-		-		8		8		-
Total loans with an allowance recorded	$	14,113	$	13,006	$	816	$	8,812	$	8,060	$	758

* Presented gross of charge-offs

The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned on the dates indicated:

	June 30, 2018		December 31, 2017
	(In Thousands)
Non-accrual loans	$	18,340	$	30,715
Loans over 90 days past due and still accruing		-		-
Total non-performing loans		18,340		30,715
Real estate and other assets held for sale		1,795		1,532
Total non-performing assets	$	20,135	$	32,247
Troubled debt restructuring, still accruing	$	15,834	$	13,770

The following table presents the aging of the recorded investment in past due and non- accrual loans as of June 30, 2018, by class of loans (In Thousands):

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual
Residential Owner Occupied	$	188,204	$	651	$	1,151	$	800	$	2,602	$	2,115
Residential Non Owner Occupied		117,030		-		85		39		124		290

Total 1-4 Family Residential Real Estate		305,234		651		1,236		839		2,726		2,405

Multi-Family Residential Real Estate		257,715		-		-		-		-		121

CRE Owner Occupied		397,067		-		-		343		343		2,348
CRE Non Owner Occupied		452,580		9		-		231		240		1,995
Agriculture Land		126,048		1,238		310		1,987		3,535		5,438
Other Commercial Real Estate		49,832		-		-		35		35		336

Total Commercial Real Estate		1,025,527		1,247		310		2,596		4,153		10,117

Construction		146,794		-		-		-		-		-

Commercial Working Capital		213,350		584		2,097		310		2,991		3,825
Commercial Other		273,887		165		30		605		800		1,324

Total Commercial		487,237		749		2,127		915		3,791		5,149

Home Equity/Home Improvement		129,357		1,134		70		148		1,352		479
Consumer Finance		29,519		191		32		64		287		66

Total Loans	$	2,381,383	$	3,972	$	3,775	$	4,562	$	12,309	$	18,337

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2017, by class of loans (In Thousands):

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual
Residential Owner Occupied	$	175,139	$	821	$	1,033	$	1,227	$	3,081	$	2,510
Residential Non Owner Occupied		96,400		495		8		233		736		520

Total 1-4 Family Residential Real Estate		271,539		1,316		1,041		1,460		3,817		3,030

Multi-Family Residential Real Estate		247,980		422		-		-		422		128

CRE Owner Occupied		393,125		195		188		1,268		1,651		10,775
CRE Non Owner Occupied		403,656		1		91		424		516		2,431
Agriculture Land		131,753		412		-		66		478		4,144
Other Commercial Real Estate		58,784		13		-		204		217		734

Total Commercial Real Estate		987,318		621		279		1,962		2,862		18,084

Construction		149,174		-		-		-		-		-

Commercial Working Capital		233,632		102		1,264		876		2,242		2,369
Commercial Other		291,455		82		-		517		599		6,474

Total Commercial		525,087		184		1,264		1,393		2,841		8,843

Home Equity and Home Improvement		133,144		2,490		434		206		3,130		591
Consumer Finance		28,800		293		80		2		375		27

Total Loans	$	2,343,042	$	5,326	$	3,098	$	5,023	$	13,447	$	30,703

Troubled Debt Restructurings

As of June 30, 2018, and December 31, 2017, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $22.3 million and $21.7 million, respectively. The Company allocated $654,000 and $751,000 of specific reserves to those loans at June 30, 2018, and December 31, 2017, respectively, and had committed to lend additional amounts totaling up to $370,000 and $242,000 at June 30, 2018, and December 31, 2017, respectively.

The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made.

Of the loans modified in a TDR, as of June 30, 2018, $6.4 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

The following tables present loans by class modified as TDRs that occurred during the three and six month periods ending June 30, 2018, and June 30, 2017:

	Loans Modified as a TDR for the Three Months Ended June 30, 2018 ($ in thousands)				Loans Modified as a TDR for the Six Months Ended June 30, 2018 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		9	$	481		12	$	624
1-4 Family Non Owner Occupied		1		75		2		142
Multi Family		0		-		0		-
CRE Owner Occupied		5		1,554		7		2,181
CRE Non Owner Occupied		1		47		1		47
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital		1		150		5		2,816
Commercial Other		0		-		0		-
Home Equity and Improvement		2		20		2		20
Consumer Finance		0		-		0		-
Total		19	$	2,327		29	$	5,830

The loans described above decreased the allowance for loan and lease losses (“ALLL”) by $16,000 in the three month period ending June 30, 2018 and decreased the ALLL by $21,000 in the six month period ending June 30, 2018.

	Loans Modified as a TDR for the Three Months Ended June 30, 2017 ($ in thousands)				Loans Modified as a TDR for the Six Months Ended June 30, 2017 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		4	$	413		8	$	512
1-4 Family Non Owner Occupied		1		23		3		106
Multi Family		0		-		0		-
CRE Owner Occupied		0		-		1		117
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		2		1,450		2		1,450
Other CRE		2		196		2		196
Commercial Working Capital		5		2,563		5		2,563
Commercial Other		3		3,467		4		3,513
Home Equity and Improvement		1		57		2		82
Consumer Finance		0		-		2		5
Total		18	$	8,169		29	$	8,544

The loans described above decreased the ALLL by $5,000 in the three month period ending June 30, 2017 and decreased the ALLL by $24,000 in the six month period ending June 30, 2017.

Of the 2018 modifications, three were made a TDR due to terming out lines of credit, 14 were made TDR due to advancing or renewing money to a watch list credit, one loan made a TDR due to a reduction of the interest rate, four were made a TDR due to bankruptcy and seven were made a TDR because the current debt was refinanced due to maturity or for payment relief.

The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and six month periods ended June 30, 2018, and June 30, 2017:

	Three Months Ended June 30, 2018 ($ in thousands)				Six Months Ended June 30, 2018 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		0		-		1		196
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		-	$	-		1	$	196

The TDRs that subsequently defaulted described above had no effect on the ALLL for the three and six month period ended June 30, 2018.

	Three Months Ended June 30, 2017 ($ in thousands)				Six Months Ended June 30, 2017 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		1		225		1		225
Commercial Other		0		-		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		1	$	225		1	$	225

The TDRs that subsequently defaulted described above had no effect on the ALLL for the three and six month periods ended June 30, 2017.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

Credit Quality Indicators

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
1-4 Family Owner Occupied	$	6,404	$	123	$	2,384	$	-	$	181,894	$	190,805
1-4 Family Non Owner Occupied		106,130		717		3,179		-		7,129		117,155

Total 1-4 Family Real Estate		112,534		840		5,563		-		189,023		307,960

Multi-Family Residential Real Estate		255,385		-		2,221		-		109		257,715

CRE Owner Occupied		380,638		8,211		8,459		-		102		397,410
CRE Non Owner Occupied		442,837		5,939		4,045		-		-		452,821
Agriculture Land		109,661		3,996		15,926		-		-		129,583
Other CRE		47,290		156		1,363		-		1,057		49,866

Total Commercial Real Estate		980,426		18,302		29,793		-		1,159		1,029,680

Construction		128,230		691		-		-		17,873		146,794

Commercial Working Capital		198,150		9,338		8,853		-		-		216,341
Commercial Other		262,392		8,599		3,696		-		-		274,687

Total Commercial		460,542		17,937		12,549		-		-		491,028

Home Equity and Home Improvement		-		-		514		-		130,195		130,709
Consumer Finance		-		-		133		-		29,673		29,806

Total Loans	$	1,937,117	$	37,770	$	50,773	$	-	$	368,032	$	2,393,692

As of December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	7,534	$	99	$	2,367	$	-	$	168,220	$	178,220
Residential Non Owner Occupied		85,802		935		3,835		-		6,564		97,136

Total 1-4 Family Real Estate		93,336		1,034		6,202		-		174,784		275,356

Multi-Family Residential Real Estate		242,969		2,503		2,819		-		111		248,402

CRE Owner Occupied		370,613		10,432		13,575		-		156		394,776
CRE Non Owner Occupied		395,264		3,464		5,444		-		-		404,172
Agriculture Land		114,776		2,639		14,816		-		-		132,231
Other CRE		56,133		165		1,788		-		915		59,001

Total Commercial Real Estate		936,786		16,700		35,623		-		1,071		990,180

Construction		125,519		1,254		-		-		22,401		149,174

Commercial Working Capital		222,526		7,605		5,743		-		-		235,874
Commercial Other		280,013		3,443		8,598		-		-		292,054

Total Commercial		502,539		11,048		14,341		-		-		527,928

Home Equity and Home Improvement		-		-		600		-		135,674		136,274
Consumer Finance		-		-		82		-		29,093		29,175

Total Loans	$	1,901,149	$	32,539	$	59,667	$	-	$	363,134	$	2,356,489

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance of those loans is as follows (In Thousands):

	June 30, 2018		December 31, 2017
1-4 Family Residential Real Estate	$	1,103	$	1,154
Multi-Family Residential Real Estate		305		309
Commercial Real Estate Loans		2,777		2,921
Commercial		298		407
Consumer		1		2
Total Outstanding Balance	$	4,484	$	4,793
Recorded Investment, net of allowance of $0	$	3,571	$	3,828

Accretable yield, or income expected to be collected, is as follows:

	2018			2017
Balance at January 1	$	804		$	-
New Loans Purchased		-			1,018
Accretion of Income		(56	)		(76	)
Reclassification from Non-accretable		-			-
Charge-off of Accretable Yield		(10	)		(8	)
Balance at June 30	$	738		$	934

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three or six months ended June 30, 2018 or 2017. No allowances for loan losses were reversed during the same period.

Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended June 30, 2017, using information as of the date of acquisition are included in the table below. There were no such loans purchased during the period ended June 30, 2018. (In Thousands)

1-4 Family Residential Real Estate	$	1,720
Commercial Real Estate		4,724
Commercial		785
Consumer		4
Total	$	7,233

Cash Flows Expected to be Collected at Acquisition		$	5,721
Fair Value of Acquired Loans at Acquisition		$	4,703

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $410,000 as of June 30, 2018 and $626,000 as of December 31, 2017.

Mortgage Banking

Net revenues from the sales and servicing of mortgage loans consisted of the following :

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In Thousands)
Gain from sale of mortgage loans	$	1,383		$	1,293		$	2,464		$	2,377
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		933			924			1,877			1,858
Amortization of mortgage servicing rights		(350	)		(403	)		(669	)		(715	)
Mortgage servicing rights valuation adjustments		47			16			83			48
		630			537			1,291			1,191

Net revenue from sale and servicing of mortgage loans	$	2,013		$	1,830		$	3,755		$	3,568

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.39 billion at June 30, 2018 and December 31, 2017.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and six months ended June 30, 2018 and 2017:

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,245		$	10,161		$	10,240		$	10,117
Loans sold, servicing retained		402			396			726			752
Amortization		(350	)		(403	)		(669	)		(715	)
Carrying value before valuation allowance at end of period		10,297			10,154			10,297			10,154

Valuation allowance:
Balance at beginning of period		(396	)		(490	)		(432	)		(522	)
Impairment recovery (charges)		47			16			83			48
Balance at end of period		(349	)		(474	)		(349	)		(474	)
Net carrying value of MSRs at end of period	$	9,948		$	9,680		$	9,948		$	9,680
Fair value of MSRs at end of period	$	10,488		$	9,813		$	10,488		$	9,813

Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced. Estimates of future amortization expense are not easily estimable.

The Company has established an accrual for secondary market buy-back activity. A liability of $43,000 was accrued at both June 30, 2018, and December 31, 2017, respectively. There was no expense or credit recognized related to the accrual in the three and six months ended June 30, 2018, while a credit of $28,000 was recognized in the three months ended June 30, 2017 and $31,000 recognized for the six months ended June 30, 2017.

10.

Deposits

A summary of deposit balances is as follows:

	June 30, 2018		December 31, 2017
	(In Thousands)
Non-interest-bearing checking accounts	$	548,147	$	571,360
Interest-bearing checking and money market accounts		1,021,445		1,005,519
Savings deposits		297,870		302,022
Retail certificates of deposit less than $250,000		547,871		504,912
Retail certificates of deposit greater than $250,000		73,795		53,843
	$	2,489,128	$	2,437,656

11.

Borrowings

First Defiance’s debt, FHLB advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:

	June 30, 2018			December 31, 2017
	(In Thousands)
FHLB Advances:
Single maturity fixed rate advances	$	59,000		$	72,000
Putable advances		-			5,000
Amortizable mortgage advances		6,748			7,306
Overnight advances		20,000
Fair value adjustment on acquired balances		(26	)		(27	)
Total	$	85,722		$	84,279
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083		$	36,083

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II 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 Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 3.84% as of June 30, 2018, and 3.09% as of December 31, 2017.

The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or 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 Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I 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 Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I 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 Trust Affiliate I was 3.72% and 2.97% on June 30, 2018 and December 31, 2017, respectively.

The Trust Preferred Securities issued by Trust Affiliate I 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 Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.

The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the option of the issuer.

Repurchase Agreements . We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.

The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of June 30, 2018 and December 31, 2017, is presented in the following tables.

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
			(In Thousands)
At June 30, 2018
Repurchase agreements:
Mortgage-backed securities – residential	$	3,627	$	-	$	-	$	-	$	3,627
Collateralized mortgage obligations		3,272		-		-		-		3,272
Total borrowings	$	6,899	$	-	$	-	$	-	$	6,899
Gross amount of recognized liabilities for repurchase agreements									$	6,899

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
			(In Thousands)
At December 31, 2017
Repurchase agreements:
Mortgage-backed securities – residential	$	6,599	$	-	$	-	$	-	$	6,599
Collateralized mortgage obligations		19,420		-		-		-		19,420
Total borrowings	$	26,019	$	-	$	-	$	-	$	26,019
Gross amount of recognized liabilities for repurchase agreements									$	26,019

12.

Commitments, Guarantees and Contingent Liabilities

Loan commitments are made to accommodate the financial needs of First Federal’s customers; however, there are no long-term, fixed-rate loan commitments that result in market risk. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified 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 as of the periods stated below were as follows (In Thousands):

	June 30, 2018				December 31, 2017
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	55,492	$	181,457	$	42,458	$	161,778
Unused lines of credit		17,509		369,860		6,245		408,831
Standby letters of credit		-		7,460		-		7,605
Total	$	73,001	$	558,777	$	48,703	$	578,214

Commitments to make loans are generally made for periods of 60 days or less. In addition to the above commitments, First Defiance had commitments to sell $17.8 million and $14.9 million of loans to Freddie Mac, Fannie Mae, FHLB or BB&T Mortgage at June 30, 2018, and December 31, 2017, respectively.

13.

Income Taxes

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2013. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

The Tax reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.

14.

Derivative Financial Instruments

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately $17.7 million and $14.8 million of interest rate lock commitments at June 30, 2018, and December 31, 2017, respectively. There were $29.2 million and $23.2 million of forward commitments for the future delivery of residential mortgage loans at June 30, 2018, and December 31, 2017, respectively.

The fair value of these mortgage banking derivatives are reflected by a derivative asset recorded in other assets in the Consolidated Statements of Financial Condition. The table below provides data about the carrying values of these derivative instruments:

June 30 , 2018

December 31, 2017

Assets

(Liabilities)

Assets

(Liabilities)

Derivative

Carrying

Net Carrying

Carrying

Net Carrying

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

803

776

609

598

The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(In Thousands)
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss)	$	136	$	218	$	178	$	283

The above amounts are included in mortgage banking income with gain on sale of mortgage loans.

15.

Other Comprehensive Income

The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below. Reclassification adjustments related to securities available for sale are included in gains on sale or call of securities in the accompanying consolidated condensed statements of income.

	Before Tax Amount			Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Three months ended June 30, 2018:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	(872	)	$	183	$	(689	)
Reclassification adjustment for net gains included in net income		-			-		-
Total other comprehensive loss	$	(872	)	$	183	$	(689	)

Six months ended June 30, 2018:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	(4,429	)	$	930	$	(3,499	)
Reclassification adjustment for net gains included in net income		-			-		-
Total other comprehensive loss	$	(4,429	)	$	930	$	(3,499	)

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
	(In Thousands)
Three months ended June 30, 2017:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	2,579		$	(902	)	$	1,677
Reclassification adjustment for net gains included in net income		(267	)		94			(173	)
Total other comprehensive loss	$	2,312		$	(808	)	$	1,504

Six months ended June 30, 2017:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	4,158		$	(1,455	)	$	2,703
Reclassification adjustment for net gains included in net income		(267	)		94			(173	)
Total other comprehensive loss	$	3,891		$	(1,361	)	$	2,530

Activity in accumulated other comprehensive income (loss), net of tax, was as follows:

							Accumulated
	Securities			Post-			Other
	Available			retirement			Comprehensive
	For Sale			Benefit			Income (Loss)
	(In Thousands)
Balance January 1, 2018	$	601		$	(384	)	$	217
Other comprehensive (loss) before reclassifications		(3,499	)		-			(3,499	)

Net other comprehensive income (loss) during period		(3,499	)		-			(3,499	)

Reclassification adjustment upon adoption of ASU 2018-02		129			(82	)		47

Balance June 30, 2018	$	(2,769	)	$	(466	)	$	(3,235	)

Balance January 1, 2017	$	504		$	(289	)	$	215
Other comprehensive income before reclassifications		2,703			-			2,703
Amounts reclassified from accumulated other comprehensive income		(173	)		-			(173	)

Net other comprehensive income during period		2,530			-			2,530

Balance June 30, 2017	$	3,034		$	(289	)	$	2,745

16.

Affordable Housing Projects Tax Credit Partnership

The Company makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

The Company is a limited partner in each LIHTC Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01 “Accounting for Investments in Qualified Affordable Housing Projects.” The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and will recognize the net investment performance in the statement of income as a component of income tax expense (benefit). The Company utilized the proportional amortization method for all of its instruments. As of June 30, 2018, and December 31, 2017, the Company had $8.8 million and $9.2 million in qualified investments recorded in other assets and $5.2 million and $6.2 million in unfunded commitments recorded in other liabilities, respectively.

Unfunded Commitments

As of June 30, 2018, the expected payments for unfunded affordable housing commitments were as follows:

(dollars in thousands)	Amount
2018	$	2,007
2019		1,351
2020		392
2021		368
2022		240
Thereafter		883
Total Unfunded Commitments	$	5,241

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and six months ended June 30, 2018 and 2017.

	Three Months Ended June 30,
(dollars in thousands)	2018		2017
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	254	$	211
Amortization expense in federal income taxes		234		165

	Six Months Ended June 30,
(dollars in thousands)	2018		2017
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	508	$	422
Amortization expense in federal income taxes		469		330

There were no impairment losses of LIHTC investments for the three and six months ended June 30, 2018 and 2017.

17.

Business Combinations

Effective February 24, 2017, the Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares into First Defiance, immediately followed by the merger of CSB into First Federal. CSB operated 7 full-service banking offices in northwest and north central, Ohio and 1 commercial loan production office in central Ohio. Commercial Bancshares’ consolidated assets and equity (unaudited) as of February 24, 2017, totaled $348.4 million and $37.5 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value included in these financial statements is based on final valuations.

In accordance with ASC Topic 805, Business Combinations, the Company expensed approximately $3.7 million of direct acquisition costs, of which $2.8 million was to settle employment and benefit agreements and for personnel expenses related to operating the new Commercial Bancshares locations. The Company recorded $28.9 million of goodwill and $4.9 million of intangible assets. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is primarily attributable to synergies expected to be derived from the combination of the two entities. The acquisition was consistent with the Company’s strategy to enhance and expand its presence in northwestern and north central Ohio. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The intangible assets are related to core deposits and are being amortized over 10 years on an accelerated basis. For tax purposes, goodwill totaling $28.9 million is non-deductible. Goodwill is evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as part of the Commercial Bancshares acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction.

	February 24, 2017
	(In Thousands)

Cash Consideration	$	12,340
Equity – Dollar Value of Issued Shares		56,532
Fair Value of Total Consideration Transferred		68,872

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents		35,411
Federal Funds Sold		2,769
Securities		4,338
Loans		285,448
FHLB Stock of Cincinnati and Other Stock		2,194
Office Properties and Equipment		5,256
Intangible Assets		4,900
Bank-Owned Life Insurance		8,168
Accrued Interest Receivable and Other Assets		3,606
Deposits – Non-Interest Bearing		(56,061	)
Deposits – Interest Bearing		(251,931	)
Advances from FHLB		(1,403	)
Accrued Interest Payable and Other Liabilities		(2,717	)
Total Identifiable Net Assets		39,978

Goodwill	$	28,894

Under the terms of the merger agreement, Commercial Bancshares common shareholders had the opportunity to elect to receive 2.3616 shares of common stock of the Company or cash in the amount of $51.00 for each share of Commercial Bancshares common stock, subject to adjustment as provided for in the merger agreement. Total consideration for Commercial Bancshares common shares outstanding was paid 80% in Company stock and 20% in cash. The Company issued 2,279,004 shares of its common stock and paid $12.3 million in cash to the former shareholders of Commercial Bancshares.

On April 13, 2017, First Defiance and Corporate One Benefits Agency, Inc. (“Corporate One”) jointly announced the acquisition of Corporate One’s business by First Defiance. The total purchase price paid in cash was made up of the following: $6.5 million was paid at closing, $500,000 was due and paid the second quarter of 2018, and $2.3 million at the end of a three-year earn-out based on the compound annual growth rate of net revenue over the performance period of Corporate One, for a total purchase price of $9.3 million. The recorded fair value of the $2.3 million earn-out was $1.8 million at December 31, 2017. As of December 31, 2017, total Company recorded goodwill of $7.9 million as well as identifiable intangible assets of $756,000 consisting of customer relationship intangible of $564,000 and a non-compete intangible of $192,000. The fair value included in these financial statements is based on final valuation. Corporate One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, Fostoria and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit programs to effectively lead them into the future. It is anticipated that the transaction will enhance employee benefit offerings and expand First Insurance’s presence into adjacent markets in northwest Ohio.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Certain statements contained in this quarterly report are not statements of historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, or “continue” or the negative thereof or other variations thereon or comparable terminology, and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of market and other factors. The Company assumes no obligation to update any forward-looking statements.

Non-GAAP Financial Measures

This document contains GAAP financial measures and certain non-GAAP financial measures which are presented as management believes they are helpful in understanding the Company’s results of operations or financial position. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis. The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures for the three and six months ended June 30, 2018 and 2017.

Non-GAAP Financial Measures – Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In Thousands)
Net interest income (GAAP)	$	26,547		$	24,632		$	52,234		$	46,277
Add: FTE adjustment		251			486			489			956
Net interest income on a FTE basis (1)	$	26,798		$	25,118		$	52,723		$	47,233

Non-interest income-less securities gains/losses (2)		10,214			10,140			20,917			20,422
Non-interest expense (3)		22,665			20,630			45,916			43,772
Average interest-earning assets net of average
Unrealized gains/losses on securities (4)		2,717,956			2,588,293			2,691,498			2,470,489
Average interest-earning assets		2,714,328			2,591,397			2,689,216			2,473,471
Average unrealized gains/losses on securities		(3,628	)		3,104			(2,282	)		2,982

Ratios:
Net interest margin (1) / (4)		3.95	%		3.89	%		3.95	%		3.86	%
Efficiency ratio (3) / (1) + (2)		61.24	%		58.96	%		62.35	%		64.70	%

Critical Accounting Policies

First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States (“GAAP”) in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements included in the Company’s 2017 Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company’s 2017 Form 10-K include the Allowance for Loan Losses, Goodwill, and the Valuation of Mortgage Servicing Rights. There have been no material changes in assumptions or judgments relative to those critical policies during the first six months of 2018.

General

First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”) and First Defiance Risk Management Inc. (“First Defiance Risk Management”).

On June 22, 2018, the Company announced a stock split in the form of a share distribution of one common share for each of the Company’s authorized and outstanding common shares. The stock split was distributed on July 12, 2018, to shareholders of record as of July 2, 2018. All share and per share data in this Quarterly Report on Form 10-Q has been adjusted and is reflective of the stock split.

First Federal is a federally chartered stock savings bank headquartered in Defiance, Ohio. It conducts operations through thirty-six full-service banking center offices in Allen, Defiance, Fulton, Hancock, Henry, Lucas, Marion, Ottawa, Paulding, Putnam, Seneca, Williams, Wood, and Wyandot counties in northwest and central Ohio, two full-service banking center offices, and one loan production office in Allen County in northeast Indiana, five full-service banking center offices in Lenawee County in southeast Michigan and one commercial loan production office in Ann Arbor, Michigan that was opened late in the fourth quarter of 2017.

First Federal provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust and wealth management services through its extensive branch network.

First Insurance is a wholly owned subsidiary of First Defiance. First Insurance is an insurance agency that conducts business through offices located in the Archbold, Bowling Green, Bryan, Defiance, Findlay, Fostoria, Lima, Sylvania, and Tiffin, Ohio areas. The Maumee and Oregon offices were consolidated into a new office in Sylvania, Ohio in January 2018. First Insurance offers property and casualty insurance, life insurance and group health insurance.

First Defiance Risk Management is a wholly owned insurance company subsidiary of the Company to insure the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. First Defiance Risk Management was incorporated on December 20, 2012.

Regulation - First Defiance is subject to regulation examination and oversight by the Federal Reserve Board (“Federal Reserve”). First Federal is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”). Because the Federal Deposit Insurance Corporation (“FDIC”) insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. In addition, First Federal is subject to regulations of the Consumer Financial Protection Bureau (the “CFPB”), which was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and has broad powers to adopt and enforce consumer protection regulations. First Defiance and First Federal must file periodic reports with the Federal Reserve and the OCC and examinations are conducted periodically by the Federal Reserve, the OCC and the FDIC to determine whether First Defiance and First Federal are in compliance with various regulatory requirements and are operating in a safe and sound manner.

First Defiance is also subject to various Ohio laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties to Ohio.

Regulatory Capital Requirements - The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

In July 2013, the United States banking regulators issued final new capital rules applicable to smaller banking organizations which also implement certain provisions of the Dodd-Frank Act. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phase in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital are being phased in from January 1, 2015, through January 1, 2019.

The rules include (a) a minimum common equity Tier 1 (“CET1”) capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4%.

Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses (“ALLL”), subject to new eligibility criteria, less applicable deductions.

The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phases in through January 1, 2019, and is currently 1.875%.

The federal banking agencies have established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable.

Effective January 1, 2015, in order to be “well-capitalized,” a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital of at least 8% and a leverage ratio of at least 5%, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. As of June 30, 2018, First Federal met the ratio requirements in effect to be deemed "well-capitalized."

Deposit Insurance - The FDIC maintains the Depositors Insurance Fund (“DIF”), which insures the deposit accounts of First Federal to the maximum amount provided by law. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States government.

The FDIC assesses deposit insurance premiums on each insured institution quarterly based on risk characteristics of the institution. The FDIC may also impose a special assessment in an emergency situation.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the ratio of the DIF to insured deposits of the total industry. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC’s rules reduced assessment rates on all banks but imposed a surcharge on banks with assets of $10 billion or more until the DRR reaches 1.35% and provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%. The rules also changed the method to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than less risky banks.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. These assessments will continue until the Financing Corporation bonds mature in 2019.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.

Business Strategy - First Defiance’s primary objective is to be a high-performing community focused financial institution, well regarded in its market areas. First Defiance accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. First Defiance believes in a “Customer First” philosophy that is strengthened by its Trusted Advisor initiative. First Defiance also has a tagline of “Better Together” as an indication of its commitment to local, responsive, personalized service. First Defiance believes this strategy results in greater customer loyalty and profitability through core relationships. First Defiance is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of First Defiance’s business strategy are commercial banking, consumer banking, including the origination and sale of single-family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.

Commercial and Commercial Real Estate Lending - Commercial and commercial real estate lending have been an ongoing focus and a major component of First Federal’s success. First Federal provides primarily commercial real estate and commercial business loans with an emphasis on owner-occupied commercial real estate and commercial business lending, including a focus on the deposit balances that accompany these relationships. First Federal’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. First Federal’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require First Federal to have a high degree of knowledge and understanding of their business in order to provide them with solutions to meet their financial needs. First Federal’s “Customer First” philosophy and culture complements this need of its clients. First Federal believes this personal service model differentiates First Federal from its competitors, particularly the larger regional institutions. First Federal offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. First Federal also believes that the small business customer is a strong market for First Federal. First Federal participates in many of the Small Business Administration (“SBA”) lending programs and implemented a program targeting the small business customer. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.

Consumer Banking - First Federal offers customers a full range of deposit and investment products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service (“CDARS”) and savings accounts. First Federal offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. First Federal also offers online banking services, which include mobile banking, People Pay (“P2P”) and online bill pay.

Fee Income Development - Generation of fee income and the diversification of revenue sources are accomplished through the mortgage banking operation, First Insurance and the wealth management department as First Defiance seeks to reduce reliance on retail transaction fee income.

Deposit Growth - First Federal’s focus has been to grow core deposits with an emphasis on total relationship banking with both our retail and commercial customers. First Federal has initiated a pricing strategy that considers the whole relationship of the customer. First Federal will continue to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service, business development strategies and branch expansion. First Federal will look to grow its footprint in areas believed to further complement its overall market share and complement its strategy of being a high-performing community bank.

Asset Quality - Maintaining a strong credit culture is of the utmost importance to First Federal. First Federal has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. First Federal is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. First Federal has directed its attention to loan types and markets that it knows well and in which it has historically been successful. First Federal strives to have loan relationships that are well diversified in both size and industry, and monitors the overall trends in the portfolio to maintain its industry and loan type concentration targets. First Federal maintains a problem loan remediation process that focuses on detection and resolution. First Federal maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third-party loan review.

Expansion Opportunities - First Defiance believes it is well positioned to take advantage of acquisitions or other business expansion opportunities in its market areas. First Defiance believes it has a track record of successfully accomplishing both acquisitions and de novo branching in its market area. This track record puts the Company in a solid position to enter or expand its business. First Defiance will continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its primary geographic market area, which it knows well, and has been competing in for a long period of time, as well as surrounding market areas.

Investments - First Defiance invests in U.S. Treasury and federal government agency obligations, obligations of municipal and other political subdivisions, mortgage-backed securities which are issued by federal agencies, corporate bonds, and collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”). Management determines the appropriate classification of all such securities at the time of purchase in accordance with FASB ASC Topic 320, Investments –Debt and Equity Securities.

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of $607,000 at June 30, 2018. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of $286.4 million at June 30, 2018. The available-for-sale portfolio included obligations of U.S. federal government corporations and agencies ($2.5 million), certain municipal obligations ($101.3 million), CMOs/REMICs ($101.9 million), corporate bonds ($13.1 million), and mortgage backed securities ($67.6 million).

In accordance with ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income.

Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where significant new money is extended. The appraisal process is handled by the Company’s Credit Department, which selects the appraiser and orders the appraisal. First Defiance’s loan policy prohibits the account officer from talking or communicating with the appraiser to ensure that the appraiser is not influenced by the account officer in any way in making their determination of value.

First Federal generally does not require updated appraisals for performing loans unless significant new money is requested by the borrower.

When a collateral dependent loan is downgraded to classified status, First Federal reviews the most current appraisal on file and, if necessary, based on First Federal’s assessment of the appraisal, such as age, market, etc., First Federal will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s estimation of the carrying and selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, a new appraisal may be required. Finally, First Federal assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge off is necessary.

When a collateral dependent loan moves to non-performing status, First Federal generally gets a new third party appraisal and charges the loan down appropriately based upon the new appraisal and an estimate of costs to liquidate the collateral. All properties that are moved into the Other Real Estate Owned (“OREO”) category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value, which is determined based on appraised value less First Federal’s estimate of the liquidation costs.

First Federal does not adjust any appraisals upward without written documentation of this valuation change from the appraiser. When setting reserves and charge-offs on classified loans, appraisal values may be discounted downward based upon First Federal’s experience with liquidating similar properties.

All loans over 90 days past due and/or on non-accrual are classified as non-performing loans. Non-performing status automatically occurs in the month in which the 90 day delinquency occurs.

As stated above, once a collateral dependent loan is identified as non-performing, First Federal generally gets an appraisal.

Appraisals are received within approximately 60 days after they are requested. The First Federal Loan Loss Reserve Committee reviews the amount of each new appraisal and makes any necessary charge-off decisions at its meeting prior to the end of each quarter.

Any partially charged-off collateral dependent loans are considered non-performing, and as such, would need to show an extended period of time with satisfactory payment performance as well as cash flow coverage capability supported by current financial statements before First Federal will consider an upgrade to performing status. First Federal may consider moving the loan to accruing status after approximately six months of satisfactory payment performance.

For loans where First Federal determines that an updated appraisal is not necessary, other means are used to verify the value of the real estate, such as recent sales of similar properties on which First Federal had loans as well as calls to appraisers, brokers, realtors and investors. First Federal monitors and tracks its loan to value quarterly to determine accuracy and any necessary charge-offs. Based on these results, changes may occur in the processes used.

Loan modifications constitute a troubled debt restructuring (“TDR”) if First Federal for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. For loans that are considered TDRs, First Federal either computes the present value of expected future cash flows discounted at the original loan’s effective interest rate or it may measure impairment based on the fair value of the collateral. For those loans measured for impairment utilizing the present value of future cash flows method, any discount is carried as a reserve in the ALLL. For those loans measured for impairment utilizing the fair value of the collateral, any shortfall is charged off.

Earnings - The profitability of First Defiance is primarily dependent on its net interest income and non-interest income. Net interest income is the difference between interest income on interest-earning assets, principally loans and securities, and interest expense on interest-bearing deposits, Federal Home Loan Bank of Cincinnati (“FHLB”) advances, and other borrowings. The Company’s non-interest income is mainly derived from service fees and other charges, mortgage banking income, and insurance commissions. First Defiance’s earnings also depend on the provision for loan losses, non-interest expenses (such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums, and miscellaneous other expenses) and federal income tax expense.

Changes in Financial Condition

At June 30, 2018, First Defiance's total assets, deposits and stockholders’ equity amounted to $3.04 billion, $2.49 billion and $386.9 million, respectively, compared to $2.99 billion, $2.44 billion and $373.3 million, respectively, at December 31, 2017.

Net loans receivable (excluding loans held for sale) increased $36.0 million to $2.36 billion. The variance in loans receivable between June 30, 2018, and December 31, 2017 includes an increase of $48.3 million in commercial real estate loans, $32.5 million in residential real estate loans, and $0.6 million increase in consumer loans. That growth was partially offset by a $2.4 million decrease in construction loans, a $36.9 decrease in commercial loans, and a $5.5 million decrease in home equity and improvement loans.

The investment securities portfolio increased $25.7 million to $287.0 million at June 30, 2018 from $261.3 million at December 31, 2017. The increase is mainly a result of $42.8 million of securities being purchased during the period. This was offset by $12.5 million of securities maturing or being called in the period. There was also a $4.4 million decrease in the market value of available-for-sale securities during the period ended June 30, 2018.

Deposits increased from $2.44 billion at December 31, 2017, to $2.49 billion as of June 30, 2018. Interest bearing demand and money market deposits increased $15.9 million to $1.02 billion and retail time deposits increased $62.9 million to $621.7 million. Non-interest bearing demand deposits decreased $23.2 million to $548.1 million and savings deposits decreased $4.2 million to $297.9 million.

Stockholders’ equity increased from $373.3 million at December 31, 2017, to $386.9 million at June 30, 2018. The increase in stockholders’ equity was primarily the result of recording net income of $22.8 million. This was offset by $6.1 million of common stock dividends being paid in the first six months of 2018 and a $3.5 million other comprehensive loss.

Average Balances, Net Interest Income and Yields Earned and Rates Paid

The following table presents for the periods indicated the total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in thousands of dollars and rates, and the net interest margin. The table reports interest income from tax-exempt loans and investment on a fully tax-equivalent basis. All average balances are based upon daily balances (dollars in thousands).

	Three Months Ended June 30,
	2018							2017
	Average				Yield/			Average				Yield/
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	2,337,294	$	27,685		4.75	%	$	2,238,061	$	25,368		4.55	%
Securities (3)		280,131		2,265		3.20			259,619		2,188		3.42
Interest bearing deposits		80,914		373		1.85			77,725		201		1.04
FHLB stock		15,989		227		5.69			15,992		187		4.69
Total interest-earning assets		2,714,328		30,550		4.51			2,591,397		27,944		4.33
Non-interest-earning assets		304,480							317,086
Total assets	$	3,018,808						$	2,908,483

Interest-bearing liabilities:
Deposits	$	1,933,409	$	3,144		0.65	%	$	1,785,895	$	2,170		0.49	%
FHLB advances and other		67,261		282		1.68			104,923		414		1.58
Subordinated debentures		36,198		320		3.55			36,156		229		2.54
Securities sold under repurchase agreements		9,140		6		0.26			28,609		13		0.18
Total interest-bearing liabilities		2,046,008		3,752		0.74			1,955,583		2,826		0.58
Non-interest bearing deposits		554,021		-					560,441		-
Total including non-interest bearing demand deposits		2,600,029		3,752		0.58			2,516,024		2,826		0.45
Other non-interest-bearing liabilities		37,614							34,936
Total liabilities		2,637,643							2,550,960
Stockholders’ equity		381,165							357,523
Total liabilities and stock-Holders’ equity	$	3,018,808						$	2,908,483
Net interest income; interest rate spread			$	26,798		3.77	%			$	25,118		3.75	%
Net interest margin (4)						3.95	%						3.89	%
Average interest-earning assets to average interest-bearing liabilities						133	%						133	%

(1)

Interest on certain tax-exempt loans and securities is not taxable for federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21% for the period in 2018 and 35% for the period in 2017.

(2)

Annualized

(3)

Securities yield=represents annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses. See Non-GAAP Financial Measure discussion for further details.

(4)

Net interest margin is net interest income divided by average interest-earning assets. See Non-GAAP Financial Measure discussion for further details.

	Six Months Ended June 30,
	2018							2017
	Average				Yield/			Average				Yield/
	Balance		Interest (1)		Rate (2)			Balance		Interest (1)		Rate (2)
Interest-earning assets:
Loans receivable	$	2,326,805	$	54,236		4.70	%	$	2,132,064	$	47,390		4.48	%
Securities (3)		271,864		4,329		3.21			257,230		4,361		3.46
Interest bearing deposits		74,557		670		1.81			68,904		346		1.01
FHLB stock		15,990		458		5.78			15,273		353		4.66
Total interest-earning assets		2,689,216		59,693		4.48			2,473,471		52,450		4.28
Non-interest-earning assets		309,120							291,972
Total assets	$	2,998,336						$	2,765,443

Interest-bearing liabilities:
Deposits	$	1,911,199	$	5,755		0.61	%	$	1,706,318	$	3,966		0.47	%
FHLB advances		73,092		601		1.66			104,600		780		1.50
Subordinated debentures		36,195		600		3.34			36,153		443		2.46
Securities sold under repurchase agreements		12,561		14		0.22			27,135		28		0.21
Total interest-bearing liabilities		2,033,047		6,970		0.69			1,874,206		5,217		0.56
Non-interest bearing deposits		549,735		-					521,668		-
Total including non-interest bearing demand deposits		2,582,782		6,970		0.54			2,395,874		5,217		0.44
Other non-interest-bearing liabilities		37,975							33,586
Total liabilities		2,620,757							2,429,460
Stockholders' equity		377,579							335,983
Total liabilities and stock-holders' equity	$	2,998,336						$	2,765,443
Net interest income; interest rate spread			$	52,723		3.79	%			$	47,233		3.72	%
Net interest margin (4)						3.95	%						3.86	%
Average interest-earning assets to average interest-bearing liabilities						132	%						132	%

(1)

Interest on certain tax-exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21% for the period in 2018 and 35% for the period in 2017.

(2)

Annualized

(3)

Securities yield =represents annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses. See Non-GAAP Financial Measure discussion for further details.

(4)

Net interest margin is net interest income divided by average interest-earning assets. See Non-GAAP Financial Measure discussion for further details.

Results of Operations

Three Months Ended June 30, 2018 and 2017

On a consolidated basis, First Defiance’s net income for the quarter ended June 30, 2018, was $11.1 million compared to net income of $8.3 million for the comparable period in 2017. On a per share basis, basic and diluted earnings per common share for the three months ended June 30, 2018, were both $0.54, compared to basic and diluted earnings per common share of $0.41 for the quarter ended June 30, 2017.

Net Interest Income

First Defiance’s net interest income is determined by its interest rate spread (i.e., the difference 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 $26.5 million for the quarter ended June 30, 2018, up from $24.6 million for the same period in 2017. The tax-equivalent net interest margin was 3.95% for the quarter ended June 30, 2018, an increase from 3.89% for the same period in 2017. The increase in margin between the 2018 and 2017 second quarters was primarily due to loan yields increasing at a faster pace than deposit yields as a result of the rate hikes over the past year. The yield on interest-earning assets was 4.51% for the quarter ended June 30, 2018, up 18 basis points from 4.33% for the same period in 2017. The cost of interest-bearing liabilities between the two periods increased only 16 basis points to 0.74% in the second quarter of 2018 from 0.58% in the same period in 2017.

Total interest income increased $2.8 million to $30.3 million for the quarter ended June 30, 2018, from $27.5 million for the quarter ended June 30, 2017. This was primarily due to continued loan growth and an increase in interest rates. Income from loans increased to $27.7 million for the quarter ended June 30, 2018, compared to $25.3 million for the same period in 2017 due to average loan growth of $99.2 million. The increase in the loan portfolio yield to 4.75% at June 30, 2018, was due mainly to increasing interest rates. The investment interest income increased $287,000 in the second quarter of 2018 to $2.0 million; however, the yield dropped 22 basis points to 3.20% at June 30, 2018, compared to 3.42% at June 30, 2017. The decline in investment yield is primarily attributable to the reinvestment of matured securities at lower yields. Income from interest-bearing deposits and FHLB stock increased to $373,000 and $227,000, respectively, in the second quarter of 2018 compared to $201,000 and $187,000 for the same period in 2017 due to increased interest rates.

Interest expense increased by $926,000 in the second quarter of 2018 compared to the same period in 2017, to $3.8 million from $2.8 million. The cost of interest-bearing liabilities increased 16 basis points from 0.58% at June 30, 2017 to 0.74% at June 30, 2018. Interest expense related to interest-bearing deposits was $3.1 million in the second quarter of 2018 compared to $2.2 million for the same period in 2017. Interest expense recognized by the Company related to FHLB advances was $282,000 in the second quarter of 2018 compared to $414,000 for the same period in 2017 as decreased volumes offset the increase in interest rates. Expenses on subordinated debentures and notes payable were $320,000 and $6,000, respectively, in the second quarter of 2018 compared to $229,000 and $13,000 respectively for the same period in 2017.

Allowance for Loan and Lease Losses (“ALLL”)

The ALLL represents management’s assessment of the estimated probable incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy of the ALLL regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect 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 ALLL is a material estimate that is susceptible to significant fluctuation 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 commercial loan and commercial real estate loan relationships. The Company’s goal is to have approximately 55% to 60% of the portfolio reviewed annually. This includes all relationships over $5.0 million with new exposure greater than $2.0 million and a sample of other relationships greater than $5.0 million; loan relationships between $1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of other relationships between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the ALLL associated with these types of loans.

The ALLL is made up of two basic components. The first component of the allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is impaired and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is impaired and collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any SBA or Farm Service Agency (“FSA”) guarantees. The specific reserve portion of the ALLL was $819,000 at June 30, 2018, and $758,000 at December 31, 2017.

The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the potential losses incurred in the portfolio based on quantitative and qualitative factors. For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type to allocate historic loss experience. The loss experience factor is then applied to the non-impaired loan portfolio. The Company utilizes a loss migration measurement for each loan portfolio segment with differentiation between loan risk grades in calculating the general reserve component for non-impaired loans. The Company’s historical loss calculation uses an average of all four-year loss migration periods to the present beginning with data from the second quarter 2011. Management believes this provides a precise calculation of historical losses by incorporating more data points for the average loss ratio and including periods that provide a more complete coverage of the full business cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio.

The quantitative general allowance increased $300,000 to $6.3 million at June 30, 2018, from $6.0 million at December 31, 2017.

In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on the non-impaired loan portfolio for various factors. The overall qualitative factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative factors: economic, environment and risk.

ECONOMIC

Changes in international, national and local economic business conditions and developments, including the condition of various market segments.

Changes in the value of underlying collateral for collateral dependent loans.

ENVIRONMENT

Changes in the nature and volume in the loan portfolio.

The existence and effect of any concentrations of credit and changes in the level of such concentrations.

Changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.

Changes in the quality and breadth of the loan review process.

Changes in the experience, ability and depth of lending management and staff.

RISK

Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, TDRs, and other loan modifications.

Changes in the political and regulatory environment.

The qualitative analysis at June 30, 2018, indicated a general reserve of $20.2 million compared with $20.0 million at December 31, 2017, an increase of $200,000. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to make adjustments to these sub-factors based on that review.

The economic factors for all loan segments decreased in the first six months of 2018 due to strengthening trends in the U.S. economy particularly unemployment rates which decreased in all markets.

The environmental factors for all loan segments, but particularly the commercial real estate and commercial loan segments increased in the first six months of 2018 due to an increase in credit concentrations and an increase in the mix of lending in First Federal’s defined metro markets.

The risk factors for all loan segments, but particularly the commercial loan segment, were decreased in the first six months of 2018 due to favorable trends in the levels of non-performing loans and classified assets.

First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from 0.50% for construction loans to 1.50% for home equity and improvement loans at June 30, 2018.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves and the increase in net charge-offs in the quarter, the Company’s provision for loan losses for the second quarter of 2018 was $423,000 compared to $2.1 million for the same period in 2017. The ALLL was $27.3 million at June 30, 2018 and $26.7 million at December 31, 2017. The allowance for loans losses represented 1.15% of loans, net of undisbursed loan funds and deferred fees and costs, at June 30, 2018 and 1.14% at December 31, 2017. In management’s opinion, the overall ALLL of $27.3 million as of June 30, 2018, is adequate to cover probable incurred losses.

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. In the three and six month periods ended June 30, 2018, there were $0 and $544,000, respectively of write-downs of real estate held for sale. Management believes that the values recorded at June 30, 2018, for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans decreased to $50.5 million at June 30, 2018, compared to $59.4 million at December 31, 2017, a decrease of $8.9 million due to payoffs and an upgrade of a classified relationship during the quarter.

First Defiance’s ratio of ALLL to non-performing loans was 149.0% at June 30, 2018, compared with 86.9% at December 31, 2017. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at June 30, 2018, are appropriate. Of the $18.3 million in non-accrual loans at June 30, 2018, $13.8 million or 75.1% are less than 90 days past due.

At June 30, 2018, First Defiance had total non-performing assets of $20.1 million, compared to $32.2 million at December 31, 2017. Non-performing assets include loans that are on non-accrual, OREO and other assets held for sale. Non-performing assets at June 30, 2018, and December 31, 2017, by category were as follows:

Table 1 – Nonperforming Asset

	June 30,			December 31,
	2018			2017
	(In Thousands)
Non-performing loans:
One to four family residential real estate	$	2,411		$	3,037
Non-residential and multi-family residential real estate		10,240			18,219
Commercial		5,145			8,841
Construction		-			-
Home equity and improvement		479			590
Consumer finance		65			28
Total non-performing loans		18,340			30,715

Real estate owned		1,795			1,532
Total repossessed assets	$	1,795			1,532

Total Nonperforming assets	$	20,135		$	32,247

TDR loans, accruing	$	15,834		$	13,770

Total nonperforming assets as a percentage of total assets		0.66	%		1.08	%
Total nonperforming loans as a percentage of total loans*		0.77	%		1.31	%
Total nonperforming assets as a percentage of total loans plus REO*		0.84	%		1.37	%
ALLL as a percent of total nonperforming assets		135.69	%		82.75	%

* Total loans are net of undisbursed loan funds and deferred fees and costs.

Non-performing loans in the commercial loan category represented 1.05% of the total loans in that category at June 30, 2018, compared to 1.68% for the same category at December 31, 2017. Non-performing loans in the non-residential and multi-family residential real estate loan category were 0.80% of the total loans in this category at June 30, 2018, compared to 1.47% at December 31, 2017. Non-performing loans in the residential loan category represented 0.78% of the total loans in that category at June 30, 2018, compared to 1.10% for the same category at December 31, 2017.

First Federal’s Asset Review Committee meets monthly to review the status of work-out strategies for all criticized relationships, which include all non-accrual loans. Based on such factors as anticipated collateral values in liquidation scenarios, cash flow projections, assessment of net worth of guarantors and all other factors which may mitigate risk of loss, the Asset Review Committee makes recommendations regarding proposed charge-offs which are approved by the Loan Loss Reserve Committee.

The following table details net charge-offs and nonaccrual loans by loan type.

Table 2 – Net Charge-offs and Non-Accruals by Loan Type

	For the Six Months Ended June 30, 2018						As of June 30, 2018
	Net
	Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	36			(2.75	)%	$	2,411		13.15	%
Construction		-			0.00	%		-		0.00	%
Commercial real estate		97			(7.41	)%		10,240		55.84	%
Commercial		(1,606	)		122.60	%		5,145		28.05	%
Consumer		90			(6.87	)%		65		0.35	%
Home equity and improvement		73			(5.57	)%		479		2.61	%
Total	$	(1,310	)		100.00	%	$	18,340		100.00	%

	For the Six Months Ended June 30, 2017						As of June 30, 2017
	Net
	Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	(40	)		(1.87	)%	$	3,139		10.34	%
Construction		-			0.00	%		243		0.80	%
Commercial real estate		251			11.72	%		18,907		62.28	%
Commercial		1,818			84.87	%		7,463		24.58	%
Consumer		18			0.84	%		51		0.17	%
Home equity and improvement		95			4.44	%		556		1.83	%
Total	$	2,142			100.00	%	$	30,359		100.00	%

Table 3 – ALLL Activity

	For the Quarter Ended
	2nd 2018		1st 2018			4th 2017			3rd 2017		2nd 2017
	(In Thousands)

Allowance at beginning of period	$	27,267	$	26,683		$	26,341		$	25,915	$	25,749
Provision (credit) for loan losses		423		(1,095	)		314			462		2,118
Charge-offs:
Residential		78		16			170			60		-
Commercial real estate		254		55			29			-		110
Commercial		84		97			210			64		2,027
Consumer finance		72		31			27			20		21
Home equity and improvement		41		117			55			92		100
Total charge-offs		529		316			491			236		2,258
Recoveries		160		1,995			519			200		306
Net charge-offs		369		(1,679	)		(28	)		36		1,952
Ending allowance	$	27,321	$	27,267		$	26,683		$	26,341	$	25,915

The following table sets forth information concerning the allocation of First Federal’s ALLL by loan categories at the dates indicated.

Table 4 – ALLL Allocation by Loan Category

	June 30, 2018					March 31, 2018					December 31, 2017					September 30, 2017					June 30, 2017
			Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans
	Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category
	(Dollars In Thousands)
Residential	$	2,682		12.18	%	$	2,534		11.15	%	$	2,532		11.14	%	$	2,538		11.33	%	$	2,641		11.68	%
Construction		737		11.25	%		667		10.19	%		647		10.76	%		578		10.23	%		540		9.91	%
Commercial real estate		14,166		50.85	%		13,756		51.88	%		13,056		50.10	%		12,774		50.38	%		12,329		49.93	%
Commercial		7,455		19.39	%		7,838		20.25	%		7,965		21.33	%		8,025		21.32	%		7,973		21.75	%
Consumer		249		1.18	%		263		1.13	%		228		1.18	%		241		1.21	%		233		1.22	%
Home equity and improvement		2,032		5.15	%		2,209		5.40	%		2,255		5.49	%		2,185		5.53	%		2,199		5.51	%
	$	27,321		100.00	%	$	27,267		100.00	%	$	26,683		100.00	%	$	26,341		100.00	%	$	25,915		100.00	%

Key Asset Quality Ratio Trends

Table 5 – Key Asset Quality Ratio Trends

	2nd Qtr 2018			1st Qtr 2018			4th Qtr 2017			3rd Qtr 2017			2nd Qtr2017
Allowance for loan losses / loans*		1.15	%		1.16	%		1.14	%		1.16	%		1.15	%
Allowance for loan losses / non-performing assets		135.69	%		92.86	%		82.75	%		88.74	%		83.51	%
Allowance for loan losses / non-performing loans		148.97	%		97.64	%		86.87	%		90.36	%		85.36	%
Non-performing assets / loans plus OREO*		0.84	%		1.24	%		1.37	%		1.30	%		1.38	%
Non-performing assets / total assets		0.66	%		0.97	%		1.08	%		1.01	%		1.07	%
Net charge-offs / average loans (annualized)		0.06	%		(0.29	)%		0.00	%		0.01	%		0.35	%

* Total loans are net of undisbursed funds and deferred fees and costs.

Non-Interest Income .

Total non-interest income increased $74,000 in the second quarter of 2018 to $10.2 million from $10.1 million for the same period in 2017. The second quarter of 2018 had no gains or losses from the sale of securities, while the second quarter 2017 included gains of $267,000 from the sale of securities.

Service Fees. Service fees and other charges increased by $135,000 or 4.3% in the second quarter of 2018 compared to the same period in 2017. This is due mainly to the increased loan and deposit base in the second quarter of 2018 compared to the same period in 2017.

Overdrawn balances, net of an allowance for losses, are reflected as loans on First Defiance’s balance sheet. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a service to the customer and therefore deemed to be non-interest income rather than interest income. Fee income recorded for the quarters ending June 30, 2018 and 2017 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, was $615,000 and $641,000, respectively. Accounts charged off are included in non-interest expense. The allowance for uncollectible overdrafts was $16,000 at June 30, 2018, $24,000 at December 31, 2017, and $14,000 at June 30, 2017.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans was $2.0 million in the second quarter of 2018, up from $1.8 million in the second quarter of 2017. Gains from the sale of mortgage loans were $1.4 million in the second quarter of 2018, up from $1.3 million in the second quarter of 2017 . Mortgage loan servicing revenue was $933,000 in the second quarter of 2018, up slightly from $924,000 in the second quarter of 2017. First Defiance had a positive change in the valuation adjustment in mortgage servicing assets of $47,000 in the second quarter of 2018 compared with a positive adjustment of $16,000 in the second quarter of 2017.

Insurance Commission Income. Income from the sale of insurance products were $3.5 million in the second quarter of 2018, up from $3.3 million in the second quarter of 2017, a 6.0% increase in the quarter comparison.

Bank-Owned Life Insurance . Income from bank-owned life insurance was $566,000 for the second quarter of 2018, up from $422,000 in the second quarter of 2017. This increase was primarily a result of a death benefit received in the second quarter of 2018 amounting to $168,000.

Non-Interest Expense.

Non-interest expense increased $2.0 million to $22.7 million for the second quarter of 2018 compared to $20.6 million for the same period in 2017. The increase is mainly attributable to the increase in compensation and benefits of $1.4 million further explained in the section below.

Compensation and Benefits . Compensation and benefits increased to $12.9 million in the second quarter of 2018, compared to $11.5 million in the second quarter of 2017. The increase in compensation and benefits versus the prior year reflects merit increases, additional increases to minimum pay levels, and increases to staff to achieve the overall growth strategies.

Occupancy. Occupancy expense increased slightly by $72,000 to $2.0 million for the quarter ended June 30, 2018, compared to the same period in 2017. This can be attributed to continued growth strategies and newly signed leases in metro markets.

Other Non-Interest Expenses . Other non-interest expense of $4.6 million in the second quarter of 2018 increased from $4.0 million in the second quarter of 2017. Other expenses in the second quarter 2018 include change in value of the deferred compensation plan liability of $445,000 compared to $275,000 in the same period in 2017, additional provision for off balance sheet commitments, and additional advertising in certain markets.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the second quarter of 2018 was 61.24% compared to 58.96% for the second quarter of 2017.

Six Months Ended June 30, 2018 and 2017

On a consolidated basis, First Defiance’s net income for the six months ended June 30, 2018 was $22.8 million compared to income of $13.5 million for the same period in 2017. On a per share basis, basic and diluted earnings per common share for the six months ended June 30, 2018 were both $1.12, compared to basic and diluted earnings per common share of $0.69 and $0.68, respectively, for the same period in 2017.

The first six months of 2018 includes the results from the operations of the Commercial Savings Bank (“CSB”) acquisition completed on February 24, 2017 and Corporate One Benefits Agency, Inc. (“Corporate One”) acquired on April 1, 2017. In addition, the first six months of 2017 includes merger and conversion expenses related to the acquisitions of $3.9 million, which had an after tax impact of $2.8 million, or $0.14 per diluted share.

Net Interest Income

Net interest income was $52.2 million for the first six months of 2018 compared with $46.3 million in the first six months of 2017. Average interest-earning assets increased to $2.69 billion in the first six months of 2018 compared to $2.47 billion in the first six months of 2017.

For the six month period ended June 30, 2018, total interest income was $59.2 million compared to $51.5 million for the same period in 2017. Interest expense increased by $1.8 million to $7.0 million for the six months ended June 30, 2018 compared to $5.2 million for the same period in 2017.

Net interest margin for the first six months of 2018 was 3.95%, up 9 basis points from the 3.86% margin reported in the six month period ended June 30, 2017.

Provision for Loan Losses

The provision for loan losses was a credit of $672,000 for the six months ended June 30, 2018, compared to $2.2 million expense during the six months ended June 30, 2017. Charge-offs for the first half of 2017 were $2.7 million and recoveries of previously charged off loans totaled $580,000 for net charge-offs of $2.1 million. By comparison, only $845,000 of charge-offs were recorded in the same period of 2018 and $2.2 million of recoveries were realized for net recoveries of $1.3 million.

Non-Interest Income

Total non-interest income increased $228,000 to $20.9 million for the six months ended June 30, 2018 from $20.7 million recognized for the same period in 2017.

Service Fees. Service fees and other charges were $6.4 million for the first six months of 2017, up from $5.9 million for the same period in 2016. This is due mainly to the increased loan and deposit base from the second quarter of 2018 compared to the same period in 2017.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans increased $187,000 to $3.8 million for the six months ended June 30, 2018 from $3.6 million for the same period in 2017. Gains realized from the sale of mortgage loans increased $87,000 to $2.46 million for the first six months of 2018 from $2.38 million for the same period in 2017. Mortgage loan servicing revenue increased slightly to $1.88 million in the first half of 2018 from $1.86 million for the same period in 2017. The Company recorded a positive valuation adjustment of $83,000 in the first six months of 2018 compared to a positive adjustment of $48,000 in the first six months of 2017.

Sale of Non Mortgage Loans . Gain on the sale of non-mortgages, which includes SBA and FSA loans, totaled $267,000 in the first half of 2018, a $177,000 increase compared to $90,000 in the first half of 2017, due to an increase in the volume of sellable SBA and FSA loans.

Insurance Commission Income. Income from the sale of insurance and investment products was $7.8 million in the first six months of 2018, an increase of $1.0 million from $6.8 million in the first six months of 2017. The increase is primarily due to added commissions from the Corporate One merger completed on April 1, 2017.

Bank-Owned Life Insurance . Income from bank-owned life insurance was $1.0 million in the first six months of 2018, a decrease of $1.2 million from $2.2 million in the same period of 2017. In February 2017, the Company surrendered an underperforming BOLI policy and recorded a tax penalty of $1.7 million (recorded in income tax expense) and purchased a new BOLI policy receiving a $1.5 million enhancement value gain.

Non-Interest Expense

Non-interest expense was $45.9 million for the first six months of 2018, up from $43.8 million for the same period in 2017.

Compensation and Benefits . Compensation and benefits increased to $26.1 million for the six months ended June 30, 2018, compared to $25.8 million for the same period in 2017. The increase is mainly related to merit increases, additional increases to minimum pay levels, higher incentive compensation, increases to staff related to growth strategies, and increased personnel expenses related to operating the new CSB and Corporate One locations.

Other Non-Interest Expenses . Other non-interest expenses increased $1.2 million to $9.2 million for the first six months of 2018 from $8.0 million for the same period in 2017. The increase in other non-interest expense is primarily due to an OREO write-down of $544,000 and other miscellaneous expense increases over the previous year comparative period.

The efficiency ratio for the first six months of 2018 was 62.35% compared to 64.70% for the same period in 2017.

Income Taxes.

The Tax Cuts and Jobs Act was enacted on December 22, 2017, establishing a new, flat corporate federal statutory income tax rate of 21% effective January 1, 2018.

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of 18.14% for the six months ended June 30, 2018 compared to 35.84% for the same period in 2017. The tax rate for 2018 is lower than the statutory 21% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax.

Liquidity

As a regulated financial institution, First Federal is required to maintain appropriate levels of “liquid” assets to meet short-term funding requirements.

First Defiance had $12.9 million of cash provided by operating activities during the first six months of 2018. The Company's cash provided by operating activities resulted from the origination of loans held for sale and net income mostly offset by the proceeds on the sale of loans.

At June 30, 2018, First Federal had $236.9 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $394.8 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Federal had commitments to sell $17.8 million of loans held-for-sale. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB and other financial institutions are available.

Liquidity risk arises from the possibility that the Company may not be able to meet its financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Company’s Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates First Federal’s Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity on a monthly basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Controller.

Capital Resources

Capital is managed at First Federal and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity and operational risks inherent in the business, as well as flexibility needed for future growth and new business opportunities.

In July 2013, the federal banking agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2016, and are subject to a phase-in period through January 1, 2019, minimum requirements increased for both quantity and quality of capital held by the Company and the Bank. The rules include a new minimum CET1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 0.625% of risk-weighted assets during 2016, 1.25% during the year 2017, 1.875% during the year 2018, and increasing each year until fully phased-in during 2019 at 2.50%, effectively resulting in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance sheet exposures.

The Company met each of the well capitalized ratio guidelines at June 30, 2018. The following table indicates the capital ratios for First Defiance (consolidated) and First Federal at June 30, 2018, and December 31, 2017. (In Thousands):

June 30, 2018
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	291,644		10.99	%	$	119,440		4.5	%		N/A		N/A
First Federal	$	312,145		11.77	%	$	119,330		4.5	%	$	172,365		6.5	%

Tier 1 Capital (1)
Consolidated	$	326,644		11.17	%	$	116,952		4.0	%		N/A		N/A
First Federal	$	312,145		10.70	%	$	116,645		4.0	%	$	145,806		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	326,644		12.31	%	$	159,254		6.0	%		N/A		N/A
First Federal	$	312,145		11.77	%	$	159,106		6.0	%	$	212,141		8.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	353,964		13.34	%	$	212,338		8.0	%		N/A		N/A
First Federal	$	339,465		12.80	%	$	212,141		8.0	%	$	265,177		10.0	%

(1)

Excludes capital conservation buffer of 1.875% as of June 30, 2018.

(2)

Core capital is computed as a percentage of adjusted total assets of $2.92 billion for consolidated and First Federal, respectively. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.65 billion for consolidated and First Federal, respectively.

December 31, 2017
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	274,832		10.43	%	$	118,596		4.5	%		N/A		N/A
First Federal	$	298,571		11.33	%	$	118,534		4.5	%	$	171,216		6.5	%

Tier 1 Capital (1)
Consolidated	$	309,832		10.80	%	$	114,773		4.0	%		N/A		N/A
First Federal	$	298,571		10.43	%	$	114,539		4.0	%	$	143,173		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	309,832		11.76	%	$	158,128		6.0	%		N/A		N/A
First Federal	$	298,571		11.33	%	$	158,046		6.0	%	$	210,728		8.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	336,515		12.77	%	$	210,838		8.0	%		N/A		N/A
First Federal	$	325,254		12.35	%	$	210,728		8.0	%	$	263,410		10.0	%

(1)

Excludes capital conservation buffer of 1.25% as of December 31, 2017.

(2)

Core capital is computed as a percentage of adjusted total assets of $2.87 billion for consolidated and $2.86 billion for First Federal. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.64 billion for consolidated and $2.63 billion for First Federal.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the Annual Report on Form 10-K for the year ended December 31, 2017, First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

First Defiance monitors its exposure to interest rate risk on a monthly basis through simulation analysis that measures the impact changes in interest rates can have on net interest income. The simulation technique analyzes the effect of a presumed 100 basis point shift in interest rates (which is consistent with management’s estimate of the range of potential interest rate fluctuations) and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, non-maturity deposit assumptions and capital requirements.

The table below presents, for the twelve months subsequent to June 30, 2018 and December 31, 2017, an estimate of the change in net interest income that would result from a gradual (ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of June 30, 2018, net interest income sensitivity to changes in interest rates for the twelve months subsequent to June 30, 2018, remained relatively stable for the ramp and shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2017.

Net Interest Income Sensitivity Profile
	Impact on Future Annual Net Interest Income
(dollars in thousands)	June 30, 2018					December 31, 2017
Gradual Change in Interest Rates
+200	$	1,833		1.65	%	$	2,354		2.18	%
+100		896		0.81	%		1,200		1.11	%
-100		(2,216	)	-2.00	%		(3,033	)	-2.81	%

Immediate Change in Interest Rates
+200	$	3,810		3.44	%	$	4,821		4.47	%
+100		2,010		1.81	%		2,463		2.28	%
-100		(5,701	)	-5.14	%		(6,223	)	-5.77	%

To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted. Conversely, if the yield curve should steepen, net interest income may increase.

The results of all the simulation scenarios are within the Company’s Board mandated guidelines as of June 30, 2018, except for the down 100 and 200 basis points over the first twelve months in a dynamic shock balance sheet as well as in the down 200 basis points in a static shock balance sheet. Management is reviewing the Board policy limits in all scenarios to determine if they are adequate and if so, any measures to be taken to bring the current results back into alignment with Board guidelines.

In addition to the simulation analysis, First Defiance also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in rates beyond 200 basis points as of June 30, 2018, was considered to be unlikely given the current interest rate environment and, therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the six months ended June 30, 2018, and the year-ended December 31, 2017.

June 30, 2018
Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	(Dollars in Thousands)
+400 bp		706,879		66,660			10.41	%
+ 300 bp		695,827		55,609			8.69	%
+ 200 bp		680,900		40,682			6.35	%
+ 100 bp		663,111		22,893			3.58	%
0 bp		640,218		-			-
- 100 bp		601,755		(38,463	)		(6.01	)%
- 200 bp		544,066		(96,152	)		(15.02	)%

December 31, 2017
Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	(Dollars in Thousands)
+400 bp		700,563		80,544			12.99	%
+ 300 bp		685,883		65,864			10.62	%
+ 200 bp		668,127		48,108			7.76	%
+ 100 bp		647,439		27,420			4.42	%
0 bp		620,019		-			-
- 100 bp		585,967		(34,052	)		(5.49	)%

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), including those disclosure controls and procedures designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2018. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

No changes occurred in the Company’s internal controls over financial reporting during the quarter ended June 30, 2018, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FIRST DEFIANCE FINANCIAL CORP.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

Neither First Defiance nor any of its subsidiaries is engaged in any legal proceedings of a material nature.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company had no unregistered sales of equity securities during the quarter ended June 30, 2018.

The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended June 30, 2018 (share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018):

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
Beginning Balance, March 31, 2018								755,000
April 1 – April 30, 2018		-	$	-		-		755,000
May 1 – May 31, 2018		-		-		-		755,000
June 1 – June 30, 2018		-		-		-		755,000
Total		-	$	-		-		755,000

(1)

On January 29, 2016, the Company announced that its Board of Directors authorized another program for the repurchase of up to 5% of the outstanding common shares or 900,000 shares. There is no expiration date for the repurchase program.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

	Exhibit 3.1	Articles of Incorporation of First Defiance (1)
	Exhibit 3.2	Amendment to Articles of Incorporation of First Defiance (2)
	Exhibit 3.3	Code of Regulations of First Defiance (3)
	Exhibit 10.1	Form of Restricted Stock Award Agreement
	Exhibit 10.2	Restricted Stock Unit Award Agreement
	Exhibit 10.3	First Defiance Deferred Compensation Plan, revised October 30, 2014
	Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 101	The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Statements of Financial Condition at June 30, 2018 and December 31, 2017, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and Six Months ended June 30, 2018 and 2017 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months ended June 30, 2018 and 2017, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholders’ Equity for the Six Months ended June 30, 2018 and 2017, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the Six Months ended June 30, 2018 and 2017 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

(1)

Incorporated by reference to the like numbered exhibit in the Registrant’s Form S-3 (File No. 333-163014), filed on November 10, 2009.

(2)

Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K (File No. 000-26850), filed on June 22, 2018.

(3)

Incorporated by reference to Exhibit 4.3 of the Registrant’s Form S-8 POS (File No. 333-197203), filed on July 17, 2018.

FIRST DEFIANCE FINANCIAL CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		First Defiance Financial Corp.
		(Registrant)

Date:	August 7, 2018	By:	/s/ Donald P. Hileman
			Donald P. Hileman
			President and
			Chief Executive Officer

Date:	August 7, 2018	By:	/s/ Kevin T. Thompson
			Kevin T. Thompson
			Executive Vice President and
			Chief Financial Officer

Exhibit 10.1

FIRST DEFIANCE FINANCIAL CORP.

2018 EQUITY INCENTIVE PLAN

RESTRICTED STOCK

AWARD AGREEMENT

First Defiance Financial Corp. (the “ Company ”) hereby grants the undersigned Participant an Award consisting of Shares of Restricted Stock in the Company, subject to the terms and conditions described in the First Defiance Financial Corp. 2018 Equity Incentive Plan (the “ Plan ”) and this Restricted Stock Award Agreement (this “ Award Agreement ”).

Name of Participant : __________ (the “ Participant ”).

Grant Date: __________ (the “ Grant Date ”).

Award of Restricted Stock: The Award consists of __________ Shares of Restricted Stock.

Vesting: Subject to the provisions of this Award Agreement, the Award shall vest on the third anniversary of the Grant Date (the “ Vesting Date ”) provided that the Participant is employed on that date.

Limitations on Vesting: If the Participant’s employment terminates for any reason prior to the Vesting Date, the Participant shall forfeit the Award. Notwithstanding the foregoing:

(a)

Death or Disability : In the event of the Participant’s death or Disability prior to the Vesting Date, the Award shall become immediately vested as of the date of death or Disability.

(b)

Change in Control : If a Change in Control of the Company occurs after the Grant Date but prior to the Vesting Date and the Participant is terminated by the Company other than for Cause prior to the Vesting Date and during the period beginning immediately prior to the date of the Change in Control and ending 12 months after the date of the Change in Control, the Award shall become immediately vested as of the later of the date of such termination or the date of such Change in Control.

Settlement: If the applicable terms and conditions of this Award Agreement are satisfied, the Shares of Restricted Stock shall be released from any transfer restrictions or delivered to the Participant as soon as practicable, but not later than 30 days after all applicable restrictions have lapsed.

Non-Competition and Non-Solicitation :

(a)

Throughout the period from the Grant Date to the Vesting Date or, if earlier, to the first anniversary of the Participant’s termination of employment for any reason (the “Non-Compete Period”), the Participant agrees that he will not, except on behalf of the Company or any Subsidiary (collectively, the “Control Group”) or with the written consent of a member the Control Group: (a) engage in any business activity, directly or indirectly, on his own behalf or as a partner, stockholder (except by ownership of less than 1% of the outstanding stock of a publicly held corporation), director, trustee, principal, agent, employee, consultant or otherwise of any person, firm or corporation, which is engaged in any activity in which the Control Group is engaged at the time; or (b) allow the use of his name by or in connection with any business that is competitive with any activity in which the Control Group is engaged.

(b)

Throughout the period from the Grant Date to the first anniversary of the Participant’s termination of employment for any reason (the “Non-Solicit Period”), the Participant agrees that he will not, except on behalf of the Control Group or with the written consent of a member of the Control Group, offer employment to or employ, for himself or on behalf of any competitor of the Control Group, any person who at any time within the prior three years shall have been employed by the Control Group.

(c)

In the event that the Participant violates any of these restrictive covenants, (i) the Award (whether or not vested) will be cancelled and forfeited in its entirety; and (ii) to the extent the Award has vested, the Participant shall pay to the Company within 90 days of the Company’s request an amount equal to the Fair Market Value of the Shares. The parties acknowledge that this Section 7 is fair and reasonable under the circumstances. It is the desire and intent of the parties that the provisions of this Section 7 shall be enforced to the fullest extent permitted by law. Accordingly, if any particular portion of this Section 7 shall be adjudicated to be invalid or unenforceable, this Section 7 shall be deemed amended to: (1) reform the particular portion to provide for such maximum restrictions as will be valid and enforceable, or if that is not possible, (2) delete the portion found invalid or unenforceable, such reformation or deletion to apply only with respect to the operation of this Section 7 in the particular jurisdiction in which such adjudication is made. During the Participant’s employment, the covenants contained in this Section 7 shall apply without regard to geographic location. Upon the termination of the Participant’s employment, the covenants contained in this Section 7 shall be limited to a twenty-five (25) mile radius of any office of the Control Group.

Miscellaneous:

(a)

Non-Transferability . The Shares of Restricted Stock subject to the Award may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except by will or the laws of descent and distribution.

(b)

Beneficiary . Unless otherwise specifically designated by the Participant in writing, the Participant’s beneficiary shall be the Participant’s spouse or, if no spouse survives the Participant, the Participant’s estate.

(c)

No Right to Continued Service or to Awards . The granting of an Award shall impose no obligation on the Company or any Affiliate to continue the employment of the Participant or interfere with or limit the right of the Company or any Affiliate to terminate the employment of the Participant at any time, with or without Cause, which right is expressly reserved.

(d)

Tax Withholding . The Company or an Affiliate, as applicable, shall have the power and right to deduct, withhold or collect any amount required by law or regulation to be withheld with respect to any taxable event arising with respect to the Award. To the extent permitted by the Committee, in its sole discretion, this amount may be: (i) withheld from other amounts due to the Participant, (ii) withheld from the value of any Award being settled or any Shares transferred in connection with the exercise or settlement of an Award, (iii) withheld from the vested portion of any Award (including Shares transferable thereunder), whether or not being exercised or settled at the time the taxable event arises, or (iv) collected directly from the Participant. Unless the Participant has otherwise irrevocably elected a different method to satisfy the withholding requirement, the Participant shall be deemed to have elected to satisfy the withholding requirement by having the Company or an Affiliate, as applicable, withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction. The Participant may elect a higher level of withholding. All such elections will be irrevocable and made in writing and will be subject to any terms and conditions that the Committee, in its sole discretion, deems appropriate.

(e)

Requirements of Law . The grant of the Award shall be subject to all applicable laws, rules and regulations (including applicable federal and state securities laws) and to all required approvals of any governmental agencies or national securities exchange, market or other quotation system.

(f)

Governing Law . The Plan and the Award Agreement shall be governed by and construed in accordance with the laws of (other than laws governing conflicts of laws) the State of Ohio.

(g)

Award Subject to Plan . The Award is subject to the terms and conditions described in this Award Agreement and the Plan, which is incorporated by reference into and made a part of this Award Agreement. In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern. The Committee has the sole responsibility of interpreting the Plan and this Award Agreement, and its determination of the meaning of any provision in the Plan or this Award Agreement will be binding on the Participant. Capitalized terms that are not defined in this Award Agreement have the same meanings as in the Plan.

(h)

Section 409A of the Code . This Award Agreement is intended, and shall be construed and interpreted, to comply with Section 409A of the Code and if necessary, any provision shall be held null and void to the extent such provision (or part thereof) fails to comply with Section 409A of the Code or the Treasury Regulations thereunder. For purposes of Section 409A of the Code, each payment of compensation under the Award Agreement shall be treated as a separate payment of compensation. Any amounts payable solely on account of an involuntary termination shall be excludible from the requirements of Section 409A of the Code, either as separation pay or as short-term deferrals to the maximum possible extent. Nothing herein shall be construed as the guarantee of any particular tax treatment to the Participant, and the Company shall have no liability with respect to any failure to comply with the requirements of Section 409A of the Code. Any reference to the Participant’s “termination” shall mean the Participant’s “separation from service”, as defined in Section 409A of the Code. In addition, if the Participant is determined to be a “specified employee” (within the meaning of Section 409A of the Code and as determined under the Company’s policy for determining specified employees), the Participant shall not be entitled to payment or to distribution of any portion of an Award that is subject to Section 409A of the Code (and for which no exception applies) and is payable or distributable on account of the Participant’s termination until the expiration of six months from the date of such termination (or, if earlier, the Participant’s death). Such Award, or portion thereof, shall be paid or distributed on the first business day of the seventh month following such termination.

(i)

Signature in Counterparts . This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

[ Signature page follows ]

PARTICIPANT

			Date:
Signature


Print Name

FIRST DEFIANCE FINANCIAL CORP.

By:			Date:

Its:

Exhibit 10.2

FIRST DEFIANCE FINANCIAL CORP.
2018 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

First Defiance Financial Corp. (the " Company ") hereby grants the undersigned Participant a Restricted Stock Unit Award (the " Award "), subject to the terms and conditions described in the First Defiance Financial Corp. 2018 Equity Incentive Plan (the "Plan") and this Restricted Stock Unit Award Agreement (this " Award Agreement ").

Name of Participant: _____________________

Grant Date: ___________ (the " Grant Date ").

Award of Restricted Stock Units: The Award consists of _____________ RSUs.

Vesting: S ubject to the provisions of this Award Agreement, the Award shall vest on the third anniversary of the Grant Date (the " Vesting Date " ) provided that the Participant is employed on that date and the Participant is in compliance with the covenants set forth in Section 7.

Limitations on Vesting: If the Participant's employment terminates for any reason prior to the Vesting Date, the Participant shall forfeit all unvested RSUs subject to the Award. Notwithstanding the foregoing, if the Participant is employed and in compliance with the covenants set forth in Section 7 on the applicable date described below:

(a)

Death; Disability or Retirement: If the Participant Retires, dies or becomes Disabled before the Vesting Date, the Award shall become immediately vested as of the date of such Retirement, death or Disability.

(b)

Change in Control: If a Change in Control occurs after the Grant Date but prior to the Vesting Date and the Participant is terminated by the Company other than for Cause prior to the Vesting Date and during the period beginning immediately prior to the date of the Change in Control and ending 12 months after the date of the Change in Control, the Award shall become immediately vested as of the later of the date of such termination or the date of such Change in Control.

Form of Settlement: If the applicable terms and conditions of this Award Agreement are satisfied and the Participant becomes vested in the Award pursuant to Section 4 or 5, the Company shall issue a Share to such Participant for each vested RSU. The Shares shall be issued as soon as practicable but not later than 30 days after the applicable date of vesting.

Non-Solicitation Covenant. In consideration for this Award of RSUs, the Participant hereby agrees and covenants that:

(a)

During Participant’s employment with Company, and for an additional period of one (1) year following the termination of Participant’s employment with Company for any reason, Participant agrees that Participant shall not, in any capacity or manner whatsoever, directly or indirectly:

(i)

interfere with, or attempt to interfere with, any contractual or other relationship between Company or its affiliates and any of its or their customers or suppliers;

(ii)

hire or attempt to hire for employment any person who is employed by Company or its affiliates, or who was employed by Company or its affiliates during the one (1) year period prior to Participant’s termination, or attempt to influence such person to terminate employment with Company or its affiliates; or

(iii)

solicit, or attempt to solicit, any person or entity that was a customer, or an actively sought prospective customer, of Company or its affiliates as of the date of Participant’s termination, for the purpose of taking or diverting away any business from Company or its affiliates.

(b)

Reasonable Restrictions . The parties hereto acknowledge and agree that the restrictions in Section 7(a) of this Agreement are reasonable and properly required for the adequate protection of the business of Company and its affiliates. If it is judicially determined that Participant has violated any obligations under this Agreement, then the period applicable to each obligation determined to have been violated shall automatically be extended by a period of time equal in length to the period during which such violation(s) occurred. If the scope of any restriction contained in this Section 7 is too broad to permit enforcement of such restriction to its fullest extent, then such restriction will be enforced to the maximum extent permitted by law, and the Participant hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restriction

(c)

Remedies for Breach of this Agreement . Participant acknowledges and agrees that a breach of the covenants, promises, agreements and obligations set forth in this Agreement will result in material and irreparable injury to Company for which there is no adequate remedy at law, and that it would not be possible to measure damages for such injury precisely. In the event of such a breach or threat thereof, the Company shall have the right to seek, in addition to money damages, a temporary restraining order, preliminary injunction or permanent injunction restraining Participant from engaging in the activities prohibited by this Agreement, or any other relief as may be appropriate in law or equity or required for specific enforcement of the covenants set forth in this Agreement.

(d)

Waivers . No waiver of any breach or delay in enforcing the terms of this Agreement shall operate or be construed as a waiver of any subsequent breach. No action taken pursuant to this Agreement, including any investigation by or on behalf of Company shall be deemed to constitute a waiver by Company of its rights and remedies available to it.

Miscellaneous:

(a)

Non-Transferability . RSUs may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except by will or the laws of descent and distribution.

(b)

Beneficiary . Payments with respect to the Award shall be made to the Participant, except that, in the event of the Participant's death, payment shall be made to the Participant's beneficiary. Unless otherwise specifically designated by the Participant in writing, the Participant's beneficiary shall be the Participant's spouse or, if none, the Participant's estate.

(c)

No Right to Continued Service or to Awards . The granting of an Award shall impose no obligation on the Company or any Affiliate to continue the employment of a Participant or interfere with or limit the right of the Company or any Affiliate to terminate the employment of the Participant at any time, with or without Cause, which right is expressly reserved.

(d)

Tax Withholding . The Company or an Affiliate, as applicable, will have the power and right to deduct, withhold or collect any amount required by law or regulation to be withheld with respect to any taxable event arising with respect to the RSUs. To the extent permitted by the Committee, in its sole discretion, this amount may be: (i) withheld from other amounts due to the Participant, (ii) withheld from the value of any Award being settled or any Shares transferred in connection with the exercise or settlement of an Award, (iii) withheld from the vested portion of any Award (including Shares transferable thereunder), whether or not being exercised or settled at the time the taxable event arises, or (iv) collected directly from the Participant. Unless the Participant has otherwise irrevocably elected a different method to satisfy the withholding requirement, the Participant shall be deemed to have elected to satisfy the withholding requirement by having the Company or an Affiliate, as applicable, withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction. The Participant may elect a higher level of withholding. All such elections will be irrevocable and made in writing and will be subject to any terms and conditions that the Committee, in its sole discretion, deems appropriate.

(e)

Requirements of Law . The grant of Awards shall be subject to all applicable laws, rules and regulations (including applicable federal and state securities laws) and to all required approvals of any governmental agencies or national securities exchange, market or other quotation system.

(f)

Governing Law . The Plan and all Award Agreements shall be governed by and construed in accordance with the laws of (other than laws governing conflicts of laws) the State of Ohio.

(g)

(h)

Section 409A of the Code . This Award Agreement is intended, and shall be construed and interpreted, to comply with Section 409A of the Code and if necessary, any provision shall be held null and void to the extent such provision (or part thereof) fails to comply with Section 409A of the Code or the Treasury Regulations thereunder. Any amounts payable solely on account of an involuntary termination shall be excludible from the requirements of Section 409A of the Code, either as separation pay or as short-term deferrals to the maximum possible extent. Nothing herein shall be construed as the guarantee of any particular tax treatment to the Participant, and the Company shall have no liability with respect to any failure to comply with the requirements of Section 409A of the Code. Any reference to the Participant's "termination" shall mean the Participant's "separation from service," as defined in Section 409A of the Code. In addition, if the Participant is determined to be a "specified employee" (within the meaning of Section 409A of the Code and as determined under the Company's policy for determining specified employees), the Participant shall not be entitled to payment or to distribution of any portion of an Award that is subject to Section 409A of the Code (and for which no exception applies) and is payable or distributable on account of the Participant's termination until the expiration of six months from the date of such termination (or, if earlier, the Participant's death). Such Award, or portion thereof, shall be paid or distributed on the first business day of the seventh month following such termination.

(i)

Signature in Counterparts . This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

[signature page attached]

PARTICIPANT

			Date:

FIRST DEFIANCE FINANCIAL CORP.

By:			Date:

Its:

Exhibit 10.3

First Defiance

Deferred Compensation Plan

Revised October 30, 2014

TABLE OF CONTENTS

		Page

ARTICLE 1	Definitions	1

ARTICLE 2	Selection, Enrollment, Eligibility	9

2.1	Selection by Committee	9
2.2	Enrollment and Eligibility Requirements; Commencement of Participation	10
2.3	Termination of a Participant’s Eligibility	11

ARTICLE 3	Deferral Commitments/Company Contribution Amounts/ Vesting/Crediting/Taxes	11

3.1	Reference source not found. Maximum Deferral	11
3.2	Minimum Deferrals	11
3.3	Election to Defer; Effect of Election Form	12
3.4	Withholding and Crediting of Annual Deferral Amounts	14
3.5	Company Contribution Amount	14
3.6	Vesting	15
3.7	Crediting/Debiting of Account Balances	16
3.8	FICA and Other Taxes	18

ARTICLE 4	Scheduled Distribution; Unforeseeable Financial Emergencies	18

4.1	Scheduled Distribution	18
4.2	Postponing Scheduled Distributions	19
4.3	Other Benefits Take Precedence Over Scheduled Distributions	19
4.4	Unforeseeable Financial Emergencies	19

ARTICLE 5	Retirement Benefit	21

5.1	Retirement Benefit	21
5.2	Payment of Retirement Benefit	21

ARTICLE 6	Termination Benefit	22

6.1	Termination Benefit	22
6.2	Payment of Termination Benefit	22

ARTICLE 7	Disability Benefit	22

7.1	Disability Benefit	22
7.2	Payment of Disability Benefit	22

ARTICLE 8	Death Benefit	22

8.1	Death Benefit	22
8.2	Payment of Death Benefit	22

ARTICLE 9	Beneficiary Designation	22

9.1	Beneficiary	22
9.2	Beneficiary Designation; Change; Spousal Consent	23
9.3	Acknowledgement	23
9.4	No Beneficiary Designation	23
9.5	Doubt as to Beneficiary	23
9.6	Discharge of Obligations	23

ARTICLE 10	Leave of Absence	23

10.1	Paid Leave of Absence	23
10.2	Unpaid Leave of Absence	24

ARTICLE 11	Termination of Plan, Amendment or Modification	24

11.1	Termination of Plan	24
11.2	Amendment	25
11.3	Plan Agreement	26
11.4	Effect of Payment	26

ARTICLE 12	Administration	26

12.1	Committee Duties	26
12.2	Administration Upon Change In Control	26
12.3	Agents	26
12.4	Binding Effect of Decisions	26
12.5	Indemnity of Committee	27
12.6	Employer Information	27

ARTICLE 13	Other Benefits and Agreements	27

13.1	Coordination with Other Benefits	27

ARTICLE 14	Claims Procedures	27

14.1	Presentation of Claim	27
14.2	Notification of Decision	27
14.3	Review of a Denied Claim	28
14.4	Decision on Review	28
14.5	Legal Action	29

ARTICLE 15	Trust	29

15.1	Establishment of the Trust	29
15.2	Interrelationship of the Plan and the Trust	29
15.3	Distributions From the Trust	29

ARTICLE 16	Miscellaneous	29

16.1	Status of Plan	29
16.2	Unsecured General Creditor	29
16.3	Employer’s Liability	29
16.4	Nonassignability	30
16.5	Not a Contract of Employment	30
16.6	Furnishing Information	30
16.7	Terms	30
16.8	Captions	30
16.9	Governing Law	30
16.10	Notice	30
16.11	Successors	31
16.12	Spouse’s Interest	31
16.13	Validity	31
16.14	Incompetent	31
16.15	Court Order	31
16.16	Insurance	31
16.15	Domestic Relations Orders	31
16.18	Distribution in the Event of Income Inclusion Under Code Section 409A	31
16.19	Deduction Limitation on Benefit Payments	32
16.20	Fair Construction	32

FIRST DEFIANCE

DEFERRED COMPENSATION PLAN

Effective July 1, 2014

Purpose

The purpose of this Plan is to provide specified benefits to Directors and a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of First Defiance Financial Corp., an Ohio corporation, and its subsidiaries and affiliates, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

Effective July 1, 2014 (the “Restatement Date”), the provisions of this Plan shall amend and restate the Plan as restated December 31, 2008.

The Plan is intended to comply with all applicable law, including Code Section 409A and related Treasury guidance and Regulations, and shall be operated and interpreted in accordance with this intention.

ARTICLE 1

Definitions

For the purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1

“Account Balance” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the Company Contribution Account balance and (iii) the Participant’s Transfer Account balance. Subaccounts shall be maintained for each type of Company Contribution described in Plan section 3.5. The Account Balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

If a Participant is both an Employee and a Director and participates in the Plan in each capacity, then separate Account Balances (and separate Annual Accounts, if applicable) shall be established for such Participant as a device for the measurement and determination of the (a) amounts deferred under the Plan that are attributable to the Participant’s status as an Employee, and (b) amounts deferred under the Plan that are attributable to the Participant’s status as a Director.

1.2

“Annual Deferral Amount” shall mean that portion of a Participant's Base Salary, Bonus, Commissions, Director Fees and LTIP Amounts that a Participant defers in accordance with Article 3 for any one Plan Year, without regard to whether such amounts are withheld and credited during such Plan Year. In the event of a Participant's Retirement, Disability, death or Separation from Service prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event.

- 1 -

1.3

“Annual Installment Method” shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: (i) for the first annual installment, the Participant’s vested Account Balance shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee in its sole discretion, and (ii) for remaining annual installments, the Participant’s vested Account Balance shall be calculated on every anniversary of such calculation date, as applicable. Each annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one and the denominator of which is the remaining number of annual payments due to the Participant. By way of example, if the Participant elects a ten (10) year Annual Installment Method for the Retirement Benefit, the first payment shall be 1/10 of the vested Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the vested Account Balance, calculated as described in this definition. Shares of Stock that shall be distributable from a Participant’s Deferral Account shall be distributable in shares of actual Stock in the same manner previously described. However, the Committee may, in its sole discretion, adjust the annual installments in order to distribute whole shares of actual Stock.

1.4

“Base Salary” shall mean the annual cash compensation relating to services performed during any calendar year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, director fees and other fees, and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee’s gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or nonqualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Employee.

1.5

“Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant.

1.6

“Beneficiary Designation Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.

1.7

“Benefit Distribution Date” shall mean the date that triggers distribution of a Participant’s vested Account Balance. A Participant’s Benefit Distribution Date shall be determined upon the occurrence of any one of the following:

(a)

If the Participant Retires, his or her Benefit Distribution Date shall be the last day of the six-month period immediately following the date on which the Participant Retires; provided, however , in the event the Participant changes his or her Retirement Benefit election in accordance with Section 5.2(b), his or her Benefit Distribution Date shall be postponed in accordance with Section 5.2(b); or

(b)

If the Participant experiences a Separation from Service, his or her Benefit Distribution Date shall be the last day of the six-month period immediately following the date on which the Participant experiences a Separation from Service; or

(c)

The date on which the Committee is provided with proof that is satisfactory to the Committee of the Participant’s death, if the Participant dies prior to the complete distribution of his or her vested Account Balance; or

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(d)

The date on which the Participant becomes Disabled.

1.8

“Board” shall mean the board of directors of the Company.

1.9

“Bonus” shall mean any compensation, in addition to Base Salary, Commissions and LTIP Amounts, earned by a Participant for services rendered during a Plan Year, under any Employer's annual bonus and cash incentive plans, or other arrangement designated by the Committee, as further specified on an Election Form.

1.10

“Change in Control” shall mean the occurrence of a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of a corporation, as determined in accordance with this Section.

In order for an event described below to constitute a Change in Control with respect to a Participant, except as otherwise provided in part (b)(ii) of this Section, the applicable event must relate to the corporation for which the Participant is providing services, the corporation that is liable for payment of the Participant’s Account Balance (or all corporations liable for payment if more than one), as identified by the Committee in accordance with Treas. Reg. §1.409A- 3(i)(5)(ii)(A)(2), or such other corporation identified by the Committee in accordance with Treas. Reg. §1.409A-3(i)(5)(ii)(A)(3).

In determining whether an event shall be considered a “change in the ownership,” a “change in the effective control” or a “change in the ownership of a substantial portion of the assets” of a corporation, the following provisions shall apply:

(a)

A “change in the ownership” of the applicable corporation shall occur on the date on which any one person, or more than one person acting as a group, acquires ownership of stock of such corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation, as determined in accordance with Treas. Reg. §1.409A-3(i)(5)(v). If a person or group is considered either to own more than 50% of the total fair market value or total voting power of the stock of such corporation, or to have effective control of such corporation within the meaning of part (b) of this Section, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the ownership” of such corporation.

(b)

A “change in the effective control” of the applicable corporation shall occur on either of the following dates:

(i)

The date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of such corporation possessing 30% or more of the total voting power of the stock of such corporation, as determined in accordance with Treas. Reg. §1.409A-3(i)(5)(vi). If a person or group is considered to possess 30% or more of the total voting power of the stock of a corporation, and such person or group acquires additional stock of such corporation, the acquisition of additional stock by such person or group shall not be considered to cause a “change in the effective control” of such corporation; or

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(ii)

The date on which a majority of the members of the applicable corporation’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of such corporation’s board of directors before the date of the appointment or election, as determined in accordance with Treas. Reg. §1.409A-3(i)(5)(vi). In determining whether the event described in the preceding sentence has occurred, the applicable corporation to which the event must relate shall only include a corporation identified in accordance with Treas. Reg. §1.409A-3(i)(5)(ii) for which no other corporation is a majority shareholder.

(c)

A “change in the ownership of a substantial portion of the assets” of the applicable corporation shall occur on the date on which any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions, as determined in accordance with Treas. Reg. §1.409A-3(i)(5)(vii). A transfer of assets shall not be treated as a “change in the ownership of a substantial portion of the assets” when such transfer is made to an entity that is controlled by the shareholders of the transferor corporation, as determined in accordance with Treas. Reg. §1.409A-3(i)(5)(vii)(B).

1.11

“Claimant” shall have the meaning set forth in Section 14.1.

1.12

“Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.

1.13

“Commissions” shall mean the cash commissions earned by a Participant from any Employer for services rendered during a Plan Year, excluding Bonus, LTIP Amounts or other additional incentives or awards earned by the Participant, and determined in accordance with Code Section 409A and related Treasury Regulations and Guidance.

1.14

“Committee” shall mean the committee described in Article 12.

1.15

“Company” shall mean First Defiance Financial Corp., an Ohio corporation, and any successor to all or substantially all of the Company’s assets or business.

1.16

“Company Contribution Account” shall mean (i) the sum of the Participant’s Company Contributions, plus (ii) amounts credited or debited to the Participant’s Company Contribution Account in accordance with Section 3.7 of this Plan, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant’s Company Contribution Account.

1.17

“Company Contributions” shall mean the Company Contributions determined in accordance with Section 3.5.

1.18

“Compensation” means a Participant’s Compensation as defined in the plan document for the Qualified Plan for the type of Supplemental Contribution being made under the terms of this Plan.

1.19

“Death Benefit” shall mean the benefit set forth in Article 8.

1.20

“Deferral Account” shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited or debited to the Participant’s Deferral Account in accordance with this Plan, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account.

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1.21

“Designated Participant” means a Participant who has been designated by the Committee to receive either or both of the Supplemental Contributions provided by Plan section 3.5(c).

1.22

“Director” shall mean any member of the board of directors of any Employer.

1.23

“Director Fees” shall mean the annual fees earned by a Director from any Employer, including retainer fees and meetings fees, as compensation for serving on the board of directors.

1.24

“Disability” or “Disabled” shall mean that a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident or health plan covering employees of the Participant’s Employer. For purposes of this Plan, a Participant shall be deemed Disabled if determined to be totally disabled by the Social Security Administration. A Participant shall also be deemed Disabled if determined to be disabled in accordance with the applicable disability insurance program of such Participant’s Employer, provided that the definition of “disability” applied under such disability insurance program complies with the requirements of this Section.

1.25

“Disability Benefit” shall mean the benefit set forth in Article 7.

1.26

“Discretionary Contribution” shall mean, for any one Plan Year, the Company Contribution made at the discretion of an Employer pursuant to Plan Section 3.5(b).

1.27

“Election Form” shall mean the form, which may be in electronic format, established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan.

1.28

“Employee” shall mean a person who is an employee of any Employer.

1.29

“Employer(s)” shall mean the Company and/or any of its subsidiaries or affiliates (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor, all of which will be listed at the end of this document.

For the purpose of determining whether a Participant has experienced a Separation from Service, the term “Employer” shall mean:

(i)

The entity for which the Participant performs services and with respect to which the legally binding right to compensation deferred or contributed under this Plan arises; and

(ii)

All other entities with which the entity described above would be aggregated and treated as a single employer under Code Section 414(b) (controlled group of corporations) and Code Section 414(c) (a group of trades or businesses, whether or not incorporated, under common control), as applicable. In order to identify the group of entities described in the preceding sentence, the Committee shall use an ownership threshold of at least 50% as a substitute for the 80% minimum ownership threshold that appears in, and otherwise must be used when applying, the applicable provisions of (A) Code Section 1563 for determining a controlled group of corporations under Code Section 414(b), and (B) Treas. Reg. §1.414(c)- 2 for determining the trades or businesses that are under common control under Code Section 414(c).

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1.30

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

1.31

“LTIP Amounts” shall mean any portion of the compensation attributable to a Plan Year that is earned by a Participant as an Employee under any Employer's long-term incentive plan or any other long-term incentive arrangement designated by the Committee.

1.32

“Participant” shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who submits an executed Plan Agreement, Election Form and Beneficiary Designation Form, which are accepted by the Committee, and (iii) whose Plan Agreement has not terminated.

1.33

“Performance-Based Compensation” shall mean compensation the entitlement to or amount of which is contingent on the satisfaction of pre-established organizational or individual performance criteria relating to a performance period of at least 12 consecutive months, as determined by the Committee in accordance with Treas. Reg. §1.409A-1(e)

1.34

“Plan” shall mean the First Defiance Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time, and by any other documents that together with this instrument define a Participant’s rights to amounts credited to his or her Account Balance.

1.35

“Plan Agreement” shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant’s Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant.

1.36

“Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.

1.37

“Qualified Plan” means the First Defiance Financial Corp. 401(k) Employee Savings Plan.

1.38

“Required Company Contribution” shall mean, for any one Plan Year, the Company Contribution made by an Employer pursuant to Plan Section 3.5(a) as required by an agreement between the Company and a Participant.

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1.39

“Retirement,” “Retire(s)” or “Retired” shall mean with respect to a Participant who is an Employee, a Separation from Service on or after the attainment of age 55 with 5 Years of Service, and shall mean with respect to a Participant who is a Director, a Separation from Service. If a Participant is both an Employee and a Director and participates in the Plan in each capacity, (a) the determination of whether the Participant qualifies for Retirement as an Employee shall be made when the Participant experiences a Separation from Service as an Employee and such determination shall only apply to the applicable Account Balance established in accordance with Section 1.1 for amounts deferred under the Plan as an Employee, and (b) the determination of whether the Participant qualifies for Retirement as a Director shall be made at the time the Participant experiences a Separation from Service as a Director and such determination shall only apply to the applicable Account Balance established in accordance with Section 1.1 for amounts deferred under the Plan as a Director.

1.40

“Retirement Benefit” shall mean the benefit set forth in Article 5.

1.41

“Salary Deferral Plan” shall mean the deferred compensation agreements, effective as of September 1, 2002, entered into between First Federal Bank (now known as First Federal Bank of the Midwest) and the applicable individual identified in such agreement, including such agreements as have been attested to by the First Federal Bank of the Midwest (each, a “Salary Deferral Plan”), with respect to amounts credited to such Salary Deferral Plan.

1.42

“Scheduled Distribution” shall mean the distribution set forth in Section 4.1.

1.43

“Separation from Service” shall mean a termination of services provided by a Participant to his or her Employer, whether voluntarily or involuntarily, other than by reason of death or Disability, as determined by the Committee in accordance with Treas. Reg. §1.409A-1(h). In determining whether a Participant has experienced a Separation from Service, the following provisions shall apply:

(a)

For a Participant who provides services to an Employer as an Employee, except as otherwise provided in part (c) of this Section, a Separation from Service shall occur when such Participant has experienced a Separation from Service with such Employer. A Participant shall be considered to have experienced a Separation from Service when the facts and circumstances indicate that the Participant and his or her Employer reasonably anticipate that either (i) no further services will be performed for the Employer after a certain date, or (ii) that the level of bona fide services the Participant will perform for the Employer after such date (whether as an Employee or as an independent contractor) will permanently decrease to no more than 20% of the average level of bona fide services performed by such Participant (whether as an Employee or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the Employer if the Participant has been providing services to the Employer less than 36 months).

If a Participant is on military leave, sick leave, or other bona fide leave of absence, the employment relationship between the Participant and the Employer shall be treated as continuing intact, provided that the period of such leave does not exceed 6 months, or if longer, so long as the Participant retains a right to reemployment with the Employer under an applicable statute or by contract. If the period of a military leave, sick leave, or other bona fide leave of absence exceeds 6 months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship shall be considered to be terminated for purposes of this Plan as of the first day immediately following the end of such 6-month period. In applying the provisions of this paragraph, a leave of absence shall be considered a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Employer.

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(b)

For a Participant who provides services to an Employer as an independent contractor, except as otherwise provided in part (c) of this Section, a Separation from Service shall occur upon the expiration of the contract (or in the case of more than one contract, all contracts) under which services are performed for such Employer, provided that the expiration of such contract(s) is determined by the Committee to constitute a good-faith and complete termination of the contractual relationship between the Participant and such Employer.

(c)

For a Participant who provides services to an Employer as both an Employee and an independent contractor , a Separation from Service generally shall not occur until the Participant has ceased providing services for such Employer as both as an Employee and as an independent contractor, as determined in accordance with the provisions set forth in parts (a) and (b) of this Section, respectively. Similarly, if a Participant either (i) ceases providing services for an Employer as an independent contractor and begins providing services for such Employer as an Employee, or (ii) ceases providing services for an Employer as an Employee and begins providing services for such Employer as an independent contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services for such Employer in both capacities, as determined in accordance with the applicable provisions set forth in parts (a) and (b) of this Section.

Notwithstanding the foregoing provisions in this part (c), if a Participant provides services for an Employer as both an Employee and as a Director, to the extent permitted by Treas. Reg. §1.409A-1(h)(5) the services provided by such Participant as a Director shall not be taken into account in determining whether the Participant has experienced a Separation from Service as an Employee, and the services provided by such Participant as an Employee shall not be taken into account in determining whether the Participant has experienced a Separation from Service as a Director.

1.44

“Specified Employee” shall mean any Participant who is determined to be a “key employee” (as defined under Code Section 416(i) without regard to paragraph (5) thereof) for the applicable period, as determined annually by the Committee in accordance with Treas. Reg. §1.409A-1(i). In determining whether a Participant is a Specified Employee, the following provisions shall apply:

(a)

The Committee’s identification of the individuals who fall within the definition of “key employee” under Code Section 416(i) (without regard to paragraph (5) thereof) shall be based upon the 12-month period ending on each December 31st (referred to below as the “identification date”). In applying the applicable provisions of Code Section 416(i) to identify such individuals, “compensation” shall be determined in accordance with Treas. Reg. §1.415(c)-2(a) without regard to (i) any safe harbor provided in Treas. Reg. §1.415(c)-2(d), (ii) any of the special timing rules provided in Treas. Reg. §1.415(c)-2(e), and (iii) any of the special rules provided in Treas. Reg. §1.415(c)-2(g); and

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(b)

Each Participant who is among the individuals identified as a “key employee” in accordance with part (a) of this Section shall be treated as a Specified Employee for purposes of this Plan if such Participant experiences a Separation from Service during the 12-month period that begins on the April 1st following the applicable identification date.

1.45

“Stock” shall mean First Defiance Financial Corp. common stock, $0.01 par value, or any other equity securities of the Company designated by the Committee.

1.46

“Supplemental Contributions” shall mean the Company Supplemental Contributions determined in accordance with Section 3.5(c).

1.47

“Supplemental Matching Contribution” shall mean, for any one Plan Year, the Supplemental Matching Contributions determined in accordance with Section 3.5(c)(1).

1.48

“Supplemental Nonelective Contribution” shall mean, for any one Plan Year, the Supplemental Nonelective Contributions determined in accordance with Section 3.5(c)(2).

1.49

“Termination Benefit” shall mean the benefit set forth in Article 6.

1.50

“Transfer Account” shall mean any and all such balances accrued by a Participant under a Salary Deferral Plan shall be credited to the Participant’s Transfer Account (subject to the terms and conditions of this Plan) on or around December 31, 2005.

1.51

“Treasury Guidance” shall mean any official releases of the Department of Treasury and the Internal Revenue Service including regulations, notices, revenue rulings, revenue procedures and other like official materials.

1.52

“Trust” shall mean one or more trusts established by the Company in accordance with Article 15.

1.53

“Unforeseeable Financial Emergency” shall mean a severe financial hardship of the Participant resulting from (a) an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary or the Participant’s dependent (as defined in Code Section 152 without regard to paragraphs (b)(1), (b)(2) and (d)(1)(b) thereof), (b) a loss of the Participant’s property due to casualty, or (c) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined by the Committee based on the relevant facts and circumstances.

1.54

“Years of Service” shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. The Committee shall make a determination as to whether any partial year of employment shall be counted as a Year of Service.

ARTICLE 2

Selection, Enrollment, Eligibility

2.1

Selection by Committee Participation in the Plan shall be limited to Directors and, as determined by the Committee in its sole discretion, a select group of management or highly compensated Employees. The Committee shall determine, in its sole discretion, from among the select group of management or highly compensated Employees, which Employees may actually participate in this Plan and which benefits of the Plan will apply to the selected Employee. A Employee selected for participation is not necessarily eligible for all benefits of the Plan, e.g. a Participant may be eligible to make Deferral Contributions, but not be eligible to receive Employer Contributions.

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2.2

Enrollment and Eligibility Requirements; Commencement of Participation

(a)

As a condition to participation, each Director or selected Employee who is eligible to participate in the Plan effective as of the first day of a Plan Year shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, prior to the first day of such Plan Year, or such other earlier deadline as may be established by the Committee in its sole discretion. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary.

(b)

A Director or selected Employee who first becomes eligible to participate in this Plan after the first day of a Plan Year must complete these requirements to submit an Election Form and a Beneficiary Designation Form within thirty (30) days after he or she first becomes eligible to participate in the Plan, or within such other earlier deadline as may be established by the Committee, in its sole discretion, in order to participate for that Plan Year. In such event, such person’s participation in this Plan shall not commence earlier than the date determined by the Committee pursuant to Section 2.2(c) and such person shall not be permitted to defer under this Plan any portion of his or her Base Salary, Bonus, LTIP Amounts, Commissions and/or Director Fees that are paid with respect to services performed prior to his or her participation commencement date, except to the extent permissible under Code Section 409A and related Treasury Guidance.

(c)

Each Director or selected Employee who is eligible to participate in the Plan shall commence participation in the Plan on the date that the Committee determines, in its sole discretion, that the Director or Employee has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period. Notwithstanding the foregoing, the Committee shall process such Participant’s deferral election as soon as administratively practicable after such deferral election is submitted to and accepted by the Committee.

(d)

If a Director or an Employee fails to meet all requirements contained in this Section 2.2 within the period required, that Director or Employee shall not be eligible to participate in the Plan during such Plan Year. A Director or an Employee who has been eligible for and enrolled in the Plan with respect to any form of deferred compensation under Article 3 at an earlier date who is subsequently made eligible for a different type or form of deferred compensation under Article 3 shall not again be required to re-enroll, except to the extent necessary to make any election that might be specifically required for the new form or type of deferred compensation.

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2.3

Termination of a Participant’s Eligibility . If the Committee determines that an Employee Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, or that the inclusion of Directors in this Plan could jeopardize the status of this Plan as a plan intended to be “unfunded” and “maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1), the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Committee makes such determination, (ii) prevent the Participant from making future deferral elections, and/or (iii) take further action that the Committee deems appropriate. Notwithstanding the foregoing, in the event of a Termination of the Plan, the termination of the affected Participants’ eligibility for participation in the Plan shall not be governed by this Section 2.3, but rather shall be governed by Section 11.1. In the event that a Participant is no longer eligible to defer compensation under this Plan, the Participant’s Account Balance shall continue to be governed by the terms of this Plan until such time as the Participant’s Account Balance is paid in accordance with the terms of this Plan.

ARTICLE 3

Deferral Commitments/Company Contribution Amounts/

Vesting/Crediting/Taxes

3.1

Maximum Deferral

(a)

Annual Deferral Amount . For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Bonus, Commissions, LTIP Amounts and/or Director Fees up to the following maximum percentages for each deferral elected:

Deferral	Maximum Percentage
Base Salary		80	%
Bonus		100	%
Commissions		80	%
LTIP Amounts		100	%
Director Fees		100	%

(b)

Short Plan Year . Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, then to the extent required by Section 3.2 and Code Section 409A and related Treasury Guidance, the maximum amount of the Participant’s Base Salary, Bonus, Commissions, LTIP Amounts or Director Fees that may be deferred by the Participant for the Plan Year shall be determined by applying the percentages set forth in Section 3.1(a) to the portion of such compensation attributable to services performed after the date that the Participant’s deferral election is made.

3.2

Minimum Deferrals

(a)

Annual Deferral Amount . For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Bonus, Commissions, LTIP Amounts and/or Director Fees in the following minimum amounts for each deferral elected:

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Deferral	Minimum Amount
Base Salary, Bonus, Commissions and/or LTIP Amounts	$	2,000 aggregate
Director Fees	$	0

If the Committee determines, in its sole discretion, prior to the beginning of a Plan Year that a Participant has made an election for less than the stated minimum amounts, or if no election is made, the amount deferred shall be zero.

(b)

Short Plan Year . Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year , the minimum Annual Deferral Amount shall be an amount equal to the minimum set forth above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12.

3.3

Election to Defer; Effect of Election FormGeneral Timing Rule for Deferral Elections . Except as otherwise provided in this Section 3.3(a), in order for a Participant to make a valid election to defer Base Salary, Bonus, Commissions, Director Fees and/or LTIP Amounts, the Participant must submit an Election Form on or before the deadline established by the Committee, which in no event shall be later than the December 31st preceding the Plan Year in which such compensation will be earned.

Any deferral election made in accordance with this Section 3.3(a) shall be irrevocable; provided, however, that if the Committee permits or requires Participants to make a deferral election by the deadline described above for an amount that qualifies as Performance-Based Compensation, the Committee may permit a Participant to subsequently change his or her deferral election for such compensation by submitting a new Election Form in accordance with Section 3.3(d) below.

(a)

Timing of Deferral Elections for Newly Eligible Plan Participants . A Director or selected Employee who first becomes eligible to participate in the Plan on or after the beginning of a Plan Year, as determined in accordance with Treas. Reg. §1.409A- 2(a)(7)(ii) and the “plan aggregation” rules provided in Treas. Reg. §1.409A-1(c)(2), may be permitted to make an election to defer the portion of Base Salary, Bonus, Commissions, Director Fees and/or LTIP Amounts attributable to services to be performed after such election, provided that the Participant submits an Election Form on or before the deadline established by the Committee, which in no event shall be later than 30 days after the Participant first becomes eligible to participate in the Plan.

If a deferral election made in accordance with this Section 3.3(b) relates to compensation earned based upon a specified performance period, the amount eligible for deferral shall be equal to (i) the total amount of compensation for the performance period, multiplied by (ii) a fraction, the numerator of which is the number of days remaining in the service period after the Participant’s deferral election is made, and the denominator of which is the total number of days in the performance period.

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Any deferral election made in accordance with this Section 3.3(b) shall become irrevocable no later than the 30 th day after the date the Director or selected Employee becomes eligible to participate in the Plan.

(b)

Timing of Deferral Elections for Fiscal Year Compensation . In the event that the fiscal year of an Employer is different than the taxable year of a Participant, the Committee may determine that a deferral election may be made for “fiscal year compensation” (as defined below), by submitting an Election Form on or before the deadline established by the Committee, which in no event shall be later than the last day of the Employer’s fiscal year immediately preceding the fiscal year in which the services related to such compensation will begin to be performed. For purposes of this Section, the term “fiscal year compensation” shall only include Bonus and LTIP Amounts relating to a service period coextensive with one or more consecutive fiscal years of the Employer, of which no amount is paid or payable during the Employer’s fiscal year(s) that constitute the service period.

A deferral election made in accordance with this Section 3.3(c) shall be irrevocable; provided, however, that if the Committee permits or requires Participants to make a deferral election by the deadline described in this Section 3.3(c) for an amount that qualifies as Performance-Based Compensation, the Committee may permit a Participant to subsequently change his or her deferral election for such compensation by submitting a new Election Form in accordance with 3.3(d) below.

(d)

Timing of Deferral Elections for Performance-Based Compensation . Subject to the limitations described below, the Committee may determine that an irrevocable deferral election for an amount that qualifies as Performance-Based Compensation may be made by submitting an Election Form on or before the deadline established by the Committee, which in no event shall be later than 6 months before the end of the performance period.

In order for a Participant to be eligible to make a deferral election for Performance-Based Compensation in accordance with the deadline established pursuant to this Section 3.3(d), the Participant must have performed services continuously from the later of (i) the beginning of the performance period for such compensation, or (ii) the date upon which the performance criteria for such compensation are established, through the date upon which the Participant makes the deferral election for such compensation. In no event shall a deferral election submitted under this Section 3.3(d) be permitted to apply to any amount of Performance-Based Compensation that has become readily ascertainable.

(e)

Timing Rule for Deferral of Compensation Subject to Risk of Forfeiture . With respect to compensation (i) to which a Participant has a legally binding right to payment in a subsequent year, and (ii) that is subject to a forfeiture condition requiring the Participant’s continued services for a period of at least 12 months from the date the Participant obtains the legally binding right, the Committee may determine that an irrevocable deferral election for such compensation may be made by timely delivering an Election Form to the Committee in accordance with its rules and procedures, no later than the 30 th day after the Participant obtains the legally binding right to the compensation, provided that the election is made at least 12 months in advance of the earliest date at which the forfeiture condition could lapse, as determined in accordance with Treas. Reg. §1.409A-2(a)(5).

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Any deferral election(s) made in accordance with this Section 3.3(e) shall become irrevocable no later than the 30 th day after the Participant obtains the legally binding right to the compensation subject to such deferral election(s).

3.4

Withholding and Crediting of Annual Deferral Amounts

(a)

For each Plan Year, the Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Salary. The Bonus, Commissions, LTIP Amounts and/or Director Fees portion of the Annual Deferral Amount shall be withheld at the time the Bonus, Commissions, LTIP Amounts or Director Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. Annual Deferral Amounts shall be credited to a Participant’s Deferral Account at the time such amounts would otherwise have been paid to the Participant.

(b)

Notwithstanding any provision or election under this Plan to the contrary, if necessary to comply with Code Section 409A or to facilitate administration of the Company’s payroll system, the Committee, in its sole discretion, may choose to either (i) not withhold Base Salary or Commissions during any payroll period in which any portion of such Base Salary or Commissions relates to services performed in a prior Plan Year, or (ii) withhold Base Salary or Commissions during any payroll period in which any portion of such Base Salary or Commissions relates to services performed in a prior Plan Year in accordance with the Participant’s deferral election submitted for the prior Plan Year. Accordingly, in order to carry out the intent of this provision, the Committee may adjust a Participant’s Base Salary or Commissions deferral election submitted pursuant to this Article 3.

3.5

Company Contributions .

(a)

For each Plan Year, an Employer may be required to credit amounts to a Participant’s Required Company Contribution subaccount in accordance with employment or other agreements entered into between the Participant and the Employer. Such amounts shall be credited on the date or dates prescribed by such agreements.

(b)

For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant’s Discretionary Contribution Account under this Plan, which amount shall be for that Participant the Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Contribution Amount for that Plan Year. The Company Contribution Amount described in this Section 3.5(b), if any, shall be credited on a date or dates to be determined by the Committee, in its sole discretion.

(c)

Company Supplemental Contributions:

(1) Supplemental Matching Contributions. Each Designated Participant who is eligible to receive a matching montribution under the Qualified Plan shall be entitled to receive a Supplemental Matching Contribution as defined herein. The Supplemental Matching Contribution is the amount equal to the excess, if any, of A minus B, where:

“A” is the matching contribution that would have been contributed to the Qualified Plan and allocated to the Participant for the Taxable Year, determined without the limitations imposed by Code §402(g), §401(a)(4), §401(a)(17) or §415 calculated using the Participant’s Compensation for the Taxable Year; and

“B” is the actual matching contribution made on behalf of the Participant’s account under the Qualified Plan for the Taxable Year.

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(2) Supplemental Nonelective Contributions . Each Designated Participant who is eligible to receive a nonelective contribution under the Qualified Plan shall be entitled to receive a Supplemental Nonelective Contribution as defined herein. The Supplemental Nonelective Contribution is the amount equal to the excess, if any, of C minus D, where:

“C” is the nonelective contribution that would have been contributed to the Qualified Plan and allocated to the Participant for the Taxable Year, determined without the limitations imposed by Code §401(a)(4), §401(a)(17), or §415 calculated using the Participant’s Compensation for the Taxable Year; and

“D” is the actual nonelective contribution made on behalf of the Participant’s account under the Qualified Plan for the Taxable Year.

(d)

If not otherwise specified in the Participant’s employment or other agreement entered into between the Participant and the Employer, or as set forth in this Plan, the amount (or the method or formula for determining the amount) of a Participant’s Company Contribution shall be set forth in writing in one or more documents, which shall be deemed to be incorporated into this Plan in accordance with Section 1.34, no later than the date on which such Company Contribution Amount is credited to the applicable Company Contributions Account of the Participant.

3.6

Vesting .

(a)

A Participant shall at all times be 100% vested in his or her Deferral Account and Transfer Account.

(b)

A Participant shall be vested in his or her Company Contribution Account in accordance with:

(1)

The vesting schedule(s) set forth in his or her Plan Agreement, employment agreement or any other agreement entered into between the Participant and his or her Employer.

(2)

If not addressed in such agreements described in subparagraph (1), a vesting schedule declared by the Committee in its sole discretion.

(3)

If not addressed as provided in subparagraphs (1 or 2), the Participant shall be deemed 100% vested in any Company Contribution not subject to a vesting schedule described in subparagraph (1 or 2).

(4)

Each different type of Company Contribution may be subject to a different vesting schedule and each year’s contributions of any type may be subject to a different vesting schedule; the Company Contribution account does not have to be subject to only one or a uniform vesting schedule.

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(c)

Notwithstanding anything to the contrary contained in this Section 3.6, upon a Participant’s (i) death while employed by an Employer, (ii) Disability, or (iii) Retirement that occurs on or after the Participant’s attainment of age sixty-five (65), the Participant’s Company Contribution Account shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedules).

3.7

Crediting/Debiting of Account Balances In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules:

(a)

Measurement Funds . Subject to the restrictions found in Section 3.7(c) below, the Participant may elect one or more of the measurement funds selected by the Committee, in its sole discretion, which are based on certain mutual funds (the “Measurement Funds”), for the purpose of crediting or debiting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the first calendar quarter that begins at least thirty (30) days after the day on which the Committee gives Participants advance written notice of such change.

(b)

Election of Measurement Funds . Subject to the restrictions found in Section 3.7(c) below, a Participant, in connection with his or her initial deferral election in accordance with Section 3.70 above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.7(a) above) to be used to determine the amounts to be credited or debited to his or her Account Balance. If a Participant does not elect any of the Measurement Funds as described in the previous sentence, the Participant’s Account Balance shall automatically be allocated into the lowest-risk Measurement Fund, as determined by the Committee, in its sole discretion. Subject to the restrictions found in Section 3.7(c) below, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply as of the first business day deemed reasonably practicable by the Committee, in its sole discretion, and shall continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. Notwithstanding the foregoing, the Committee, in its sole discretion, may impose limitations on the frequency with which one or more of the Measurement Funds elected in accordance with this Section may be added or deleted by such Participant; furthermore, the Committee, in its sole discretion, may impose limitations on the frequency with which the Participant may change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund.

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(c)

First Defiance Stock Unit Fund .

(i)

The Committee, in its sole discretion, may permit a Participant to initially elect to irrevocably allocate all or a portion of his or her future Director Fees, in accordance with the terms of this Plan, to the First Defiance Stock Unit Fund. Any deferrals of Director Fees allocated to the First Defiance Stock Unit Fund by such Participant cannot be re-allocated to any other Measurement Fund and shall only be distributable in actual shares of Stock.

(ii)

Any stock dividends, cash dividends or other non-cash dividends that would have been payable on the Stock credited to such Participant’s Account Balance shall be credited to the Participant’s Account Balance in the form of additional shares of Stock and shall automatically and irrevocably be deemed to be re-invested in the First Defiance Stock Unit Fund until such amounts are distributed to the Participant. The number of shares credited to the Participant for a particular stock dividend shall be equal to (a) the number of shares of Stock credited to the Participant’s Account Balance as of the payment date for such dividend in respect of each share of Stock, multiplied by (b) the number of additional or fractional shares of Stock actually paid as a dividend in respect of each share of Stock. The number of shares credited to the Participant for a particular cash dividend or other non-cash dividend shall be equal to (a) the number of shares of Stock credited to the Participant’s Account Balance as of the payment date for such dividend in respect of each share of Stock, multiplied by (b) the fair market value of the dividend, divided by (c) the “fair market value” of the Stock on the payment date for such dividend.

(iii)

The number of shares of Stock credited to the Participant’s Account Balance may be adjusted by the Committee, in its sole discretion, to prevent dilution or enlargement of Participants’ rights with respect to the portion of his or her Account Balance allocated to the First Defiance Stock Unit Fund in the event of any reorganization, reclassification, stock split, or other unusual corporate transaction or event which affects the value of the Stock, provided that any such adjustment shall be made taking into account any crediting of shares of Stock to the Participant under Section 3.7.

(iv)

For purposes of this Section 3.7(c), the “fair market value” of the Stock shall be determined by the Committee in its sole discretion.

(d)

Proportionate Allocation . In making any election described in Section 3.7(b) above, the Participant shall specify on the Election Form, in increments of one percent (1%), the percentage of his or her Account Balance or Measurement Fund, as applicable, to be allocated/reallocated.

(e)

Crediting or Debiting Method . The performance of each Measurement Fund (either positive or negative) will be determined on a daily basis based on the manner in which such Participant’s Account Balance has been hypothetically allocated among the Measurement Funds by the Participant.

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(f)

No Actual Investment . Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation of his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the investments on which the Measurement Funds are based, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company.

3.8

FICA and Other Taxes .

(a)

Annual Deferral Amounts . For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary, Bonus, Commissions and/or LTIP Amounts that is not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.8.

(b)

Company Contribution Account . When a Participant becomes vested in a portion of his or her Company Contribution Account, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary, Bonus, Commissions and/or LTIP Amounts that is not deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Company Contribution Amount. If necessary, the Committee may reduce the vested portion of the Participant’s Company Contribution Account, as applicable, in order to comply with this Section 3.8.

(c)

Distributions . The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.

ARTICLE 4

Scheduled Distribution; Unforeseeable Financial Emergencies

4.1

Scheduled Distribution In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a Scheduled Distribution, in the form of a lump sum payment, from the Plan with respect to all or a portion of the Annual Deferral Amount. The Scheduled Distribution shall be a lump sum payment in an amount that is equal to the portion of the Annual Deferral Amount the Participant elected to have distributed as a Scheduled Distribution, plus amounts credited or debited in the manner provided in Section 3.7 above on that amount, calculated as of the close of business on or around the date on which the Scheduled Distribution becomes payable. Subject to the other terms and conditions of this Plan, each Scheduled Distribution elected shall be paid out during a sixty (60) day period commencing immediately after the first day of any Plan Year designated by the Participant (the “Scheduled Distribution Date”). A Participant may only select one Scheduled Distribution Date for each elected Scheduled Distribution; a Participant may not elect to receive a Scheduled Distribution in the form of installment payments. The Plan Year designated by the Participant must be at least three (3) Plan Years after the end of the Plan Year to which the Participant’s deferral election described in Section 3.3 relates. By way of example, if a Scheduled Distribution is elected for Annual Deferral Amounts that are earned in the Plan Year commencing January 1, 2008, the earliest Scheduled Distribution Date that may be designated by a Participant would be January 1, 2012, and the Scheduled Distribution would become payable during the sixty (60) day period commencing immediately after such Scheduled Distribution Date.

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4.2

Postponing Scheduled Distributions A Participant may elect to postpone a Scheduled Distribution described in Section 4.1 above, and have such amount paid out during a sixty (60) day period commencing immediately after an allowable alternative Benefit Distribution Date designated by the Participant in accordance with this Section 4.2. In order to make this election, the Participant must submit a new Election Form to the Committee in accordance with the following criteria:

(a)

The election of the new Benefit Distribution Date shall have no effect until at least 12 months after the date on which the election is made and such Scheduled Distribution Election Form must be submitted to and accepted by the Committee in its sole discretion at least twelve (12) months prior to the Participant's previously designated Scheduled Distribution Date;

(b)

The new Benefit Distribution Date selected by the Participant must be the first day of a Plan Year, and must be at least five years after the previously designated Benefit Distribution Date; and

(c)

The election must be made at least 12 months prior to the Participant’s previously designated Benefit Distribution Date for such Scheduled Distribution.

For purposes of applying the provisions of this Section 4.2, a Participant’s election to postpone a Scheduled Distribution shall not be considered to be made until the date on which the election becomes irrevocable. Such an election shall become irrevocable no later than the date that is 12 months prior to the Participant’s previously designated Benefit Distribution Date for such Scheduled Distribution.

4.3

Other Benefits Take Precedence Over Scheduled Distributions Should a Benefit Distribution Date occur that triggers a benefit under Articles 5, 6, 7 or 8, any Annual Deferral Amount that is subject to a Scheduled Distribution election under Section 4.1 shall not be paid in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article. Notwithstanding the foregoing, the Committee shall interpret this Section 4.3 in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to Treasury guidance and Regulations issued after the effective date of this Plan.

4.4

Payout/Suspensions for Unforeseeable Financial Emergencies

(a)

If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to suspend deferrals of Base Salary, Bonus, Commissions, Director Fees and LTIP Amounts to the extent deemed necessary by the Committee to satisfy the Unforeseeable Financial Emergency. If suspension of deferrals is not sufficient to satisfy the Participant’s Unforeseeable Financial Emergency, or if suspension of deferrals is not required under Code Section 409A and other applicable tax law, the Participant may further petition the Committee to receive a partial or full payout from the Plan. The Participant shall only receive a payout from the Plan to the extent such payout is deemed necessary by the Committee to satisfy the Participant’s Unforeseeable Financial Emergency, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution.

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(b)

The payout shall not exceed the lesser of (i) the Participant's vested Account Balance, calculated as of the close of business on or around the date on which the amount becomes payable, as determined by the Committee in its sole discretion, or (ii) the amount necessary to satisfy the Unforeseeable Financial Emergency, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution. Notwithstanding the foregoing, a Participant may not receive a payout from the Plan to the extent that the Unforeseeable Financial Emergency is or may be relieved (A) through reimbursement or compensation by insurance or otherwise, (B) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship or (C) by suspension of deferrals under this Plan, if the Committee, in its sole discretion, determines that suspension is required by Code Section 409A and other applicable tax law.

If the Committee, in its sole discretion, approves a Participant’s petition for suspension, the Participant’s deferrals under this Plan shall be suspended as of the date of such approval. If the Committee, in its sole discretion, approves a Participant’s petition for suspension and payout, the Participant’s deferrals under this Plan shall be suspended as of the date of such approval and the Participant shall receive a payout from the Plan within sixty (60) days of the date of such approval.

If the Committee, in its sole discretion, approves a Participant’s petition for payout from the Plan, the Participant’s Benefit Distribution Date for such payout shall be the date on which such Committee approval occurs and such payout shall be distributed to the Participant in a lump sum no later than 60 days after such Benefit Distribution Date. In addition, in the event of such approval the Participant’s outstanding deferral elections under the Plan shall be cancelled.

(c)

A Participant’s deferral elections under this Plan shall also be cancelled to the extent the Committee determines that such action is required for the Participant to obtain a hardship distribution from an Employer’s 401(k) plan pursuant to Treas. Reg. §1.401(k)-1(d)(3).

(d)

Notwithstanding the foregoing, the Committee shall interpret all provisions relating to suspension and/or payout under this Section 4.4 in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to Treasury guidance and Regulations issued after the effective date of this Plan.

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ARTICLE 5

5.1

Retirement Benefit A Participant who Retires shall receive, as a Retirement Benefit, his or her vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee in its sole discretion. If a Participant experiences a Separation from Service that qualifies as a Retirement, the Participant shall be eligible to receive his or her vested Account Balance in either a lump sum or annual installment payments, as elected by the Participant in accordance with Section 5.2 (the “Retirement Benefit”). A Participant’s Retirement Benefit shall be calculated as of the close of business on or around the applicable Benefit Distribution Date for such benefit, which shall be (i) the first day after the end of the 6-month period immediately following the date on which the Participant experiences such Separation from Service if the Participant is a Specified Employee, and (ii) for all other Participants, the date on which the Participant experiences a Separation from Service; provided, however, if a Participant changes the form of distribution for the Retirement Benefit in accordance with Section 5.2(b), the Benefit Distribution Date for the Retirement Benefit shall be determined in accordance with Section 5.2(b).

5.2

Payment of Retirement Benefit

(a)

A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to an Annual Installment Method of up to fifteen (15) years. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such Participant shall be deemed to have elected to receive the Retirement Benefit in a lump sum.

(b)

A Participant may change the form of payment of the Retirement Benefit by submitting an Election Form to the Committee in accordance with the following criteria:

(i)

The election shall not take effect until at least 12 months after the date on which the election is made;

(ii)

The new Benefit Distribution Date for the Participant’s Retirement Benefit shall be 5 years after the Benefit Distribution Date that would otherwise have been applicable to such benefit; and

(iii)

The election must be made at least 12 months prior to the Benefit Distribution Date that would otherwise have been applicable to the Participant’s Retirement Benefit.

For purposes of applying the provisions of this Section 5.2, a Participant’s election to change the form of payment for the Retirement Benefit shall not be considered to be made until the date on which the election becomes irrevocable. Such an election shall become irrevocable no later than the date that is 12 months prior to the Benefit Distribution Date that would otherwise have been applicable to the Participant’s Retirement Benefit. Subject to the requirements of this Section 5.2, the Election Form most recently accepted by the Committee that has become effective shall govern the form of payout of the Participant’s Retirement Benefit.

Notwithstanding the foregoing, the Committee shall interpret all provisions relating to changing the Retirement Benefit election under this Section 5.2 in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to Treasury Guidance or Regulations issued after the effective date of this Plan.

(c)

The lump sum payment shall be made, or installment payments shall commence, no later than sixty (60) days after the Participant’s Benefit Distribution Date. Remaining installments, if any, shall be paid no later than sixty (60) days after each anniversary of the Participant’s Benefit Distribution Date.

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ARTICLE 6

6.1

Termination Benefit . If a Participant experiences a Separation from Service that does not qualify as a Retirement, the Participant shall receive his or her vested Account Balance in the form of a lump sum payment (the “Termination Benefit”). A Participant’s Termination Benefit shall be calculated as of the close of business on or around the Benefit Distribution Date for such benefit, which shall be (i) the first day after the end of the 6-month period immediately following the date on which the Participant experiences such Separation from Service if the Participant is a Specified Employee, and (ii) for all other Participants, the date on which the Participant experiences a Separation from Service.

6.2

Payment of Termination Benefit The Termination Benefit shall be paid to the Participant in a lump sum payment no later than sixty (60) days after the Participant’s Benefit Distribution Date.

ARTICLE 7

7.1

Disability Benefit If a Participant becomes Disabled prior to the occurrence of a distribution event described in Articles 5 and 6, as applicable, the Participant shall receive his or her vested Account Balance in the form of a lump sum payment (the “Disability Benefit”). The Disability Benefit shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date for such benefit, which shall be the date on which the Participant becomes Disabled.

7.2

Payment of Disability Benefit . The Disability Benefit shall be paid to the Participant no later than 60 days after the Participant’s Benefit Distribution Date.

ARTICLE 8

8.1

Death Benefit In the event of a Participant’s death prior to the complete distribution of his or her vested Account Balance, the Participant's Beneficiary(ies) shall receive the Participant's unpaid vested Account Balance in a lump sum payment (the “Death Benefit”). The Death Benefit shall be calculated as of the close of business on or around the Benefit Distribution Date for such benefit, which shall be the date on which the Committee is provided with proof that is satisfactory to the Committee of the Participant’s death.

8.2

Payment of Death Benefit The Death Benefit shall be paid to the Participant’s Beneficiary(ies) no later than sixty (60) days after the Participant’s Benefit Distribution Date.

ARTICLE 9

Beneficiary Designation

9.1

Beneficiary Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.

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9.2

Beneficiary Designation; Change; Spousal Consent A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, spousal consent is required and shall be provided in a form designated by the Committee, executed by such Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

9.3

Acknowledgment No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.

9.4

No Beneficiary Designation If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate.

Any beneficiary designation made by a Participant of an individual who was a spouse of the Participant at the date of the designation, but from whom the Participant was subsequently divorced, shall be deemed automatically revoked unless the Participant affirms or reinstates such designation subsequent to the divorce or a domestic relations court order created at the time of the divorce requires that the beneficiary be the former spouse.

9.5

Doubt as to Beneficiary If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction.

9.6

Discharge of Obligations The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits.

ARTICLE 10

Leave of Absence

10.1

Paid Leave of Absence If a Participant is authorized by the Participant's Employer to take a paid leave of absence from the employment of the Employer, (i) the Participant shall continue to be considered eligible for the benefits provided in Articles 4, 5, 6, 7 or 8 in accordance with the provisions of those Articles, and (ii) the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.2.

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10.2

Unpaid Leave of Absence If a Participant is authorized by the Participant's Employer to take an unpaid leave of absence from the employment of the Employer for any reason, such Participant shall continue to be eligible for the benefits provided in Articles 4, 5, 6, 7 or 8 in accordance with the provisions of those Articles. However, the Participant shall be excused from fulfilling his or her Annual Deferral Amount commitment that would otherwise have been withheld during the remainder of the Plan Year in which the unpaid leave of absence is taken. During the unpaid leave of absence, the Participant shall not be allowed to make any additional deferral elections. However, if the Participant returns to employment, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment and for every Plan Year thereafter while a Participant in the Plan, provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.2 above.

ARTICLE 11

Termination of Plan, Amendment or Modification

11.1

Termination of Plan Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to terminate the Plan with respect to all of its Participants. In the event of a Plan termination no new deferral elections shall be permitted for the affected Participants and such Participants shall no longer be eligible to receive new company contributions. However, after the Plan termination the Account Balances of such Participants shall be credited with Annual Deferral Amounts attributable to salary reductions taken from any type compensation prior to the Plan termination to the extent deemed necessary to comply with Code Section 409A and related Treasury Regulations The Measurement Funds available to Participants following the termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Plan termination is effective. Except as provided in the following paragraphs, subsequent to a Plan termination, Participant Account Balances shall remain in the Plan and shall not be distributed until such amounts become eligible for distribution in accordance with the other applicable provisions of the Plan.

Following termination, the Company may distribute each Participant’s Account Balance, but is not required to so liquidate the Plan, under the following circumstances:

(1) Dissolution/Bankruptcy . The Company may terminate and liquidate the Plan within 12 months following a dissolution of a corporate company taxable under Code §331 or with approval of a Bankruptcy court under 11 U.S.C. §503(b)(1)(A), provided that the Deferred Compensation is paid to the Participants and is included in the Participants’ gross income in the latest of (or, if earlier, the Taxable Year in which the amount is actually or constructively received): (i) the calendar year in which the plan termination and liquidation occurs; (ii) the first calendar year in which the amounts no longer are subject to a Substantial Risk of Forfeiture; or

(iii) the first calendar year in which the payment is administratively practicable.

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(2) Change in Control . The Company may terminate and liquidate the Plan by irrevocable action taken within the 30 days preceding or the 12 months following a Change in Control, provided The Company distributes all Plan Accounts (and must distribute the accounts under any Aggregated Plans which plan The Company also must terminate and liquidate as to each Participant who has experienced the Change in Control) within 12 months following the date of Company’s irrevocable action to terminate and liquidate the Plan and Aggregated Plans. Where the Change in Control results from an asset purchase transaction, the employer with discretion to terminate and liquidate the Plan is the employer, or entity, that is primarily liable after the transaction to pay the Deferred Compensation.

(3) Other . The Company may terminate the Plan for any other reason in The Company’s discretion provided that: (i) the termination and liquidation does not occur proximate to a downturn in The Company’s financial health; (ii) The Company also terminates all Aggregated Plans in which any Participant also is a participant; (ii) the Plan makes no payments in the 12 months following the date of Company’s irrevocable action to terminate and liquidate the Plan other than payments the Plan would have made irrespective of Plan termination; (iii) the Plan makes all payments within 24 months following the date of Company’s irrevocable action to terminate and liquidate the Plan; and (iv) The Company within 3 years following the date of Company’s irrevocable action to terminate and liquidate the Plan does not adopt a new plan covering any Participant that would be an Aggregated Plan.

(4) Applicable Treasury Guidance . The Company may terminate and liquidate the Plan under such other circumstances as Treasury Guidance may permit. Any adopting Employer can only terminate and liquidate its portion of the Plan (i.e. make distributions to its affected Participants) with the approval of the Company and only if such termination and liquidation will be in compliance with Code section 409A and any related Treasury Guidance.

(5) Rules and Procedures . The Administrator or The Company may establish such rules and procedures to carry out the termination of the Plan as it deems necessary to comply with the applicable requirements and limitations of Treas. Reg. §1.409A-3(j)(4)(ix) and any other Treasury Guidance.

11.2

Amendment

(a)

The Company may, at any time, amend or modify the Plan; no Employer other than the Company may so amend or modify the Plan in whole or in part, regardless of whether the amendment is limited to that Employer except with the approval of the Company. Notwithstanding the foregoing, (i) no amendment or modification shall be effective to decrease the value of a Participant's vested Account Balance in existence at the time the amendment or modification is made, and (ii) no amendment or modification of this Section 11.2 or Section 12.2 of the Plan shall be effective.

(b)

Notwithstanding any provision of the Plan to the contrary, in the event that the Company determines that any provision of the Plan may cause amounts deferred under the Plan to become immediately taxable to any Participant under Code Section 409A, and related Treasury guidance or Regulations, the Company may (i) adopt such amendments to the Plan and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Company determines necessary or appropriate to preserve the intended tax treatment of the Plan benefits provided by the Plan and/or (ii) take such other actions as the Company determines necessary or appropriate to comply with the requirements of Code Section 409A, and related Treasury guidance or Regulations.

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11.3

Plan Agreement Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the written consent of the Participant.

11.4

Effect of Payment The full payment of the Participant’s vested Account Balance under Articles 4, 5, 6, 7, 8, or 11 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan, and the Participant's Plan Agreement shall terminate.

ARTICLE 12

Administration

12.1

Committee Duties Except as otherwise provided in this Article 12, this Plan shall be administered by a Committee, which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and (ii) decide or resolve any and all questions, including benefit entitlement determinations and interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.

12.2

Administration Upon Change In Control Within one hundred and twenty (120) days following a Change in Control, the individuals who comprised the Committee immediately prior to the Change in Control (whether or not such individuals are members of the Committee following the Change in Control) may, by written consent of the majority of such individuals, appoint an independent third party administrator (the “Administrator”) to perform any or all of the Committee’s duties described in Section 12.1 above, including without limitation, the power to determine any questions arising in connection with the administration or interpretation of the Plan, and the power to make benefit entitlement determinations. Upon and after the effective date of such appointment, (i) the Company must pay all reasonable administrative expenses and fees of the Administrator, and (ii) the Administrator may only be terminated with the written consent of the majority of Participants with an Account Balance in the Plan as of the date of such proposed termination.

12.3

Agents In the administration of this Plan, the Committee or the Administrator, as applicable, may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel.

12.4

Binding Effect of Decisions The decision or action of the Committee or Administrator, as applicable, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

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12.5

Indemnity of Committee All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator.

12.6

Employer Information To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Separation from Service of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require.

ARTICLE 13

Other Benefits and Agreements

13.1

Coordination with Other Benefits The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

ARTICLE 14

Claims Procedures

14.1

Presentation of Claim Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”) may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.

14.2

Notification of Decision . The Committee shall consider a Claimant's claim within a reasonable time, but no later than ninety (90) days after receiving the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial ninety (90) day period. In no event shall such extension exceed a period of ninety (90) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. The Committee shall notify the Claimant in writing:

(a)

that the Claimant's requested determination has been made, and that the claim has been allowed in full; or

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(b)

that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:

(i)

the specific reason(s) for the denial of the claim, or any part of it;

(ii)

specific reference(s) to pertinent provisions of the Plan upon which such denial was based;

(iii)

a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary;

(iv)

an explanation of the claim review procedure set forth in Section 14.3 below; and

(v)

a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

14.3

Review of a Denied Claim On or before sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. The Claimant (or the Claimant's duly authorized representative):

(a)

may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claim for benefits;

(b)

may submit written comments or other documents; and/or

(c)

may request a hearing, which the Committee, in its sole discretion, may grant.

14.4

Decision on Review The Committee shall render its decision on review promptly, and no later than sixty (60) days after the Committee receives the Claimant’s written request for a review of the denial of the claim. If the Committee determines that special circumstances require an extension of time for processing the claim, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall such extension exceed a period of sixty (60) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the benefit determination. In rendering its decision, the Committee shall take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The decision must be written in a manner calculated to be understood by the Claimant, and it must contain:

(a)

specific reasons for the decision;

(b)

specific reference(s) to the pertinent Plan provisions upon which the decision was based;

(c)

a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits; and

(d)

a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

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14.5

Legal Action A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE 15

Trust

15.1

Establishment of the Trust In order to provide assets from which to fulfill the obligations of the Participants and their beneficiaries under the Plan, the Company may establish a trust by a trust agreement with a third party, the trustee, to which each Employer may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan, (the “Trust”).

15.2

Interrelationship of the Plan and the Trust The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.

15.3

Distributions From the Trust Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan.

ARTICLE 16

Miscellaneous

16.1

Status of Plan . The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted (i) in a manner consistent with that intent, and (ii) in accordance with Code Section 409A and related Treasury guidance and Regulations.

16.2

Unsecured General Creditor Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

16.3

Employer's Liability An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

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16.4

Nonassignability Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.

16.5

Not a Contract of Employment The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.

16.6

Furnishing Information A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.

16.7

Terms Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

16.8

Captions The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

16.9

Governing Law Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Ohio without regard to its conflicts of laws principles.

16.10

Notice Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

	First Defiance Financial Corp.
	Attn: Chief Financial Officer
	601 Clinton Street
	Defiance, Ohio 43512

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

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16.11

Successors The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries.

16.12

Spouse's Interest The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession.

16.13

Validity In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

16.14

Incompetent If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

16.15

Court Order The Committee is authorized to comply with any court order in any action in which the Plan or the Committee has been named as a party, including any action involving a determination of the rights or interests in a Participant’s benefits under the Plan. Notwithstanding the foregoing, the Committee shall interpret this provision in a manner that is consistent with Code Section 409A and other applicable tax law, including but not limited to guidance issued after the effective date of this Plan.

16.16

Insurance . The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.

16.17

Domestic Relations Orders If necessary to comply with a domestic relations order, as defined in Code Section 414(p)(1)(B), pursuant to which a court has determined that a spouse or former spouse of a Participant has an interest in the Participant’s benefits under the Plan, the Committee shall have the right to immediately distribute the spouse’s or former spouse’s interest in the Participant’s benefits under the Plan to such spouse or former spouse.

16.18

Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant’s Account Balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to comply with the requirements of Code Section 409A and related Treasury Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of (i) the portion of his or her Account Balance required to be included in income as a result of the failure of the Plan to comply with the requirements of Code Section 409A and related Treasury Regulations, or (ii) the unpaid vested Account Balance.

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16.19

Deduction Limitation on Benefit Payments . If an Employer reasonably anticipates that the Employer’s deduction with respect to any distribution from this Plan would be limited or eliminated by application of Code Section 162(m), then to the extent permitted by Treas. Reg. §1.409A-2(b)(7)(i), payment shall be delayed as deemed necessary to ensure that the entire amount of any distribution from this Plan is deductible. Any amounts for which distribution is delayed pursuant to this Section shall continue to be credited/debited with additional amounts in accordance with Section 3.7. The delayed amounts (and any amounts credited thereon) shall be distributed to the Participant (or his or her Beneficiary in the event of the Participant’s death) at the earliest date the Employer reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m). In the event that such date is determined to be after a Participant’s Separation from Service and the Participant to whom the payment relates is determined to be a Specified Employee, then to the extent deemed necessary to comply with Treas. Reg. §1.409A-3(i)(2), the delayed payment shall not made before the end of the six-month period following such Participant’s Separation from Service.

16.20

Fair Construction . The Company, any adopting Employer, Participants and Beneficiaries intend that this Plan in form and in operation comply with Code 409A, the regulations thereunder, and all other present and future Applicable Guidance. The Company and any other party with authority to interpret or administer the Plan will interpret the Plan terms in a manner which is consistent with Applicable Law. However, as required under Treas. Reg. §1.409A-1(c)(1), the “interpretation” of the Plan does not permit the deletion of material terms which are expressly contrary to Code §409A and the regulations thereunder and also does not permit the addition of missing terms necessary to comply therewith. Such deletions or additions may be accomplished only by means of a Plan amendment under Section 11.2. Any Participant, Beneficiary or Company permitted Annual Deferral Amount election, initial payment election, change payment election or any other Plan permitted election, notice or designation which is not compliant with Code section 409A and related Treasury Guidance is not an “election” or other action under the Plan and has no effect whatsoever.

IN WITNESS WHEREOF, the Company has signed this Plan document as of [month] , 2014.

	“Company”
	First Defiance Financial Corp., an Ohio corporation

	By:
	Title:

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First Defiance Deferred Compensation Plan

List of Adopting Employers

Entity		Effective Date

First Insurance and Investments, Inc.		December 31, 2005

First Federal Bank of the Midwest		September 1, 2002

- 33 -

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Donald P. Hileman, certify that:

I have reviewed this Quarterly Report on Form 10-Q of First Defiance Financial Corp.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	August 7, 2018	/s/ Donald P. Hileman
		Donald P. Hileman
		President and
		Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Kevin T. Thompson, certify that:

I have reviewed this Quarterly Report on Form 10-Q of First Defiance Financial Corp.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	August 7, 2018	/s/ Kevin T. Thompson
		Kevin T. Thompson
		Executive Vice President and
		Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald P. Hileman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that:

The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations.

Date:	August 7, 2018	/s/ Donald P. Hileman
		Donald P. Hileman
		Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin T. Thompson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that:

The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations.

Date:	August 7, 2018	/s/ Kevin T. Thompson
		Kevin T. Thompson
		Chief Financial Officer