FIRST DEFIANCE FINANCIAL CORP (Form: 10-K, Received: 03/16/2020 15:50:58)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 incorporation or organization)		(I.R.S. Employer Identification Number)
601 Clinton Street, Defiance, Ohio		43512
(Address of principal executive offices)		(Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, Par Value $0.01 Per Share	FDEF	The NASDAQ Stock Market
(Title of Class)	(Trading Symbol)	(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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

☒

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 ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the closing price of such stock as of June 30, 2019, was approximately $552.2 million.

As of March 4, 2020, there were issued and outstanding 37,666,170 shares of the registrant’s common stock.

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2020 Annual Meeting of the registrant’s shareholders.

First Defiance Financial Corp.

Annual Report on Form 10-K

Table of Contents


		Page
PART I		3
Item 1.	Business	3
Item 1A.	Risk Factors	22
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	29
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29

PART II		30
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 8.	Financial Statements and Supplementary Data	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	108
Item 9A.	Controls and Procedures	108
Item 9B.	Other Information	108

PART III		109
Item 10.	Directors, Executive Officers and Corporate Governance	109
Item 11.	Executive Compensation	109
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	109
Item 13.	Certain Relationships and Related Transactions, and Director Independence	109
Item 14.	Principal Accounting Fees and Services	109

PART IV		110
Item 15.	Exhibits, Financial Statement Schedules	110
Item 16.	Form 10-K Summary	110

SIGNATURES		111

PART I

Item 1. Business

First Defiance Financial Corp. (“First Defiance” or the “Company”) was incorporated in Ohio in June 1995 and is a financial holding company that, through its 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. (collectively, “the Subsidiaries”), focuses on traditional banking and property, casualty, life and group health insurance products.

The Company’s philosophy is to grow and prosper, building long-term relationships based on top quality service, high ethical standards, and safe and sound assets. The Company operates as a locally- oriented, community-based financial services organization, augmented by experienced, centralized support in select critical areas. The Company’s local market orientation is reflected in its market area management and local advisory boards, which are comprised of local business persons, professionals and other community representatives that assist area management in responding to local banking needs.

The Company’s operating objectives include expansion, diversification within its markets, growth of its fee-based income, and growth organically and through acquisitions of financial institutions, branches and financial services businesses. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and possess either significant market area presence or have the potential for improved profitability through financial management, economies of scale and expanded services. The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of premiums over book and market values and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in any future transaction.

On June 22, 2018, the Company announced a stock split in the form of a share distribution of two common shares 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 Form 10-K have been adjusted and are reflective of the stock split.

First Defiance's website, www.fdef.com, contains a hyperlink under the Investor Relations section to EDGAR, where the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after First Defiance has filed the report with the U. S. Securities and Exchange Commission (“SEC”).

The Company’s principal executive offices are located at 601 Clinton Street, Defiance, Ohio 43512, and its telephone number is (419) 782-5015.

Recent Developments

On January 31, 2020, First Defiance completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between First Defiance and UCFC. At the effective time of the merger (the “Merger”), UCFC merged with and into First Defiance, with First Defiance surviving the Merger. Simultaneously with the completion of the Merger, First Defiance converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.

Immediately following the Merger, First Federal, acquired UCFC’s wholly owned bank subsidiary, Home Savings Bank. Immediately prior to the merger of the banks, First Federal converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the merger of the banks, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers.

At December 31, 2019, prior to the Merger, the Company had consolidated assets of $3.5 billion, consolidated deposits of $2.9 billion, and consolidated stockholders’ equity of $426.2 million. At December 31, 2019, UCFC reported consolidated assets of $2.9 billion, consolidated deposits of $2.3 billion, and consolidated stockholders’ equity of $332.1 million.

The remainder of this annual report on Form 10-K discusses the Company as it existed on December 31, 2019 (prior to the Merger), unless otherwise specifically indicated.

The Subsidiaries

The Company’s core business operations are conducted through its subsidiaries:

First Federal Bank of the Midwest: First Federal was a federally chartered stock savings bank headquartered in Defiance, Ohio until the effective time of the Merger. At the effective time of the Merger, First Federal converted to an Ohio bank headquartered in Youngstown, Ohio. At December 31, 2019, prior to the Merger, First Federal conducted 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, three full-service banking center offices 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.

First Federal is primarily engaged in community banking. It attracts deposits from the general public through its offices and website, and uses those and other available sources of funds to originate residential real estate loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer loans. 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 residential collateralized mortgage obligations (“CMOs”), and corporate bonds. First Federal’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is a member of the Federal Home Loan Bank (“FHLB”) System.

First Insurance Group of the Midwest: First Insurance is a wholly-owned subsidiary of First Defiance. First Insurance is an insurance agency that conducts business throughout First Federal’s markets. The Maumee and Oregon, Ohio, 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: First Defiance Risk Management was incorporated on December 20, 2012, as 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 help minimize the risk allocable to each participating insurer.

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 Mission & Vision and Core Values initiatives. 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. In the later part of 2017, the Company recognized the need to adapt its organization structure to meet certain future strategic objectives and to continue its past success. The Company believes that fully utilizing the strengths of its leadership team and a structure that supports strategic initiatives will enhance its ability to achieve even more objectives in the future. As such, in 2016, the Company redefined its market areas to support strategies to enhance processes and efficiencies to support overall growth. That structure included three metro markets; Toledo, Ohio, Fort Wayne, Indiana, and Columbus, Ohio, and two legacy markets; Southern Market Area and Northern Market Area. As a result of the Merger, the Company has added three new metro markets: the Mahoning Valley, Akron/Canton and Cleveland markets.

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 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 lending programs. 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”), online bill pay, and online account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000 ATMs nationwide without a surcharge fee.

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 for both our retail and commercial customers. First Federal’s pricing strategy considers the whole relationship of the customer. First Federal continues 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 opportunities in its market areas, as evidenced by the Merger. 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.

Securities

During 2019, First Defiance’s securities portfolio is managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. The Chief Financial Officer, Controller, and the Chief Executive Officer can each approve transactions up to $3.0 million. Two of the three officers are required to approve transactions between $3.0 million and $5.0 million. All transactions in excess of $5.0 million must be approved by the Board of Directors.

First Defiance’s investment portfolio includes agency CMO issues totaling $82.1 million, all of which are fully amortizing securities. Management does not believe the risks associated with any of its CMO investments are significantly different from risks associated with other pass-through mortgage-backed securities. First Defiance did not have any off-balance sheet derivative securities at December 31, 2019.

First Defiance’s securities portfolio is classified as either “available-for-sale” or “held-to-maturity.” Securities classified as “available-for-sale” may be sold prior to maturity due to changes in interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s liquidity needs.

The carrying value of securities at December 31, 2019, by contractual maturity is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Contractually Maturing																				Total
			Weighted					Weighted					Weighted					Weighted
	Under 1		Average			1 - 5		Average			6-10		Average			Over 10		Average
	Year		Rate %			Years		Rate %			Years		Rate %			Years		Rate %			Amount		Rate
	(Dollars in Thousands)
Mortgage-backed securities	$	—		—		$	18		4.23	%	$	443		5.27	%	$	86,772		3.09	%	$	87,233		3.10	%
CMOs - residential		—		—			—		—			3,201		3.26	%		78,919		3.27	%		82,120		3.27	%
U.S. government and federal agency obligations		—		—			519		2.00	%		2,000		3.00	%		—		—			2,519		2.79	%
Obligations of states and political subdivisions		392		3.64	%		10,156		3.34	%		24,668		3.51	%		55,017		3.42	%		90,233		3.44	%
Corporate bonds		5,000		2.78	%		7,000		3.06	%		—		—			—		—			12,000		2.94	%
Total	$	5,392				$	17,693				$	30,312				$	220,708				$	274,105
Unamortized premiums/ (discounts)																						3,218
Unrealized gain on securities available for sale and unrecognized gain on held to maturity																						6,125
Total																					$	283,448

The carrying value of investment securities is as follows:

	December 31
	2019		2018		2017
	(In Thousands)
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	2,524	$	2,503	$	508
Obligations of state and political subdivisions		95,439		99,887		92,828
CMOs - residential, REMICS and mortgage-backed securities		173,384		178,880		154,210
Corporate bonds, trust preferred stock and preferred stock		12,101		12,806		13,104
Total	$	283,448	$	294,076	$	260,650
Held-to-maturity securities:
Mortgage-backed securities	$	—	$	51	$	68
Obligations of state and political subdivisions		—		475		580
Total	$	—	$	526	$	648

For additional information regarding First Defiance’s investment portfolio, refer to Note 5 – Investment Securities to the Consolidated Financial Statements.

Interest-Bearing Deposits

The Company had $85.0 million and $43.0 million in overnight investments at the Federal Reserve at December 31, 2019 and 2018, respectively, which amount is included in interest-bearing deposits. First Defiance had interest-earning deposits at the FHLB of Cincinnati and other financial institutions amounting to $1.0 million and $1.7 million at December 31, 2019 and 2018, respectively.

Residential Loan Servicing Activities

Servicing mortgage loans for investors involves a contractual right to receive a fee for processing and administering loan payments on mortgage loans that are not owned by the Company and are not included on the Company’s balance sheet. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. At December 31, 2019, First Federal serviced loans totaling $1.5 billion in principal. The vast majority of the loans serviced for others are fixed rate conventional mortgage loans. The Company primarily sells its loans to, and then services for, Freddie Mac, Fannie Mae and FHLB.

As compensation for its mortgage servicing activities, the Company receives servicing fees, usually approximating 0.25% per annum of the loan balances serviced, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of a default by the borrower, the Company receives no servicing fees until the default is cured. Loan servicing fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens.

Lending Activities

General – Financial institutions are limited in the amount of loans they may make to one borrower. At December 31, 2019, First Federal’s limit on loans-to-one borrower was $55.0 million.

Loan Portfolio Composition – The net increase in net loans receivable over the prior year was $234.6 million for 2019, $189.7 million for 2018 and $407.4 million (including $285.4 million acquired from The Commercial Savings Bank (“CSB”), which the Company acquired through a merger that became effective on February 24, 2017) for 2017. The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated geographically in the northwest and central Ohio, northeast Indiana, and southeast Michigan market areas. Management has identified lending for income generating rental properties as an industry concentration. Total loans for income generating rental property totaled $1.1 billion at December 31, 2019, which represents 38.4% of the Company’s loan portfolio.

The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated.

	December 31
	2019					2018					2017					2016					2015
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
	(Dollars in Thousands)
Real estate:
1-4 family residential	$	324,773		11.3	%	$	322,686		12.1	%	$	274,862		11.1	%	$	207,550		10.2	%	$	205,330		11.0	%
Multi-family residential		270,839		9.4	%		278,358		10.4	%		248,092		10.1	%		196,983		9.7	%		167,558		9.0	%
Commercial real estate		1,235,187		43.0	%		1,126,452		42.3	%		987,129		40.0	%		843,579		41.5	%		780,870		41.8	%
Construction		305,305		10.6	%		265,772		10.0	%		265,476		10.8	%		182,886		9.0	%		163,877		8.7	%
Total real estate loans		2,136,104		74.3	%		1,993,268		74.8	%		1,775,559		72.0	%		1,430,998		70.4	%		1,317,635		70.4	%
Other:
Commercial		578,071		20.1	%		509,577		19.1	%		526,142		21.3	%		469,055		23.0	%		419,349		22.4	%
Home equity and improvement		122,864		4.3	%		128,152		4.8	%		135,457		5.5	%		118,429		5.8	%		116,962		6.2	%
Consumer finance		37,649		1.3	%		34,405		1.3	%		29,109		1.2	%		16,680		0.8	%		16,281		0.9	%
		738,584		25.7	%		672,134		25.2	%		690,708		28.0	%		604,164		29.7	%		552,592		29.6	%
Total loans		2,874,688		100.0	%		2,665,402		100.0	%		2,466,267		100.0	%		2,035,162		100.1	%		1,870,227		100.0	%
Less:
Undisbursed loan funds		94,865					123,293					115,972					93,355					66,902
Net deferred loan origination fees		2,259					2,070					1,582					1,320					1,108
Allowance for loan losses		31,243					28,331					26,683					25,884					25,382
Net loans	$	2,746,321				$	2,511,708				$	2,322,030				$	1,914,603				$	1,776,835

In addition to the loans reported above, First Defiance had $18.0 million, $6.6 million, $10.4 million, $9.6 million, and $5.5 million in loans classified as held for sale at December 31, 2019, 2018, 2017, 2016 and 2015, respectively. The fair value of such loans, which are all single-family residential mortgage loans, approximated their carrying value for all years presented.

Contractual Principal, Repayments and Interest Rates – The following table sets forth the dollar amount of gross loans due after one year from December 31, 2019, which has fixed interest rates or which have floating or adjustable interest rates.

			Floating or
	Fixed		Adjustable
	Rates		Rates		Total
	(In Thousands)
Real estate	$	733,880	$	941,948	$	1,675,828
Commercial		139,140		66,458		205,598
Other		31,990		2,119		34,109
	$	905,010	$	1,010,525	$	1,915,535

Originations, Purchases and Sales of Loans – The lending activities of First Federal are subject to the written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained from a variety of sources, including referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio advertising and walk-in customers.

First Federal’s loan approval process for all types of loans is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan.

A commercial loan application is first reviewed by a commercial lender and underwritten by a commercial credit analyst. All loan requests must be presented for review or approval to a Regional Credit Officer. Loans which exceed $1,000,000 must then be presented to the Chief Credit Officer or Credit Administration Officer for approval. These two positions can also approve loans up to $2,000,000 individually or $4,000,000 when using their authority concurrently. Any loan in excess of these limits must be presented for approval to the Executive Loan Committee.

Residential mortgage applications are accepted by retail lenders or branch managers, who utilize an automated underwriting system to review the loan request. First Federal also receives mortgage applications via an online residential mortgage origination system. A final approval of all residential mortgage applications is made by a member of a centralized underwriting staff within their designated lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.

Retail lenders and branch managers are authorized to originate and approve direct consumer loan requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess of the lender’s approved lending limit may be approved by retail lending managers up to their approved lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy must be approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.

First Federal offers adjustable-rate loans in order to decrease the vulnerability of its operations to changes in interest rates. The demand for adjustable-rate loans in First Federal’s primary market area has been a function of several factors, including customer preference, the level of interest rates, the expectations of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates.

The following table shows total loans originated, loan reductions, and the net increase in First Federal’s total loans and loans held for sale during the periods indicated:

	Years Ended December 31
	2019			2018			2017
	(In Thousands)
Loan originations:
1-4 family residential	$	358,970		$	282,109		$	240,921
Multi-family residential		47,217			70,665			74,342
Commercial real estate		293,990			279,251			181,289
Construction		112,344			184,631			205,088
Commercial		251,951			186,943			219,588
Home equity and improvement		60,268			58,918			68,856
Consumer finance		18,505			22,260			15,185
Total loans originated		1,143,245			1,084,777			1,005,269
Loans acquired in acquisitions:		—			—			285,448
Loans purchased:		—			—			11,476
Loan payoffs, sales and repayments		(922,564	)		(889,464	)		(870,259	)
Net increase in total loans and loans held for sale	$	220,681		$	195,313		$	431,934

Asset Quality

First Defiance’s credit policy establishes guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to ensure sound credit decisions. First Defiance’s credit policies and review procedures are meant to minimize the risk and uncertainties inherent in lending. In following the policies and procedures, management must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur because of changing economic conditions.

Delinquent Loans — The following table sets forth information concerning delinquent loans at December 31, 2019, in dollar amount and as a percentage of First Defiance’s total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts that are past due.

	30 to 59 Days					60 to 89 Days					90 Days and Over					Total
	Amount		Percentage			Amount		Percentage			Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
1-4 family residential real estate	$	1,328		0.05	%	$	570		0.02	%	$	646		0.02	%	$	2,544		0.09	%
Multi- family residential		—		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%
Commercial real estate		339		0.01	%		172		0.01	%		2,716		0.10	%		3,227		0.12	%
Construction		—		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%
Commercial		273		0.01	%		206		0.01	%		2,444		0.09	%		2,923		0.11	%
Home equity and improvement		956		0.03	%		240		0.01	%		39		0.00	%		1,235		0.04	%
Consumer finance		143		0.01	%		64		0.00	%		7		0.00	%		214		0.01	%
Total	$	3,039		0.11	%	$	1,252		0.05	%	$	5,852		0.21	%	$	10,143		0.37	%

Overall, the level of delinquencies at December 31, 2019, declined slightly from the levels at December 31, 2018, when First Defiance reported that 0.50% of its outstanding loans were at least 30 days delinquent. The level of total loans 90 or more days delinquent has decreased to 0.21% at December 31, 2019, from 0.32% at December 31, 2018. The level of total loans 60-89 days delinquent decreased to 0.03% at December 31, 2019, from 0.07% at December 31, 2018. The level of loans that were 30 to 59 days past due increased to 0.11% at December 31, 2019, from 0.10% at December 31, 2018. Management has assessed the collectability of all loans that are 90 days or more delinquent as part of its procedures in establishing the allowance for loan losses.

Non-performing Assets – All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collectability of additional interest is not expected. Generally, First Defiance places all loans more than 90 days past due on non-accrual status. First Defiance also places loans on non-accrual status when the loan is paying as agreed but the Company believes the financial condition of the borrower is such that this classification is warranted. When a loan is placed on non-accrual status, total unpaid interest accrued to date is reversed. Subsequent payments are generally applied to the outstanding principal balance but may be recorded as interest income, depending on the assessment of the ultimate collectability of the loan. First Defiance considers that a loan is impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. First Defiance measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if collateral dependent. If the estimated recoverability of the impaired loan is less than the recorded investment, First Defiance will recognize impairment by allocating a portion of the allowance for loan losses on cash flow dependent loans and by charging off the deficiency on collateral dependent loans. See Note 7 of the Notes to the Consolidated Financial Statements which is incorporated herein by reference.

Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. First Defiance also repossesses other assets securing loans, consisting primarily of automobiles. When such property is acquired it is recorded at fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and a write-down of the value is recorded with a corresponding charge to operations if it is determined that the carrying value of property exceeds its estimated net realizable value. During 2019, First Defiance recognized $264,000 of expense related to write-downs in value of real estate acquired by foreclosure or acquisition. The balance of real estate owned at December 31, 2019, was $100,000. During 2018, there was $552,000 of expense related to write-downs in fair value of real estate acquired by foreclosure or acquisition. The balance of real estate owned at December 31, 2018 was $1.2 million. The decline in real estate owned is a result of the sale of properties held by the Company.

As of December 31, 2019, First Defiance’s total non-performing loans amounted to $13.4 million or 0.49% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $19.0 million or 0.75% of total loans, at December 31, 2018. Non-performing loans are loans which are more than 90 days past due or on non-accrual.

The following table sets forth the amounts and categories of First Defiance’s non-performing assets (excluding impaired loans not considered non-performing) and troubled debt restructurings at the dates indicated.

	December 31
	2019			2018			2017			2016			2015
	(Dollars in Thousands)
Non-performing loans:
1-4 family residential real estate	$	2,411		$	3,640		$	3,037		$	2,928		$	2,610
Multi-family residential real estate		—			102			128			2,639			2,419
Commercial real estate		7,609			10,255			18,091			6,953			7,429
Commercial		2,961			4,500			8,841			1,007			3,078
Home equity and improvement		449			393			590			730			689
Consumer finance		7			126			28			91			36
Total non-performing loans		13,437			19,016			30,715			14,348			16,261
Real estate owned		100			1,205			1,532			455			1,321
Total repossessed assets		100			1,205			1,532			455			1,321
Total non-performing assets	$	13,537		$	20,221		$	32,247		$	14,803		$	17,582
Restructured loans, accruing	$	8,486		$	11,573		$	13,770		$	10,544		$	11,178
Total non-performing assets as a percentage of total assets		0.39	%		0.64	%		1.08	%		0.60	%		0.77	%
Total non-performing loans as a percentage of total loans*		0.49	%		0.75	%		1.31	%		0.74	%		0.90	%
Total non-performing assets as a percentage of total loans plus OREO*		0.49	%		0.80	%		1.37	%		0.76	%		0.97	%
Allowance for loan losses as a percent of total non-performing assets		230.80	%		140.11	%		82.75	%		174.86	%		144.36	%

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

Allowance for Loan Losses – First Defiance maintains an allowance for loan losses to absorb probable incurred credit losses in the loan portfolio. The allowance for loan loss is made up of two components. The first is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolio based on quantitative and qualitative factors.

The second component of the allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual credits. In evaluating the adequacy of its allowance each quarter, management grades all loans in the commercial portfolio. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Loan Losses” for further discussion on management’s evaluation of the allowance for loan losses.

Loans are charged against the allowance when such loans meet the Company’s established policy on loan charge-offs and the allowance itself is adjusted quarterly by recording a provision for loan losses. As such, actual losses and losses provided for should be approximately the same if the overall quality, composition and size of the portfolio remained static along with a static loan environment. To the extent that the portfolio grows at a rapid rate or overall quality or the loan environment deteriorates, the provision generally will exceed charge-offs. However, in certain circumstances, net charge-offs may exceed the provision for loan losses when management determines that loans previously provided for in the allowance for loan losses are uncollectible and should be charged-off or as overall credit or the loan environment improves. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowances may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.

At December 31, 2019, First Defiance’s allowance for loan losses totaled $31.2 million compared to $28.3 million at December 31, 2018. The following table sets forth the activity in First Defiance’s allowance for loan losses during the periods indicated.

	Years Ended December 31
	2019			2018			2017			2016			2015
	(Dollars in Thousands)
Allowance at beginning of year	$	28,331		$	26,683		$	25,884		$	25,382		$	24,766
Provision for credit losses		2,905			1,176			2,949			283			136
Charge-offs:
1-4 family residential real estate		(515	)		(261	)		(279	)		(350	)		(282	)
Commercial real estate and multi-family		(148	)		(1,387	)		(429	)		(92	)		(468	)
Commercial		(528	)		(724	)		(2,301	)		(615	)		(68	)
Consumer finance		(289	)		(233	)		(139	)		(94	)		(53	)
Home equity and improvement		(245	)		(269	)		(301	)		(268	)		(350	)
Total charge-offs		(1,725	)		(2,874	)		(3,449	)		(1,419	)		(1,221	)
Recoveries		1,732			3,346			1,299			1,638			1,701
Net (charge-offs) recoveries		7			472			(2,150	)		219			480
Ending allowance	$	31,243		$	28,331		$	26,683		$	25,884		$	25,382
Allowance for loan losses to total non-performing loans at end of year		232.51	%		148.99	%		86.87	%		180.40	%		156.09	%
Allowance for loan losses to total loans at end of year*		1.12	%		1.12	%		1.14	%		1.33	%		1.41	%
Net charge-offs (recoveries) for the year to average loans		0.00	%		-0.02	%		0.10	%		-0.01	%		-0.03	%

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

The provision for credit losses increased in 2019 from the previous year due to growth in the loan portfolio and improving credit quality. Management feels that the level of the allowance for loan losses at December 31, 2019, is sufficient to cover the estimated losses incurred but not yet recognized in the loan portfolio.

The following table sets forth information concerning the allocation of First Defiance’s allowance for loan losses by loan categories at the dates indicated. For information about the percent of total loans in each category to total loans, see “Lending Activities-Loan Portfolio Composition” above.

	December 31
	2019					2018					2017					2016					2015
			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
	67
1-4 family residential	$	2,867		11.3	%	$	2,881		12.1	%	$	2,532		11.1	%	$	2,627		10.2	%	$	3,212		11.0	%
Multi-family residential real estate		2,939		9.4	%		3,101		10.4	%		2,702		10.1	%		2,228		9.7	%		2,151		9.0	%
Commercial real estate		13,363		43.0	%		12,041		42.3	%		10,354		40.0	%		10,625		41.5	%		11,772		41.8	%
Construction		996		10.6	%		682		10.0	%		647		10.8	%		450		9.0	%		517		8.7	%
Commercial loans		9,003		20.1	%		7,281		19.1	%		7,965		21.3	%		7,361		23.0	%		5,192		22.4	%
Home equity and improvement loans		1,700		4.3	%		2,026		4.8	%		2,255		5.5	%		2,386		5.8	%		2,270		6.2	%
Consumer loans		375		1.3	%		319		1.3	%		228		1.2	%		207		0.8	%		171		0.9	%
	$	31,243		100.0	%	$	28,331		100.0	%	$	26,683		100.0	%	$	25,884		100.0	%	$	25,285		100.0	%

Sources of Funds

General – Deposits are the primary source of First Defiance’s funds for lending and other investment purposes. In addition to deposits, First Defiance derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the FHLB may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.

Deposits – First Defiance’s deposits are attracted principally from within First Defiance’s primary market area through the offering of a broad selection of deposit instruments, including checking accounts, money market accounts, savings accounts, and term certificate accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit, and the interest rate.

To supplement its funding needs, First Defiance also has the ability to utilize the national market for certificates of deposit. First Defiance has used these deposits in the past and could in the future if necessary. First Defiance had no national market certificates of deposit as of December 31, 2019 or 2018.

Average balances and average rates paid on deposits are as follows:

	Years Ended December 31
	2019					2018					2017
	Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in Thousands)
Noninterest-bearing demand deposits	$	594,785		—		$	562,439		—		$	528,926		—
Interest-bearing demand deposits		1,111,532		0.69	%		1,026,383		0.27	%		955,248		0.18	%
Savings deposits		299,040		0.05	%		297,492		0.04	%		284,814		0.04	%
Time deposits		711,867		2.08	%		621,239		1.78	%		530,414		1.33	%
Totals	$	2,717,224		0.83	%	$	2,507,553		0.56	%	$	2,299,402		0.38	%

The following table sets forth the maturities of First Defiance’s retail certificates of deposit having principal amounts $250,000 or greater at December 31, 2019 (In Thousands):

Retail certificates of deposit maturing in quarter ending:
March 31, 2020	$	15,844
June 30, 2020		23,827
September 30, 2020		20,462
December 31, 2020		10,785
After December 31, 2020		36,617
Total retail certificates of deposit with balances $250,000 or greater	$	107,535

The following table details the deposit accrued interest payable as of December 31:

	2019		2018
	(In Thousands)
Interest-bearing demand deposits and money market accounts	$	85	$	52
Certificates of deposit		330		314
	$	415	$	366

For additional information regarding First Defiance’s deposits see Note 11 to the Consolidated Financial Statements.

Borrowings – First Defiance may obtain advances from the FHLB of Cincinnati by pledging certain of its residential mortgage loans, commercial real estate loans, multi-family loans, home equity loans and investment securities provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities.

The following table sets forth certain information as to First Defiance’s FHLB advances and other borrowings at the dates indicated.

	Years Ended December 31
	2019			2018			2017
	(Dollars in Thousands)
Long-term:
FHLB advances	$	85,063		$	60,189		$	84,279
Weighted average interest rate		2.00	%		1.68	%		1.55	%
Short-term:
FHLB advances	$	—		$	25,000		$	—
Weighted average interest rate		—			2.45	%		—
Securities sold under agreements to repurchase	$	2,999		$	5,741		$	26,019
Weighted average interest rate		0.24	%		0.31	%		0.20	%

The following table sets forth the maximum month-end balance and average balance of First Defiance’s long-term FHLB advances and other borrowings during the periods indicated.

	Years Ended December 31
	2019			2018			2017
	(Dollars in Thousands)
Long-term:
FHLB advances:
Maximum balance	$	85,178		$	84,306		$	105,214
Average balance		71,319			67,365			102,115
Weighted average interest rate		1.98	%		1.75	%		1.44	%

The following table sets forth the maximum month-end balance and average balance of First Defiance’s short-term FHLB advances and other borrowings during the periods indicated.

	Years Ended December 31
	2019			2018			2017
	(Dollars in Thousands)
Short-term:
FHLB advances:
Maximum balance	$	20,000		$	40,000		$	—
Average balance		1,694			6,082			44
Weighted average interest rate		2.45	%		1.33	%		0.80	%
Securities sold under agreement to repurchase:
Maximum balance	$	6,402		$	5,741		$	26,019
Average balance		3,587			8,911			23,337
Weighted average interest rate		0.29	%		0.26	%		0.23	%

First Defiance borrows funds under a variety of programs at the FHLB. As of December 31, 2019, there was $85.1 million outstanding under various FHLB advance programs. First Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. At December 31, 2019 and 2018, no outstanding balances existed under First Defiance’s short-term Cash Management Advance Line of Credit. The total available under the Cash Management Advance Line is $15.0 million. In addition, First Defiance has a $100.0 million REPO Advance line of credit available. There was nothing drawn on this line at December 31, 2019 while $25.0 million was drawn at December 31, 2018. Amounts are generally borrowed under these lines on an overnight basis. First Defiance’s total borrowing capacity at the FHLB is limited by various collateral requirements. Eligible collateral includes mortgage loans, home equity loans, non-mortgage loans, cash, and investment securities. At December 31, 2019, First Defiance had additional borrowing capacity with the FHLB of $744.8 million as a result of these collateral requirements.

As a member of the FHLB of Cincinnati, First Federal must maintain a minimum investment in the capital stock of that FHLB in an amount defined in the FHLB’s regulations. First Federal is permitted to own stock in excess of the minimum requirement and was in compliance with the minimum requirement with an investment in stock of the FHLB of Cincinnati of $11.9 million at December 31, 2019, and $14.2 million at December 31, 2018. First Federal held stock of the FHLB of Indianapolis of $2,400 at December 31, 2019, and $2,500 at December 31, 2018.

Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the Community Reinvestment Act of 1977, as amended (the “CRA”) and its record of lending to first-time homebuyers.

For additional information regarding First Defiance’s FHLB advances and other debt see Notes 12 and 14 to the Consolidated Financial Statements.

Subordinated Debentures – In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (“Trust Affiliate II”) that issued $15.0 million of Guaranteed Capital Trust Securities (“Trust Preferred Securities”). In connection with the transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) to Trust Affiliate II. Trust Affiliate II 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 Subordinated Debentures held by Trust Affiliate II are the sole assets of the trust. 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 3.39% and 4.29% as of December 31, 2019 and 2018, respectively.

The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company 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.

In October 2005, the Company formed an affiliated trust, First Defiance Statutory Trust I (“Trust Affiliate I”) that issued $20.0 million of Trust Preferred Securities. In connection with the 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 Subordinated Debentures held by Trust Affiliate I are the sole assets of the trust. 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%, or 3.27% and 4.17% as of December 31, 2019 and 2018, 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 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 by the Company at any time now.

Employees

First Defiance had 699 employees at December 31, 2019. None of these employees are represented by a collective bargaining agent, and First Defiance believes that it maintains good relationships with its personnel.

Competition

Competition in originating commercial real estate and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors. First Federal has a significant market share of the lending markets in which it conducts operations, except for central Ohio.

Management believes that First Federal’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price and the quality of customer service and name recognition. First Federal’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. First Federal competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.

Regulation

General – First Defiance is subject to regulation examination and oversight by the Federal Reserve Board (“Federal Reserve”). At December 31, 2019, First Federal was subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”). As a result of the Merger, First Federal converted to an Ohio bank and became subject to regulation, examination and oversight by the Ohio Division of Financial Institutions (“ODFI”) instead of the OCC. Its primary federal regulator is 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, as amended (“Dodd-Frank Act”) and has broad powers to adopt and enforce consumer protection regulations. Prior to the Merger, First Defiance and First Federal were required to file periodic reports with the Federal Reserve and the OCC (OCC filings ceased at the time of the Merger) and examinations were conducted periodically by the Federal Reserve, the OCC and the FDIC to determine whether First Defiance and First Federal were in compliance with various regulatory requirements and are operating in a safe and sound manner. As a result of the Merger, First Federal will be subject to examination by the ODFI in lieu of the OCC.

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

Holding Company Regulation – At December 31, 2019, First Defiance was a unitary thrift holding company. In connection with the Merger, First Defiance converted to a bank holding company and elected to become a financial holding company. First Defiance is subject to the requirements of the Bank Holding Company Act of 1956, as amended (“BHC Act”), and examination and regulation by the Federal Reserve. The Federal Reserve has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, issue cease and desist or removal orders, and require that a bank holding company divest subsidiaries (including its banking subsidiaries). In general, the Federal Reserve may initiate enforcement action for violations of laws and regulations and unsafe or unsound practices.

A bank holding company is required to serve as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. The Federal Reserve may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the shareholders of the bank holding company if the Federal Reserve believes the payment would be an unsafe or unsound practice. The Federal Reserve also requires bank holding companies to provide advance notification of planned dividends under certain circumstances.

The BHC Act requires the prior approval of the Federal Reserve in any case where a bank holding company proposes to: acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it; acquire all or substantially all of the assets of another bank or bank holding company; or merge or consolidate with any other bank holding company.

In order to become a financial holding company, all of a bank holding company’s subsidiary depository institutions must be well capitalized and well managed under federal banking regulations, and such depository institutions must have received a rating of at least satisfactory under the CRA. In addition, the holding company must be well managed and must be well capitalized.

Financial holding companies may engage in a wide variety of financial activities, including any activity that the Federal Reserve and the Treasury Department consider financial in nature or incidental to financial activities, and any activity that the Federal Reserve determines to be complementary to a financial activity and which does not pose a substantial safety and soundness risk. These activities include securities underwriting and dealing activities, insurance and underwriting activities and merchant banking/equity investment activities. Because it has authority to engage in a broad array of financial activities, a financial holding company may have several affiliates that are functionally regulated by financial regulators other than the Federal Reserve, such as the SEC and state insurance regulators.

If a financial holding company or a subsidiary bank fails to meet the requirements for the holding company to remain a financial holding company, the financial holding company must enter into a written agreement with the Federal Reserve within 45 days to comply with all applicable capital and management requirements. Until the Federal Reserve determines that the holding company and its subsidiary banks meet the requirements, the Federal Reserve may impose additional limitations or conditions on the conduct or activities of the financial holding company or any affiliate that the Federal Reserve finds to be appropriate or consistent with federal banking laws. If the deficiencies are not corrected within 180 days, the financial holding company may be required to divest ownership or control of all banks. If restrictions are imposed on the activities of the holding company, such restrictions may not be made publicly available pursuant to confidentiality regulations of the banking regulators.

Regulation of Ohio State Chartered Banks – As an Ohio state-chartered bank, First Federal is supervised and regulated primarily by the ODFI and the Federal Reserve. In addition, First Federal’s deposits are insured up to applicable limits by the FDIC, and First Federal will be subject to the applicable provisions of the Federal Deposit Insurance Act, as amended, and certain other regulations of the FDIC.

Various requirements and restrictions under the laws of the United States and the State of Ohio will affect the operations of First Federal, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, limitations on branching and increasingly extensive consumer protection laws and regulations.

Economic Growth, Regulatory Relief and Consumer Protection Act - On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law. The Regulatory Relief Act repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including First Defiance, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including First Defiance, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with consolidated assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.

Regulatory Capital Requirements and Prompt Corrective Action – The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, as well as state member banks. 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 incentivizes 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.

The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard,” published by the Basel Committee on Banking Supervision. New capital rules applicable to smaller banking organizations (the “Basel III Capital Rules”) which also implement certain of the provisions of the Dodd-Frank Act became effective commencing on January 1, 2015. Compliance with the new minimum capital requirements was required effective January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.

The Basel III Capital 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, trust preferred securities that have been grandfathered (but which are not otherwise permitted), 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, subject to specified 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 included in 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 Basel III Capital 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 was fully phased in effective January 1, 2019 at 2.5%.

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.

In accordance with the Basel III Capital Rules, in order to be “well-capitalized” under the prompt corrective action guidelines, a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10.0%, a tier 1 risk-based capital of at least 8.0% and a leverage ratio of at least 5.0%, 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 December 31, 2019, First Federal met the capital ratio requirements to be deemed "well-capitalized" according to the guidelines described above. See Note 17 of the Notes to the Consolidated Financial Statements which is incorporated herein by reference.

The following table sets forth the amounts and percentage levels of regulatory capital of First Defiance and First Federal, the minimum amounts required for each of First Defiance and First Federal, and the amounts required for First Federal to be deemed well capitalized under the prompt corrective action system, all as of December 21, 2019. (Dollars in Thousands):

	Actual					Minimum Required for Adequately Capitalized					Minimum Required to be Well Capitalized for Prompt Corrective Action
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	322,813		10.60	%	$	137,001		4.5	%	N/A		N/A
First Federal	$	335,251		11.03	%	$	136,752		4.5	%	$	197,531		6.5	%
Tier 1 Capital (2)
Consolidated	$	357,813		10.78	%	$	132,805		4.0	%	N/A		N/A
First Federal	$	335,251		10.13	%	$	132,435		4.0	%	$	165,544		5.0	%
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated	$	357,813		11.75	%	$	182,667		6.0	%	N/A		N/A
First Federal	$	335,251		11.03	%	$	182,336		6.0	%	$	243,114		8.0	%
Total Capital (to Risk Weighted Assets) (2)
Consolidated	$	389,056		12.78	%	$	243,556		8.0	%	N/A		N/A
First Federal	$	366,494		12.06	%	$	243,114		8.0	%	$	303,893		10.0	%

(1)	Excludes capital conservation buffer of 2.50% as of December 31, 2019.

(2)	Core capital is computed as a percentage of adjusted total assets of $3.32 billion for consolidated and $3.31 billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $3.04 billion for consolidated and for the Bank.

In December 2018, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under the current expected credit loss (“CECL”) model (accounting standard). The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day‑one adverse effects on regulatory capital that may result from the adoption of the CECL model.

In September 2019, consistent with Section 201 of the Regulatory Relief Act, the Federal Reserve, along with the other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gives community banks, including First Federal, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks meet certain requirements. Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it has less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a leverage ratio greater than 9.0%. The final rule adopts tier 1 capital and the existing leverage ratio into the CBLR framework. The tier 1 numerator takes into account the modifications made in relation to the capital simplifications and CECL methodology transitions rules as of the compliance dates of those rules. Qualifying institutions that elect to use the CBLR framework (each, a “CBLR Bank”) and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk‑based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well‑capitalized ratio requirements. CBLR Banks will not be required to calculate or report risk‑based capital. A CBLR Bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk‑based capital rule.

Dividends – Dividends paid by First Federal to First Defiance are subject to various regulatory restrictions. First Federal paid $36.0 million in dividends to First Defiance in 2019 and $22.0 million in 2018. Generally, First Federal may not pay dividends to First Defiance in excess of its net profits (as defined by statute) for the last two fiscal years, plus any year-to-date net profits without the approval of the OCC. First Insurance paid $1.2 million in dividends to First Defiance in 2019 and $1.6 million in dividends in 2018. First Defiance Risk Management paid $1.4 million in dividends to First Defiance in 2019 and $950,000 in dividends in 2018.

First Defiance’s ability to pay dividends to its shareholders is primarily dependent on its receipt of dividends from the Subsidiaries. The Federal Reserve expects First Defiance to serve as a source of strength for First Federal and may require First Defiance to retain capital for further investment in First Federal, rather than pay dividends to First Defiance shareholders. Payment of dividends by First Defiance or First Federal may be restricted at any time at the discretion of its applicable regulatory authorities if they deem such dividends to constitute an unsafe or unsound practice. These provisions could have the effect of limiting First Defiance's ability to pay dividends on its common shares.

Transactions with Insiders and Affiliates – Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limits. Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the “disinterested” members of board of directors of the association with any “interested” director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program. Loans to executive officers are subject to additional restrictions. All transactions between savings associations and their affiliates must comply with Sections 23A and 23B of the Federal Reserve Act, as amended (“FRA”) and the Federal Reserve’s Regulation W. An affiliate of a savings association is any company or entity that controls, is controlled by, or is under common control with the savings association. First Defiance, First Defiance Risk Management and First Insurance are affiliates of First Federal.

Deposit Insurance – The FDIC maintains the Deposit 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 U. S. government.

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 or 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.

The FDIC assesses a quarterly deposit insurance premium 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 amount in the DIF as a percentage of all DIF insured deposits. 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 insured 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 reached 1.35% and provided 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 DRR reached 1.35% at September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits have been determined by the FDIC for banks with assets of less than $10 billion for the portion of their assessments that contributed to the increase of the DRR to 1.35%. These credits may be applied beginning in the quarterly assessment period in which the DRR reached a minimum of 1.38%. 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 FDIC-insured institutions 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 September 2019. The Financing Corporation has projected that the final assessment will be collected on the March 29, 2019 FDIC invoice.

Consumer Protection Laws and Regulations – Banks are subject to regular examination to ensure compliance with federal statutes and regulations applicable to their business, including consumer protection statutes and implementing regulations. Potential penalties under these laws include, but are not limited to, fines. The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services. The CFPB has adopted numerous rules with respect to consumer protection laws and has commenced related enforcement actions. The following are just a few of the consumer protection laws applicable to First Federal:

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Community Reinvestment Act of 1977: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.

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Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.

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Truth in Lending Act: requires that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably.

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Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of any of certain criteria.

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Home Mortgage Disclosure Act: requires financial institutions to collect data that enables regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the communities in which they are located.

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Real Estate Settlement Procedures Act: requires that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs.

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Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from unauthorized access.

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or consumer finance law.

In October 2017, the CFPB issued a final rule (the “Payday Rule”) to establish regulations for payday loans, vehicle title loans, and certain high-cost installment loans. The Payday Rule addressed two discrete topics. First, it contained a set of provisions with respect to the underwriting of certain covered loans and related reporting and recordkeeping requirements (the “Mandatory Underwriting Provisions”). Second, it contained a set of provisions establishing certain requirements and limitations with respect to attempts to withdraw payments from consumers’ checking or other accounts and related recordkeeping requirements (the “Payment Provisions”). The Payday Rule became effective on January 16, 2018. However, most provisions had a compliance date of August 19, 2019.

On February 6, 2019, the CFPB proposed delaying the August 19, 2019, compliance date for the Mandatory Underwriting Provisions to November 19, 2020. The CFPB proposed in a separate notice to rescind the Mandatory Underwriting Provisions.

On June 6, 2019, the CFPB issued a final rule delaying the compliance date for most Mandatory Underwriting Provisions until November 19, 2020. However, the final rule did not delay the compliance date for the Payment Provisions. The Company does not expect the Payday Rule to have a material effect on its financial condition or results of operations on a consolidated basis.

CRA - Under the CRA, every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications to banking regulators, such as an application for approval of a merger or the establishment of a branch. An unsatisfactory rating may be used as the basis for the denial of an application to acquire another financial institution or open a new branch. As of its last examination, First Federal received a CRA rating of “satisfactory.”

In June 2010, the Federal Reserve, the OCC and the FDIC issued joint interagency guidance on incentive compensation policies (the Joint Guidance) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The Joint Guidance made incentive compensation part of the regulatory agencies’ examination process, with the findings of the supervisory initiatives included in reports of examination and enforcement actions possible.

In May 2016, the federal bank regulatory agencies approved a joint notice of proposed rules (the “Proposed Joint Rules”) designed to prohibit incentive-based compensation arrangements that encourage inappropriate risks at financial institutions. The Proposed Joint Rules would apply to covered financial institutions with total assets of $1 billion or more. For all covered institutions, including “Level 3” institutions like First Defiance (those institutions with consolidated assets of at least $1 billion but less than $50 billion), the proposed rule would:

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prohibit incentive-based compensation arrangements that are “excessive” or “could lead to material financial loss;”

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require incentive based compensation that is consistent with a balance of risk and reward, effective management and control of risk, and effective governance; and

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require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.

Further, as stock exchanges impose additional listing requirements under the Dodd-Frank Act, public companies will be required to implement “clawback” procedures for incentive compensation payments and to disclose the details of the procedures, which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards.

Patriot Act – In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the U. S. government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. First Federal has established policies and procedures that it considers to be in compliance with the requirements of the Patriot Act.

Volcker Rule – The Volcker Rule, which became effective under the Dodd-Frank Act in 2015 prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds. On July 9, 2019, the five federal agencies that adopted the Volcker Rule issued a final rule to exempt certain community banks, including First Federal, from the Volcker Rule, consistent with the Regulatory Relief Act. Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets are excluded from the restrictions of the Volcker Rule. Further, the Volcker Rule does not impact the operations of First Defiance or its subsidiaries, as the Company does not engage in the businesses prohibited by the Volcker Rule and banks under $10.0 billion in assets are exempted from the Volcker Rule provisions.

Office of Foreign Assets Control Regulation – The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. First Defiance is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Cybersecurity – In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If First Defiance fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. First Defiance expects this trend of state-level activity in those areas to continue and is continually monitoring developments in the states in which its customers are located.

In the ordinary course of business, First Defiance relies on electronic communications and information systems to conduct its operations and to store sensitive data. First Defiance employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. First Defiance employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of First Defiance’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, First Defiance has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, First Defiance’s systems and those of its customers and third-party service providers are under constant threat and it is possible that First Defiance could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Item 1A. Risk Factors

The risks listed below present risks that could have a material impact on the Company’s financial condition, results of operations, or business. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair the Company’s business operations.

Economic, political and financial market conditions may adversely affect First Defiance’s operations and financial condition.

First Defiance’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services First Defiance offers, is highly dependent upon the business environment in the markets where the Company operates, mainly in the State of Ohio, Northeast Indiana and Southeast Michigan. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other factors. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a U.S. withdrawal from a significant renegotiation of trade agreements, trade wars, the election of a new U. S. President in 2020, and other factors beyond First Defiance’s control may adversely affect its deposit levels and composition, the quality of its assets including investment securities available for purchase, demand for loans, the ability of its borrowers to repay their loans and the value of the collateral securing the loans it makes. Because First Defiance has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and First Defiance’s ability to sell the collateral upon foreclosure.

Recent political developments have resulted in substantial changes in economic and political conditions for the U. S. and the remainder of the world. Economic turmoil in Europe and Asia and changes in oil production in the Middle East affect the economy and stock prices in the U. S. While these changes do not have a direct, immediate impact on First Defiance’s financial performance, we cannot predict how the change in the political climate will affect the economy and First Defiance’s performance in the future.

The outbreak of the novel coronavirus (“COVID-19”), or an outbreak of other highly infectious or contagious diseases, could adversely impact certain industries in which First Defiance’s customers operate and impair their ability to fulfill their obligations to First Defiance. Further, the spread of the outbreak could cause severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which First Defiance operates and could potentially create widespread business continuity issues for First Defiance.

First Defiance’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. The spread of highly infectious or contagious diseases could cause severe disruptions in the U.S. economy which could disrupt the Company’s operations and if the global response to contain COVID-19 escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases may result in a decrease in our customers’ businesses or a disruption in the services provided by First Defiance’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth strategy. The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide First Defiance with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread business continuity issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

First Defiance’s loan portfolio includes a concentration of commercial real estate loans and commercial loans, which involve risks specific to real estate value and the successful operations of these businesses.

At December 31, 2019, First Federal’s portfolio of commercial real estate loans totaled $1.5 billion, or approximately 52.4% of total loans. First Federal’s commercial real estate loans typically have higher principal amounts than residential real estate loans, and many of our commercial real estate borrowers have more than one loan outstanding. As a result, an adverse development on one loan can expose First Defiance to greater risk of loss on other loans. Additionally, repayment of the loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic conditions and events outside of the control of the borrower or lender could negatively impact the future cash flows and market values of the affected properties.

At December 31, 2019, First Federal’s portfolio of commercial loans totaled $578.1 million, or approximately 20.1% of total loans. Commercial loans generally expose First Defiance to a greater risk of nonpayment and loss than commercial real estate or residential real estate loans since repayment of such loans often depends on the successful operations and income stream of the borrowers. First Federal’s commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower such as accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.

First Defiance targets its business lending towards small- and medium-sized businesses, many of which have fewer financial resources than larger companies and may be more susceptible to economic downturns. If general economic conditions negatively impact these businesses, First Defiance’s results of operations and financial condition may be adversely affected.

If First Defiance's actual loan losses exceed its allowance for loan losses, First Defiance's net income will decrease.

In accordance with GAAP, First Defiance must maintain an allowance for loan losses to provide for loan defaults and non-performance, which when combined, are referred to as the allowance for loan losses. First Defiance's allowance for loan losses is based upon a number of relevant factors, including, but not limited to, trends in the level of nonperforming assets and classified loans, current economic conditions in the primary lending area, prior experience, possible losses arising from specific problem loans, and management's evaluation of the risks in the current portfolio. However, there are many factors that can result in actual loan losses exceeding the allowance.

For instance, in deciding whether to extend credit or enter into other transactions with customers and counterparties, First Defiance may rely on information provided to us by customers and counterparties, including financial statements and other financial information. First Defiance may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Such information may not turn out to be accurate. Further, First Defiance's loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. As a result, First Defiance may experience significant loan losses, which could have a material adverse effect on its operating results.

The amount of future losses also is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond management's control, and these losses may exceed current estimates. Further, federal regulatory agencies, as an integral part of their examination process, review First Defiance's loans and allowance for loan losses and may require that First Defiance increase its allowance. Moreover, the Financial Accounting Standards Board (“FASB”) has changed its requirements for establishing the allowance, which became effective for First Defiance in the first quarter of 2020. That accounting change exposes First Defiance to increased risk of failure to establish a sufficient allowance and the possibility that First Defiance will need to increase its allowance substantially through an increase to the provision for loan losses, which will adversely affect First Defiance's net income.

As a result of any of the above factors, First Defiance's allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse effect on First Defiance's operating results. There is no assurance that First Defiance will not further increase the allowance for loan losses. Either of these occurrences could have a material adverse effect on First Defiance's financial condition and results of operations.

Changes in interest rates can adversely affect First Defiance’s profitability.

First Defiance’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities, and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond First Defiance’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest First Defiance receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect First Defiance’s ability to originate loans and obtain deposits, the fair value of First Defiance’s financial assets and liabilities, and the average duration of certain assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, First Defiance’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. While we generally invest in securities with limited credit risk, certain investment securities we hold possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages. All investment securities are subject to changes in market value due to changing interest rates and implied credit spreads. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on First Defiance’s results of operations and financial condition.

First Federal originates a significant amount of residential mortgage loans that it sells in the secondary market. The origination of residential mortgage loans is highly dependent on the local real estate market and the current interest rates. Increasing interest rates tend to reduce the origination of loans for sale and consequently fee income, which First Defiance reports as mortgage banking income. Conversely, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of mortgage servicing rights on the loans sold to be lower than originally anticipated. If this happens, First Defiance may be required to write down the value of its mortgage servicing rights faster than anticipated, which will increase expense and lower earnings. Accelerated repayments on loans and mortgage backed securities could result in the reinvestment of funds at lower rates than the loans or securities were paying.

Laws, regulations and periodic regulatory reviews may affect First Defiance’s results of operations.

The financial services industry is extensively regulated. First Defiance is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, borrowers, the DIF and the banking system as a whole, and not to benefit First Defiance’s shareholders. Regulations affecting banks and financial services businesses are undergoing continuous changes, and management cannot predict the effect of these changes. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact First Defiance and its ability to increase the value of its business, possibly limiting the services it provides, increasing the potential for competition from non-banks, or requiring it to change the way it operates.

Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets held by an institution, the adequacy of an institution’s allowance for loan losses and the ability to complete acquisitions. Additionally, actions by regulatory agencies against First Defiance could cause it to devote significant time and resources to defending its business and may lead to penalties that materially affect First Defiance and its shareholders. Even the reduction of regulatory restrictions could have an adverse effect on First Defiance and its shareholders if such lessening of restrictions increases competition within First Defiance’s industry or market area.

First Defiance is currently assessing the expected effect of the Payday Rule on First Federal’s business and on First Defiance’s financial condition and results of operations. The costs of complying with this regulation or a determination to discontinue certain types of consumer lending in light of the expense of compliance could have an adverse effect on the financial conditions and results of operations of First Defiance. The impact of this rule on First Federal, both with and without the proposed amendments, is estimated to be minimal.

In addition to laws, regulations and actions directed at the operations of banks, proposals to reform the housing finance market could negatively affect First Defiance’s ability to sell loans.

Although it is impossible for First Defiance to predict at this time what changes in laws and regulations will be implemented and the effect they will have on First Defiance and the rest of its industry, it is possible that First Defiance’s revenue could decrease, our interest expense could increase and deposit insurance premiums could change, and steps may need to be taken to increase qualifying capital. First Defiance’s operating and compliance costs could also increase and could adversely affect its financial condition and results of operations.

Changes in tax laws could adversely affect First Defiance's financial condition and results of operations.

First Defiance is subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to the tax laws could have a material adverse effect on First Defiance's results of operations. In addition, First Defiance's customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by customers, including changes in the deductibility of mortgage loan related expenses, may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for First Defiance's loans and deposit products. In addition, such negative effects on First Defiance's customers could result in defaults on the loans already made and decrease the value of mortgage-backed securities in which First Defiance has invested.

The laws and regulations applicable to the banking industry could change at any time. The potential exists for new laws and regulations, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations. Increased regulation could increase First Defiance’s cost of compliance and reduce its income to the extent that they limit the manner in which First Defiance may conduct business, including its ability to offer new products, charge fees for specific products and services, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.

First Defiance’s ability to meet cash flow needs on a timely basis at a reasonable cost may adversely affect net income.

First Defiance’s principal sources of liquidity are local deposits and wholesale funding sources such as FHLB advances, Federal Funds purchased, securities sold under repurchase agreements, and brokered or other out-of-market certificate of deposit purchases. First Defiance also maintains a portfolio of securities that can be used as a secondary source of liquidity. First Defiance’s access to funding sources in amounts adequate to finance or capitalize its activities or on terms that are acceptable could be impaired by factors that affect First Defiance directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Other possible sources of liquidity include the sale or securitization of loans, the issuance of additional collateralized borrowings beyond those currently utilized with the FHLB, the issuance of debt securities and the issuance of preferred or common securities in public or private transactions, or borrowings from a commercial bank. First Defiance does not currently have any borrowings from a commercial bank, but it has used them in the past.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to First Defiance’s shareholders, or fulfill obligations such as repaying First Defiance’s borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.

Integrating First Defiance and UCFC after the Merger may be more difficult, costly, or time consuming than expected and the anticipated benefits and cost savings of the Merger may not be realized.

Although the Merger closed on January 31, 2020, the integration of First Defiance and UCFC is an ongoing process. First Defiance’s ability to successfully combine and integrate the businesses of First Defiance and UCFC in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers is a risk. It is possible that the integration process could result in inconsistencies in standards, controls, procedures and policies that adversely affect First Defiance’s ability to maintain relationships with clients, customers, depositors and employees, or to achieve the anticipated benefits and cost savings of the Merger. Further, First Defiance is dependent upon several outside vendors to make the integration successful. If such vendors are unable to meet their obligations to First Defiance, including because of any issues related to COVID-19, such failure could result impede a successful integration. If First Defiance experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. In addition, the actual cost savings of the Merger could be less than anticipated.

Competition affects First Defiance’s earnings.

First Defiance’s continued profitability depends on its ability to continue to effectively compete to originate loans and attract and retain deposits. Competition for both loans and deposits is intense in the financial services industry. The Company competes in its market area by offering superior service and competitive rates and products. The type of institutions First Defiance competes with include large regional commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their size and ability to achieve economies of scale, certain of First Defiance’s competitors can offer a broader range of products and services than the Company can offer. In addition, the OCC announced in 2018 that it would start accepting applications for bank charters from nondepository financial technology companies engaged in banking activities, which has added to the number of parties with whom the Company competes. Further, technological advances allow consumers to pay bills and transfer funds electronically without banks. Consumers can also shop for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches. To stay competitive in its market area, First Defiance may need to adjust the interest rates on its products to match rates of its competition, which could have a negative impact on net interest margin.

First Defiance is at risk of increased losses from fraud.

Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. Further, in addition to fraud committed directly against it, First Defiance may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.

The increasing complexity of First Defiance’s operations presents varied risks that could affect its earnings and financial condition.

First Defiance processes a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security and our internal control system and compliance with a complex array of consumer and safety and soundness regulations. First Defiance could also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.

First Defiance has established and maintains a system of internal controls that provides management with information on a timely basis and allows for the monitoring of compliance with operational standards. These systems have been designed to manage operational risks at an appropriate, cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. Losses from operational risks may still occur, however, including losses from the effects of operational errors.

Unauthorized disclosure of sensitive or confidential client or customer information or confidential trade secrets, whether through a breach of the Company’s computer systems or otherwise, could severely harm its business.

Potential misuse of funds or information by First Defiance’s employees or by third parties could result in damage to First Defiance’s customers for which First Defiance could be held liable, subject First Defiance to regulatory sanctions and otherwise adversely affect First Defiance’s financial condition and results of operations.

First Defiance’s employees handle a significant amount of funds, as well as financial and personal information. First Defiance also depends upon third-party vendors who have access to funds and personal information about customers. Cybersecurity breaches of other companies, such as the breach of the systems of a credit bureau, may result in criminals using personal information obtained from such other source to impersonate a customer of First Defiance and obtain funds from customer accounts. Further, First Defiance may be affected by data breaches at retailers and other third parties who participate in data interchanges with First Defiance’s customers that involve the theft of customer credit and debit card data, which may include the theft of debit card personal identification numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in First Defiance incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on First Defiance’s results of operations.

Although First Defiance has implemented systems to minimize the risk of fraudulent taking or misuse of funds or information, there can be no assurance that such systems will be adequate or that a taking or misuse of funds or information by employees, by third parties who have authorized access to funds or information, or by third parties who are able to access funds or information without authorization will never occur. First Defiance could be held liable for such an event and could also be subject to regulatory sanctions. First Defiance could also incur the expense of developing additional controls and investing in additional equipment or contracts to prevent future such occurrences. Although First Defiance has insurance to cover such potential losses, First Defiance cannot provide assurance that such insurance will be adequate to meet any liability, and insurance premiums may rise substantially if First Defiance suffers such an event. In addition, any loss of trust or confidence placed in First Defiance by our customers could result in a loss of business, which could adversely affect our financial condition and results of operations, or result in a loss of investor confidence, hurting First Defiance’s stock price and ability to acquire capital in the future. First Defiance could also lose revenue by the wrongful appropriation of confidential information about its business operations by competitors who use the information to compete with First Defiance.

First Defiance could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, First Defiance’s computer systems.

First Defiance relies heavily on its own information systems and those of vendors to conduct business and to process, record, and monitor transactions. Risks to the system could result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. Other businesses have been victims of a ransomware attack in which a business becomes unable to access its own information and is presented with a demand to pay a ransom in order to once again have access to its information. First Defiance is also at risk for the impact of natural disasters, terrorism and international hostilities on its systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats to businesses with which First Defiance deals.

Potential adverse consequences of attacks on First Defiance’s computer systems or other threats include damage to First Defiance’s reputation, loss of customer business, costs of incentives to customers or business partners in order to maintain their relationships, loss of investor confidence and a reduction in First Defiance’s stock price, litigation, increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), and increased insurance premiums, all of which could result in financial loss and material adverse effects on First Defiance’s results of operations and financial condition.

If First Defiance forecloses on collateral property resulting in First Defiance’s ownership of the underlying real estate, First Defiance may be subject to the increased costs associated with the ownership of real property, resulting in reduced income.

A significant portion of First Defiance’s loan portfolio is secured by real property. During the ordinary course of business, First Defiance may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, First Defiance may be liable for remediation costs, as well as for personal injury and property damage.

In addition, when First Defiance forecloses on real property, the amount First Defiance realizes after a default is dependent upon factors outside of First Defiance’s control, including, but not limited to, economic conditions, neighborhood real estate values, interest rates, real estate taxes, operating expenses of the mortgaged properties, zoning laws, governmental rules, regulations and fiscal policies, and acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and First Defiance may have to sell the property at a loss. The foregoing expenditures could adversely affect First Defiance’s financial condition and results of operations.

First Defiance’s business strategy focuses on planned growth, including strategic acquisitions, and its financial condition and results of operations could be negatively affected if First Defiance fails to grow or fails to manage its growth effectively.

First Defiance’s ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, its ability to integrate mergers and other acquisitions and manage growth and First Defiance’s ability to raise capital. There can be no assurance that growth opportunities will be available.

First Defiance may acquire other financial institutions or parts of institutions in the future, open new branches, and consider new lines of business and new products or services. Expansions of its business would involve a number of expenses and risks, including:

•

the time and costs associated with identifying and evaluating potential acquisitions or expansions into new markets;

•

the potential inaccuracy of estimates and judgments used to evaluate the business and risks with respect to target institutions;

•

the time and costs of hiring local management and opening new offices;

•

the delay between commencing making acquisitions or engaging in new activities and the generation of profits from the expansion;

•

First Defiance’s ability to finance an expansion and the possible dilution to existing shareholders;

•

the diversion of management’s attention to the expansion;

•

management’s lack of familiarity with new market areas;

•

the integration of new products and services and new personnel into First Defiance’s existing business;

•

the incurrence and possible impairment of goodwill associated with an acquisition and effects on First Defiance’s results of operations; and

•

the risk of loss of key employees and customers.

If First Defiance’s growth involves the acquisition of companies through mergers or other acquisitions, the success of such acquisitions will depend on, among other things, First Defiance’s ability to combine the businesses in a manner that permits growth opportunities and cost efficiencies, and does not cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of First Defiance to maintain relationships with customers and employees or to achieve the anticipated benefits of the acquisitions.

Failure to manage First Defiance’s growth effectively could have a material adverse effect on its business, future prospects, financial condition or results of operations and could adversely affect First Defiance’s ability to successfully implement its business strategy.

First Defiance’s ability to pay dividends is subject to regulatory limitations which, to the extent First Defiance requires such dividends in the future, may affect its ability to pay dividends or repurchase its stock.

First Defiance is a separate legal entity from First Federal and does not have significant operations of its own. Dividends from First Federal provide a significant source of capital for First Defiance. The availability of dividends from First Federal is limited by various statutes and regulations. The federal and state banking regulators require that insured financial institutions and their holding companies should generally only pay dividends out of current operating earnings. It is possible, depending upon the financial condition of First Federal and other factors, that First Federal’s primary regulator could assert that the payment of dividends or other payments by First Federal are an unsafe or unsound practice. In the event First Federal is unable to pay dividends to First Defiance, First Defiance may not be able to pay its obligations as they become due, repurchase its stock, or pay dividends on its common stock. Consequently, the potential inability to receive dividends from First Federal could adversely affect First Defiance’s business, financial condition, results of operations or prospects.

Failure to integrate or adopt new technology may undermine First Defiance’s ability to meet customer demands, leading to adverse effects on First Defiance’s financial condition and results of operations.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. First Defiance’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. First Defiance may not be able to effectively implement or have the resources to implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could adversely affect First Defiance’s business, financial condition, or results of operations.

A transition away from LIBOR as a reference rate for financial contracts could negatively affect First Defiance’s income and expenses and the value of various financial contracts.

LIBOR is used extensively in the U.S. and globally as a reference rate for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. In 2017, the United Kingdom’s Financial Conduct Authority announced that in 2021 it would no longer compel banks to submit rates required to calculate LIBOR. Therefore, it is uncertain at this time to what extent banks will continue to provide submissions for the calculation of LIBOR after 2021.

As a result of this announcement, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified and recommended alternatives for LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR) and proposed implementations of the recommended alternatives in floating rate instruments, including loans and derivatives. It is currently unknown whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what effect of their implementation may have on the markets for floating-rate financial instruments. Any discontinuance, modification, alternative reference rates or other reforms may adversely affect interest rates on our current or future indebtedness and other financial instruments.

First Federal has a significant number of loans, derivative contracts, borrowings and other financial instruments, and continues to enter into loans, derivatives contracts, borrowings and other financial instruments, with attributes that are directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk for First Defiance. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change First Defiance’s market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Further, First Defiance’s failure to adequately manage this transition process with its customers could adversely impact its reputation. Although First Defiance is currently unable to assess what the ultimate impact of the transition from LIBOR will be, any market-wide transition away from LIBOR could have an adverse effect on its business, financial condition and results of operations.

First Defiance may be the subject of litigation, which would result in legal liability and damage to its business and reputation.

From time to time, First Defiance and its subsidiaries may be subject to claims or legal action from customers, employees or others. Financial institutions like First Defiance are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. First Defiance is also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding its businesses. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other financial institutions, First Defiance is also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against First Defiance could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At December 31, 2019, First Federal conducted its business from its main office at 601 Clinton St., Defiance, Ohio, and 44 other full-service banking centers in northwest and central Ohio, northeast Indiana and southeast Michigan as well as a loan production office in southeast Michigan. First Insurance conducted its business primarily from nine offices in northwest Ohio.

First Defiance maintained its headquarters in the main office of First Federal at 601 Clinton St., Defiance, Ohio. Back-office operation departments, including information technology, loan processing and underwriting, deposit processing, accounting and risk management were headquartered in an operations center located at 25600 Elliott Rd., Defiance, Ohio. As a result of the Merger, First Defiance acquired UCFC’s headquarters at 275 West Federal Street, Youngstown, Ohio, which is now owned by First Defiance. This location is now the headquarters for First Federal.

The information contained in Note 9 to the consolidated financial statements titled Premises and Equipment is incorporated herein by reference.

Item 3. Legal Proceedings

First Defiance is involved in routine legal proceedings that are incidental to and occur in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of First Defiance.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common shares trade on The NASDAQ Global Select Market under the symbol “FDEF.” As of January 31, 2020, the Company had approximately 2,310 shareholders of record.

The line graph below compares the yearly percentage change in cumulative total shareholder return on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31, 2014, and the reinvestment of all dividends are assumed. The performance graph represents past performance and should not be considered to be an indication of future performance.

The payment of future cash dividends is at the discretion of our Board of Directors and subject to a number of factors, including results of operations, general business conditions, growth, financial condition, regulatory limitation and other factors deemed relevant by the Board. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in the Regulation section in Item 1 above. For further information, see Note 17 of the Notes to the Consolidated Financial Statements which is incorporated herein by reference.

	Period Ending
Index	12/31/14		12/31/15		12/31/16		12/31/17		12/31/18		12/31/19
First Defiance Financial Corp.		100.00		113.29		155.51		162.46		156.63		206.80
NASDAQ Composite		100.00		106.96		116.45		150.96		146.67		200.49
SNL Bank NASDAQ		100.00		107.95		149.68		157.58		132.82		166.75
SNL Midwest Thrift		100.00		122.45		147.45		140.23		128.00		169.21

The following table provides information regarding First Defiance’s purchases of its common shares during the fourth quarter period ended December 31, 2019:

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 (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (1)
October 1 – October 31, 2019		—	$	—		—		500,000
November 1 – November 30, 2019		—		—		—		500,000
December 1 – December 31, 2019		—		—		—		500,000
Total		—	$	—		—		500,000

(1)

On May 23, 2019, the Company announced that its Board of Directors authorized a program for the repurchase of up to 500,000 shares of outstanding common stock as of that date, or 500,000 shares. On February 18, 2020, the Company announced that the Board increased the program by an additional 500,000 shares. There is no expiration date for the repurchase program.

The information set forth under the caption “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters - Equity Compensation Plans” of Part III of this Form 10‑K is incorporated herein by reference.

Item 6. Selected Financial Data

The following table is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2019. The following consolidated selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this Form 10-K. The operating results of acquired companies are included with the Company’s results of operations since their respective dates of acquisition.

	As of and For the Year Ended December 31
	2019			2018			2017			2016			2015
	(Dollars and Shares in Thousands, Except Per Share Data)
Financial Condition:
Total assets	$	3,468,992		$	3,182,376		$	2,993,403		$	2,477,597		$	2,297,676
Investment securities		283,448			294,602			261,298			251,176			236,678
Loans receivable, net		2,746,321			2,511,708			2,322,030			1,914,603			1,776,835
Allowance for loan losses		31,243			28,331			26,683			25,884			25,382
Non-performing assets (1)					20,221			32,247			14,803			17,582
Deposits and borrowers’ escrow balances		2,875,816			2,624,534			2,440,581			1,984,278			1,838,811
FHLB advances		85,063			85,189			84,279			103,943			59,902
Stockholders’ equity		426,167			399,589			373,286			293,018			280,197
Share Information:
Basic earnings per share	$	2.49		$	2.27		$	1.62		$	1.61		$	1.44
Diluted earnings per share		2.48			2.26			1.61			1.60			1.41
Book value per common share		21.60			19.81			18.38			16.31			15.39
Tangible book value per common share (2)		16.34			14.71			13.24			12.80			11.89
Cash dividends per common share		0.79			0.64			0.50			0.44			0.39
Dividend payout ratio		31.73	%		28.19	%		30.96	%		27.41	%		27.00	%
Weighted average diluted shares outstanding		19,931			20,468			20,056			18,070			18,742
Shares outstanding end of period		19,730			20,171			20,312			17,966			18,204
Operations:
Interest income	$	141,084		$	124,717		$	108,102		$	87,383		$	80,836
Interest expense		25,435			16,462			11,431			8,440			6,781
Net interest income		115,649			108,255			96,671			78,943			74,055
Provision for loan losses		2,905			1,176			2,949			283			136
Noninterest income		44,956			39,208			40,081			34,030			31,803
Noninterest expense		97,063			89,412			85,351			71,093			67,889
Income before tax		60,637			56,875			48,452			41,597			37,833
Federal income tax		11,267			10,626			16,184			12,754			11,410
Net Income		49,370			46,249			32,268			28,843			26,423
Performance Ratios:
Return on average assets		1.50	%		1.52	%		1.13	%		1.20	%		1.19	%
Return on average equity		12.15	%		12.03	%		9.19	%		10.10	%		9.52	%
Interest rate spread (2)		3.64	%		3.79	%		3.74	%		3.61	%		3.71	%
Net interest margin (2)		3.93	%		3.98	%		3.88	%		3.74	%		3.81	%
Ratio of operating expense to average total assets		2.96	%		2.93	%		2.99	%		2.97	%		3.05	%
Efficiency ratio (2)		60.08	%		60.29	%		61.81	%		62.20	%		63.01	%
Other Ratios:
Equity to total assets at end of period		12.29	%		12.56	%		12.47	%		11.83	%		12.19	%
Average equity to average assets		12.37	%		12.61	%		12.32	%		11.91	%		12.49	%
Asset Quality Ratios:
Non-performing assets to total assets at end of period (1)		0.39	%		0.64	%		1.08	%		0.60	%		0.77	%
Allowance for loan losses to total loans*		1.12	%		1.12	%		1.14	%		1.33	%		1.41	%
Net charge-offs (recoveries) to average loans		0.00	%		-0.02	%		0.10	%		-0.01	%		-0.03	%

(1)	Non-performing assets include non-accrual loans that are contractually past due 90 days or more and real estate, mobile homes and other assets acquired by foreclosure or deed-in-lieu thereof.

(2)	Refer to Non-GAAP Financial Measures in Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Corporation that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per common share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of First Defiance or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

•

Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

•

Volatility and disruption in national and international financial markets.

•

Government intervention in the U.S. financial system.

•

Changes in the level of non-performing assets and charge-offs.

•

Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

•

The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve.

•

Inflation, interest rate, securities market and monetary fluctuations.

•

Political instability.

•

Acts of God or of war or terrorism.

•

The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

•

Changes in consumer spending, borrowing and saving habits.

•

Changes in the financial performance and/or condition of the Company’s borrowers or customers.

•

Technological changes including core system conversions.

•

Acquisitions and integration of acquired businesses.

•

The ability to increase market share and control expenses.

•

Changes in the competitive environment among financial holding companies and other financial service providers.

•

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply.

•

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”) and other accounting standard setters.

•

The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

•

Greater than expected costs or difficulties related to the integration of new products and lines of business.

•

The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

This Item 7 presents information to assess the financial condition and results of operations of First Defiance. This item should be read in conjunction with the Consolidated Financial Statements and the supplemental financial data contained elsewhere in this Annual Report on Form 10-K.

Non-GAAP Financial Measures

This Annual Report on Form 10-K contains GAAP financial measures and certain non-GAAP financial measures. Management believes that these measures 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 at December 31, 2019 and 2018.

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

(In Thousands)	December 31, 2019			December 31, 2018
Net interest income (GAAP)	$	115,649		$	108,255
Add: FTE adjustment		967			1,004
Net interest income on a FTE basis (1)	$	116,616		$	109,259
Noninterest income – less securities gains/(losses) (2)	$	44,932		$	39,035
Noninterest expense (3)		97,063			89,412
Average interest-earning assets less average unrealized gains/(losses) on securities(4)		2,966,372			2,744,752
Average interest-earning assets		2,969,662			2,741,215
Average unrealized gains/losses on securities		3,290			(3,537	)
Ratios:
Net interest margin (1) / (4)		3.93	%		3.98	%
Efficiency ratio (3) / (1) + (2)		60.08	%		60.29	%

Non-GAAP Financial Measures – Tangible Book Value

(In Thousands, except per share data)	December 31, 2019			December 31, 2018
Total Shareholders’ Equity (GAAP)	$	426,167		$	399,589
Less: Goodwill		(100,069	)		(98,569	)
Intangible assets		(3,772	)		(4,391	)
Tangible common equity (1)	$	322,326		$	296,629
Common shares outstanding (2)		19,730			20,171
Tangible book value per share (1) / (2)	$	16.34		$	14.71

Overview

At December 31, 2019, First Defiance was a unitary thrift holding company that conducted business through its wholly-owned subsidiaries, First Federal, First Insurance and First Defiance Risk Management. Upon completion of the Merger on January 31, 2020 (described below), First Defiance converted to a financial holding company.

At December 31, 2019, First Federal was a federally chartered stock savings bank that provided financial services to communities based in northwest Ohio, northeast Indiana, and southeastern Michigan where it operated 44 full service banking centers in fourteen northwest and central Ohio counties, one northeast Indiana county, and one southeastern Michigan county. First Federal also operated one loan production office in Ann Arbor, Michigan, which is located in Washtenaw County. As a result of the Merger, First Federal converted to an Ohio bank and operates 77 branches, 12 loan offices and 3 wealth offices in Ohio, Michigan, Indiana, Pennsylvania, and West Virginia. Currently, 33 branches, 3 wealth offices and 12 loan production offices continue to operate as Home Savings Bank.

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 sells a variety of property and casualty, group health and life and individual health and life insurance products. First Insurance is an insurance agency that conducts business throughout First Federal’s markets.

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.

Recent Developments

On January 31, 2020, First Defiance completed its previously announced acquisition of UCFC. At the effective time of the Merger, UCFC merged with and into First Defiance, with First Defiance surviving the Merger. Immediately following the Merger, First Federal, acquired UCFC’s wholly owned bank subsidiary, Home Savings Bank, and UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers.

Financial Condition

Assets at December 31, 2019, totaled $3.47 billion compared to $3.18 billion at December 31, 2018, an increase of $287.3 million or 9.0%. The increase in assets was primarily due to an increase in loans receivable, net of undisbursed loan funds and deferred fees and costs, of $234.6 million, and an increase in federal funds sold of $42.0 million. These increases were funded primarily by an increase in total deposits of $249.4 million.

Securities

The securities portfolio decreased $11.2 million, or 3.8%, to $283.4 million at December 31, 2019. The 2019 activity in the portfolio included $33.5 million of purchases, which were partially offset by $1.5 million of amortization, $49.2 million of principal pay-downs and maturities, and $2.7 million of securities being sold. There was a net gain of $8.7 million in the market value of available-for-sale securities. For additional information regarding First Defiance’s investment securities see Note 5 to the Consolidated Financial Statements.

Loans

Loans receivable, net of undisbursed loan funds and deferred fees and costs, increased $234.6 million, or 9.3%, to $2.75 billion at December 31, 2019. For more details on the loan balances, see Note 7 – Loans Receivable to the Consolidated Financial Statements.

The majority of First Defiance’s commercial real estate and commercial loans are to small- and mid-sized businesses. The combined commercial, commercial real estate and multi-family real estate loan portfolios totaled $2.08 billion and $1.85 billion at December 31, 2019 and 2018, respectively, and accounted for approximately 72.5% and 71.8% of First Defiance’s loan portfolio at the end of those respective periods. First Defiance believes it has been able to establish itself as a leader in its market area in the commercial and commercial real estate lending area by hiring experienced lenders and providing a high level of customer service to its commercial lending clients.

The 1-4 family residential portfolio totaled $324.8 million at December 31, 2019, compared with $322.7 million at the end of 2018. At the end of 2019, those loans comprised 11.3% of the total loan portfolio, up from 12.1% at December 31, 2018.

Construction loans, which include one-to-four family and commercial real estate properties, increased to $305.3 million at December 31, 2019, compared to $265.8 million at December 31, 2018. These loans accounted for approximately 10.6% and 10.0% of the total loan portfolio at December 31, 2019 and 2018, respectively.

Home equity and home improvement loans decreased to $122.9 million at December 31, 2019, from $128.2 million at the end of 2018. At the end of 2019, those loans comprised 4.3% of the total loan portfolio, down from 4.8% at December 31, 2018.

Consumer finance and mobile home loans were $37.6 million at December 31, 2019 up from $34.4 million at the end of 2018. These loans accounted for approximately 1.3% and 1.3% of the total loan portfolio at December 31, 2019 and 2018, respectively.

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 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 insure that the appraiser is not influenced by the account officer in any way in making a 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 appropriate, based on First Federal’s assessment of the appraisal, such as age, market, etc. First Federal will discount the appraisal 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 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.

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. 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.

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.

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 and the balance is over $250,000, 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 specific reserve in the allowance for loan and lease losses. For those loans measured for impairment utilizing the fair value of the collateral, any shortfall is charged-off. For loans that are considered TDRs and the balance is under $250,000 a specific reserve is carried in the allowance for loan and lease losses based on a general reserve analysis. As of December 31, 2019, and December 31, 2018, First Federal had $8.5 million and $11.6 million, respectively, of loans that were still performing and which were classified as TDRs.

Allowance for Loan Losses

The allowance for loan losses 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 allowance for loan losses 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 allowance for loan losses 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 goal is to have approximately 45% to 50% 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 allowance for loan losses associated with these types of loans.

The allowance for loan loss 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. For loans that are considered impaired and the balance is over $250,000, 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 specific reserve in the allowance for loan and lease losses. For those loans measured for impairment utilizing the fair value of the collateral, any shortfall is usually charged-off. For loans that are considered impaired and the balance is under $250,000 a specific reserve is carried in the allowance for loan and lease losses based on a general reserve analysis. The Company also considers the impacts of any Small Business Association or Farm Service Agency guarantees. The specific reserve was $422,000 at December 31, 2019, and $595,000 at December 31, 2018.

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 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 loss migration measurement for each loan portfolio segment with differentiation between loan risk grades in calculating the general reserve component for non-impaired loans. Since December 31, 2016, the historical loss calculation was changed from using a an average of four (4) four-year loss migration periods to using an average of all four-year loss migration periods to the present beginning with data from the second quarter 2011. Management believes this enhancement is consistent with the rationale of the previous measurement but provides a more 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 remained steady at $6.6 million at December 31, 2019, from $5.9 million at December 31, 2018, due to relatively small changes in the historical loss rates from the migration analysis.

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, trouble debt restructuring, and other loan modifications.

Changes in the political and regulatory environment.

The qualitative analysis at December 31, 2019, indicated a general reserve of $24.2 million compared with $21.8 million at December 31, 2018, an increase of $2.4 million. Management reviews the overall economic, environmental and risk factors quarterly and determines appropriate adjustments to these sub-factors based on that review.

The economic factors for all loan segments decreased in 2019 primarily due to strengthening trends in the U.S. economy, particularly unemployment rates, which decreased in all markets.

The environmental factors increased in 2019 for all loan segments. This is principally 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 decreased in 2019 in most loan segments with the largest decrease being in commercial. This is 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 0.48% for construction loans to 1.42% for home equity and improvement loans.

As a result of the quantitative and qualitative analysis, along with the change in specific reserves, the Company’s provision for loan losses for 2019 was $2.9 million compared to $1.2 million for 2018. The allowance for loan losses was $31.2 million at December 31, 2019, and $28.3 million at December 31, 2018, and represented 1.12% and 1.12% of loans, net of undisbursed loan funds and deferred fees and costs, respectively. Charge-offs totaled $1.7 million in 2019 and recoveries also totaled $1.7 million in 2019. In management’s opinion, the overall allowance for loan losses as of December 31, 2019, is adequate.

The Company will adopt ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326)”which requires the Company to implement a new allowance model known as the current expected credit loss (“CECL”) model which estimates the expected lifetime credit loss on a loan. Further details to the Company’s adoption of CECL can be found in Footnote 1 to the Consolidated Financial Statements.

Management also assesses the value of OREO 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 2019, First Defiance recorded OREO write-downs that totaled $264,000. These amounts were included in other noninterest expense. Management believes that the values recorded at December 31, 2019, for OREO and repossessed assets represent the realizable value of such assets.

Total classified loans decreased from $51.0 million at December 31, 2018 to $34.2 million at December 31, 2019, a reduction of $16.8 million, due to payoffs and upgrades.

First Defiance’s ratio of allowance for loan losses to non-performing loans was 232.5% at December 31, 2019, compared with 149.0% at December 31, 2018. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at December 31, 2019, are appropriate.

At December 31, 2019, First Defiance had total non-performing assets of $13.6 million, compared to $20.2 million at December 31, 2018. Non-performing assets include loans that are 90 days past due, OREO and other assets held for sale.

The decrease in non-performing assets between December 31, 2019, and December 31, 2018, is primarily in commercial loans and commercial real estate loans. The balance of commercial and commercial real estate non-performing loans was $4.3 million lower at December 31, 2019, compared to December 31, 2018. OREO balances also dropped $1.1 million between December 31, 2018 and December 31, 2019.

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 net charge-offs and non-accrual loan balances as a percentage of total are presented in the table below at December 31, 2019 and 2018.

Table 1 – Net Charge-offs and Non-accruals by Loan Type

	For the Twelve Months Ended						As of December 31,
	December 31, 2019						2019
	Net			% of Total Net
	Charge-offs			Charge-offs			Non-accrual		% of Total Non-
	(Recoveries)			(Recoveries)			Loans		Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	322			4600.00	%	$	2,411		18.00	%
Construction		—			0.00	%		—		0.00	%
Commercial real estate		(497	)		-7100.00	%		7,609		57.00	%
Commercial		(114	)		(1,628.57	)%		2,961		22.00	%
Consumer finance		221			3157.14	%		7		0.00	%
Home equity and improvement		61			871.43	%		449		3.00	%
Total	$	(7	)		100.00	%	$	13,437		100.00	%

	For the Twelve Months Ended						As of December 31,
	2018						2018
	Net			% of Total Net
	Charge-offs			Charge-offs			Non-accrual		% of Total Non-
	(Recoveries)			(Recoveries)			Loans		Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	130			27.54	%	$	3,640		19.00	%
Construction		—			0.00	%		—		0.00	%
Commercial real estate		610			129.24	%		10,357		54.00	%
Commercial		(1,497	)		(317.16	)%		4,500		24.00	%
Consumer finance		207			43.86	%		126		1.00	%
Home equity and improvement		78			16.53	%		393		2.00	%
Total	$	(472	)		100.00	%	$	19,016		100.00	%

The following table sets forth information concerning the allocation of First Defiance’s allowance for loan losses by loan categories at December 31, 2019 and 2018.

Table 2 – Allowance for Loan Loss Allocation by Loan Category

	December 31, 2019					December 31, 2018
			Percent of					Percent of
			total loans					total loans
	Amount		by category			Amount		by category
	(Dollars in Thousands)
1-4 family residential	$	2,867		11.3	%	$	2,881		12.1	%
Multi-family residential real estate		2,939		9.4	%		3,101		10.4	%
Commercial real estate		13,363		43.0	%		12,041		42.3	%
Construction		996		10.6	%		682		10.0	%
Commercial loans		9,003		20.1	%		7,281		19.1	%
Home equity and improvement loans		1,700		4.3	%		2,026		4.8	%
Consumer loans		375		1.3	%		319		1.3	%
	$	31,243		100.0	%	$	28,331		100.0	%

Loans Acquired with Impairment

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.

High Loan-to-Value Mortgage Loans

The majority of First Defiance’s mortgage loans are collateralized by one-to-four-family residential real estate, have loan-to-value ratios of 80% or less, and are made to borrowers in good credit standing. First Federal usually requires residential mortgage loan borrowers whose loan-to-value is greater than 80% to purchase private mortgage insurance (“PMI”). Management also periodically reviews and monitors the financial viability of its PMI providers.

First Federal originates and retains a limited number of residential mortgage loans with loan-to-value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be approved by First Federal’s Chief Credit Officer. Management monitors the balance of one-to-four family residential loans, including home equity loans and committed lines of credit that exceed certain loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences and one-to-four family construction loans, 75% for developed land and 65% for raw land). These loans are generally paying as agreed.

First Defiance does not make interest-only, first-mortgage residential loans, nor does it have residential mortgage loan products or other consumer products that allow negative amortization.

Goodwill and Intangible Assets

Goodwill was $100.1 million at December 31, 2019, and $98.6 million at December 31, 2018 an increase of $1.5 million due to the acquisition of Strategic Investment Advisors, LLC (“SIA”). Core deposit intangibles and other intangible assets decreased to $3.8 million at December 31, 2019, compared to $4.4 million at December 31, 2018. During 2019, changes to the core deposit intangibles and other intangibles were due to the recognition of $1.1 million of amortization expense offset by $501,000 in intangibles created by the acquisition of SIA. No impairment of goodwill was recorded in 2019 or 2018.

Deposits

Total deposits at December 31, 2019, were $2.87 billion compared to $2.62 billion at December 31, 2018, an increase of $249.4 million, or 9.5%. Noninterest-bearing checking accounts grew by $23.2 million, interest-bearing checking accounts and money markets grew by $157.5 million, savings increased by $10.3 million and retail certificates of deposit grew by $58.4 million. Management can utilize the national market for certificates of deposit to supplement its funding needs if necessary. For more details on the deposit balances in general see Note 11 – Deposits to the Consolidated Financial Statements.

Borrowings

FHLB advances totaled $85.1 million at December 31, 2019, compared to $85.2 million at December 31, 2018. The balance at the end of 2019 includes thirteen fixed-rate advances totaling $84.0 million with rates ranging from 1.43% to 2.89% and one amortizing advance of $1.1 million with a rate of 2.14%.

At December 31, 2019, First Defiance also had $3.0 million of securities that were sold with agreements to repurchase, compared to $5.7 million at December 31, 2018.

Equity

Total stockholders’ equity increased $26.6 million to $426.2 million at December 31, 2019, compared to $399.6 million at December 31, 2018. The increase in stockholders’ equity was the result of recording net income of $49.4 million and a gain of $6.7 million in other comprehensive income. This was partially offset by the payment of $15.6 million of common stock dividends, the repurchase of 515,977 shares of common stock totaling $15.1 million.

Results of Operations

Summary

First Defiance reported net income of $49.4 million for the year ended December 31, 2019, compared to $46.2 million and $32.3 million for the years ended December 31, 2018 and 2017, respectively. On a diluted per common share basis, First Defiance earned $2.48 in 2019, $2.26 in 2018 and $1.61 in 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 $115.6 million for the year ended December 31, 2019, compared to $108.3 million and $96.7 million for the years ended December 31, 2018 and 2017, respectively. The tax-equivalent net interest margin was 3.93%, 3.98% and 3.88% for the years ended December 31, 2019, 2018 and 2017, respectively. The margin decreased 5 basis points between 2018 and 2019 primarily due to the drop in treasury rates along with the declines in the federal funds rate impacting asset yields more negatively than deposit costs. Interest-earning asset yields increased 19 basis points (to 4.78% in 2019 from 4.59% in 2018) but the cost of interest- bearing liabilities between the two periods increased 34 basis points (to 1.14% in 2019 from 0.80% in 2018).

Total interest income increased by $16.4 million, or 13.1%, to $141.1 million for the year ended December 31, 2019, from $124.7 million for the year ended December 31, 2018. This increase was primarily due to solid loan growth, the increase in asset yields and a more profitable earning asset mix. Interest income from loans increased to $130.9 million for 2019 compared to $114.4 million in 2018, which represents an increase of 14.4%. The average balance of loans receivable increased $214.9 million to $2.6 billion at December 31, 2019, from $2.4 billion at December 31, 2018.

During the same period, the average balance of investment securities increased to $294.0 million in 2019 from $280.0 million for the year ended December 31, 2018. Interest income from investment securities increased to $8.2 million in 2019 compared to $8.1 million in 2018. The overall duration of investments decreased to 2.75 years at December 31, 2019, from 4.29 years at December 31, 2018.

Interest expense increased by $9.0 million in 2019 compared to 2018, to $25.4 million from $16.5 million. This increase was mainly due to a 34 basis point increase in the average cost of interest-bearing liabilities in 2019 and a $171.9 million increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased $177.3 million to $2.12 billion at December 31, 2019, from $1.95 billion at December 31, 2018. Interest expense related to interest-bearing deposits was $22.6 million in 2019 compared to $13.9 million in 2018.

Interest expenses on FHLB advances and other interest-bearing funding sources were $1.4 million and $25,000 respectively, in 2019 and $1.3 million and $23,000 respectively in 2018. The increase in FHLB advance expense was due to advances that matured in 2019 being replaced with advances with a higher interest rate than in 2018. Interest expense recognized by the Company related to subordinated debentures was $1.4 million in 2019 and $1.3 million in 2018.

Total interest income increased by $16.6 million, or 15.4%, to $124.7 million for the year ended December 31, 2018, from $108.1 million for the year ended December 31, 2017. This is due to solid loan growth, the increase in interest rates and a more profitable earning asset mix. Interest income from loans increased to $114.4 million for 2018 compared to $99.5 million in 2017, which represents an increase of 14.9%. The average balance of loans receivable increased $184.3 million to $2.4 billion at December 31, 2018, from $2.2 billion at December 31, 2017.

During the same period, the average balance of investment securities increased to $280.0 million in 2018 from $258.8 million for the year ended December 31, 2017. Interest income from investment securities increased to $8.1 million in 2018 compared to $6.9 million in 2017, which represents an increase of 17.1%. The overall duration of investments increased to 4.29 years at December 31, 2018, from 3.40 years at December 31, 2017.

Interest expense increased by $5.0 million in 2018 compared to 2017, to $16.5 million from $11.4 million. This increase was mainly due to a 21 basis point increase in the average cost of interest-bearing liabilities in 2018 and a $127.5 million increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased $175.9 million to $1.95 billion at December 31, 2018, from $1.77 billion at December 31, 2017. Interest expense related to interest-bearing deposits was $13.9 million in 2018 compared to $8.8 million in 2017.

Interest expenses on FHLB advances and other interest-bearing funding sources were $1.3 million and $23,000 respectively, in 2018 and $1.5 million and $208,000 respectively in 2017. The decrease in FHLB advance expense was due to a $28.7 million decrease in the average balance of FHLB advances to $73.4 million at December 31, 2018, compared to $102.2 million at December 31, 2017. The decrease in average balances of FHLB advances offset an increase in the rate paid on FHLB advances as it increased to 1.72% at December 31, 2018, from 1.44% at December 31, 2017. Interest expense recognized by the Company related to subordinated debentures was $1.3 million in 2018 and $935,000 in 2017 due to rising rates.

The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2019, 2018 and 2017:

Table 3 – Net Interest Margin

	Year Ended December 31
	(In Thousands)
	2019							2018							2017
	Average Balance		Interest⁽¹⁾		Yield/ Rate			Average Balance		Interest⁽¹⁾		Yield/ Rate			Average Balance		Interest⁽¹⁾		Yield/ Rate
Interest-Earning Assets:
Loans receivable (4)	$	2,597,864	$	130,943		5.04	%	$	2,382,941	$	114,500		4.80	%	$	2,198,639	$	99,742		4.54	%
Securities (5)		294,027		9,060		3.08	%		279,867		9,036		3.23	%		258,775		8,654		3.39	%
Interest-earning deposits		65,424		1,395		2.13	%		63,261		1,270		2.01	%		72,215		836		1.16	%
FHLB stock		12,347		653		5.29	%		15,146		915		6.04	%		15,632		784		5.02	%
Total interest-earning assets		2,969,662		142,051		4.78	%		2,741,215		125,721		4.59	%		2,545,261		110,016		4.33	%
Noninterest-earning assets		314,118						307,310							306,270
Total Assets	$	3,283,780						$	3,048,525						$	2,851,531
Interest-Bearing Liabilities:
Interest-bearing deposits	$	2,122,439	$	22,613		1.07	%	$	1,945,114	$	13,897		0.71	%	$	1,769,786	$	8,818		0.50	%
FHLB advances		73,013		1,443		1.98	%		73,421		1,261		1.72	%		102,155		1,470		1.44	%
Subordinated debentures		36,083		1,354		3.75	%		36,083		1,281		3.55	%		36,156		935		2.58	%
Other borrowings		3,924		25		0.64	%		8,947		23		0.26	%		27,929		208		0.74	%
Total interest-bearing liabilities		2,235,459		25,435		1.14	%		2,063,565		16,462		0.80	%		1,936,026		11,431		0.59	%
Noninterest-bearing demand deposits		594,785		—		—		562,439			—		—		528,926			—		—
Total including non- interest- bearing demand deposits		2,830,244		25,435		0.90	%		2,626,004		16,462		0.63	%	2,464,952			11,431		0.46	%
Other noninterest liabilities		47,250						38,216							35,343
Total Liabilities		2,877,494							2,664,220							2,500,295
Stockholders’ equity		406,286							384,305							351,236
Total liabilities and stockholders’ equity	$	3,283,780						$	3,048,525						$	2,851,531
Net interest income; interest rate spread (2)			$	116,616		3.64	%			$	109,259		3.79	%			$	98,585		3.74	%
Net interest margin (3)						3.93	%						3.98	%						3.88	%
Average interest-earning assets to average interest- bearing liabilities						132.8	%						132.8	%						131.5	%

(1)

Interest on certain tax exempt loans (amounting to $338,000, $380,000 and $375,000 in 2019, 2018 and 2017, respectively) and tax-exempt securities ($3.3 million, $3.4 million and $3.2 million in 2019, 2018, and 2017, respectively) is not taxable for Federal income tax purposes. The average balance of such loans was $8.4 million, $10.5 million and $11.5 million in 2019, 2018, and 2017, respectively, while the average balance of such securities was $96.7 million, $98.2 million and $91.2 million in 2019, 2018, and 2017, respectively. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21% for 2019 and 2018 and 35% for 2017.

(2)	Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.

(3)	Net interest margin is net interest income divided by average interest-earning assets excluding average unrealized gains/losses. See Non-GAAP Financial Measure discussion for further details.

(4)	For the purpose of the computation for loans, non-accrual loans are included in the average loans outstanding.

(5)	Securities yield = annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.

See Non-GAAP Financial Measure discussion for further details.

The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected First Defiance’s tax-equivalent interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

Table 4 – Changes in Interest Rates and Volumes (1)

	Year Ended December 31
	(In Thousands)
	2019 vs. 2018									2018 vs. 2017
	Increase (decrease) due to rate			Increase (decrease) due to volume			Total increase (decrease)			Increase (decrease) due to rate			Increase (decrease) due to volume			Total increase (decrease)
Interest-Earning Assets
Loans	$	5,788		$	10,655		$	16,443		$	6,107		$	8,651		$	14,758
Securities		(422	)		446			24			(306	)		688			382
Interest-earning deposits		81			44			125			549			(115	)		434
FHLB stock		(105	)		(157	)		(262	)		156			(25	)		131
Total interest-earning assets	$	5,342		$	10,988		$	16,330		$	6,506		$	9,199		$	15,705
Interest-Bearing Liabilities
Deposits	$	7,352		$	1,364		$	8,716		$	4,135		$	944		$	5,079
FHLB advances		189			(7	)		182			252			(461	)		(209	)
Subordinated Debentures		73			—			73			348			(2	)		346
Notes Payable		20			(18	)		2			(91	)		(94	)		(185	)
Total interest- bearing liabilities	$	7,634		$	1,339		$	8,973		$	4,644		$	387		$	5,031
Increase in net interest income							$	7,357								$	10,674

(1)	The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for Loan Losses – First Defiance’s provision for loan losses was $2.9 million for the year ended December 31, 2019, compared to $1.2 million for December 31, 2018, and $2.9 million for December 31, 2017.

Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management to absorb probable losses incurred in the loan portfolio. Factors considered by management include identifiable risk in the portfolios, historical experience, the volume and type of lending conducted by First Defiance, the amount of non-performing loans (including loans which meet the FASB ASC Topic 310 definition of impaired), the amount of loans graded by management as substandard, doubtful, or loss, general economic conditions (particularly as they relate to First Defiance’s market areas) and other factors related to the collectability of First Defiance’s loan portfolio. See also Allowance for Loan Losses in this Management’s Discussion and Analysis and Note 7 to the Consolidated Financial Statements.

Noninterest Income – Noninterest income increased by $5.7 million, or 14.7%, in 2019 to $45.0 million from $39.2 million for the year ended December 31, 2018. Noninterest income decreased by $873, or (2.2%), in 2018 compared to the $40.1 million recognized in 2017.

Service fees and other charges increased to $14.0 million for the year ended December 31, 2019, from $13.1 million for 2018. The increase in service fees and other charges in 2019 is primarily due to increased interchange income and a higher level of swap income.

Noninterest income also includes gains, losses and impairment on investment securities. In 2019, First Defiance realized a $24,000 gain on sale of securities compared to a $173,000 gain in 2018 and a gain of $584,000 for 2017.

Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing mortgage loans for others, an offset for amortization of mortgage servicing rights, and adjustments for impairment in the value of mortgage servicing rights. Mortgage banking income totaled $9.5 million, $7.1 million and $7.0 million in 2019, 2018 and 2017, respectively. The $2.4 million increase in 2019 from 2018 is primarily attributable to an increase in the gain on sale of loans of $3.2 million offset by an increase of $468,000 in mortgage servicing rights amortization expense and a $367,000 negative change in the valuation adjustments on mortgage servicing rights. First Defiance originated more residential mortgages for sale into the secondary market in 2019 compared with 2018 as long term interest rates fell resulting in more refinance activity. The balance of the mortgage servicing right valuation allowance was $534,000 at the end of 2019.

The $73,000 increase in 2018 from 2017 is attributable to a decrease of $123,000 in mortgage servicing rights amortization expense along with a $70,000 increase in servicing revenue and a $42,000 positive change in the valuation adjustments on mortgage servicing rights. This was partially offset by a $162,000 decrease in the gain on sale of loans. First Defiance originated $205.9 million of residential mortgages for sale into the secondary market in 2018 compared with $213.5 million in 2017. The balance of the mortgage servicing right valuation allowance was $300,000 at the end of 2018. See Note 8 to the Consolidated Financial Statements.

Gains on the sale of non-mortgage loans, which include SBA and FSA loans, totaled $226,000 in 2019 compared to $317,000 in 2018 and $217,000 in 2017. Fluctuations in the volume of eligible SBA loans were the reasons for the difference in income year to year to year.

Insurance commission income was flat between 2019 and 2018 at $14.1 million. Insurance commission income increased $1.2 million, or 9.5%, to $14.1 million in 2018 from $12.9 million in 2017 mainly due to having a full year results of the Corporate One acquisition and an increase in general production in the property and casualty and group employee benefits lines of business.

Income from bank owned life insurance (“BOLI”) increased $391,000 in 2019 to $2.2 million from $1.8 million in 2018. Income in 2017 was $3.1 million. In 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.

Trust income increased $164,000 to $2.3 million in 2019 from $2.1 million in 2018 and $2.3 million in 2017. The decrease in 2018 is due to a $428,000 positive accrual adjustment recorded in 2017 to bring trust fees to an accrual basis of accounting.

Other noninterest income increased $2.1 million to $2.7 million in 2019 compared to $598,000 million in 2018 and $1.9 million in 2017. The increase in 2019 is primarily attributable to a $907,000 increase in value on deferred compensation plan assets compared to a $388,000 decrease in value on deferred compensation plan assets in 2018. Income was lower in 2018 compared to 2017 due to similar fluctuations seen in the value of deferred compensation plan assets between the two years. Stock market performance determines the increase or decrease in the deferred compensation plan assets and can be very volatile.

Noninterest Expense – Total noninterest expense for 2019 was $97.1 million compared to $89.4 million for the year ended December 31, 2018, and $85.4 million for the year ended December 31, 2017.

Compensation and benefits increased $4.6 million, or 8.8%, to $57.2 million from $52.6 million in 2018. The increase is mainly related to merit increases and increases in health care. Occupancy expense increased $386,000, to $9.0 million in 2019 compared to $8.6 million in 2018 while data processing expense decreased $500,000 to $8.1 million in 2019 from $8.6 million in 2018. Other noninterest expenses increased $3.7 million to $22.3 million in 2019 from $18.6 million in 2018. The increase is due to one-time acquisition related charges associated with the acquisition of UCFC, which were $1.4 million in 2019 compared to zero in 2018. In addition, 2019 saw a $2.2 million increase in expense for an increase in the liability associated with the deferred compensation plan year over year as a result of the stock market performance in 2019 compared to 2018. See Note 19 to the Consolidation Financial Statements for further details.

Compensation and benefits increased $2.8 million or 5.5% to $52.6 million from $49.8 million in 2017. The increase is mainly related to merit increases and investing some of the benefits of lower tax rates in support of our metro market growth strategies. Occupancy expense increased $934,000, to $8.6 million in 2018 compared to $7.7 million in 2017 and data processing expense increased $818,000 to $8.6 million in 2018 from $7.7 million in 2017 both increases primarily related to our metro market growth initiatives. Other noninterest expenses decreased $181,000 to $18.6 million in 2018 from $18.8 million in 2017. This decrease is due to an $806,000 benefit from the deferred compensation accounting correction as well as a $1.2 million reduction year over year due to the decline in the liabilities of the deferred compensation plan as a result of the stock market performance in the fourth quarter of 2018. See Note 19 to the Consolidation Financial Statements for further details.

Income Taxes – Income taxes totaled $11.3 million in 2019 compared to $10.6 million in 2018 and $16.2 million in 2017. The effective tax rates for those years were 18.6%, 18.7%, and 33.4%, respectively. The tax rate is lower than the statutory 21% and 35% 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. See Note 18 – Income Taxes to the Consolidated Financial Statements for further details.

Concentrations of Credit Risk

Financial institutions such as First Defiance generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.

Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. As of December 31, 2019. First Defiance’s loan portfolio was concentrated geographically in its northwest and central Ohio, northeast Indiana, and southeast Michigan market areas. Management has also identified lending for income-generating rental properties as an industry concentration. Total loans for income-generating rental property totaled $982.5 million at December 31, 2018, which represents 37.9% of the Company’s loan portfolio. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 0.03% at December 31, 2018. There are no other industry concentrations that exceed 10% of the Company’s loan portfolio.

Liquidity and Capital Resources

The Company’s primary source of liquidity is its core deposit base, raised through First Federal’s branch network, along with wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.

Cash generated from operating activities was $39.7 million, $53.1 million and $36.0 million in 2019, 2018 and 2017, respectively. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of proceeds from the sale of loans (less the origination of loans held for sale), the provision for loan losses, depreciation expense, the origination, amortization and impairment of mortgage servicing rights and increases and decreases in other assets and liabilities.

The primary investing activity of First Defiance is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. In 2017, the Company purchased $11.5 million in portfolio residential home loans. There were no purchases in 2019 or 2018.

In considering the more typical investing activities, during 2019, $49.1 million and $2.7 million was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale investment securities, respectively, and $253.1 million was used by an increase in loans while $33.5 million was used to purchase available-for-sale investment securities. During 2018, $32.6 million and $5.5 million was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale investment securities, respectively, and $220.0 million was used by an increase in loans while $76.6 million was used to purchase available-for-sale investment securities. During 2017, $32.7 million and $34.2 million was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale investment securities, respectively, and $133.4 million was used by an increase in loans while $73.0 million was used to purchase available-for-sale investment securities.

Principal financing activities include the gathering of deposits, the utilization of FHLB advances, and the sale of securities under agreements to repurchase such securities and borrowings from other banks. In 2019, total deposits increased by $249.4 million. Securities sold under repurchase arrangements decreased by $2.7 million in 2019. Also in 2019, the Company paid $15.6 million in common stock dividends and $15.1 million in common stock purchases. In 2018, total deposits increased by $183.2 million. Securities sold under repurchase arrangements decreased by $20.3 million in 2018. Also in 2018, the Company paid $13.0 million in common stock dividends and $6.3 million in common stock purchases. In 2017, total deposits increased by $148.1 million. Securities sold under repurchase arrangements decreased by $5.8 million in 2017. Also in 2017, the Company paid $9.9 million in common stock dividends. For additional information about cash flows from First Defiance’s operating, investing and financing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.

At December 31, 2019, First Defiance had the following commitments to fund deposits, advances, borrowing obligations and post-retirement benefits:

	Maturity Dates by Period at December 31, 2019
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In Thousands)
Certificates of deposit	$	738,788	$	457,202	$	235,228	$	46,358		—
FHLB fixed advances including interest⁽¹⁾		85,084		21,000		43,000		21,084		—
Subordinated debentures		36,083		—		—		—		36,083
Securities sold under repurchase agreements		2,999		2,999		—		—		—
Lease obligations		19,184		1,211		2,302		2,185		13,486
Post-retirement benefits		2,006		187		417		413		989
Total contractual obligations	$	884,144	$	482,599	$	280,947	$	70,040	$	50,558

To meet its obligations management can adjust the rate of savings certificates to retain deposits in changing interest rate environments; it can sell or securitize mortgage and non-mortgage loans; and it can turn to other sources of financing including FHLB advances, the Federal Reserve, and brokered certificates of deposit. At December 31, 2019, First Defiance had additional borrowing capacity of $744.8 million under its agreements with the FHLB.

First Federal is subject to various capital requirements. At December 31, 2019, First Federal had capital ratios that exceeded the standard to be considered “well capitalized.” For additional information about First Defiance and First Federal’s capital requirements, see Note 17 – Regulatory Matters to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

First Defiance has established various accounting policies that govern the application of accounting principles generally accepted in the United States (“GAAP”) in the preparation of its Consolidated Financial Statements. The significant accounting policies of First Defiance are described in the footnotes to the Consolidated Financial Statements. 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. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying value of assets and liabilities and the results of operations of First Defiance.

Allowance for Loan Losses - First Defiance believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its Consolidated Financial Statements. In determining the appropriate estimate for the allowance for loan losses, management considers a number of factors relative to both specific credits in the loan portfolio and macro-economic factors relative to the economy of the United States as a whole and the economy of the northwest and central Ohio, northeast Indiana and southeast Michigan regions in which the Company does business.

Factors relative to specific credits that are considered include a customer’s payment history, a customer’s recent financial performance, an assessment of the value of collateral held, knowledge of the customer’s character, the financial strength and commitment of any guarantors, the existence of any customer or industry concentrations, changes in a customer’s competitive environment and any other issues that may impact a customer’s ability to meet his obligations.

Economic factors that are considered include levels of unemployment and inflation, specific plant or business closings in the Company’s market area, the impact of strikes or other work stoppages, the impact of weather or environmental conditions, especially relative to agricultural borrowers, and other matters that may have an impact on the economy as a whole.

In addition to the identification of specific customers who may be potential credit problems, management considers its historical losses, the results of independent loan reviews, an assessment of the adherence to underwriting standards, and other factors in providing for loan losses that have not been specifically classified. Management believes that the level of its allowance for loan loss is sufficient to cover the estimates loss incurred but not yet recognized on the loan portfolio. Refer to Allowance for Loan Losses in this Management’s Discussion and Analysis and Note 2 - Statement of Accounting Policies for a further description of the Company’s estimation process and methodology related to the allowance for loan losses.

Goodwill and Intangibles - First Defiance has two reporting units: First Federal and First Insurance. At December 31, 2019, First Defiance had goodwill of $100.1 million, including $80.0 million in First Federal and $20.1 million in First Insurance. The carrying value of goodwill is tested annually for impairment or more frequently if it is determined appropriate. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess.

If, for any future period First Defiance determines that there has been impairment in the carrying value of goodwill balances, First Defiance will record a charge to earnings, which could have a material adverse effect on net income, but not risk-based capital ratios.

First Defiance has core deposit and other intangible assets resulting from acquisitions which are subject to amortization. First Defiance determines the amount of identifiable intangible assets based upon independent core deposit and customer relationship analyses at the time of the acquisition. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No events or changes in circumstances that would indicate that the carrying amount of any identifiable intangible assets may not be recoverable had occurred during the years ended December 31, 2019 and 2018.

Off- Balance Sheet Arrangements - For information regarding off-balance sheet commitments as of December 31, 2019, reference Footnote 6 – Commitments and Contingent Liabilities.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Asset/Liability Management

A significant portion of the Company’s revenues and net income is derived from net interest income and, accordingly, the Company strives to manage its interest-earning assets and interest-bearing liabilities to generate an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of the Company’s performance due to changes in interest rates. The Company attempts to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. First Defiance does not presently use off-balance sheet derivatives for risk management.

First Defiance monitors interest rate risk on a monthly basis through simulation analysis that measures the impact changes in interest rates can have on net interest income. The simulation technique analyzes the 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. It should be noted that other areas of First Defiance’s income statement, such as gains from sales of mortgage loans and amortization of mortgage servicing rights are also impacted by fluctuations in interest rates, but are not considered in the simulation of net interest income.

The table below presents, for the twelve months subsequent to December 31, 2019, and December 31, 2018, 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 December 31, 2019, net interest income sensitivity to changes in interest rates for the twelve months subsequent to December 31, 2019, was slightly more liability sensitive for the ramp and shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2018. This change was due to interest rates moving lower between December 31, 2018 and December 31, 2019. The Company did not complete an earnings at risk analysis for the down 200 basis point change in rates as of December 31, 2019.

Table 7 – Net Interest Income Sensitivity Profile

	Impact on Future Annual Net Interest Income
(dollars in thousands)	December 31, 2019						December 31, 2018
Gradual Change in Interest Rates
+200	$	2,641			2.24	%	$	1,910		1.61	%
+100		1,435			1.22	%		981		0.83	%
-100		(2,741	)		-2.33	%		(2,025	)	-1.71	%
-200	N/A			N/A				(6,236	)	-5.27	%
Immediate Change in Interest Rates
+200	$	4,477			3.80	%	$	3,424		2.89	%
+100		2,487			2.11	%		1,865		1.57	%
-100		(5,335	)		-4.53	%		(5,057	)	-4.27	%
-200	N/A			N/A				(14,455	)	-12.21	%

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 Board mandated guidelines as of December 31, 2019. Management reviews the Board policy limits in all scenarios to determine if they are adequate and if any changes should be made to Board mandated guidelines.

In addition to the simulation analysis, First Federal also prepares an “economic value of equity” (“EVE”) analysis. This 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 interest rates beyond 100 basis points as of December 31, 2019, was considered to be unlikely given the current interest rate levels and therefore was not included in this analysis. The results of this analysis are reflected in the following table.

Table 8 – Economic Value of Equity Analysis

	December 31, 2019
									Economic Value of Equity as % of
	Economic Value of Equity								Present Value of Assets
Change in Rates	$ Amount		$ Change			% Change			Ratio			Change in bp
	(Dollars in Thousands)
+ 400 bp		769,381		107,066			16.17	%		24.00	%		473
+ 300 bp		753,286		90,971			13.74	%		23.08	%		381
+ 200 bp		729,852		67,537			10.20	%		21.98	%		271
+ 100 bp		701,004		38,689			5.84	%		20.74	%		147
0 bp		662,315		—			—			19.27	%		—
- 100 bp		601,361		(60,954	)		(9.20	)%		17.29	%		(198	)

	December 31, 2018
									Economic Value of Equity as % of
	Economic Value of Equity								Present Value of Assets
Change in Rates	$ Amount		$ Change			% Change			Ratio			Change in bp
	(Dollars in Thousands)
+ 400 bp		751,259		66,752			9.75	%		25.96	%		404
+ 300 bp		741,404		56,897			8.31	%		25.13	%		322
+ 200 bp		729,505		44,998			6.57	%		24.25	%		233
+ 100 bp		710,688		26,181			3.82	%		23.18	%		126
0 bp		684,507		—			—			21.92	%		-
- 100 bp		642,625		(41,882	)		(6.12	)%		20.26	%		(165	)
- 200 bp		578,124		(106,383	)		(15.54	)%		18.04	%		(387	)

Based on the above analysis, in the event of a 200 basis point increase in interest rates as of December 31, 2019, First Federal would experience a 10.20% increase in its economic value of equity. During periods of rising rates, the value of monetary assets declines. Conversely, during periods of falling rates, the value of monetary assets increases. It should be noted that the amount of change in value of specific assets and liabilities due to changes in rates is not the same in a rising rate environment as in a falling rate environment. Based on the EVE analysis, the change in the economic value of equity in both rising and falling rate environments is relatively low because both its assets and liabilities have relatively short durations. The average duration of its assets at December 31, 2019, was 1.63 years while the average duration of its liabilities was 3.55 years.

In evaluating First Federal’s exposure to interest rate risk, certain shortcomings inherent in each of the methods of analysis presented must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates while interest rates on other types of financial instruments may lag behind current changes in market rates. Furthermore, in the event of changes in rates, prepayments and early withdrawal levels could differ significantly from the assumptions in calculating the table and the results therefore may differ from those presented.

Item 8.Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

The management of First Defiance Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of our principal executive and principal financial officers and effected by the Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Based on our evaluation under the framework in the 2013 Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

Crowe LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, is included in this Item 8.

/s/ Donald P. Hileman		/s/ Paul Nungester
Donald P. Hileman		Paul Nungester
Chief Executive Officer		Executive Vice President and
		Chief Financial Officer

Report of Independent Registered Public Accounting Firm

Stockholders and the Board of Directors of

First Defiance Financial Corp.

Defiance, Ohio

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial condition of First Defiance Financial Corp. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have served as the Company’s auditor since 2005.

/s/ Crowe LLP
Crowe LLP
Cleveland, Ohio
March 16, 2020

First Defiance Financial Corp.

Consolidated Statements of Financial Condition

(Dollars in Thousands, except per share data)

	December 31
	2019		2018
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	46,254	$	55,962
Federal funds sold		85,000		43,000
		131,254		98,962
Securities available-for-sale, carried at fair value		283,448		294,076
Securities held-to-maturity, carried at amortized cost (fair value $0 and $526 at December 31, 2019 and 2018, respectively)		—		526
		283,448		294,602
Loans held for sale		18,008		6,613
Loans receivable, net of allowance of $31,243 and $28,331 at December 31, 2019 and 2018, respectively		2,746,321		2,511,708
Mortgage servicing rights		10,267		10,119
Accrued interest receivable		10,244		9,641
Federal Home Loan Bank (FHLB) stock		11,915		14,217
Bank owned life insurance		75,544		67,660
Premises and equipment		39,563		40,670
Real estate and other assets held for sale (OREO)		100		1,205
Goodwill		100,069		98,569
Core deposit and other intangibles		3,772		4,391
Other assets		38,487		23,365
Total assets	$	3,468,992	$	3,181,722

continued

First Defiance Financial Corp

Consolidated Statements of Financial Condition (continued)

(Dollars in Thousands, except per share data)

	December 31
	2019			2018
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing	$	630,359		$	607,198
Interest-bearing		2,239,966			2,013,684
Total		2,870,325			2,620,882
Advances from the Federal Home Loan Bank		85,063			85,189
Securities sold under agreements to repurchase		2,999			5,741
Subordinated debentures		36,083			36,083
Advance payments by borrowers		5,491			3,652
Deferred taxes		905			264
Other liabilities		41,959			30,322
Total liabilities		3,042,825			2,782,133
Commitments and Contingent Liabilities (Note 6)
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; 25,371,086 and 25,398,992 shares issued and 19,729,886 and 20,171,392 shares outstanding, respectively		127			127
Additional paid-in capital		161,955			161,593
Accumulated other comprehensive income, net of tax of $1,221 and $(468), respectively		4,595			(2,148	)
Retained earnings		329,175			295,588
Treasury stock, at cost, 5,641,200 and 5,227,600 shares respectively		(69,685	)		(55,571	)
Total stockholders’ equity		426,167			399,589
Total liabilities and stockholders’ equity	$	3,468,992		$	3,181,722

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statements of Income

(Dollar Amounts in Thousands, except per share data)

	Years Ended December 31
	2019		2018		2017
Interest Income
Loans	$	130,853	$	114,398	$	99,540
Investment securities:
Taxable		4,883		4,738		3,762
Tax-exempt		3,300		3,396		3,180
Interest-bearing deposits		1,395		1,270		836
FHLB stock dividends		653		915		784
Total interest income		141,084		124,717		108,102
Interest Expense
Deposits		22,613		13,897		8,818
Federal Home Loan Bank advances and other		1,443		1,261		1,470
Subordinated debentures		1,354		1,281		935
Securities sold under agreement to repurchase		25		23		208
Total interest expense		25,435		16,462		11,431
Net interest income		115,649		108,255		96,671
Provision for loan losses		2,905		1,176		2,949
Net interest income after provision for loan losses		112,744		107,079		93,722
Noninterest Income
Service fees and other charges		14,028		13,100		12,139
Mortgage banking income		9,483		7,077		7,004
Insurance commissions		14,118		14,085		12,866
Gain on sale of non-mortgage loans		226		317		217
Gain on sale or call of securities		24		173		584
Trust income		2,255		2,091		2,332
Income from bank owned life insurance		2,158		1,767		3,085
Other noninterest income		2,664		598		1,854
Total noninterest income		44,956		39,208		40,081
Noninterest Expense
Compensation and benefits		57,175		52,566		49,847
Occupancy		9,027		8,641		7,707
FDIC insurance		484		1,021		1,250
Data processing		8,055		8,555		7,737
Other noninterest expense		22,322		18,629		18,810
Total noninterest expense		97,063		89,412		85,351
Income before income taxes		60,637		56,875		48,452
Federal income taxes		11,267		10,626		16,184
Net Income	$	49,370	$	46,249	$	32,268
Earnings per common share (Note 4)
Basic	$	2.49	$	2.27	$	1.62
Diluted	$	2.48	$	2.26	$	1.61
Dividends declared per common share	$	0.79	$	0.64	$	0.50

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

	For the Years Ended December 31
	2019			2018			2017
Net income	$	49,370		$	46,249		$	32,268
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities arising during the period		8,754			(3,356	)		733
Reclassification adjustment for (gains) losses realized in income		(24	)		(173	)		(584	)
Net unrealized gains (losses)		8,730			(3,529	)		149
Income tax effect		(1,834	)		742			(51	)
Net of tax amount		6,896			(2,787	)		98
Change in unrealized gain/(loss) on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical plan realized during the period		(310	)		560			(166	)
Net amortization and deferral		14			18			19
Net gain (loss) activity during the period		(296	)		578			(147	)
Income tax effect		143			(203	)		51
Net of tax amount		(153	)		375			(96	)
Total other comprehensive income (loss)		6,743			(2,412	)		2
Comprehensive income	$	56,113		$	43,837		$	32,270

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollar Amounts In Thousands, except number of shares)

	Preferred Stock		Common Stock Shares⁽¹⁾			Common Stock		Common Stock Warrant		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock			Total Stockholder’s Equity
Balance at January 1, 2017	$	—		17,966,412		$	127	$	—	$	126,390		$	215		$	240,592		$	(74,306	)	$	293,018
Net income																	32,268						32,268
Other comprehensive income														2									2
Stock based compensation expense											215												215
Shares issued under stock option plan, net of 15,014 repurchased and retired				8,088							51						(83	)		231			199
Capital stock issuance				2,279,004							33,792									22,740			56,532
Restricted share activity under stock incentive plans				55,754							447						(18	)		409			838
Shares issued from direct stock sales				2,824							45									28			73
Common stock dividends declared																	(9,859	)					(9,859	)
Balance at December 31, 2017	$	—		20,312,082		$	127	$	—	$	160,940		$	217		$	262,900		$	(50,898	)	$	373,286
Net income																	46,249						46,249
Other comprehensive loss														(2,412	)								(2,412	)
Adoption of ASU 2018-02 – See Note 2														47			(47	)					—
Deferred compensation plan																				636			636
Stock based compensation expense											420												420
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				48,300							258						(201	)		511			568
Shares issued from direct stock sales				3,542							68									36			104
Shares repurchased				(231,160	)															(6,330	)		(6,330	)
Common stock dividends declared																	(13,043	)					(13,043	)
Balance at December 31, 2018	$	—		20,171,392		$	127	$	—	$	161,593		$	(2,148	)	$	295,588		$	(55,571	)	$	399,589
Net income																	49,370						49,370
Other comprehensive gain														6,743									6,743
Deferred compensation plan											(80	)								158			78
Stock based compensation expense											286												286
Shares issued under stock option plan, net of 178 repurchased and retired				19,022							(32	)					(5	)		226			189
Restricted share activity under stock incentive plans net of 27,728 repurchased and retired				51,194							117						(154	)		597			560
Shares issued from direct stock sales				4,255							71									52			123
Shares repurchased				(515,977	)															(15,147	)		(15,147	)
Common stock dividends declared																	(15,624	)					(15,624	)
Balance at December 31, 2019	$	—		19,729,886		$	127	$	—	$	161,955		$	4,595		$	329,175		$	(69,685	)	$	426,167

(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 Statements of Cash Flows

(Dollar Amounts in Thousands)

	Years Ended December 31
	2019			2018			2017
Operating Activities
Net income	$	49,370		$	46,249		$	32,268
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,905			1,176			2,949
Provision for depreciation		4,231			3,688			3,567
Net amortization of premium and discounts on loans, securities, deposits and debt obligations		730			861			740
Amortization of mortgage servicing rights		1,809			1,341			1,464
Net (impairment) recovery of mortgage servicing rights		234			(132	)		(89	)
Amortization of intangibles		1,119			1,312			1,289
Gain on sale of loans		(7,932	)		(4,819	)		(4,881	)
Loss on sale or disposals or write-downs of property, plant and equipment		10			13			48
(Gain) loss on sale or write-down of OREO		180			581			(56	)
(Gain) on sale or call of securities		(24	)		(173	)		(584	)
Change in deferred taxes		(419	)		881			1,261
Proceeds from sale of loans held for sale		302,554			212,688			215,727
Origination of loans held for sale		(308,434	)		(205,884	)		(213,479	)
Stock based compensation expense		286			420			215
Restricted stock unit expense		560			568			838
Excess tax benefit (expense) on stock compensation plans		(108	)		(154	)		(171	)
Income from bank owned life insurance		(2,158	)		(1,767	)		(3,085	)
Change in interest receivable and other assets		(6,916	)		(2,878	)		(3,591	)
Change in accrued interest and other liabilities		1,688			(916	)		1,527
Net cash provided by operating activities		39,685			53,055			35,957
Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity securities		120			122			128
Proceeds from maturities, calls and paydowns of available-for-sale securities		49,104			32,620			32,687
Proceeds from sale of available-for-sale securities		2,667			5,503			34,248
Proceeds from sale of OREO		1,262			887			554
Proceeds from sale of office properties and equipment		—			14			849
Purchases of available-for-sale securities		(33,463	)		(76,647	)		(73,007	)
Purchases of office properties and equipment		(3,134	)		(4,168	)		(3,263	)
Investment in bank owned life insurance		(6,600	)		—			(20,000	)
Proceeds from bank owned life insurance death benefit		874			337			—
Proceeds from sale of bank owned life insurance		—			17,689			—
Proceeds from FHLB stock redemption		2,302			1,775			—
Net cash received (paid) in acquisitions		(1,600	)		—			19,359
Purchase of portfolio mortgage loans		—			—			(11,476	)
Proceeds from sale of non-mortgage loans		21,239			28,729			20,227
Net increase in loans receivable		(258,119	)		(219,885	)		(133,184	)
Net cash used in investing activities		(225,348	)		(213,024	)		(132,878	)
Financing Activities
Net increase in deposits and advance payments by borrowers		251,282			183,764			148,065
Repayment of Federal Home Loan Bank advances		(45,126	)		(34,090	)		(31,070	)
Proceeds from Federal Home Loan Bank advances		45,000			35,000			10,000
Decrease in securities sold under repurchase agreements		(2,742	)		(20,278	)		(5,797	)
Cash dividends paid on common stock		(15,624	)		(13,043	)		(9,859	)
Net cash paid for repurchase of common stock		(15,147	)		(6,330	)		—
Proceeds from exercise of stock options		189			111			199
Proceeds from direct treasury stock sales		123			104			73
Net cash provided by financing activities		217,955			145,238			111,611
Increase (decrease) in cash and cash equivalents		32,292			(14,731	)		14,690
Cash and cash equivalents at beginning of period		98,962			113,693			99,003
Cash and cash equivalents at end of period	$	131,254		$	98,962		$	113,693
Supplemental cash flow information:
Interest paid	$	25,348		$	16,198		$	11,382
Income taxes paid		11,200			7,950			14,350
Transfer from other liability to equity		—			636			—
Transfers from held to maturity securities to available for sale securities		404			—			—
Transfers from loans to other real estate owned and other assets held for sale		337			1,141			705
Transfer from (to) property and equipment to real estate and other assets held for sale		—			—		(130)
Sale of bank owned life insurance not yet settled		—			—			17,840
Securities traded but not yet settled		—			—			548
Initial recognition of right-of-use asset		8,808			—			—
Initial recognition of lease liability		9,339			—			—

See accompanying notes.

Notes to the Consolidated Financial Statements

1.	Basis of Presentation

As of December 31, 2019, First Defiance Financial Corp. (“First Defiance” or the “Company”) was a unitary thrift holding company that conducted business through its three 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. All significant intercompany transactions and balances are eliminated in consolidation.

First Federal is primarily engaged in attracting deposits from the general public through its branches 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, commercial and consumer loans and providing a broad range of depository, trust and wealth management services.

First Insurance is an insurance agency that conducts business throughout First Federal’s markets, offering property and casualty, and group health and life insurance products.

First Defiance Risk Management was incorporated on December 20, 2012, as 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.

2.	Statement of Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 applicable to common shares (net income less dividend requirements for preferred stock, accretion of preferred stock discount and redemption of preferred stock) 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 includes the dilutive effect of additional potential common shares issuable under stock options, warrants, restricted stock awards and stock grants. See also Note 4.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on available-for-sale securities and the net unrecognized actuarial losses and unrecognized prior service costs associated with the Company’s Defined Benefit Postretirement Medical Plan. All items included in other comprehensive income are reported net of tax. See also Notes 5, 16 and 25 and the Consolidated Statements of Comprehensive Income.

Cash Flows

Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve. Cash and amounts due from depository institutions include required balances on hand or on deposit at the FHLB and Federal Reserve of approximately $987,000 and $1.2 million, respectively, at December 31, 2019, to meet regulatory reserve and clearing requirements. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions and repurchase agreements.

Investment Securities

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the securities to maturity and are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

Securities available‑for‑sale consists of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss) until realized. Realized gains and losses are included in gains (losses) on securities or other-than-temporary impairment losses on securities. Realized gains and losses on securities sold are recognized on the trade date based on the specific identification method.

Interest income includes amortization of purchase premiums and discounts. Premiums and discounts are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are expected. Securities with unrealized losses are reviewed quarterly to determine if impairment is other–than-temporary. In performing this review management considers the length of time and extent that fair value has been less than cost, the financial condition of the issuer, the impact of changes in market interest rates on market value and whether the Company intends to sell or it would be more than likely required to sell the securities prior to their anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) other-than-temporary impairment (“OTTI”) related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

FHLB Stock

First Federal is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, 2019, the Company held $11.9 million at the FHLB of Cincinnati and $2,400 at the FHLB of Indianapolis.

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs, purchase premiums and discounts and the allowance for loan losses. Deferred fees net of deferred incremental loan origination costs, are amortized to interest income generally over the contractual life of the loan using the interest method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable, unamortized premiums and discounts, and net deferred fees and costs and undisbursed loan amounts.

Mortgage loans originated and intended for sale in the secondary market are classified as loans held for sale and are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains or losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

The Company may incur losses pertaining to loans sold to Fannie Mae and Freddie Mac but repurchased due to underwriting issues. Repurchase losses are recognized when the Company determines they are probable and estimable.

Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90 days delinquent or those loans considered impaired is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. For these loans, interest accrual is only to the extent cash payments are received. The accrual of interest on these loans is generally resumed after a pattern of repayment has been established and the collection of principal and interest is reasonably assured.

Purchased Credit Impaired Loans

The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that it will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics (credit score, loan type and date of origination). The Company considers expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and subsequently aggregated pool of loans.

The Company determines the excess of the loan’s or pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount—representing the excess of the loan’s cash flows expected to be collected over the amount paid—is accreted into interest income over the remaining life of the loan or pool (accretable yield).

Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected, and evaluates whether the present value of its loans determined using the effective interest rates has decreased and, if so, recognizes a loss. Valuation allowances for all acquired loans subject to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310 reflect only those losses incurred after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be collected. The present value of any subsequent increase in the loan’s or pool’s actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or pool. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience, current economic events in specific industries and geographical areas and other pertinent factors, including general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

Loan losses are charged-off against the allowance when in management’s estimation it is unlikely that the loan will be collected, while recoveries of amounts previously charged-off are credited to the allowance. A provision for loan loss is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors in order to maintain the allowance for loan losses at the level deemed adequate by management. The determination of whether a loan is considered past due or delinquent is based on the contractual payment terms. Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. All loans are placed on non-accrual status at 90 days past due unless the loan is adequately secured and is in process of collection. Any loan in the portfolio may be placed on non-accrual status prior to becoming 90 days past due when collection of principal or interest is in doubt.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Impaired loans have been recognized in conformity with FASB ASC Topic 310.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loans agreement. Loans, for which terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. When a loan is considered impaired, an analysis of the net present value of estimated cash flows is performed and an allowance may be established based on the outcome of that analysis, or if the loan is deemed to be collateral dependent an allowance is established based on the fair value of collateral. All modifications are reviewed by the First Federal’s Chief Credit Officer or Credit Administration Officer to determine whether or not the modification constitutes a troubled debt restructure. Commercial and commercial real estate loan relationships greater than $250,000 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net of the allowance allocation which is determined based on the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Impaired loan relationships less than $250,000 are aggregated by loan segment and risk level and given a specific reserve based on the general reserve factor for that loan segment and risk level. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

The following portfolio segments have been identified:

Commercial Real Estate Loans (consisting of multi-family residential and non-residential): Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Commercial Loans: Commercial credit is extended primarily to middle market customers. Such credits are typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.

Consumer Finance Loans: Consumer finance loans are generally made to borrowers for a specific consumer purchase and are made based on their ability to repay with their current debt to income as well as the underlying collateral value of the item being purchased. Credit scores are part of the decision process of whether or not credit is extended. Minimum standards and underwriting guidelines have been established for all consumer loan types.

1-4 Family Residential Real Estate Loans: 1-4 family residential real estate loans can be categorized two different ways. One part of this portfolio is owner occupied and loans are made based primarily on the ability of the individual borrower to support the payments as well as the payments of any other debt the borrower may have outstanding at the time the loan is made. The other part of this portfolio is non-owner occupied income producing property and loans are made primarily based on the cash flow stream from rental income as well as the cash flow support from the borrower’s unrelated cash flow. Both types of loans have a secondary repayment source of the underlying collateral and generally the loans are not extended at higher than an 80% loan-to-value (“LTV”). Minimum standards and underwriting guidelines have been established for all 1-4 family residential real estate loan types.

Construction Loans: The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used exclusively for the improvement of real estate in which the Company holds a mortgage.

Home Equity and Improvement Loans: Home Equity and Improvement loans are made to borrowers based on their ability to repay with their current debt to income as well as the underlying collateral value of the real estate taken as security. Minimum standards and underwriting guidelines have been established for all home equity and improvement loan types.

Consumer finance, 1-4 family residential real estate (including construction) and home equity and improvement loans are subject to adverse employment conditions in the local economy which could increase the default rate on loans.

Servicing Rights

Servicing rights are recognized separately when they are acquired through sales of loans. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans, driven, generally, by changes in market interest rates.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the income statement with mortgage banking income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $3.8 million, $3.8 million and $3.7 million for the years ended December 31, 2019, 2018 and 2017. Late fees and ancillary fees related to loan servicing are not material. See Note 8.

Bank Owned Life Insurance

The Company has purchased life insurance policies for certain key employees. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Premises and Equipment and Long Lived Assets

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:

Buildings and improvements		20 to 50 years
Furniture, fixtures and equipment		3 to 15 years

Long-lived assets to be held and those to be disposed of and certain intangibles are periodically evaluated for impairment. See Note 9.

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 non-controlling 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. See Note 10.

Real Estate and Other Assets Held for Sale

Real estate and other assets held for sale are comprised of properties or other assets acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. These assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Losses arising from the acquisition of such property are charged against the allowance for loan losses at the time of acquisition. These properties are carried at the lower of cost or fair value, less estimated costs to dispose. If fair value declines subsequent to foreclosure, the property is written down against expense. Costs after acquisition are expensed.

Stock Compensation Plans

Compensation cost is recognized for stock options and restricted share awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Restricted shares awards are valued at the market value of Company stock at the date of the grant. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. See Note 20.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Mortgage Banking Derivatives

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in fair values of these derivatives are included in mortgage banking income.

Operating Segments

Management considers the following factors in determining the need to disclose separate operating segments: (1) the nature of products and services, which are all financial in nature; (2) the type and class of customer for the products and services; in First Defiance’s case retail customers for retail bank and insurance products and commercial customers for commercial loan, deposit, life, health and property and casualty insurance needs; (3) the methods used to distribute products or provide services; such services are delivered through banking and insurance offices and through bank and insurance customer contact representatives. Retail and commercial customers are frequently targets for both banking and insurance products; (4) the nature of the regulatory environment; both banking and insurance entities are subject to various regulatory bodies and a number of specific regulations.

Quantitative thresholds as stated in FASB ASC Topic 280, Segment Reporting are monitored. For the year ended December 31, 2019, the reported revenue for First Insurance was 7.6% of total revenue for First Defiance. Total revenue includes interest income plus noninterest income. Net income for First Insurance for the year ended December 31, 2019 was 3.2% of consolidated net income. Total assets of First Insurance at December 31, 2019, were 0.8% of total assets. First Insurance does not meet any of the quantitative thresholds of FASB ASC Topic 280. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.

Dividend Restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid by First Federal to First Defiance. See Note 17 for further details on restrictions.

Loan Commitments and Related Financial Instruments

Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements.

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

In December 2017, a law was enacted which changed the corporate federal income tax rate from 35% to 21%, beginning January 1, 2018. Accordingly, the Company’s deferred tax assets and liabilities were re-measured at December 31, 2017, using the 21% corporate federal income tax rate resulting in a net tax expense of $154,000. An effective tax rate of 21% is used to determine after-tax components of other comprehensive income (loss) included in the statements of stockholders’ equity. See Note 18.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Retirement Plans

Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. See Note 16 and 19.

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 Company adopted ASC606 on January 1, 2018. 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 noninterest 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 $7.1 million in 2019 and $7.6 million in 2018. Income from services charges on deposit accounts is included in service fees and other charges in noninterest income.

•

Interchange income - this represents fees earned from debit and credit 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 were $4.7 million in 2019 and $4.1 million in 2018, which are reported net of network related charges. Interchange income is included in service fees and other charges in noninterest 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, and 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 $872,000 and $2.3 million, respectively, in 2019 and $821,000 and $2.1 million, respectively in 2018. Income from wealth management services is included in other noninterest income in total noninterest income. Trust fees are reported separately in total noninterest 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 a loss of $180,000 in 2019 and a loss of $28,000 in 2018. Income from the gain or loss on sales of OREO is included in other noninterest income in total noninterest 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 were $14.1 million for 2019, of which $13.2 million were new/renewal commissions and $921,000 were contingent commissions. In 2018, insurance commissions were $14.1 million, of which $13.1 million were new/renewal commissions and $1.0 million were contingent commissions.

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 Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet. The Company adopted this guidance in the first quarter of 2019. Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has elected to account for lease and related non-lease components as a single lease component. The Company has also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases, which are twelve months or less. Implementation of the guidance resulted in the recording of a right-of-use asset of $8.8 million and a lease liability of $9.3 million as of January 1, 2019. See additional disclosures in Note 9.

Accounting Standards Updates

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU gave all entities an opportunity to reclassify securities held to maturity without tainting the rest of the portfolio if they are eligible to be hedged using the “last-of-layer method.” Note that the securities need not be hedged but simply eligible to be hedged. The amendments in this ASU are effective for the reporting periods after December 15, 2018. The Company adopted ASU No. 2017-12 effective December 31, 2019 and reclassified its’ held to maturity securities to available-for-sale.

In June 2016, FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new accounting guidance in this ASU replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and HTM debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance, including loan commitments. The CECL model requires an entity to estimate credit losses over the life of an asset or off-balance sheet exposure. The new accounting guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018.

The Company is currently evaluating the impact of adoption of this new accounting guidance on its consolidated financial statements. Adoption will be applied through a one-time cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company adopted the guidance on January 1, 2020 and continues implementation efforts through its established Company-wide implementation committee along with consultation of a third-party software vendor. The Company has disaggregated its loan portfolio into segments of like kind loans with additional disaggregation based on risk level of the loans. Models have been chosen to be applied to loan segments based on factors such as life of the loan segment and loan payment types. The Company has engaged an independent third party to validate the model, methodologies and compliance with the regulation, which will be completed during the first quarter of 2020. Qualitative factors are designed to capture inherent risks that are not included within the quantitative model and the Company is finalizing the analysis of such factors. The Company is in the process of implementing the accounting, processes, controls and governance required to comply with the new accounting guidance.

While adoption of this ASU is expected to increase the allowance for credit losses, it does not change the overall credit risk in the Company's portfolios or the ultimate losses therein. The transition adjustment to increase the allowance will primarily result in a decrease to shareholders' equity, net of income taxes, on January 1, 2020. The ultimate impact of the adoption of this ASU will depend on multiple factors including the composition and risk level of the portfolios, finalization of credit loss models, economic conditions and forecasts that existed at the adoption date, and the finalization of qualitative factors.

At adoption, the Company did not have any securities classified as HTM debt securities. No allowance was recorded related to AFS debt securities at the date of adoption, January 1, 2020.

The Federal Reserve and the FDIC have adopted a rule that provides a banking organization the option to phase-in over a three-year period the effects of CECL on its regulatory capital upon the adoption of the standard. The Company does not expect to exercise the phase-in option.

3.	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 seven full-service banking offices in northwest and north central, Ohio and one 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.

In accordance with ASC 805, 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 following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2017, after giving effect to certain adjustments. The unaudited pro forma information for the twelve months ended December 31, 2017 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

	Pro Forma Twelve
	Months Ended
	December 31, 2017
	(In Thousands, except per share data)
Net Interest Income	$	98,856
Provision for loan losses		2,949
Noninterest Income		40,338
Noninterest Expense		82,597
Income Before Income Taxes		53,648
Income Tax Expense		17,780
Net Income	$	35,868
Diluted Earnings Per Share	$	3.51

The above pro forma financial information includes approximately $4.6 million of net income related to the operations of Commercial Bancshares during the twelve months of 2017. The above pro forma financial information related to 2017 excludes merger related costs that totaled $3.7 million on a pre-tax basis.

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 up to $2.3 million may be due 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 maximum 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, the Company recorded goodwill of $7.9 million as well as identifiable intangible assets of $756,000 consisting of a 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. The transaction enhanced employee benefit offerings and expanded First Insurance’s presence into adjacent markets in northwest Ohio.

On September 30, 2019, First Defiance, through First Federal, completed the acquisition of Strategic Investment Advisors, LLC (“SIA”), a financial advisory and brokerage firm. Located in Sylvania, Ohio, with assets under management of approximately $115 million and annual revenues of approximately $0.6 million, SIA was added to First Federal’s Trust and Wealth Management platform. The total purchase price paid in cash was made up of the following: $1.6 million was paid at closing, and $400,000 at the end of a two-year earn-out based on the compound revenue growth over the performance period of SIA, for a total purchase price of $2.0 million. As of December 31, 2019, the Company recorded goodwill of $1.5 million and identifiable intangible assets of $500,000 consisting of customer relationship intangible.

Effective January 31, 2020, the Company merged (the “Merger”) with United Community Financial Corp. (“UCFC”) and its subsidiaries, pursuant to an Agreement and Plan of Merger dated September 9, 2019. Pursuant to the merger agreement, UCFC was merged with and into First Defiance. Immediately following the merger, Home Savings Bank was merged with and into First Federal Bank of the Midwest with First Federal surviving the merger. In addition, UCFC’s wholly owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged with the Company’s wholly owned insurance subsidiary, First Insurance Group of the Midwest, Inc., with First insurance Group of the Midwest, Inc. surviving the merger.

As a result of the Merger and in accordance with the Merger Agreement, each share of UCFC common stock issued and outstanding immediately prior to the effective time was converted into 0.3715 share of First Defiance common stock. No fractional shares of First Defiance Common Stock were issued in the Merger, and UCFC’s shareholders became entitled to receive cash in lieu of fractional shares.

After the allocation procedures are applied as described above, the Company issued 17,927,017 First Defiance common shares and paid $106,000 to UCFC shareholder’s as a result of the Merger. Acquisition related costs aggregating $1.4 million were included in the Company’s Consolidated Statements of Operations for the year ended December 31, 2019. The fair value of First Defiance common shares issued as part of the consideration paid for the UCFC common shares was determined based on the closing price of the Company’s common shares on the effective date of the Merger.

The following table summarizes the consideration paid for UCFC:

.	(in thousands)
Cash	$	106
First Defiance shares issued at fair value		526,875
Total fair value of consideration paid	$	526,981

Goodwill is expected to be recorded arising from the acquisition consisting largely of synergies and the cost savings resulting from combining the operations of the companies. No goodwill is expected to be deductible for income tax purposes. The fair value of the assets acquired and liabilities assumed will be recorded at fair value; however, such valuations are in process at the date of the financial statements.

At the acquisition date, the Company added total assets of $2.8 billion (unaudited), total loans and loans held for sale of $2.4 billion (unaudited), and total deposits of $2.1 billion (unaudited) to the Company’s consolidated financial statements.

4.	Earnings Per Common Share

Basic earnings per share is 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 for the years ended December 31:

	2019		2018		2017
	(In Thousands, Except Per Share Amounts)
Basic Earnings Per Share:
Net income available to common shareholders	$	49,370	$	46,249	$	32,268
Less: Income allocated to participating securities		36		16		5
Net income allocated to common shareholders	$	49,334	$	46,233	$	32,263
Weighted average common shares outstanding Including participating securities		19,844		20,358		19,950
Less: Participating securities		20		9		18
Average common shares		19,824		20,349		19,932
Basic earnings per common share	$	2.49	$	2.27	$	1.62
Diluted Earnings Per Share:
Net income allocated to common shareholders	$	49,334	$	46,233	$	32,263
Weighted average common shares outstanding for basic earnings per common share		19,824		20,349		19,932
Add: Dilutive effects of stock options		107		119		124
Average shares and dilutive potential common shares		19,931		20,468		20,056
Diluted earnings per common share	$	2.48	$	2.26	$	1.61

Shares subject to issue upon exercise of options of zero in 2019, 10,500 in 2018 and zero in 2017 were excluded from the diluted earnings per common share calculation as they were anti-dilutive.

5.	Investment Securities

The following tables summarize the amortized cost and fair value of available-for-sale securities and held-to-maturity investment securities at December 31, 2019 and 2018, and the corresponding amounts of gross unrealized and unrecognized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
2019
Available-for-sale
Obligations of U.S. government corporations and agencies	$	2,518	$	6	$	—		$	2,524
Mortgage-backed securities - residential		88,380		1,380		(113	)		89,647
REMICs		1,618		18		—			1,636
Collateralized mortgage obligations - residential		81,390		796		(85	)		82,101
Corporate bonds and trust preferred		12,011		90		—			12,101
Obligations of state and political subdivisions		91,406		4,042		(9	)		95,439
Total Available-for-Sale	$	277,323	$	6,332	$	(207	)	$	283,448

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
2018
Available-for-sale
Obligations of U.S. government corporations and agencies	$	2,519	$	2	$	(18	)	$	2,503
Mortgage-backed securities - residential		76,165		111		(1,566	)		74,710
REMICs		2,712		4		(7	)		2,709
Collateralized mortgage obligations - residential		103,026		124		(1,689	)		101,461
Corporate bonds		12,910		44		(148	)		12,806
Obligations of state and political subdivisions		99,349		1,258		(720	)		99,887
Total Available-for-Sale	$	296,681	$	1,543	$	(4,148	)	$	294,076

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
Held-to-Maturity
FHLMC certificates	$	8	$	—	$	—	$	8
FNMA certificates		31		—		—		31
GNMA certificates		12		—		—		12
Obligations of states and political subdivisions		475		—		—		475
Total Held-to-Maturity	$	526	$	0	$	0	$	526

The amortized cost and fair value of the investment securities portfolio at December 31, 2019, is shown below by contractual maturity. Expected maturities will differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity tables below, mortgage-backed securities and collateralized mortgage obligations, which are not due at a single maturity date, have not been allocated over maturity groupings.

	Available-for-Sale
	Amortized		Fair
	Cost		Value
	(In Thousands)
2019
Available-for-sale
Due in one year or less	$	5,393	$	5,403
Due after one year through five years		17,680		17,881
Due after five years through ten years		26,800		27,675
Due after ten years		56,062		59,105
MBS/CMO/REMIC		171,388		173,384
Total	$	277,323	$	283,448

Securities pledged at year-end 2019 and 2018 had a carrying amount of $158.8 million and $143.9 million, respectively, and were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.

The following table summarizes First Defiance’s securities that were in an unrealized loss position at December 31, 2019, and December 31, 2018:

	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, 2019
Available-for-sale securities:
Mortgage-backed securities-residential	$	13,830	$	(42	)	$	9,721	$	(71	)	$	23,551	$	(113	)
Collateralized mortgage obligations		7,448		(29	)		5,549		(56	)		12,997		(85	)
Obligations of state and political subdivisions		1,413		(9	)		—		—			1,413		(9	)
Total temporarily impaired securities	$	22,691	$	(80	)	$	15,270	$	(127	)	$	37,961	$	(207	)

At December 31, 2018
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	—	$	—		$	500	$	(18	)	$	500	$	(18	)
Mortgage-backed securities-residential		11,589		(71	)		48,665		(1,495	)		60,254		(1,566	)
REMIC’s		—		—			857		(7	)		857		(7	)
Collateralized mortgage obligations		11,613		(53	)		70,585		(1,636	)		82,198		(1,689	)
Corporate Bonds		5,752		(148	)		—		—			5,752		(148	)
Obligations of state and political subdivisions		11,974		(69	)		16,492		(651	)		28,466		(720	)
Held to maturity securities:		8		—			26		—			34		—
Total temporarily impaired securities	$	40,936	$	(341	)	$	137,125	$	(3,807	)	$	178,061	$	(4,148	)

Management evaluates securities for OTTI on at least a quarterly basis, 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. 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 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 2019, 2018 and 2017, management determined there was no OTTI.

Net realized gains from the sales and calls of investment securities totaled $24,000 ($19,000 after tax) in 2019 while there were net realized gains of $173,000 ($136,000 after tax) and $584,000 ($380,000 after tax) in 2018 and 2017, respectively.

The proceeds from sales and calls of securities and the associated gains and losses for the years ended December 31 are listed below:

	2019			2018			2017
	(In Thousands)
Proceeds	$	2,667		$	5,503		$	34,248
Gross realized gains		35			178			665
Gross realized losses		(11	)		(5	)		(81	)

6.	Commitments and Contingent Liabilities

Loan Commitments

Loan commitments are made to accommodate the financial needs of First Federal’s customers. 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 on December 31 was as follows (In Thousands):

	2019				2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	55,013	$	123,798	$	44,352	$	114,308
Unused lines of credit		7,625		425,484		7,523		382,189
Standby letters of credit		—		14,215		—		7,239
Total	$	62,638	$	563,497	$	51,875	$	503,736

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at December 31, 2019, had interest rates ranging from 3.00% to 18.00% and maturities ranging from less than one year to 30 years.

In addition to the above commitments, at December 31, 2019, First Defiance had commitments to sell $15.8 million of loans to Freddie Mac, Fannie Mae, or FHLB of Cincinnati.

Loans

Loans receivable consist of the following:

	December 31, 2019			December 31, 2018
	(In Thousands)
Real Estate:
Secured by 1-4 family residential	$	324,773		$	322,686
Secured by multi-family residential		270,839			278,358
Secured by commercial real estate		1,235,187			1,126,452
Construction		305,305			265,772
		2,136,104			1,993,268
Other Loans:
Commercial		578,071			509,577
Home equity and improvement		122,864			128,152
Consumer Finance		37,649			34,405
		738,584			672,134
Total loans		2,874,688			2,665,402
Deduct:
Undisbursed loan funds		(94,865	)		(123,293	)
Net deferred loan origination fees and costs		(2,259	)		(2,070	)
Allowance for loan loss		(31,243	)		(28,331	)
Totals	$	2,746,321		$	2,511,708

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

The following table discloses the year-to-date activity in the allowance for loan loss for the dates indicated by portfolio segment (In Thousands):

Year to Date December 31, 2019	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	$	2,881		$	3,101		$	12,041		$	682	$	7,281		$	2,026		$	319		$	28,331
Charge-Offs		(515	)		(133	)		(15	)		—		(528	)		(245	)		(289	)		(1,725	)
Recoveries		193			52			593			—		642		184			68				1,732
Provisions		308			(81	)		744			314		1,608			(265	)		277			2,905
Ending Allowance	$	2,867		$	2,939		$	13,363		$	996	$	9,003		$	1,700		$	375		$	31,243

Year to Date December 31, 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		(261	)		—		(1,387	)		—		(724	)		(269	)		(233	)		(2,874	)
Recoveries		131			57		720			—		2,221		191			26				3,346
Provisions		479			342		2,354			35		(2,181	)		(151	)		298			1,176
Ending Allowance	$	2,881		$	3,101	$	12,041		$	682	$	7,281		$	2,026		$	319		$	28,331

Year to Date December 31, 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		(279	)		—		(429	)		—		(2,301	)		(301	)		(139	)		(3,449	)
Recoveries		115			32		657			—		243			167			85			1,299
Provisions		69			442		(499	)		197		2,662			3			75			2,949
Ending Allowance	$	2,532		$	2,702	$	10,354		$	647	$	7,965		$	2,255		$	228		$	26,683

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, 2019: (In Thousands)

	1-4 Family Residential Real Estate		Multi Family Residential Real Estate		Commercial Real Estate		Construction		Commercial		Home Equity & Improvement		Consumer Finance		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	115	$	—	$	85	$	—	$	174	$	48	$	—	$	422
Collectively evaluated for impairment		2,752		2,939		13,278		996		8,829		1,652		375		30,821
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total ending allowance balance	$	2,867	$	2,939	$	13,363	$	996	$	9,003	$	1,700	$	375	$	31,243
Loans:
Loans individually evaluated for impairment	$	7,049	$	130	$	21,002	$	—	$	6,655	$	759	$	28	$	35,623
Loans collectively evaluated for impairment		318,106		271,338		1,218,968		206,721		573,244		122,963		37,808		2,749,148
Loans acquired with deteriorated credit quality		989		289		632		—		12		—		—		1,922
Total ending loans balance	$	326,144	$	271,757	$	1,240,602	$	206,721	$	579,911	$	123,722	$	37,836	$	2,786,693

	1-4 Family Residential Real Estate		Multi Family Residential Real Estate		Commercial Real Estate		Construction		Commercial		Home Equity & Improvement		Consumer Finance		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	175	$	3	$	95	$	—	$	79	$	242	$	1	$	595
Collectively evaluated for impairment		2,706		3,098		11,946		682		7,202		1,784		318		27,736
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total ending allowance balance	$	2,881	$	3,101	$	12,041	$	682	$	7,281	$	2,026	$	319	$	28,331
Loans:
Loans individually evaluated for impairment	$	6,774	$	1,347	$	26,334	$	—	$	10,477	$	963	$	45	$	45,940
Loans collectively evaluated for impairment		315,385		277,105		1,102,355		142,096		500,730		128,065		34,486		2,500,222
Loans acquired with deteriorated credit quality		1,012		296		846		—		177		—		—		2,331
Total ending loans balance	$	323,171	$	278,748	$	1,129,535	$	142,096	$	511,384	$	129,028	$	34,531	$	2,548,493

The following tables presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans for the years ended December 31, 2019, 2018 and 2017 (In Thousands):

	Twelve Months Ended December 31, 2019
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,975	$	206	$	198
Residential Non Owner Occupied		2,065		135		137
Total 1-4 Family Residential Real Estate		7,040		341		335
Multi-Family Residential Real Estate		486		37		37
CRE Owner Occupied		6,935		382		332
CRE Non Owner Occupied		1,793		119		83
Agriculture Land		13,210		768		778
Other CRE		656		76		71
Total Commercial Real Estate		22,594		1,345		1,264
Construction		—		—		—
Commercial Working Capital		6,985		370		270
Commercial Other		1,412		76		75
Total Commercial		8,397		446		345
Home Equity and Home Improvement		862		38		35
Consumer Finance		27		1		1
Total Impaired Loans	$	39,406	$	2,208	$	2,017

	Twelve Months Ended December 31, 2018
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,704	$	151	$	150
Residential Non Owner Occupied		2,354		133		126
Total 1-4 Family Residential Real Estate		7,058		284		276
Multi-Family Residential Real Estate		1,644		90		89
CRE Owner Occupied		9,992		234		221
CRE Non Owner Occupied		2,620		94		93
Agriculture Land		13,827		575		575
Other CRE		1,304		106		106
Total Commercial Real Estate		27,743		1,009		995
Construction		—		—		—
Commercial Working Capital		8,047		256		245
Commercial Other		3,501		119		119
Total Commercial		11,548		375		364
Home Equity and Home Improvement		1,150		38		38
Consumer Finance		39		4		4
Total Impaired Loans	$	49,182	$	1,800	$	1,766

	Twelve Months Ended December 31, 2017
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	3,811	$	138	$	138
Residential Non Owner Occupied		3,038		138		138
Total 1-4 Family Residential Real Estate		6,849		276		276
Multi-Family Residential Real Estate		2,471		58		58
CRE Owner Occupied		10,592		110		109
CRE Non Owner Occupied		3,768		140		133
Agriculture Land		9,667		472		229
Other CRE		1,603		76		70
Total Commercial Real Estate		25,630		798		541
Construction		—		—		—
Commercial Working Capital		5,235		129		123
Commercial Other		5,940		109		79
Total Commercial		11,175		238		202
Home Equity and Home Improvement		1,217		43		43
Consumer Finance		59		4		4
Total Impaired Loans	$	47,401	$	1,417	$	1,124

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

	December 31, 2019						December 31, 2018
	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	$	86	$	86	$	—	$	901	$	775	$	—
Residential Non Owner Occupied		962		967		—		950		955		—
Total 1-4 Family Residential Real Estate		1,048		1,053		—		1,851		1,730		—
Multi-Family Residential Real Estate		128		130		—		1,296		1,302		—
CRE Owner Occupied		5,098		4,814		—		7,464		6,202		—
CRE Non Owner Occupied		1,815		1,006		—		1,824		1,659		—
Agriculture Land		12,734		12,792		—		14,915		14,994		—
Other CRE		—		—		—		464		462		—
Total Commercial Real Estate		19,647		18,612		—		24,667		23,317		—
Construction		—		—		—		—		—		—
Commercial Working Capital		5,417		5,435		—		7,569		7,498		—
Commercial Other		469		471		—		2,095		2,100		—
Total Commercial		5,886		5,906		—		9,664		9,598		—
Home Equity and Home Improvement		151		151		—		—		—		—
Consumer Finance		—		—		—		—		—		—
Total loans with no allowance recorded	$	26,860	$	25,852	$	—	$	37,478	$	35,947	$	—
With an allowance recorded:
Residential Owner Occupied	$	5,137	$	4,977	$	104	$	3,926	$	3,884	$	148
Residential Non Owner Occupied		1,014		1,019		11		1,152		1,160		27
Total 1-4 Family Residential Real Estate		6,151		5,996		115		5,078		5,044		175
Multi-Family Residential Real Estate		—		—		—		44		44		3
CRE Owner Occupied		2,085		1,623		60		2,419		1,935		38
CRE Non Owner Occupied		317		319		13		350		353		16
Agriculture Land		262		268		3		37		38		2
Other CRE		401		180		9		1,107		691		39
Total Commercial Real Estate		3,065		2,390		85		3,913		3,017		95
Construction		—		—		—		—		—		—
Commercial Working Capital		682		450		150		525		528		55
Commercial Other		318		299		24		560		352		24
Total Commercial		1,000		749		174		1,085		880		79
Home Equity and Home Improvement		654		608		48		1,013		963		242
Consumer Finance		28		28		—		45		45		1
Total loans with an allowance recorded	$	10,898	$	9,771	$	422	$	11,178	$	9,993	$	595

*	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:

	December 31, 2019		December 31, 2018
	(In Thousands)
Non-accrual loans	$	13,437	$	19,016
Loans over 90 days past due and still accruing		—		—
Total non-performing loans		13,437		19,016
Real estate and other assets held for sale		100		1,205
Total non-performing assets	$	13,537	$	20,221
Troubled debt restructuring, still accruing	$	8,486	$	11,573

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2019, by class of loans: (In Thousands)

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	193,226	$	1,285	$	548	$	646	$	2,479	$	2,268
Residential Non Owner Occupied		130,374		43		22		—		65		143
Total 1-4 Family Residential Real Estate		323,600		1,328		570		646		2,544		2,411
Multi-Family Residential Real Estate		271,757		—		—		—		—		—
CRE Owner Occupied		441,414		47		—		368		415		2,196
CRE Non Owner Occupied		603,609		93		—		613		706		1,285
Agriculture Land		127,889		199		172		1,735		2,106		4,123
Other Commercial Real Estate		64,463				—		—		—		5
Total Commercial Real Estate		1,237,375		339		172		2,716		3,227		7,609
Construction		206,721		—		—		—		—		—
Commercial Working Capital		248,261		253		171		2,293		2,717		2,570
Commercial Other		328,727		20		35		151		206		391
Total Commercial		576,988		273		206		2,444		2,923		2,961
Home Equity and Home Improvement		122,487		956		240		39		1,235		449
Consumer Finance		37,622		143		64		7		214		7
Total Loans	$	2,776,550	$	3,039	$	1,252	$	5,852	$	10,143	$	13,437

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 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	$	199,664	$	887	$	821	$	1,402	$	3,110	$	3,266
Residential Non Owner Occupied		119,988		64		180		165		409		363
Total 1-4 Family Residential Real Estate		319,652		951		1,001		1,567		3,519		3,629
Multi-Family Residential Real Estate		278,748		—		—		—		—		102
CRE Owner Occupied		416,879		52		300		138		490		4,377
CRE Non Owner Occupied		534,823		6		119		—		125		620
Agriculture Land		129,040		66		—		2,869		2,935		5,267
Other Commercial Real Estate		45,232		11		—		—		11		—
Total Commercial Real Estate		1,125,974		135		419		3,007		3,561		10,264
Construction		142,096		—		—		—		—		—
Commercial Working Capital		217,832		268		—		3,838		4,106		4,021
Commercial Other		289,125		32		54		235		321		480
Total Commercial		506,957		300		54		4,073		4,427		4,501
Home Equity and Home Improvement		127,346		1,446		146		90		1,682		394
Consumer Finance		34,224		134		77		96		307		126
Total Loans	$	2,534,997	$	2,966	$	1,697	$	8,833	$	13,496	$	19,016

Troubled Debt Restructurings

As of December 31, 2019 and 2018, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $15.1 million and $19.2 million, respectively. The Company allocated $388,000 and $581,000, of specific reserves to those loans at December 31, 2019 and 2018, and committed to lend additional amounts totaling up to $226,000 and $169,000 at December 31, 2019 and 2018.

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 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 real estate 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, $6.6 million are 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 table presents loans by class modified as TDRs that occurred during the years indicated (Dollars in Thousands):

	Loans Modified as a TDR for the Twelve Months Ended				Loans Modified as a TDR for the Twelve Months Ended				Loans Modified as a TDR for the Twelve Months Ended
	December 31, 2019				December 31, 2018				December 31, 2017
TDRs	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied		12	$	1,332		18	$	980		24	$	982
Residential Non Owner Occupied		0		0		4		189		5		193
Multi Family		—		—		—		—		—		—
CRE Owner Occupied		0		—		12		1,639		2		149
CRE Non Owner Occupied		2		621		1		42		1		262
Agriculture Land		—		—		—		—		5		1,700
Other CRE		—		—		—		—		2		153
Commercial Working Capital		3		170		5		2,898		7		1,475
Commercial Other		2		147		1		44		7		3,833
Home Equity and Home Improvement		1		25		7		89		6		152
Consumer Finance		—		—		8		29		5		14
Total		20	$	2,295		56	$	5,910		64	$	8,913

The loans described above increased the allowance for loan losses (“ALLL”) by $34,000 for the year ended December 31, 2019, decreased the ALLL by $110,000 for the year ended December 31, 2018, and increased the ALLL by $104,000 for the year ended December 31, 2017.

Of the 2019 modifications, one was made a TDR due to terming out lines of credit, one loan was made a TDR due to a period of interest only payments, three were classified as TDR due to extending the maturity, two were classified as TDR due to bankruptcy and 13 were classified as TDR because the current debt was refinanced due to maturity or for payment relief.

The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the indicated:

	For the Twelve Months Ended				For the Twelve Months Ended				For the Twelve Months Ended
	December 31, 2019				December 31, 2018				December 31, 2017
	($ in thousands)
TDRs That Subsequently Defaulted:	Number of Loans		Recorded Investment (as of Period End)		Number of Loans		Recorded Investment (as of Period End)		Number of Loans		Recorded Investment (as of Period End)
Residential Owner Occupied		—	$	—		1	$	76		—	$	—
Residential Non Owner Occupied		—		—		1		45		—		—
CRE Owner Occupied		1		81		—		—		—		—
CRE Non Owner Occupied		—		—		—		—		—		—
Agriculture Land		—		—		—		—		—		—
Other CRE		—		—		—		—		—		—
Commercial Working Capital		3		2,248		3		2,644		—		—
Commercial Other		—		—		1		30		—		—
Home Equity and Home Improvement		—		—		1		61		—		—
Consumer		—		—		—		—		—		—
Total		4	$	2,329		7	$	2,856		—	$	—

The TDRs that subsequently defaulted described above increased the ALLL by $4,000 for the year ended December 31, 2019, and increased the ALLL by $17,000 for the year ended December 31, 2018.

A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed regarding 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 December 31, 2019, 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	$	34,732	$	—	$	1,845	$	—	$	159,128	$	195,705
Residential Non Owner Occupied		124,807		415		1,634		—		3,583		130,439
Total 1-4 Family Real Estate		159,539		415		3,479		—		162,711		326,144
Multi-Family Residential Real Estate		271,374		—		383		—		—		271,757
CRE Owner Occupied		417,139		18,513		6,130		—		47		441,829
CRE Non Owner Occupied		598,684		3,756		1,875		—		—		604,315
Agriculture Land		111,270		4,272		14,453		—		—		129,995
Other CRE		62,522		656		256		—		1,029		64,463
Total Commercial Real Estate		1,189,615		27,197		22,714		—		1,076		1,240,602
Construction		182,858		1,645		—		—		22,218		206,721
Commercial Working Capital		225,827		18,742		6,409		—		—		250,978
Commercial Other		322,185		5,420		1,328		—		—		328,933
Total Commercial		548,012		24,162		7,737		—		—		579,911
Home Equity and Home Improvement		—		—		315		—		123,407		123,722
Consumer Finance		—		—		20		—		37,816		37,836
Total Loans	$	2,351,398	$	53,419	$	34,648	$	—	$	347,228	$	2,786,693

As of December 31, 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
Residential Owner Occupied	$	9,419	$	91	$	3,130	$	—	$	190,134	$	202,774
Residential Non Owner Occupied		109,885		700		3,087		—		6,725		120,397
Total 1-4 Family Real Estate		119,304		791		6,217		—		196,859		323,171
Multi-Family Residential Real Estate		276,594		—		2,047		—		107		278,748
CRE Owner Occupied		402,008		5,724		9,547		—		89		417,368
CRE Non Owner Occupied		529,842		2,807		2,297		—		—		534,946
Agriculture Land		111,595		4,023		16,358		—		—		131,976
Other CRE		42,189		730		1,244		—		1,082		45,245
Total Commercial Real Estate		1,085,634		13,284		29,446		—		1,171		1,129,535
Construction		122,775		219		—		—		19,102		142,096
Commercial Working Capital		205,903		6,546		9,489		—		—		221,938
Commercial Other		279,234		7,011		3,201		—		—		289,446
Total Commercial		485,137		13,557		12,690		—		—		511,384
Home Equity and Home Improvement		—		—		434		—		128,594		129,028
Consumer Finance		—		—		206		—		34,325		34,531
Total Loans	$	2,089,444	$	27,851	$	51,040	$	—	$	380,158	$	2,548,493

Certain loans acquired had evidence that the credit quality of the loan had deteriorated since its origination and in management’s assessment at the acquisition date it was probable that First Defiance would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic 310 Subtopic 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans have been recorded based on management’s estimate of the fair value of the loans.

The outstanding balance of those loans by segment is as follows (In thousands):

	December 31, 2019		December 31, 2018
1-4 Family Residential Real Estate	$	1,011	$	1,045
Multi-Family Residential Real Estate		290		300
Commercial Real Estate Loans		681		899
Commercial		57		227
Consumer		—		—
Total Outstanding Balance	$	2,039	$	2,471
Recorded Investment, net of allowance of $0	$	1,922	$	2,331

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

	2019			2018
Balance at January 1	$	468		$	804
New Loans Purchased		—			—
Accretion of Income		(26	)		(139	)
Reclassification from Non-accretable		—			—
Charge-off of Accretable Yield		—			(197	)
Balance at December 31	$	442		$	468

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the twelve months ended December 31, 2019 or 2018. 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 December 31, 2017, using information as of the date of acquisition are included in the table below. There were no such loans purchased during the years ended December 31, 2019 and December 31, 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

Loans to executive officers, directors, and their affiliates are as follows:

	Years Ended December 31,
	2019			2018
	(In Thousands)
Beginning balance	$	21,563		$	16,728
New loans		4,152			10,806
Effect of changes in composition of related parties		—			(217	)
Repayments		(3,866	)		(5,754	)
Ending Balance	$	21,849		$	21,563

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $981,000 as of December 31, 2019.

8.	Mortgage Banking

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

	Years Ended December 31,
	2019			2018			2017
	(In Thousands)
Gain from sale of mortgage loans	$	7,706		$	4,502		$	4,664
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue		3,820			3,784			3,714
Amortization of mortgage servicing rights		(1,809	)		(1,341	)		(1,464	)
Mortgage servicing rights valuation adjustments		(234	)		132			90
		1,777			2,575			2,340
Net mortgage banking income	$	9,483		$	7,077		$	7,004

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.46 billion at December 31, 2019, and $1.41 billion at December 31, 2018.

Activity for capitalized mortgage servicing rights (“MSRs”) and the related valuation allowance is as follows:

	Years Ended December 31,
	2019			2018			2017
	(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,419		$	10,240		$	10,117
Loans sold, servicing retained		2,191			1,520			1,587
Amortization		(1,809	)		(1,341	)		(1,464	)
Carrying value before valuation allowance at end of period		10,801			10,419			10,240
Valuation allowance:
Balance at beginning of period		(300	)		(432	)		(522	)
Impairment recovery (charges)		(234	)		132			90
Balance at end of period		(534	)		(300	)		(432	)
Net carrying value of MSRs at end of period	$	10,267		$	10,119		$	9,808
Fair value of MSRs at end of period	$	10,378		$	10,656		$	9,930

Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced.

The Company had no actual losses from secondary market buy-backs in 2019, 2018 or 2017. Based on management’s estimate of potential losses from secondary market buyback activity, a liability of $43,000 was accrued at both December 31, 2019 and 2018, and is reflected in other liabilities in the Consolidated Statements of Financial Condition. Expense (credit) recognized related to the accrual was $0, $0 and $(36,000) for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company’s servicing portfolio is comprised of the following:

	December 31,
	2019				2018
	Number of		Principal		Number of		Principal
Investor	Loans		Outstanding		Loans		Outstanding
	(In Thousands)
Fannie Mae		4,915	$	465,982		4,919	$	461,730
Freddie Mac		9,833		977,649		9,571		937,406
Federal Home Loan Bank		118		17,564		99		11,983
Other		12		450		17		714
Totals		14,878	$	1,461,645		14,606	$	1,411,833

Custodial escrow balances maintained in connection with serviced loans were $15.3 million and $14.3 million at December 31, 2019 and 2018, respectively.

Significant assumptions at December 31, 2019, used in determining the value of MSRs include a weighted average prepayment speed assumption (“PSA”) of 177 and a weighted average discount rate of 12.01%. Significant assumptions at December 31, 2018, used in determining the value of MSRs include a weighted average prepayment rate of 131 PSA and a weighted average discount rate of 12.01%.

9.	Premises and Equipment and Leases

Premises and equipment are summarized as follows:

	December 31,
	2019			2018
	(In Thousands)
Cost:
Land	$	8,137		$	7,977
Land improvements		1,326			1,326
Buildings		44,707			44,632
Leasehold improvements		969			1,015
Furniture, fixtures and equipment		25,703			34,871
Construction in process		990			692
		81,832			90,513
Less allowances for depreciation and amortization		(42,269	)		(49,843	)
	$	39,563		$	40,670

Depreciation expense was $4.2 million, $3.7 million and $3.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) using a modified retrospective transition approach applying several of available practical expedients at the date of initial application. These practical expedients included carryover of historical lease determination and classification conclusions, carryover of historical initial direct cost balances for existing leases and accounting for lease and non-lease components in contracts in which the Company is a lessee as a single lease component. All periods presented after January 1, 2019 are under ASC 842 whereas periods presented prior to January 1, 2019 are in accordance with prior lease accounting of ASC 840. Financial information was not updated and the disclosures required under ASC 842 were not provided for dates and periods before January 1, 2019.

The lease agreements have maturity dates ranging from December 2020 to December 2039, some of which include options for multiple five and ten year extensions. The weighted average remaining life of the lease term for these leases was 17.07 years as of December 31, 2019.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to. The weighted average discount rate for leases was 3.17% as of December 31, 2019.

The total operating lease costs were $945,000 for the year ended December 31, 2019. Rent expense for operating leases was $1.0 million and $691,000 in 2018 and 2017, respectively.

The short-term lease costs and cash payments on operating leases were $921,000 for the year ended December 31, 2019. The right-of-use asset, included in other assets, and lease liabilities, included in other liabilities, were $8.9 million and $9.5 million as of December 31, 2019 respectively.

Total estimated rental commitments for the operating leases were as follows as of December 31, 2019:

2020	$	1,211
2021		1,187
2022		1,115
2023		1,095
2024		1,090
Thereafter		13,486
Total	$	19,184

A reconciliation of the undiscounted cash flows in the maturity analysis above and the lease liability recognized in the consolidated balance sheet as of December 31, 2019, is show below.

Undiscounted cash flows	$	19,184
Undiscounted cashflows associated with new lease effective 1/1/2020		(2,459	)
Undiscounted cashflows associated with new lease effective approx. 02/2020		(1,369	)
Undiscounted cashflows associated with new lease effective approx.04/2020		(2,239	)
Discount effect of cash flows		(3,628	)
Total	$	9,489

On August 15, 2019, the Company entered into a new lease agreement with an effective date based upon when the retail office becomes operational. This lease is expected to become effective in February 2020. This lease will result in an additional right-of-use asset and lease liability of approximately $1.1 million.

On August 15, 2019, the Company entered into a new lease agreement with an effective date based upon when the loan production office becomes operational. This lease is expected to become effective in April 2020. This lease will result in an additional right-of-use asset and lease liability of approximately $1.8 million.

On August 20, 2019, the Company entered into a new lease agreement with an effective date based upon when the ATM becomes operational. This lease is expected to become effective in November 2019. This lease will result in an additional right-of-use asset and lease liability of approximately $0.1 million.

10.	Goodwill and Intangible Assets

Goodwill

The change in the carrying amount of goodwill for the year is as follows:

	December 31,
	2019		2018
	(In Thousands)
Beginning balance	$	98,569	$	98,569
Goodwill acquired or adjusted during the year		1,500		—
Ending balance	$	100,069	$	98,569

Acquired Intangible Assets

Activity in intangible assets for the years ended December 31, 2019, 2018 and 2017, was as follows:

	Gross Carrying Amount		Accumulated Amortization			Net Value
	(In Thousands)
Balance as of January 1, 2017	$	14,477	$	(13,141	)	$	1,336
Intangible assets acquired		5,656		—			5,656
Amortization of intangible assets		—		(1,289	)		(1,289	)
Balance as of December 31, 2017		20,133		(14,430	)		5,703
Amortization of intangible assets		—		(1,312	)		(1,312	)
Balance as of December 31, 2018		20,133		(15,742	)		4,391
Intangible assets acquired		500		—			500
Amortization of intangible assets		—		(1,119	)		(1,119	)
Balance as of December 31, 2019	$	20,633	$	(16,861	)	$	3,772

Estimated amortization expense for each of the next five years and thereafter is as follows (In Thousands):

2020	$	1,003
2021		824
2022		647
2023		500
2024		373
Thereafter		425
Total	$	3,772

11.

Deposits

The following schedule sets forth interest expense by type of deposit:

	Years Ended December 31,
	2019		2018		2017
	(In Thousands)
Checking and money market accounts	$	7,650	$	3,997	$	2,033
Savings accounts		142		115		102
Certificates of deposit		14,821		9,785		6,683
Totals	$	22,613	$	13,897	$	8,818

A summary of deposit balances is as follows:

	December 31,
	2019		2018
	(In Thousands)
Noninterest-bearing checking accounts	$	630,359	$	607,198
Interest-bearing checking and money market accounts		1,198,012		1,040,471
Savings deposits		303,166		292,829
Retail certificates of deposit less than $250,000		631,253		591,822
Retail certificates of deposit greater than $250,000		107,535		88,562
	$	2,870,325	$	2,620,882

Scheduled maturities of certificates of deposit at December 31, 2019, are as follows (In Thousands):

2020	$	457,202
2021		179,084
2022		56,144
2023		17,359
2024		28,999
Thereafter		—
Total	$	738,788

12.	Advances from Federal Home Loan Bank

First Federal has the ability to borrow funds from the FHLB. First Federal pledges its single-family residential mortgage loan portfolio, certain investment securities; certain first mortgage home equity loans, certain commercial real estate loans, and certain agriculture real estate loans as security for these advances. Advances secured by investment securities must have collateral of at least 105% of the borrowing. Advances secured by residential mortgages must have collateral of at least 125% of the borrowings. Advances secured by commercial real estate loans, and agriculture real estate loans must have collateral of at least 300% of the borrowings. The total level of borrowing is also limited to 50% of total assets and at least 50% of the borrowings must be secured by either one-to-four family residential mortgages or investment securities. Total loans pledged to the FHLB at December 31, 2019, and December 31, 2018, were $1.2 billion and $1.2 billion, respectively. First Federal could obtain advances of up to approximately $744.8 million from the FHLB at December 31, 2019.

At year-end, advances from the FHLB were as follows:

Principal Terms	Advance Amount			Range of Maturities	Weighted Average Interest Rate
	(In Thousands)
December 31, 2019
Single maturity fixed rate advances		83,999		January 2020 to October 2024		2.00	%
Amortizable mortgage advances		1,085		August 2027		2.14	%
Fair value adj. on acquired balances		(21	)
	$	85,063
December 31, 2018
Single maturity fixed rate advances	$	59,000		January 2019 to March 2022		1.67	%
Amortizable mortgage advances		1,213		August 2027		2.14	%
Overnight advances		25,000		Overnight		2.45	%
Fair value adj. on acquired balances		(24	)
	$	85,189

Estimated future minimum principal payments by fiscal year based on maturity date are as follows (In Thousands):

2020	$	21,000
2021		20,000
2022		23,000
2023		10,000
2024		11,084
Thereafter		0
Total minimum payments		85,084
Less fair value adj. on acquired balances		(21	)
Totals	$	85,063

First Defiance also utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. First Defiance borrows short-term advances under a variety of programs at FHLB. At December 31, 2019 and 2018, there were no amounts outstanding under First Defiance’s Cash Management Advance line of credit. The total available under this line is $15.0 million. In addition, First Defiance has a $100.0 million REPO Advance line of credit available. There were no borrowings against this line at December 31, 2019, but $25 million was drawn on this line at December 31, 2018. Amounts are generally borrowed under the Cash Management and REPO lines on an overnight basis.

13.	Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trust

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 the 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 3.39% and 4.29% as of December 31, 2019 and 2018, respectively.

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 sponsors 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 3.27% and 4.17% as of December 31, 2019 and 2018, 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.

A summary of all junior subordinated debentures issued by the Company to affiliates follows. These amounts represent the par value of the obligations owed to these affiliates, including the Company’s equity interest in the trusts. Junior subordinated debentures owed to the following affiliates were as follows:

	December 31,
	2019		2018
	(In Thousands)
First Defiance Statutory Trust I due December 2035	$	20,619	$	20,619
First Defiance Statutory Trust II due June 2037		15,464		15,464
Total junior subordinated debentures owed to unconsolidated subsidiary Trusts	$	36,083	$	36,083

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.

14.	Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings

Total securities sold under agreement to repurchase are summarized as follows:

	Years Ended December 31,
	2019			2018
	(In Thousands, Except Percentages)
Securities sold under agreement to repurchase
Amounts outstanding at year-end	$	2,999		$	5,741
Year-end interest rate		0.24	%		0.31	%
Average daily balance during year		3,587			8,911
Maximum month-end balance during the year		6,402			18,259
Average interest rate during the year		0.29	%		0.26	%

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 December 31, 2019 and 2018, is presented in the following tables.

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
At December 31, 2019			(In Thousands)
Repurchase agreements:
Mortgage-backed securities – residential	$	1,848	$	—	$	—	$	—	$	1,848
Collateralized mortgage obligations		1,151		—		—		—		1,151
Total borrowings	$	2,999	$	—	$	—	$	—	$	2,999
Gross amount of recognized liabilities for repurchase agreements									$	2,999

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
At December 31, 2018			(In Thousands)
Repurchase agreements:
Mortgage-backed securities – residential	$	4,199	$	—	$	—	$	—	$	4,199
Collateralized mortgage obligations		1,542		—		—		—		1,542
Total borrowings	$	5,741	$	—	$	—	$	—	$	5,741
Gross amount of recognized liabilities for repurchase agreements									$	5,741

As of December 31, 2019 and 2018, First Federal had the following undrawn lines of credit facilities available for short-term borrowing purposes:

A $20.0 million line of credit with First Tennessee Bank. The rate on the line of credit is at three- month LIBOR, which floats quarterly. This line was undrawn upon as of December 31, 2019 and 2018.

A $11.2 million line of credit with the Federal Reserve Bank Discount Window, at an interest rate of 50 basis points over the federal funds rate. The fed funds rate as of December, 31, 2019, was 1.75%. This line was undrawn upon as of December 31, 2019 and 2018.

A $25.0 million line of credit with U.S. Bank. The rate on this line of credit is U.S. Bank’s federal funds rate, which floats daily. This line was undrawn upon as of December 31, 2019 and 2018.

15.	Other Noninterest Expense

The following is a summary of other noninterest expense:

	Years Ended December 31,
	2019		2018		2017
	(In Thousands)
Legal and other professional fees	$	3,693	$	3,328	$	3,603
Marketing		2,262		2,407		2,070
State financial institutions tax		2,193		2,118		1,819
OREO expenses and write-downs		369		742		177
Printing and office supplies		603		631		626
Amortization of intangibles		1,119		1,312		1,289
Postage		484		505		523
Check charge-offs and fraud losses		384		415		277
Credit and collection expense		398		379		359
Other^{(1) (2) (3)}		10,817		6,792		8,067
Total other noninterest expense	$	22,322	$	18,629	$	18,810

1)	2019 includes a credit of $1.4 million of acquisition related expenses.

2)	2018 includes a credit of $806,000 for an accounting correction related to the Deferred Compensation Plan. See Note 19 for further details.

3)	2017 includes $1.1 million of acquisition related expenses.

16.	Postretirement Benefits

First Defiance sponsors a defined benefit postretirement plan that is intended to supplement Medicare coverage for certain retirees who meet minimum age requirements. First Federal employees who retired prior to April 1, 1997, and who completed 20 years of service after age 40 receive full medical coverage at no cost. First Federal employees retiring after April 1, 1997, are provided medical benefits at a cost based on their combined age and years of service at retirement. Surviving spouses are also eligible for continued coverage after the retiree is deceased at a subsidy level that is 10% less than what the retiree is eligible for. First Federal employees retiring before July 1, 1997, receive dental and vision care in addition to medical coverage. First Federal employees who retire after July 1, 1997, are not eligible for dental or vision care.

First Federal employees who were born after December 31, 1950, are not eligible for the medical coverage described above at retirement. Rather, a one-time medical spending account of up to $10,000 (based on the participant’s age and years of service) will be established to reimburse medical expenses for those individuals. First Insurance employees who were born before December 31, 1950, can continue coverage until they reach age 65, or in lieu of continuing coverage, can elect the medical spending account option, subject to eligibility requirements. Employees hired or acquired after January 1, 2003, are eligible only for the medical spending account option.

Included in accumulated other comprehensive income at December 31, 2019, 2018 and 2017, are the following amounts that have not yet been recognized in net periodic benefit cost:

	December 31,
	2019			2018			2017
	(In Thousands)
Unrecognized prior service cost	$	84		$	97		$	39
Unrecognized actuarial gains (losses)		224			(86	)		551
Total loss recognized in Accumulated Other Comprehensive Income		308			11			590
Income tax effect		(64	)		80			(206	)
Net loss recognized in Accumulated Other Comprehensive Income	$	244		$	91		$	384

The prior service cost and actuarial loss included in other comprehensive income and expected to be recognized in net postretirement benefit cost during the fiscal year-ended December 31, 2020, is $14,000 ($11,000 net of tax) and $0, respectively.

Reconciliation of Funded Status and Accumulated Benefit Obligation

The plan is not currently funded. The following table summarizes benefit obligation and plan asset activity for the plan measured as of December 31 each year:

	December 31,
	2019			2018
	(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	2,642		$	3,194
Service cost		53			55
Interest cost		105			105
Participant contribution		29			32
Plan amendments for acquisitions		—			72
Actuarial (gains) / losses		310			(632	)
Benefits paid		(152	)		(184	)
Benefit obligation at end of year		2,987			2,642
Change in fair value of plan assets:
Balance at beginning of year		—			—
Employer contribution		123			152
Participant contribution		29			32
Benefits paid		(152	)		(184	)
Balance at end of year		—			—
Funded status at end of year	$	(2,987	)	$	(2,642	)

Net periodic postretirement benefit cost includes the following components:

	Years Ended December 31,
	2019			2018			2017
	(In Thousands)
Service cost-benefits attributable to service during the period	$	53		$	55		$	58
Interest cost on accumulated postretirement benefit obligation		105			105			117
Net amortization and deferral		14			18			19
Net periodic postretirement benefit cost		172			178			194
Net (gain) / loss during the year		310			(632	)		166
Plan amendment for acquisition		—			72			—
Amortization of prior service cost and actuarial losses		(14	)		(18	)		(19	)
Total recognized in comprehensive income (loss)		296			(578	)		147
Total recognized in net periodic postretirement benefit cost and other comprehensive income	$	468		$	(400	)	$	341

The following assumptions were used in determining the components of the postretirement benefit obligation:

	2019			2018			2017
Weighted average discount rates:
Used to determine benefit obligations at December 31		3.00	%		4.00	%		3.50	%
Used to determine net periodic postretirement benefit cost for years ended December 31		4.00	%		3.50	%		4.00	%
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year		6.00	%		6.50	%		7.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.00	%		3.90	%		5.00	%
Year that rate reaches ultimate trend rate	2075			2075			2022

The following benefits are expected to be paid over the next five years and in aggregate for the next five years thereafter. Because the plan is unfunded, the expected net benefits to be paid and the estimated Company contributions are the same amount.

	Expected to be Paid
	(In Thousands)
2020	$	187
2021		202
2022		215
2023		223
2024		190
2025 through 2029		989

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect:

	One-Percentage-Point Increase				One-Percentage-Point Decrease
	Year Ended December 31,				Year Ended December 31,
	2019		2018		2019			2018
	(In Thousands)
Effect on total of service and interest cost	$	7	$	22	$	(6	)	$	(18	)
Effect on postretirement benefit obligation		199		178		(172	)		(153	)

The Company expects to contribute $187,000 before reflecting expected Medicare retiree drug subsidy payments in 2020.

17.	Regulatory Matters

First Defiance and First Federal are subject to minimum capital adequacy guidelines. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, which could have a material impact on First Defiance’s financial statements. Under capital adequacy guidelines, First Defiance and First Federal must maintain capital amounts in excess of minimum ratios based on quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

In July 2013, the Federal Reserve and the FDIC 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 First Defiance and First Federal on January 1, 2015, and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both quantity and quality of capital held by First Defiance and First Federal. The rules include a minimum common equity tier 1 capital to risk-weighted assets ratio (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results 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 federal banking agencies have also established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. The regulatory agencies can initiate certain mandatory actions if First Federal fails to meet the minimum capital requirements, which could have a material effect on First Defiance’s financial statements.

The following schedule presents First Defiance consolidated and First Federal’s regulatory capital ratios as of December 31, 2019 and 2018 (Dollars in Thousands):

	December 31, 2019
	Actual					Minimum Required for Adequately Capitalized					Minimum Required to be Well Capitalized for Prompt Corrective Action
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	322,813		10.60	%	$	137,001		4.5	%	N/A		N/A
First Federal	$	335,251		11.03	%	$	136,752		4.5	%	$	197,531		6.5	%
Tier 1 Capital (2)
Consolidated	$	357,813		10.78	%	$	132,805		4.0	%	N/A		N/A
First Federal	$	335,251		10.13	%	$	132,435		4.0	%	$	165,544		5.0	%
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated	$	357,813		11.75	%	$	182,667		6.0	%	N/A		N/A
First Federal	$	335,251		11.03	%	$	182,336		6.0	%	$	243,114		8.0	%
Total Capital (to Risk Weighted Assets) (2)
Consolidated	$	389,056		12.78	%	$	243,556		8.0	%	N/A		N/A
First Federal	$	366,494		12.06	%	$	243,114		8.0	%	$	303,893		10.0	%

(1)	Excludes capital conservation buffer of 2.5% as of December 31, 2019.

(2)	Core capital is computed as a percentage of adjusted total assets of $3.32 billion for consolidated and $3.31billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $3.04 billion for consolidated and for the Bank.

	December 31, 2018
	Actual					Minimum Required for Adequately Capitalized					Minimum Required to be Well Capitalized for Prompt Corrective Action
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	303,860		11.00	%	$	124,339		4.5	%	N/A		N/A
First Federal	$	322,520		11.68	%	$	124,225		4.5	%	$	179,436		6.5	%
Tier 1 Capital (2)
Consolidated	$	338,860		11.14	%	$	121,716		4.0	%	N/A		N/A
First Federal	$	322,520		10.62	%	$	121,461		4.0	%	$	151,827		5.0	%
Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated	$	338,860		12.26	%	$	165,786		6.0	%	N/A		N/A
First Federal	$	322,520		11.68	%	$	165,633		6.0	%	$	220,844		8.0	%
Total Capital (to Risk Weighted Assets) (2)
Consolidated	$	367,191		13.29	%	$	221,048		8.0	%	N/A		N/A
First Federal	$	350,851		12.71	%	$	220,844		8.0	%	$	276,055		10.0	%

(1)	Excludes capital conservation buffer of 1.875% as of December 31, 2018.

(2)	Core capital is computed as a percentage of adjusted total assets of $3.04 billion for consolidated and for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.76 billion for consolidated and for the Bank.

Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various regulatory restrictions. First Federal paid $36.0 million in dividends to First Defiance in 2019 and $22.0 million in 2018. First Federal may not pay dividends to First Defiance in excess of its net profits (as defined by statute) for the last two fiscal years, plus any year to date net profits without the approval of the OCC. First Insurance paid $1.2 million in dividends to First Defiance in 2019 and $1.6 million in dividends in 2018. First Defiance Risk Management paid $1.4 million in dividends to First Defiance in 2019 and $950,000 million in 2018.

18.	Income Taxes

Income tax expense for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, which is more fully discussed below, the Company recognized a net tax expense of $154,000.

The components of income tax expense are as follows:

	Years Ended December 31,
	2019			2018		2017
	(In Thousands)
Current:
Federal	$	11,476		$	9,538	$	14,588
State and local		210			207		181
Deferred		(419	)		881		1,261
Tax reform revaluation		—			—		154
	$	11,267		$	10,626	$	16,184

The effective tax rates differ from federal statutory rate applied to income before income taxes due to the following:

	Years Ended December 31,
	2019			2018			2017
	(In Thousands)
Tax expense at statutory rate (21%-2019 and 2018, 35%-2017)	$	12,734		$	11,944		$	16,958
Increases (decreases) in taxes from:
State income tax – net of federal tax benefit		166			164			119
Tax exempt interest income, net of TEFRA		(729	)		(770	)		(1,218	)
Bank owned life insurance		(555	)		(255	)		(1,212	)
Captive insurance		(354	)		(325	)		(364	)
BOLI surrender		—			—			1,721
Tax reform revaluation		—			—			154
Other		5			(132	)		26
Totals	$	11,267		$	10,626		$	16,184

Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of First Defiance’s deferred federal income tax assets and liabilities are as follows:

	December 31,
	2019			2018
	(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses	$	6,475		$	5,802
Postretirement benefit costs		613			473
Deferred compensation		1,208			1,011
Impaired loans		855			1,154
Accrued vacation		11			11
Allowance for real estate held for sale losses		—			62
Deferred loan origination fees and costs		474			435
Accrued bonus		938			638
Net unrealized losses on available-for-sale securities		—			547
Right of use asset		1,993			—
Other		1,517			1,273
Total deferred federal income tax assets		14,084			11,406
Deferred federal income tax liabilities:
FHLB stock dividends		1,404			1,558
Goodwill		4,956			4,584
Mortgage servicing rights		2,156			2,125
Fixed assets		1,935			2,046
Other intangible assets		647			778
Loan mark to market		5			7
Net unrealized gains on available-for-sale securities		1,286			—
Prepaid expenses		708			550
Lease liabilties		1,876			—
Other		16			22
Total deferred federal income tax liabilities		14,989			11,670
Net deferred federal income tax asset/ (liability)	$	(905	)	$	(264	)

The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized and thus no valuation allowance was required at December 31, 2019.

Retained earnings at December 31, 2019, include approximately $11.0 million for which no tax provision for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Company’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at December 31, 2019, was approximately $2.31 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (In Thousands):

Balance at January 1, 2017	$	398
Additions based on tax positions related to the current year		—
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		—
Reductions due to the statute of limitations		—
Settlements		(398	)
Balance at December 31, 2017	$	—
Balance at January 1, 2018	$	—
Additions based on tax positions related to the current year		—
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		—
Reductions due to the statute of limitations		—
Settlements		—
Balance at December 31, 2018	$	—
Balance at January 1, 2019	$	—
Additions based on tax positions related to the current year		—
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		—
Reductions due to the statute of limitations		—
Settlements		—
Balance at December 31, 2019	$	—

The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The total amount of interest and penalties recorded in the income statement was $0 for each of the years ended December 31, 2019, 2018 and 2017. The amount accrued for interest and penalties was $0 at December 31, 2019, 2018 and 2017.

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 2016. At December 31, 2019, the Company operated primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

Tax Cuts and Jobs Act – The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) established a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminated the corporate alternative minimum tax and allowed the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limited the deduction for net interest expense incurrent by U.S. corporations, (iv) allowed businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminated or reduced certain deductions related to meals and entertainment expenses, (vi) modified the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limited the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changed U.S. tax law related to foreign operations, however, such changes did not impact First Defiance.

As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, First Defiance re-measured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. First Defiance recognized a net tax expense related to the re-measurement of its deferred tax assets and liabilities totaling $154,000 as of December 31, 2017.

19.	Employee Benefit Plans

401(k) Plan

Employees of First Defiance are eligible to participate in the First Defiance Financial Corp. 401(k) Employee Savings Plan (the “First Defiance 401(k)”) if they meet certain age and service requirements. Under the First Defiance 401(k), First Defiance matches 100% of the participants’ contributions up to 3% of compensation and then 50% of the participants’ contributions for the next 2% of compensation. The First Defiance 401(k) also provides for a discretionary First Defiance contribution in addition to the First Defiance matching contribution. First Defiance matching contributions totaled $1.35 million, $1.31 million and $1.19 million for the years ended December 31, 2019, 2018 and 2017, respectively. There were no discretionary contributions in any of those years.

Group Life Plan

On June 30, 2010, First Federal adopted the First Federal Bank of the Midwest Executive Group Life Plan – Post Separation (the “Group Life Plan”) in which various employees, including the Company’s named executive officers, may participate. Under the terms of the Group Life Plan, First Federal will purchase and own life insurance policies covering the lives of employees selected by the board of directors of First Federal as participants. There was $60,000, $38,000 and $248,000 of expense recorded for the years ended December 31, 2019, 2018 and 2017, respectively, with a liability of $1.78 million and $1.71 million for future benefits recorded at December 31, 2019 and 2018, respectively. The acquisition of CSB added $402,000 to this liability in 2017.

Deferred Compensation

The deferred compensation plan covers all directors and certain employees that elect to participate. Under the plan, the Company pays each participant, or their beneficiary, the amount of fees deferred plus interest over a defined time period. In the fourth quarter of 2018, the stock market declined significantly resulting in a significant decline in the value of the assets and liabilities of the deferred compensation plan and an accounting correction in the deferred compensation plan was recognized. The deferred compensation plan has approximately $6.9 and $5.5 million in assets and liabilities, respectively, as of December 31, 2019, which are matched in terms of investment elections. As of December 31, 2018, the deferred compensation plan had approximately $5.0 million in assets and liabilities which are matched in terms of investment elections. Every year, other noninterest income and other noninterest expense reflects the changes in fair value of the underlying investments in the assets and liabilities, respectively. The Company made an accounting correction in 2018, which was expected to minimize any net impact to earnings from the deferred compensation plan going forward. This accounting correction was deemed immaterial and resulted in a one-time reduction to other noninterest expense of $806,000, including a $636,000 adjustment to equity for the phantom stock elections within the plan, and a $170,000 adjustment for the tax liability, as of December 31, 2018. The phantom shares are carried at cost in equity and will be treated as outstanding shares for earnings per share calculations. The net expense (income) recorded for the deferred compensation plan, excluding the one-time accounting correction, for each of the last three years was $85,000, $15,000 and $427,000 in 2019, 2018 and 2017.

20.	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 December 31, 2019, 17,700 options had been granted pursuant to previous plans, and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans 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.

The Company approved a Short-Term (“STIP”) Incentive Plan and a Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

Under the 2018 and 2019 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 between 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 41,314, 41,676 and 69,014 RSU’s to the participants in the 2017, 2018 and 2019 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 the payment.

A total of 48,363 RSU’s were issued to the participants of the 2016 LTIP in the first quarter of 2019 for the three year performance period ended December 31, 2018.

In 2019, the Company also granted to employees 38,567 restricted shares, of which 13,916 were RSUs and 24,651 were restricted stock grants. Of the 24,651 restricted stock grants, 5,258 were issued to directors and have a one-year vesting period. The remaining 19,393 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 shares. 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 twelve months ended December 31, 2019, or December 31, 2018.

Following is activity under the plans during 2019:

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2019		39,400		$	14.00
Forfeited or cancelled		(2,500	)		18.02
Exercised		(19,200	)		10.15
Granted		—			—
Options outstanding, December 31, 2019		17,700		$	17.60		5.49	$	246
Vested or expected to vest at December 31, 2019		17,700		$	17.60		5.49	$	246
Exercisable at December 31, 2019		12,000		$	17.37		5.40	$	170

Information related to the stock option plans is as follows:

	Year Ended December 31,
	2019		2018		2017
	(In Thousands, except per share amounts)
Intrinsic value of options exercised	$	390	$	893	$	301
Cash received from option exercises		189		111		199
Tax benefit realized from option exercises		4		28		54
Weighted average fair value of options granted	$	—	$	—	$	—

As of December 31, 2019, there was $14,000 of total unrecognized compensation costs 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 1.0 years.

At December 31, 2019, 207,564 restricted share awards were outstanding. Compensation expense is recognized over the performance period based on the achievement of established targets. Total expense of $2.1 million, $2.0 million and $2.0 million was recorded during the years ended December 31, 2019, 2018 and 2017, respectively, and approximately $1.2 million and $961,000 is included within other liabilities at December 31, 2019 and 2018, respectively, related to the STIPs and LTIPs.

	Restricted Stock Units					Stock Grants
Unvested Shares	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Unvested at January 1, 2019		144,586		$	23.94		30,372		$	28.48
Granted		83,659			25.50		24,651			26.54
Vested		(54,771	)		20.13		(6,104	)		28.49
Forfeited		(14,829	)		25.65		—			—
Unvested at December 31, 2019		158,645		$	25.72		48,919		$	27.49

The maximum amount of compensation expense that may be earned for the 2019 STIP and the 2017, 2018 and 2019 LTIPs at December 31, 2019, is approximately $4.2 million in the aggregate. However, the estimated expense expected to be earned as of December 31, 2019, based on the performance measures in the plans, is $4.0 million of which $1.0 million was unrecognized at December 31, 2019, and will be recognized over the remaining performance period.

As of December 31, 2019, 795,106 shares were available for grant under the 2018 Equity Plan. Options forfeited or cancelled under all plans except the 2018 Equity Plans are no longer available for grant to other participants.

21.	Parent Company Statements

Condensed parent company financial statements, which include transactions with subsidiaries, are as follow:

	December 31,
Statements of Financial Condition	2019		2018
	(In Thousands)
Assets
Cash and cash equivalents	$	18,011	$	12,153
Investment in banking subsidiary		419,496		398,922
Investment in non-bank subsidiaries		24,103		23,372
Other assets		1,169		1,723
Total assets	$	462,779	$	436,170
Liabilities and stockholders’ equity:
Subordinated debentures	$	36,083	$	36,083
Accrued liabilities		529		498
Stockholders’ equity		426,167		399,589
Total liabilities and stockholders’ equity	$	462,779	$	436,170

	Years Ended December 31,
Statements of Income	2019			2018			2017
	(In Thousands)
Dividends from subsidiaries	$	38,585		$	24,550		$	15,800
Interest expense		(1,368	)		(1,281	)		(1,090	)
Other income		1			1			1
Noninterest expense		(1,234	)		(831	)		(697	)
Income before income taxes and equity in earnings of subsidiaries		35,984			22,439			14,014
Income tax credit		(534	)		(431	)		(605	)
Income before equity in earnings of subsidiaries		36,518			22,870			14,619
Undistributed equity in earnings of subsidiaries		12,852			23,379			17,649
Net income		49,370			46,249			32,268
Other comprehensive income (loss)		6,743			(2,412	)		2
Comprehensive income	$	56,113		$	43,837		$	32,270

	Years Ended December 31,
Statements of Cash Flows	2019			2018			2017
	(In Thousands)
Operating activities:
Net income	$	49,370		$	46,249		$	32,268
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Undistributed equity in earnings of subsidiaries		(12,852	)		(23,379	)		(17,649	)
Change in other assets and liabilities		(201	)		(419	)		(358	)
Net cash provided by (used in) operating activities		36,317			22,451			14,261
Investing activities:
Cash paid for Commercial Bancshares		—			—			(12,340	)
Capital contribution to subsidiary		—			—			(6,491	)
Net cash used in investing activities		—			—			(18,831	)
Financing activities:
Repurchase of common stock		(15,147	)		(6,330	)		—
Cash dividends paid		(15,624	)		(13,043	)		(9,859	)
Stock Options Exercised		189			111			199
Direct stock sales		123			104			73
Net cash used in financing activities		(30,459	)		(19,158	)		(9,587	)
Net increase (decrease) in cash and cash equivalents		5,858			3,293			(14,157	)
Cash and cash equivalents at beginning of year		12,153			8,860			23,017
Cash and cash equivalents at end of year	$	18,011		$	12,153		$	8,860

22.	Fair Value

FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability 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.

FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 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 1 include federal agency preferred stock securities. Securities in Level 2 include U.S. 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 investors 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 20% 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: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

100

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

December 31, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	—	$	2,524	$	—	$	2,524
Mortgage-backed - residential		—		89,647		—		89,647
REMICs		—		1,636		—		1,636
Collateralized mortgage obligations		—		82,101		—		82,101
Corporate bonds and trust preferred		—		12,101		—		12,101
Obligations of state and political subdivisions		—		92,028		3,411		95,439
Mortgage banking derivative - asset		—		892		—		892

December 31, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	—	$	2,503	$	—	$	2,503
Mortgage-backed - residential		—		74,710		—		74,710
REMICs		—		2,709		—		2,709
Collateralized mortgage obligations		—		101,461		—		101,461
Preferred stock		—		—		—		—
Corporate bonds		—		12,806		—		12,806
Obligations of state and political subdivisions		—		99,887				99,887
Mortgage banking derivative - asset		—		367		—		367
Mortgage banking derivative -liability		—		73		—		73

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018.

101

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

December 31, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial Real Estate	$	—	$	—	$	68	$	68
Commercial		—		—		38		38
Total impaired loans		—		—		106		106

Mortgage servicing rights		—		273		—		273

December 31, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial Real Estate	$	—	$	—	$	1,456	$	1,456
Commercial						319		319
Total impaired loans		—		—		1,775		1,775

Mortgage servicing rights		—		629		—		629

Real estate held for sale
CRE		—		—		705		705
Total Real Estate held for sale		—		—		705		705

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2019, 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

Appraisals which utilize

sales comparison, net

income and cost approach

Discounts for collection

issues and changes in

market conditions

10-13%

10.86%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 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	$	1,775	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-13%	10.86%

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%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $106,000, with a valuation allowance of $26,000 and a fair value of $1.8 million with a valuation allowance of $9,000 at December 31, 2019 and 2018, respectively. A provision expense of $12,000, $1.2 million, $993,000 for the years ended December 31, 2019, 2018 and 2017, respectively, related to these impaired loans was included in earnings.

102

Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $273,000 with a valuation allowance of $534,000 and a fair value of $629,000 with a valuation allowance of $300,000 at December 31, 2019 and 2018, respectively. Expense of $234,000 was included in earnings for the year ended December 31, 2019 and a recovery of $132,000 and $90,000 for the years ended December 31, 2018 and 2017, respectively.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for changes in market conditions. The change in fair value of real estate held for sale was $264,000, $552,000 and $20,000 for the years ended December 31, 2019, 2018 and 2017, respectively, which was recorded directly as an adjustment to current earnings through noninterest expense.

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 December 31, 2019, and December 31, 2018. 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, 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 FHLB stock due to restrictions placed on its transferability.

The Company adopted the amendments to ASU 2016-01 relating to the loan portfolio in 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. 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 noninterest-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, NOW and certain money market accounts are equal to their carrying amounts and are a Level 1 classification. They were considered a level 2 classification at December 31, 2018. 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 1 classification. They were considered a Level 2 asset at December 31, 2018. The fair value of subordinated debentures at December 31, 2019 was considered to be the carrying value as the debt is floating rate and can be prepaid at any time without penalty.

103

FHLB advances with maturities greater than 90 days are valued based on 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 December 31, 2019.

			Fair Value Measurements at December 31, 2019 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	131,254	$	131,254	$	131,254	$	—	$	—
Investment securities		283,448		283,448		—		280,037		3,411
FHLB Stock		11,915	N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,764,329		2,756,092		—		18,456		2,737,636

Financial Liabilities:
Deposits	$	2,870,325	$	2,871,166	$	2,131,537	$	739,629	$	—
Advances from FHLB		85,063		85,003		—		85,003		—
Securities sold under repurchase agreements		2,999		2,999		2,999		—		—
Subordinated debentures		36,083		36,083		—		36,083		—

			Fair Value Measurements at December 31, 2018 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	98,962	$	98,962	$	98,962	$	—	$	—
Investment securities		294,602		294,602		—		294,602		—
FHLB Stock		14,217	N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,518,321		2,501,096		—		6,865		2,494,231

Financial Liabilities:
Deposits	$	2,620,882	$	2,613,965	$	607,198	$	2,006,767	$	—
Advances from FHLB		85,189		84,281		—		84,281		—
Securities sold under repurchase agreements		5,741		5,741		—		5,741		—
Subordinated debentures		36,083		28,854		—		—		28,854

23.	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 $17.0 million and $8.6 million of interest rate lock commitments at December 31, 2019 and 2018, respectively. There were $34.4 million and $11.5 million of forward commitments for the future delivery of residential mortgage loans at December 31, 2019 and 2018, respectively.

104

The fair value of these mortgage banking derivatives are reflected by a derivative asset or a derivative liability. The table below provides data about the carrying values of these derivative instruments:

December 31, 2019

December 31, 2018

Assets

(Liabilities)

Assets

(Liabilities)

Derivative

Carrying

Net Carrying

Carrying

Net Carrying

Value

(In Thousands)

Derivatives not designated as hedging

instruments

Mortgage Banking

Derivatives

883

)

892

367

294

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

	Twelve Months Ended December 31,
	2019		2018			2017
	(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives – Gain (Loss)	$	598	$	(304	)	$	107

24.	Quarterly Consolidated Results of Operations (Unaudited)

The following is a summary of the quarterly consolidated results of operations:

	Three Months Ended
	March 31		June 30		September 30		December 31
2019	(In Thousands, Except Per Share Amounts)
Interest income	$	33,919	$	35,241	$	35,683	$	36,241
Interest expense		5,649		6,252		6,791		6,743
Net interest income		28,270		28,989		28,892		29,498
Provision for loan losses		212		282		1,327		1,084
Net interest income after provision for loan losses		28,058		28,707		27,565		28,414
Noninterest income		10,813		10,486		11,842		11,815
Noninterest expense		24,866		24,235		23,203		24,759
Income before income taxes		14,005		14,958		16,204		15,470
Income taxes		2,523		2,759		3,033		2,952
Net income	$	11,482	$	12,199	$	13,171	$	12,518
Earnings per common share:	$	0.57	$	0.62	$	0.67	$	0.63
Basic	$	0.57	$	0.61	$	0.66	$	0.63
Diluted

105

	Three Months Ended
	March 31			June 30		September 30		December 31
2018	(In Thousands, Except Per Share Amounts)
Interest income	$	28,905		$	30,299	$	31,963	$	33,550
Interest expense		3,218			3,752		4,434		5,058
Net interest income		25,687			26,547		27,529		28,492
Provision for loan losses		(1,095	)		423		1,376		472
Net interest income after provision for loan losses		26,782			26,124		26,153		28,020
Noninterest income		10,703			10,214		9,922		8,369
Noninterest expense		23,251			22,665		22,286		21,210
Income before income taxes		14,234			13,673		13,789		15,179
Income taxes		2,497			2,564		2,483		3,082
Net income	$	11,737		$	11,109	$	11,306	$	12,097
Earnings per common share:
Basic	$	0.58		$	0.54	$	0.55	$	0.60
Diluted	$	0.58		$	0.54	$	0.55	$	0.59

25.	Other Comprehensive Income (Loss)

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. Reclassification adjustments related to the defined benefit postretirement medical plan are included in compensation and benefits in the accompanying consolidated condensed statements of income.

	Before Tax Amount			Tax Effect			Net of Tax Amount
	(In Thousands)
Twelve months ended December 31, 2019:
Securities available for sale and transferred securities:
Change in net unrealized gain/(loss) during the period	$	8,754		$	1,839		$	6,915
Reclassification adjustment for net gains included in net income		(24	)		(5	)		(19	)
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized during the period		(310	)		(146	)		(164	)
Reclassification adjustment for net amortization and deferral on defined benefit postretirement medical plan (included in compensation and benefits)		14			3			11
Total other comprehensive income	$	8,434		$	1,691		$	6,743

	Before Tax Amount			Tax Effect			Net of Tax Amount
	(In Thousands)
Twelve months ended December 31, 2018:
Securities available for sale and transferred securities:
Change in net unrealized gain/(loss) during the period	$	(3,356	)	$	(706	)	$	(2,650	)
Reclassification adjustment for net gains included in net income		(173	)		(36	)		(137	)
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized during the period		560			200			360
Reclassification adjustment for net amortization and deferral on defined benefit postretirement medical plan (included in compensation and benefits)		18			3			15
Total other comprehensive income	$	(2,951	)	$	(539	)	$	(2,412	)

106

	Before Tax Amount			Tax Effect			Net of Tax Amount
	(In Thousands)
Twelve months ended December 31, 2017
Securities available for sale and transferred securities:
Change in net unrealized gain/(loss) during the period	$	733		$	256		$	477
Reclassification adjustment for net gains included in net income		(584	)		(204	)		(380	)
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized during the period		(166	)		(59	)		(107	)
Reclassification adjustment for net amortization and deferral on defined benefit postretirement medical plan (included in compensation and benefits)		19			7			12
Total other comprehensive income	$	2		$	—		$	2

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

	Securities Available For Sale			Post- retirement Benefit			Accumulated Other Comprehensive Income
	(In Thousands)
Balance January 1, 2019	$	(2,057	)	$	(91	)	$	(2,148	)
Other comprehensive income before reclassifications		6,915			(164	)		6,751
Amounts reclassified from accumulated other comprehensive loss		(19	)		11			(8	)
Net other comprehensive income during period		6,896			(153	)		6,743
Balance December 31, 2019	$	4,839		$	(244	)	$	4,595
Balance January 1, 2018	$	601		$	(384	)	$	217
Other comprehensive income before reclassifications		(2,650	)		360			(2,290	)
Amounts reclassified from accumulated other comprehensive loss		(137	)		15			(122	)
Net other comprehensive income during period		(2,787	)		375			(2,412	)
Reclassification adjustment upon adoption of ASU 2018-02		129			(82	)		47
Balance December 31, 2018	$	(2,057	)	$	(91	)	$	(2,148	)
Balance January 1, 2017	$	504		$	(289	)	$	215
Other comprehensive income before reclassifications		477			(108	)		369
Amounts reclassified from accumulated other comprehensive loss		(380	)		13			(367	)
Net other comprehensive income during period		97			(95	)		2
Balance December 31, 2017	$	601		$	(384	)	$	217

107

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

First Defiance’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of First Defiance’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2019. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that First Defiance’s disclosure controls and procedures as of December 31, 2019, are effective.

The information set forth under “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” included in Item 8 above is incorporated herein by reference.

There were no changes in First Defiance’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect First Defiance’s internal control over financial reporting.

Item 9B. Other Information

On March 12, 2020, our Board of Directors amended the Company’s Amended and Restated Code of Regulations (the “Amendment”) in order to remove two references in the Company’s Amended and Restated Code of Regulations contemplating a change to the name of First Defiance or First Federal to be effective as of the closing of the transactions contemplated by the Agreement and Plan of Merger, dated as of September 9, 2019, between First Defiance Financial Corp. and United Community Financial Corp.

The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment, which is filed as Exhibit 3.3 to this Annual Report on Form 10-K and is incorporated herein by reference

108

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item relating to our directors, nominees for directorship and executive officers is incorporated herein by reference from the section captioned “Composition of the Board” under the heading “PROPOSAL 1 – Election of Directors” and the section immediately following the heading “EXECUTIVE OFFICERS” in the Company’s definitive proxy statement which will be filed no later than 120 days after December 31, 2019 (the “Proxy Statement”). Information regarding our Audit Committee and compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this item is incorporated herein by reference from the sections respectively captioned, “Board Committees” under the “PROPOSAL 1 – Election of Directors” and the section immediately following the heading “DELINQUENT SECTION 16(a) REPORTS” of the Proxy Statement. There have been no material changes to the procedures by which shareholders may recommend nominees to the board of directors.

First Defiance has adopted a code of ethics applicable to all officers, directors and employees that complies with SEC requirements, and is available on its Internet site at www.fdef.com under the Governance Documents tab on the Investor Relations page.

Item 11. Executive Compensation

Information regarding director compensation is set forth under the section captioned “Director Compensation” under the heading “PROPOSAL 1 – Election of Directors” of the Proxy Statement, and is incorporated herein by reference. Executive compensation information has been provided under the headings “COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE COMPENSATION” in the Proxy Statement, and is incorporated herein by reference.

The Compensation Committee Report and information related to compensation committee interlocks and insider participation have been respectively set forth under the section immediately following the heading “COMPENSATION COMMITTEE REPORT” and under the section captioned “Compensation Committee Interlocks and Insider Participation” following the heading “PROPOSAL 1 – Election of Directors” in the Proxy Statement, and are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information regarding security ownership of certain beneficial owners and management and information relating thereto is set forth in the section under the heading “BENEFICIAL OWNERSHIP” in the Proxy Statement, and is incorporated herein by reference.

Equity Compensation Plans

The following table provides information as of December 31, 2019, with respect to the shares of First Defiance common stock that are reserved for issuance under First Defiance’s existing equity compensation plans.

Plan Category

Number of

securities to

be Issued

Upon Exercise

of Outstanding

Options,

Warrants

and Rights

Weighted

Average

Exercise Price of

Outstanding

Options,

Warrants

and Rights

Number of

Securities

Remaining

Available

for Future

Issuance

Under Equity

Compensation

Plans (Excluding

Securities

Reflected

in Column (a)

(a)

(b)

(c)

Equity Compensation Plans Approved by Security Holders

17,700

17.60

795,106

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item, including related transactions and director independence, is set forth respectively in the section following the heading “RELATED PERSON TRANSACTIONS” and in the section captioned “Composition of the Board” following the heading “PROPOSAL 1 – Election of Directors” in the Proxy Statement, which are both incorporated by reference.

Item 14. Principal Accountant Fees and Services

The information required by this item is set forth under the section captioned “Audit Fees” following the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” in the Proxy Statement, and is incorporated herein by reference.

109

PART IV

Item 15.Exhibits, Financial Statement Schedules

(a)	Financial Statements

(1)

The following documents are filed as Item 8 of this Form 10-K.

(A)

Report of Independent Registered Public Accounting Firm (Crowe LLP)

(B)

Consolidated Statements of Financial Condition as of December 31, 2019 and 2018

(C)

Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017

(D)

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

(E)

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017

(F)

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

(G)

Notes to Consolidated Financial Statements

(2)

Separate financial statement schedules are not being filed because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the related notes.

(3)

The exhibits required by this item are listed in the Exhibit Index of this Form 10-K.

Item 16.10-K Summary

None.

110

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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.

March 16, 2020	By:	/s/ Paul Nungester
		Paul Nungester, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2020.

Signature		Title

/s/ John L. Bookmyer		Chairman of the Board
John L. Bookmyer

/s/ Richard J. Schiraldi		Vice Chairman of the Board
Richard J. Schiraldi

/s/ Donald P. Hileman		Chief Executive Officer
Donald P. Hileman

/s/ Gary M. Small		President
Gary M. Small

/s/ Paul Nungester		Executive Vice President and Chief
Paul Nungester		Financial Officer (principal accounting officer)

/s/ Marty E. Adams		Director
Marty E. Adams

/s/ Zahid Afzal		Director
Zahid Afzal

/s/ Louis M. Altman		Director
Louis M. Altman

/s/ Terri A. Bettinger		Director
Terri A. Bettinger

/s/ Lee Burdman		Director
Lee Burdman
/s/ Jean A. Hubbard		Director
Jean A. Hubbard

/s/ Charles D. Niehaus		Director
Charles D. Niehaus

/s/ Mark A. Robison		Director
Mark A. Robison

/s/ Samuel S. Strausbaugh		Director
Samuel S. Strausbaugh

111

Exhibit Index

This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be part of this document.

The SEC maintains an internet web site that contains reports, proxy statements, and other information about issuers, like First Defiance, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by First Defiance with the SEC are also available at the First Defiance Financial Corp. web site. The address of the site is http://www.fdef.com. Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this report.


Exhibit
Number		Description

2.1		Agreement and Plan of Merger, dated as of September 9, 2019, between First Defiance Financial Corp. and United Community Financial Corp. (incorporated herein by reference to Exhibit 2.1 in Registrant’s Form 8-K filed September 10, 2019 (File No. 000-26850))

3.1		Amended and Restated Articles of Incorporation of First Defiance (incorporated herein by reference to Exhibit 3.1 in Registrant’s Form 8-K filed February 3, 2020 (File No. 000-26850))

3.2		Amended and Restated Code of Regulations of First Defiance (incorporated herein by reference to Exhibit 3.2 in Registrant’s Form 8-K filed February 3, 2020 (File No. 000-26850))

3.3*		Amendment to Amended and Restated Code of Regulations of First Defiance

4.1*		Description of Capital Stock

10.1+		First Federal Amended and Restated Executive Group Life Plan – Post Separation, effective June 30, 2010 (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 10-Q filed November 2, 2010 (File No. 000-26850))

10.2+		2010 Equity Incentive Plan (incorporated herein by reference to Annex A to the Registrant’s 2010 Proxy Statement filed March 19, 2010 (File No. 000-26850))

10.3+		First Amendment to First Defiance Financial Corp. 2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 8-K filed March 15, 2012 (File No. 000-26850))

10.4+		2010 Equity Plan Form of Long-Term Incentive Performance-Based Award Agreement (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 10-Q filed November 8, 2011 (File No. 000-26850))

10.5+		Form of Restricted Stock Award Agreement under 2010 Equity Plan (incorporated herein by reference to Exhibit 10.3 in the Registrant’s Form 8-K filed December 30, 2013 (File No. 000-26850))

10.6+		Form of Restricted Stock Unit Award Agreement under 2010 Equity Plan (incorporated herein by reference to Exhibit 10.24 in the Registrant’s Form 10-K filed February 28, 2017 (File No. 000-26850)

10.7+		First Defiance Financial Corp. and Affiliates Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.2 in the Registrant’s Form 8-K filed March 15, 2012 (File No. 000-26850))

10.8+		Form of First Defiance Financial Corp. Long-Term Restricted Stock Unit Award Agreement under the Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.4 in Form 8-K filed March 15, 2012 (File No. 000-26850))

10.9+		2018 Equity Incentive Plan (incorporated herein by reference to Annex A in the Registrant’s Proxy Statement for the 2018 Annual Meeting filed March 12, 2018 (File No. 000-26850)

10.10+		Change of Control and Non-Solicitation Agreement with John R. Reisner, dated March 20, 2018 (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 8-K filed March 22, 2018 (File No. 000-26850))
10.11+		Change of Control and Non-Compete Agreement with Dennis E. Rose, Jr., dated September 13, 2001 (incorporated herein by reference to Exhibit 10.36 in the Registrant’s Form 10-K filed February 27, 2015 (File No. 000-26850))

10.12+		Form of Restricted Stock Award Agreement under 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 10-Q filed August 7, 2018 (File No. 000-26850))

10.13+		Form of Restricted Stock Unit Award Agreement under 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 in the Registrant’s Form 10-Q filed August 7, 2018 (File No. 000-26850))
10.14+		First Defiance Deferred Compensation Plan, revised October 30, 2014 (incorporated herein by reference to Exhibit 10.3 in the Registrant’s Form 10-Q filed August 7, 2018 (File No. 000-26850))

112


10.15+		Employment Agreement with Donald P. Hileman, dated December 20, 2018 (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 8-K filed December 27, 2018 (File No. 000-26850))

10.16+		First Amendment to the Employment Agreement with Donald P. Hileman, dated March 4, 2019 (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 8-K filed March 6, 2019 (File No. 000-26850))

10.17+		Employment Agreement with Kevin T. Thompson, dated December 24, 2018 (Incorporated herein by reference to Exhibit 10.2 in the Registrant’s Form 8-K filed December 27, 2018 (File No. 000-26850))

10.18+		Form of Performance-Based Restricted Stock Unit Award Agreement (LTIP) under the 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.26 in the Registrant’s Form 10-K filed February 28, 2019 (File No. 000-26850))

10.19+		Amendment to Form of Performance-Based Restricted Stock Unit Award Agreements (LTIP) under the 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.3 in Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

10.20+		Form of Performance-Based Restricted Stock Unit Award Agreement (Long-Term Equity Asset Growth) under the 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.27 in the Registrant’s Form 10-K filed February 28, 2019 (File No. 000-26850))

10.21+		Amendment to Form of Performance-Based Restricted Stock Unit Award Agreement (Long-Term Equity Asset Growth) under the 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 in the Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

10.22+		Form of Performance-Based Restricted Stock Unit Award Agreement (LTIP) under the 2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.28 in the Registrant’s Form 10-K filed February 28, 2019 (File No. 000-26850))

10.23+		Form of Performance-Based Restricted Stock Unit Award Agreement (Long-Term Equity Asset Growth) under the 2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.29 in the Registrant’s Form 10-K filed February 28, 2019 (File No. 000-26850))

10.24+*		Change of Control and Non-Solicitation Agreement with Sharon L. Davis, dated March 26, 2018

10.25+		Employment Agreement with Paul D. Nungester, dated May 1, 2019 (incorporated herein by reference to Exhibit 10.1 in the Registrant’s Form 10-Q filed May 7, 2019 (File No. 000-26850))

10.26+		Employment Agreement with Donald P. Hileman, dated September 9, 2019 (incorporated herein by reference to Exhibit 10.1 in Registrant’s Form 8-K filed September 10, 2019 (File No. 000-26850))

10.27+		Employment Agreement with Gary M. Small, dated September 9, 2019 (incorporated herein by reference to Exhibit 10.2 in Registrant’s Form 8-K filed September 10, 2019 (File No. 000-26850))

10.28+		Amendment to Donald P. Hileman Performance-Based Restricted Stock Unit Award Agreements (LTIP) under the 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.1 in Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

10.29+		Amendment to Donald P. Hileman Performance-Based Restricted Stock Unit Award Agreement (Long-Term Equity Asset Growth) under the 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 in the Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

21*		List of Subsidiaries of the Company

23.1*		Consent of Crowe LLP

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101**		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements tagged as blocks of text and in detail.

*	Filed herewith

**	Furnished herewith

+	Indicates management contract or compensatory plan.

113

Exhibit 3.3

FIRST AMENDMENT TO AMENDED AND RESTATED CODE OF REGULATIONS

FRST DEFIANCE FINANCIAL CORP.

Effective as of March 12, 2020:

1. Article XII, Section 2 of the Amended and Restated Code of Regulations for First Defiance Financial Corp., shall be deleted in its entirety and replaced with the following:

SECTION 2. Office of the Bank. The main office of the Corporation’s subsidiary, First Federal Bank of the Midwest, herein the “Bank,” will be located in Youngstown, Ohio.

2. The first paragraph of Article XII, Section 3 of the Amended and Restated Code of Regulations for First Defiance Financial Corp., shall be deleted in its entirety and replaced with the following:

SECTION 3. Officers of the Corporation. Notwithstanding any other provision of this Code of Regulations, the Board of Directors shall, subject to the next succeeding paragraph in this Section 3, elect the following individuals to the following officer positions for the periods of time set forth opposite their names, pursuant to Section 7.14(d) of the Agreement and Plan of Merger between the Corporation and United Community Financial Corp. (“United Community”), dated September 9, 2019 (the “Agreement”) (terms capitalized but not otherwise defined in this Code of Regulations shall have the meaning given to them in the Agreement):

Exhibit 4.1

Description of First Defiance Financial Corp. Capital Stock

As of December 31, 2019, First Defiance Financial Corp., an Ohio corporation (“First Defiance,” the “Company,” “we,” or “our”), had one class of securities registered pursuant to Section 12 of the U.S. Securities Exchange Act of 1934, as amended: Common Stock, par value $0.01 per share (“Common Shares”).

Effective as of the closing of First Defiance’s merger with United Community Financial Corp. (the “Merger”) on January 31, 2020, First Defiance’s Amended and Restated Articles of Incorporation (the “Articles”) were adopted. The Articles authorize 80,000,000 shares of capital stock, consisting of 75,000,000 Common Shares, and 5,000,000 shares of preferred stock, $0.01 par value (“Preferred Shares”). First Defiance has no Preferred Shares issued or outstanding.

The following summary is subject to, and qualified in its entirety by reference to, the Articles, and First Defiance’s Amended and Restated Code of Regulations, as amended on the date of the Merger (the “Regulations”), as well as the applicable provisions of Chapters 1701, 1704 and 1707 of the Ohio Revised Code. For a complete description of the terms and provisions of our Common Shares, refer to the Articles and the Regulations, both of which are filed as exhibits to First Defiance’s Annual Report on Form 10-K.

Common Shares

Voting Rights

Holders of Common Shares are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. Our Common Shares do not have cumulative voting rights for the election of directors. Unless otherwise provided in the Articles or the Regulations, a majority of votes cast by shareholders at a meeting is sufficient to pass on any matter before the shareholders.

Board of Directors

Our Board of Directors (“Board”) is divided into three classes (Class I, Class II and Class III), elected for staggered three-year terms. Our Regulations provide that the Board consist of 13 directors: (i) Donald Hileman, John Bookmyer and five other persons who served as directors of First Defiance or First Federal Bank of the Midwest immediately prior to the effective time of the Merger (the “First Defiance related directors”) and (ii) Gary Small, Richard Schiraldi, and four other persons who served as directors of United Community Financial Corp. or Home Savings Bank immediately prior to the effective time of the Merger (the “UCFC related directors”). If, prior to the second anniversary of the “succession date” (as defined in the Regulations), which will be between January 1, 2021, and June 30, 2021, any of the initial Class I, II or III directors ceases to serve as a director for any reason or does not stand for reelection, the vacancy will be filled by

the Board with an individual selected by the UCFC related directors (if such director was a UCFC related director) or the First Defiance related directors (if such director was a First Defiance related director) in good faith in a manner intended to preserve the principles of representation in the Regulations, provided that such individual is reasonably agreeable to the Governance and Nominating Committee of the Board in accordance with the good faith execution of its duties.

Dividends

The Board may, at any regular or special meeting, declare dividends on our outstanding capital stock. Dividends may be paid in cash, in property or in our capital stock.

First Defiance’s ability to pay dividends to its shareholders is primarily dependent on its receipt of dividends from First Federal Bank of the Midwest (“First Federal”) and its other subsidiaries. The Federal Reserve expects First Defiance to serve as a source of strength for First Federal and may require First Defiance to retain capital for further investment in First Federal, rather than pay dividends to First Defiance shareholders. Payment of dividends by First Defiance or First Federal may be restricted at any time at the discretion of its applicable regulatory authorities if they deem such dividends to constitute an unsafe or unsound practice. These provisions could have the effect of limiting First Defiance's ability to pay dividends on its common shares.

First Federal must have the approval of the Ohio Division of Financial Institutions if the payment of a cash dividend in any year would cause the total dividends for that year to exceed the total of First Federal’s net income for the current year and the retained net income of First Federal for the preceding two years. Payments of dividends by First Federal may be restricted at any time at the discretion of First Federal’s governing regulatory authorities if such regulatory authorities deem such dividends to constitute unsafe and/or unsound banking practices or if necessary to maintain adequate capital.

The Federal Reserve Board has issued a policy statement with regard to the payment of cash dividends by financial holding companies and other bank holding companies. The policy statement provides that, as a matter of prudent banking, a financial holding company or a bank holding company should not maintain a rate of cash dividends on common stock unless its net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the financial holding company’s or bank holding company’s capital needs, asset quality and overall financial condition. Accordingly, a financial holding company or a bank holding company should not pay dividends that exceed its net income or can only be funded in ways that weaken the financial holding company's or bank holding company’s financial health, such as by borrowing. In addition, First Defiance may not pay dividends that would cause First Defiance to fail to satisfy the capital adequacy regulations applicable to bank holding companies which qualify as financial holding companies, including having a capital conservation buffer that is greater than 2.5%.

No Preemptive Rights

No shareholder of the Company shall have, as a matter of right, the preemptive right to purchase or subscribe for shares of any class, now or hereafter authorized, or to purchase or subscribe for securities or other obligations convertible into or exchangeable for such shares or which by warrants or otherwise entitle the holders thereof to subscribe for or purchase any such shares.

Share Repurchases by the Company

We have the right, but not the obligation, to repurchase our common shares from our shareholders.

Preferred Shares

Our 5,000,000 authorized but unissued preferred shares are typically referred to as “blank check” preferred shares. This term refers to preferred shares for which the rights and restrictions are determined by the board of directors of a corporation at the time the preferred shares are issued. Under our Articles, our Board has the authority, without any further shareholder vote or action, to issue the preferred shares in one or more series, from time to time, with full or limited voting power, or without voting power, and with all designations, preferences and relative, participating, optional or other special rights and privileges of, and qualifications, limitations or restrictions upon, the preferred shares, as may be provided in the amendment or amendments to our Articles adopted by our Board. The authority of our Board includes, but is not limited to, the determination or fixing of the following with respect to a particular series of preferred shares: the distinctive serial designation and the number of shares constituting such series; the voting rights, full, conditional or limited, of shares of such series; the dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends; the amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company; whether the shares of such series shall be entitled to the benefits of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and, if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such funds; whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Company and, if so convertible or exchangeable, the conversion price or prices, or the rates or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; the price or other consideration for which the shares of such series shall be issued; restrictions, if any, on the issuance of shares of the same series or any other class or series; and whether the shares of such series shall be redeemable and, if so, the

price or prices at which, and the terms and conditions upon which such shares may be redeemed; and such other rights, preferences and limitations as shall not be inconsistent with our Articles, our Regulations or Ohio law.

Transfer Agent and Registrar

The transfer agent and registrar for our common shares is Broadridge Financial Solutions, Inc.

Listing

Our common shares are listed on the NASDAQ Global Market under the symbol “FDEF.”

Ohio Anti-takeover Statutes

Certain state laws make a change in control of an Ohio corporation more difficult, even if desired by the holders of a majority of the corporation’s shares. Provided below is a summary of the Ohio anti-takeover statutes.

Ohio Revised Code Section 1701.831 is a “control share acquisition” statute. The control share acquisition statute provides, in essence, that any person acquiring shares of an “issuing public corporation” (which First Defiance meets by definition) in any of the following three ownership ranges must seek and obtain shareholder approval of the acquisition transaction that first puts such ownership within each such range: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; and (iii) a majority or more.

The control share acquisition statute applies not only to traditional offers but also to open market purchases, privately-negotiated transactions and original issuances by an Ohio corporation, whether friendly or unfriendly. The procedural requirements of the control share acquisition statute could render approval of any control share acquisition difficult because it must be authorized at a special meeting of shareholders, for which the statutorily prescribed form of notice has been given and at which the statutorily prescribed quorum is present, by the affirmative vote of the majority of the voting power of the corporation in the election of directors represented at the meeting and by a majority of the portion of such voting power, excluding the voting power of interested shares.

A corporation may elect not to be covered by the provisions of the control share acquisition statute by the adoption of an appropriate amendment to its articles of incorporation or its regulations. We have not adopted such an amendment. Our Articles, as currently in effect, provide that Section 1701.831 of the Ohio Revised Code applies to control share acquisitions of shares of First Defiance.

Ohio Revised Code Chapter 1704 is a “merger moratorium” statute. The merger moratorium statute provides that, unless a corporation’s articles of incorporation otherwise provide, an “issuing public corporation” (which First Defiance meets by definition) may not

engage in a “Chapter 1704 transaction” for three years following the date on which a person acquires more than 10% of the voting power in the election of directors of the issuing corporation, unless the Chapter 1704 transaction is approved by the corporation’s board of directors prior to such transaction. A person who acquires such voting power is an “interested shareholder,” and “Chapter 1704 transactions” involve a broad range of transactions, including mergers, consolidations, combinations, liquidations, recapitalizations and other transactions between an issuing public corporation and an interested shareholder if such transactions involve at least 5% of the aggregate fair market value of the assets or shares of the issuing public corporation or assets representing at least 10% of its earning power or income. After the initial three-year moratorium, Chapter 1704 prohibits such transactions absent approval by disinterested shareholders or the transaction meeting certain statutorily defined fair price provisions.

A corporation may elect not to be covered by the provisions of Ohio Revised Code Chapter 1704 by the adoption of an appropriate amendment to its articles of incorporation. We have not adopted such an amendment. Our Articles, as currently in effect, provide that Ohio Revised Code Chapter 1704 applies to First Defiance.

Ohio also has enacted Ohio Revised Code Section 1707.043, which provides that a person who announces a control bid with respect to an Ohio corporation that has issued and outstanding shares listed on a national securities exchange (which First Defiance does with our common shares) must disgorge profits realized by that person upon the sale of any equity securities within 18 months of the announcement.

In addition, Section 1701.59 of the Ohio Revised Code provides that, in determining what a director reasonably believes to be in the best interests of the corporation, such director may consider, in addition to the interests of the corporation’s shareholders, any of the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the State of Ohio and the United States, community and societal considerations and the long-term as well as the short-term interests in the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

The overall effect of the statutes described above may be to render more difficult or discourage the removal of incumbent management of an Ohio corporation or the assumption of effective control of an Ohio corporation by other persons.

Exhibit 10.24

CHANGE OF CONTROL AND NON-SOLICITATION AGREEMENT

THIS CHANGE OF CONTROL AND NON-SOLICITATION AGREEMENT (this “Agreement”) is entered into as of the 26 day of March, 2018, by and among First Defiance Financial Corp. an Ohio corporation and thrift holding company (“First Defiance”), First Federal Bank of the Midwest, a federal savings bank (“First Federal”) (collectively, with First Defiance, the “Company”), and Sharon Davis, an individual (the “Employee”).

WITNESSETH:

WHEREAS, the Employee is currently employed by the Company;

WHEREAS, as a result of the skill, knowledge and experience of the Employee, the Company believes it is in the best interest of the Company to provide the Employee with a sense of security to encourage the Employee to remain an employee of the Company; and

WHEREAS, the Company and the Employee desire to enter into this Agreement to set forth their understanding as to their respective rights and obligations in the event of the termination of Employee’s employment under the circumstances set forth in this Agreement;

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the Company and the Employee hereby agree as follows:

1.Term. The term of this Agreement shall begin on the date above and shall continue until December 31, 2019, unless sooner terminated for Just Cause, as defined in this Agreement. This Agreement shall automatically renew for additional one year periods following the original term, at the end of each subsequent one year period, upon the same terms and conditions unless the Company provides at least 30 days prior notice of its intent not to renew.

2.Termination of Employment.

(a)Termination by the Company in Connection with a Change of Control. In the event that the employment of the Employee is terminated by the Company, or its successors or assigns, at any time during the term of this Agreement for any reason other than Just Cause within six months prior to a Change of Control (hereinafter defined) or within one year after a Change of Control and provided that Employee has executed a Release pursuant to Section 2(g) below, then the following shall occur:

(i)The Company shall promptly pay to the Employee or to his beneficiaries, dependents or estate an amount equal to two times the Employee’s current annual base salary and two times the Employee’s five year average annual short term cash bonus;

(ii)The Company shall pay the premiums required to maintain coverage for the Employee and his eligible dependents under the health insurance plan of the Employer in which the Employee is a participant immediately prior to the Change of Control of the Company in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, until the earliest of (A)

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the first anniversary of the termination of the Employee’s employment or (B) the date on which the Employee is eligible to participate in another employer’s comparable health insurance plan as a full-time employee; and

(iii)The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by the Employee offset in any manner the obligations of the Company hereunder, except as specifically stated in clause (ii) above.

For purposes of this Agreement, the term “Just Cause” shall mean personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. For purposes of this paragraph, no act or failure to act on the Employee’s part shall be considered “willful” unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee’s action or omission was in the best interest of the Company.

(b)Termination by the Employee in Connection with a Change of Control. The Employee may voluntarily terminate the Employee’s employment pursuant to this Agreement within twelve months following a Change of Control and shall be entitled to compensation as set forth in Section 2(a) of this Agreement in the event that, without the Employee’s express written consent, there is:

(i)an assignment by the Company to the Employee of any duties that are materially inconsistent with his positions, duties, responsibilities and status with the Company immediately prior to such Change of Control;

(ii)a material change in the Employee’s reporting responsibilities, titles or offices as an employee and as in effect immediately prior to such a Change of Control; or

(iii)a removal of the Employee from or a failure to re-elect the Employee to the offices of Director of Human Resources and Executive Vice President of First Federal, except in connection with Just Cause, or the Employee’s death;

(iv)a reduction by the Company in the Employee’s base salary, as in effect immediately prior to the Change of Control;

(v)a relocation of the principal executive office of the Company outside of the Defiance, Ohio area or, a requirement that the Employee be based anywhere other than an area in which the Company’s principal executive office is located, except for required travel on business of the Company to an extent substantially consistent with the Employee’s present business travel obligations;

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(vi)a failure by the Company to provide the Employee with the same fringe benefits that were provided to the Employee immediately prior to a Change of Control, or with a package of fringe benefits (including paid vacations) that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such fringe benefits taken as a whole;

(vii)a failure by the Company to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 7 hereof; or

(viii)a failure by the Company to comply with any material provision of this Agreement.

(c)In the event that payments pursuant to this Agreement, either alone or together with any other payments that are made by the Company to the Employee, would constitute a “parachute payment” within the meaning of Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations promulgated thereunder (“Section 280G”), or would result in the imposition of a penalty tax pursuant to Section 280G, such payments shall be reduced to the maximum amount that may be paid under Section 280G without exceeding such limits. In the event a reduction in payments is necessary in order to comply with the requirements of this Agreement relating to the limitations of Section 280G or applicable banking regulatory limits, then such reductions shall be applied based on the following principles, in order: (i) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (ii) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (iii) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Code Section 409A, then the reduction shall be made pro-rata among the payments or benefits otherwise due or payable (on the basis of the relative present value of the parachute payments).

(d)Death of the Employee. This Agreement shall automatically terminate upon the death of the Employee.

(e)“Golden Parachute” Provision. Any payments made to the Employee pursuant to this Agreement or otherwise are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) and any regulations promulgated thereunder.

(f)Definition of “Change of Control”. A “Change of Control” shall have the meaning set forth in Section 409A(a)(2)(A)(v) of the Code.

(g)As a condition to receiving any payments under Section 2 of this Agreement, the Employee shall agree to release the Companies and all of their affiliates and subsidiaries, employees, directors and successors (the “Released Parties”) from any and all claims that the Employee may have against the Released Parties through the date of such release (the “Release”) in a form similar to the attached Exhibit A, and no payments shall be made under Section 2 until

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such Release has become irrevocable, effective and enforceable. In the event that the release execution period spans two tax years, no amount will be payable under Section 2 until the second tax year.

3.Confidential Information. The Employee acknowledges that the Employee has learned and has access to confidential information regarding the Company and its customers and businesses. The Employee agrees and covenants not to disclose or use for the Employee’s own benefit, or the benefit of any other person or entity, any confidential information, unless or until the Company consents to such disclosure or use or such information becomes common knowledge in the industry or is otherwise legally in the public domain. The Employee shall not knowingly disclose or reveal to any unauthorized person any confidential information relating to the Company, its parent, subsidiaries or affiliates, or to any of the businesses operated by them, and the Employee confirms that such information constitutes the exclusive property of the Company. The Employee shall not otherwise knowingly act (a) to the material detriment of the Company, its subsidiaries, or affiliates, or (b) in a manner which is inimical or contrary to the interests of the Company.

4.Nonassignability. Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee, the Employee’s beneficiaries or legal representatives without the Company’s prior written consent; provided, however, that nothing in this Section 4 shall preclude (a) the Employee from designating a beneficiary to receive any benefits which were payable hereunder prior to the Employee’s death, or (b) the executors, administrators, or other legal representatives of the Employee or the Employee’s estate from assigning any rights hereunder to the person or persons entitled thereto. The Company may assign this Agreement and Company’s rights hereunder in whole, but not in part, to any entity with or into which either Company may hereafter merge or consolidate or to which the Company may transfer all or substantially all of its assets, provided that the assignee assumes all of the Company’s obligations under this Agreement, either by operation of law or by express written agreement.

5.Non-Solicitation Provisions. If the Employee terminates his employment with the Company for any reason other than in accordance with Section 2(b) of this Agreement, the Employee agrees that, for a period of 12 months following the termination of the Employee’s employment, the Employee shall not (i) either as principal, agent, owner, shareholder or investor of more than 5% of the stock, officer, director, partner, lender, independent contractor consultant or in any other capacity, engage in, have a financial interest in or be in any way connected or affiliated with, or render advice or services to, any person or entity that engages in any activity which would compete in any way with the business operated by the Company in the counties where they do business, or (ii) directly or indirectly, solicit, divert, take away or interfere with, or attempt to solicit, divert, take away or interfere with, the relationship of the Company or any of their subsidiaries with any person or entity who is or was a customer, or employee or supplier of the Company or any of their subsidiaries immediately prior to the date of termination.

The parties hereto acknowledge and agree that the duration and area for which the non-solicitation covenant and other covenants set forth in this Agreement are to be effective are fair and reasonable and are reasonably required for the protection of the Companies. In the event that any court determines that the time period or the area, or both of them, are unreasonable as to any covenant and that such covenant is to that extent unenforceable, the parties hereto agree that

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the covenant shall remain in full force and effect for the greatest time period and in the greatest area that would not render it unenforceable.

6.No Attachment. Except as required by law, no right to receive payment under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.

7.Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, the Employee and the Company and their respective permitted successors and assigns.

8.Amendment of Agreement. This Agreement may not be modified or amended, except by an instrument in writing signed by the parties hereto.

9.Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver, unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than the act specifically waived.

10.Severability. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect the other provisions of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with applicable law, continue in full force and effect.

11.Headings. The headings of the paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

12.Governing Law; Regulatory Authority. This Agreement has been executed and delivered in the State of Ohio and its validity, interpretation, performance and enforcement shall be governed by the laws of the State of Ohio, except to the extent that federal law is governing. If this Agreement conflicts with any applicable federal law as now or hereafter in effect, then federal law shall govern.

13.Effect of Prior Agreements. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Company or any predecessor of the Company and the Employee.

14.Notices. Any notice or other communication required or permitted pursuant to this Agreement shall be deemed delivered if such notice or communication is in writing and is delivered personally or by facsimile transmission or is deposited in the United States mail, postage prepaid, addressed as follows:

If to the Company:

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First Defiance Financial Corp.

601 Clinton St.

Defiance, OH 43512

If to the Employee:

Sharon Davis

Current Address on File

[signature page follows]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers, and the Employee has signed this Agreement, each as of the day and year first above written.


	FIRST DEFIANCE FINANCIAL CORP.

	By /s/ Donald P. Hileman

	EMPLOYEE

	By /s/ Sharon Davis Sharon Davis

	FIRST FEDERAL BANK OF THE MIDWEST

	By /s/ Donald P. Hileman

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Exhibit 21

List of Subsidiaries of First Defiance Financial Corp.


Name		Jurisdiction of Incorporation
First Federal Bank of the Midwest		OH
First Insurance Group of the Midwest		OH
First Defiance Risk Management, Inc.		NV
HSB Capital, LLC		OH
HSB Insurance, Inc.		DE

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement on Form S-3 (333-180902) and in the Registration Statements on Form S-8 (333-197203 and 333-166891) of First Defiance Financial Corp. of our report dated March 16, 2020 relating to the consolidated financial statements and effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of First Defiance Financial Corp. for the year ended December 31, 2019.

		/s/ Crowe LLP
		Crowe LLP

South Bend, Indiana

March 16, 2020

Exhibit 31.1

SARBANES-OXLEY ACT OF 2002, SECTION 302

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Donald P. Hileman, President and Chief Executive Officer, certify that:

I have reviewed this annual report on Form 10-K of First Defiance Financial Corp. (the “registrant”);

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 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:

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;

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;

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

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 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):

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

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.

Dated: March 16, 2020

/s/ Donald P. Hileman

Donald P. Hileman

President and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

SARBANES-OXLEY ACT OF 2002, SECTION 302

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Paul Nungester, Chief Financial Officer, certify that:

I have reviewed this annual report on Form 10-K of First Defiance Financial Corp. (the “registrant”);

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.

Dated: March 16, 2020

/s/ Paul Nungester

Paul Nungester

Chief Financial Officer

(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Defiance Financial Corp (the “Registrant”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Donald P. Hileman, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	By:	/s/ Donald P. Hileman
		Name: Donald P. Hileman
		Title: President and Chief
		Executive Officer

Date: March 16, 2020

A signed original of this Certification has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Defiance Financial Corp (the “Registrant”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (the “Report”), I, Paul Nungester, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

	By:	/s/ Paul Nungester
		Name: Paul Nungester
		Title: Executive Vice President
		and Chief Financial Officer

Date: March 16, 2020

A signed original of this Certification has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.