PREMIER FINANCIAL CORP - Quarter Report: 2010 March (Form 10-Q)

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period Ended March 31, 2010

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from to

Commission file number 0-26850

First Defiance Financial Corp.

(Exact name of registrant as specified in its charter)

Ohio

34-1803915

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)


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

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

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

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

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


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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 8,117,770 shares outstanding at April 30, 2010.

FIRST DEFIANCE FINANCIAL CORP.

INDEX


		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited): Consolidated Condensed Statements of Financial Condition – March 31, 2010 and December 31, 2009	2

	Consolidated Condensed Statements of Income – Three months ended March 31, 2010 and 2009	4

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2010 and 2009	5

	Consolidated Condensed Statements of Cash Flows – Three months ended March 31, 2010 and 2009	6

	Notes to Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53

Item 4.	Controls and Procedures	53

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults upon Senior Securities	54

Item 4.	(Removed and Reserved)	54

Item 5.	Other Information	54

Item 6.	Exhibits	54

	Signatures	55

PART 1-FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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


	March 31, 2010		December 31, 2009
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	28,678	$	29,613
Interest-bearing deposits		125,980		91,503

		154,658		121,116
Securities:
Available-for-sale, carried at fair value		146,448		137,458
Held-to-maturity, carried at amortized cost (fair value $1,920 and $1,958 at March 31, 2010 and December 31, 2009, respectively)		1,887		1,920

		148,335		139,378
Loans held for sale		12,357		10,346
Loans receivable, net of allowance of $38,980 at March 31, 2010 and $36,547 at December 31, 2009, respectively		1,537,622		1,580,575
Accrued interest receivable		7,405		6,851
Federal Home Loan Bank stock		21,376		21,376
Bank owned life insurance		30,555		30,804
Premises and equipment		42,830		43,597
Real estate and other assets held for sale		12,768		13,527
Goodwill		56,585		56,585
Core deposit and other intangibles		6,450		6,888
Mortgage servicing rights		9,283		8,958
Deferred taxes		3,525		3,289
Other assets		15,026		14,233

Total assets	$	2,058,775	$	2,057,523

(continued)

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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


	March 31, 2010			December 31, 2009
Liabilities and stockholders’ equity
Liabilities:
Deposits	$	1,599,584		$	1,580,226
Advances from the Federal Home Loan Bank		126,917			146,927
Securities sold under repurchase agreements		44,883			48,398
Subordinated debentures		36,083			36,083
Advance payments by borrowers		397			665
Other liabilities		15,256			11,138

Total liabilities		1,823,120			1,823,437

Stockholders’ equity:

Preferred stock, $.01 par value per share: 37,000 shares authorized and issued with a liquidation preference of $37,236, net of discount		36,333			36,293

Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued		—			—
Common stock, $.01 par value per share: 25,000,000 shares authorized; 12,739,496 and 12,739,496 shares issued and 8,117,520 and 8,117,520 shares outstanding, respectively		127			127
Common stock warrant		878			878
Additional paid-in capital		140,729			140,677
Accumulated other comprehensive income (loss), net of tax of $171 and $(85), respectively		316			(158	)
Retained earnings		129,903			128,900
Treasury stock, at cost, 4,621,976 and 4,621,976 shares respectively		(72,631	)		(72,631	)

Total stockholders’ equity		235,655			234,086

Total liabilities and stockholders’ equity	$	2,058,775		$	2,057,523

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

(Amounts in Thousands, except per share data)


	Three Months Ended March 31,
	2010			2009
Interest Income
Loans	$	22,397		$	23,377
Investment securities:
Taxable		990			1,083
Non-taxable		462			409
Interest-bearing deposits		61			14
FHLB stock dividends		219			239

Total interest income		24,129			25,122
Interest Expense
Deposits		5,398			7,183
FHLB advances and other		1,218			1,319
Subordinated debentures		323			426
Notes payable		105			157

Total interest expense		7,044			9,085

Net interest income		17,085			16,037
Provision for loan losses		6,889			2,746

Net interest income after provision for loan losses		10,196			13,291
Non-interest Income
Service fees and other charges		3,158			3,086
Insurance commission income		1,109			1,523
Mortgage banking income		1,807			2,714
Gain on sale of non-mortgage loans		37			55
Gain on sale or call of securities		6			—
Other-than-temporary impairment (OTTI) losses on investment securities
Total impairment losses on investment securities		(70	)		(846	)
Losses recognized in other comprehensive income		—			174

Net impairment loss recognized in earnings		(70	)		(672	)
Trust income		122			102
Income from Bank Owned Life Insurance		212			59
Gain on life insurance		268			—
Other non-interest income		117			(63	)

Total non-interest income		6,766			6,804
Non-interest Expense
Compensation and benefits		6,457			7,365
Occupancy		1,828			2,117
FDIC insurance premium		1,046			567
State franchise tax		563			501
Data processing		1,196			1,054
Amortization of intangibles		437			391
Other non-interest expense		3,305			3,001

Total non-interest expense		14,832			14,996

Income before income taxes		2,130			5,099
Federal income taxes		624			1,691

Net Income	$	1,506		$	3,408

Dividends accrued on preferred shares	$	(463	)	$	(463	)
Accretion on preferred shares	$	(40	)	$	(38	)

Net income (loss) applicable to common shares	$	1,003		$	2,907

Earnings per common share (Note 7)
Basic	$	0.12		$	0.36
Diluted	$	0.12		$	0.36
Dividends declared per share (Note 6)	$	—		$	0.17
Average shares outstanding (Note 7)
Basic		8,117			8,117
Diluted		8,142			8,117

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands)


	Preferred Stock		Common Stock		Common Stock Warrant		Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
Balance at January 1, 2010	$	36,293	$	127	$	878	$	(72,631	)	$	140,677	$	(158	)	$	128,900		$	234,086
Comprehensive income:
Net income		—		—		—		—			—		—			1,506			1,506
Change in net unrealized gains and losses on available-for-sale securities, net of income taxes of $256		—		—		—		—			—		474			—			474

Total comprehensive income																			1,980
Stock option expense		—		—		—		—			52		—			—			52
Preferred Stock Dividends		—		—		—		—			—		—			(463	)		(463	)
Accretion on preferred shares		40		—		—		—			—		—			(40	)		—

Balance at March 31, 2010	$	36,333	$	127	$	878	$	(72,631	)	$	140,729	$	316		$	129,903		$	235,655


Balance at January 1, 2009	$	36,134	$	127	$	878	$	(72,638	)	$	140,447	$	(1,904	)	$	126,115		$	229,159
Comprehensive income:
Net income		—		—		—		—			—		—			3,408			3,408
Change in net unrealized gains and losses on available-for-sale securities, net of income taxes of $(97)		—		—		—		—			—		(180	)		—			(180	)

Total comprehensive income																			3,228
Stock option expense		—		—		—		—			64		—			—			64
Preferred stock dividends		—		—		—		—			—		—			(463	)		(463	)
Accretion on preferred shares		38		—		—		—			—		—			(38	)		—
Common stock dividends declared		—		—		—		—			—		—			(1,380	)		(1,380	)

Balance at March 31, 2009	$	36,172	$	127	$	878	$	(72,638	)	$	140,511	$	(2,084	)	$	127,642		$	230,608

See Accompanying Notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)


	Three Months Ended March 31,
	2010			2009
Operating Activities
Net income	$	1,506		$	3,408
Items not requiring (providing) cash
Provision for loan losses		6,889			2,746
Depreciation		881			953
Amortization of mortgage servicing rights, net of impairment recoveries		105			788
Amortization of core deposit and other intangible assets		438			391
Net amortization of premiums and discounts on loans and deposits		200			464
Amortization of premiums and discounts on securities		100			(47	)
Change in deferred taxes		(492	)		(590	)
Proceeds from the sale of loans held for sale		56,329			137,520
Originations of loans held for sale		(57,606	)		(148,469	)
Gain from sale of loans		(1,201	)		(2,868	)
OTTI losses on investment securities		70			672
Gain from sale or call of securities		(6	)		—
Loss on sale or write-down of real estate and other assets held for sale		557			302
Stock option expense		52			64
Income from bank owned life insurance		(212	)		(59	)
Gain on life insurance		(268	)		—
Changes in:
Accrued interest receivable		(554	)		(711	)
Other assets		(793	)		(773	)
Other liabilities		4,118			1,246

Net cash provided by (used in) operating activities		10,113			(4,963	)

Investing Activities
Proceeds from maturities of held-to-maturity securities		33			33
Proceeds from maturities and pay-downs of available-for-sale securities		6,358			3,300
Proceeds from sale of real estate and other assets held for sale		1,739			593
Proceeds from the sale of available-for-sale securities		28			—
Proceeds from sale of non-mortgage loans		2,973			1,764
Purchases of available-for-sale securities		(14,810	)		(9,260	)
Proceeds from bank owned life insurance		729			—
Purchases of premises and equipment, net		(114	)		(557	)
Net decrease in loans receivable		31,287			25,720

Net cash provided by investing activities		28,223			21,593

Financing Activities
Net increase in deposits and advance payments by borrowers		19,194			70,212
Repayment of Federal Home Loan Bank long-term advances		(20,010	)		(10	)
Net increase (decrease) in Federal Home Loan Bank short-term advances		—			(9,100	)
Increase (decrease) in securities sold under repurchase agreements		(3,515	)		(10,570	)
Cash dividends paid on common stock		—			(1,380	)
Cash dividends paid on preferred stock		(463	)		(361	)

Net cash provided by (used in) financing activities		(4,794	)		48,791

Increase (decrease) in cash and cash equivalents		33,542			65,421
Cash and cash equivalents at beginning of period		121,116			46,152

Cash and cash equivalents at end of period	$	154,658		$	111,573


Supplemental cash flow information:
Interest paid	$	7,183		$	8,994

Income taxes paid	$	—		$	1,500

Transfers from loans to other real estate owned and other assets held for sale	$	3,059		$	1,734

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements

(Unaudited at March 31, 2010 and 2009)

1. Basis of Presentation

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

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository, trust and wealth management services. First Insurance is an insurance agency that does business in the Defiance and Bowling Green, Ohio areas offering property and casualty, and group health and life insurance products.

The consolidated condensed statement of financial condition at December 31, 2009 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K.

The accompanying consolidated condensed financial statements as of March 31, 2010 and for the three month periods ended March 31, 2010 and 2009 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance’s 2009 Annual Report on Form 10-K for the year ended December 31, 2009. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the entire year.

2. Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas where First Defiance uses estimates are the valuation of certain investment securities, the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, the determination of unrecognized income tax benefits, and the determination of post-retirement benefits.

Earnings Per Common Share

Basic earnings per common share is net income applicable to common shares divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, warrants and stock grants.

Reclassifications

Some items in the prior financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards

In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The effect of adopting this new guidance did not have a significant impact on the Company’s financial statements.

In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The effect of adopting this guidance on January 1, 2010 did not have a material impact on the Company’s financial statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation

techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted these provisions of the ASU in preparing the Company’s financial statements for the period ended March 31, 2010. The adoption of these provisions of this ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s financial statements of income and condition. See Note 4 for the disclosures required by this ASU.

This ASU also requires Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s financial statements of income and condition.

3. Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss) (“OCI”). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale and the net unrecognized actuarial losses and unrecognized prior services costs associated with the Company’s Defined Benefit Postretirement Medical Plan. All items reported in other comprehensive income (loss) are reported net of tax. Following is a summary of other comprehensive income (loss) for the three months ended March 31, 2010 and 2009:


	Three Months Ended March 31,
	2010			2009
	(In thousands)
Net income	$	1,506		$	3,408
Change in securities available-for-sale (AFS):
Unrealized gains (losses) on securities AFS for which other-than-temporary impairment losses have been recognized in income		(29	)		(846	)
Other-than-temporary impairment losses on securities AFS realized in income		70			672


Net unrealized gains (losses)		41			(174	)
Unrealized holding gains (losses) on securities AFS arising during the period		695			(103	)
Reclassification adjustment for (gains) losses realized in income		(6	)		—

Net unrealized gains (losses)		689			(103	)

Income tax effect		(256	)		97

Other comprehensive income (loss)		474			(180	)


Comprehensive income	$	1,980		$	3,228

The following table summarizes the changes within each classification of accumulated comprehensive income for the three months ended March 31, 2010 and 2009:


	Unrealized gains (losses) on available for sale securities		Postretirement Benefit			Accumulated other comprehensive income (loss), net
	(In thousands)
Balance at December 31, 2009	$	468	$	(626	)	$	(158	)
Other comprehensive income (loss), net		474		—			474

Balance at March 31, 2010	$	942	$	(626	)	$	316


	Unrealized gains (losses) on available for sale securities			Postretirement Benefit			Accumulated other comprehensive income (loss), net
	(In thousands)
Balance at December 31, 2008	$	(1,100	)	$	(804	)	$	(1,904	)
Other comprehensive income (loss), net		(180	)		—			(180	)

Balance at March 31, 2009	$	(1,280	)	$	(804	)	$	(2,084	)

4. 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 which 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 and municipal securities. The Company classifies its pooled trust preferred collateralized debt obligations as Level 3. The portfolio consists of collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies. Based on the lack of observable market data, the Company estimated fair values based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model which used appropriately adjusted discount rates reflecting credit and liquidity risks. The Company used an independent third party which is described further in Note 8.

Impaired loans - The fair value of impaired loans with specific allocations of the allowance for loan loss is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in impaired loans being valued using Level 3 inputs.

Mortgage servicing rights - Mortgage servicing rights are reported at fair value utilizing Level 2 inputs. MSRs are valued by a third party consultant using a proprietary cash flow valuation model.

Mortgage banking derivative - The fair value of mortgage banking derivatives are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

Real estate held for sale - Real estate held for sale is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell.

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


March 31, 2010	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	$	—	$	15,222	$	—	$	15,222
Mortgage-backed – residential		—		33,165		—		33,165
REMICs		—		3,792		—		3,792
Collateralized mortgage obligations		—		46,681		—		46,681
Trust preferred stock		—		—		1,579		1,579
Preferred stock		102		—		—		102
Obligations of state and political subdivisions		—		45,907		— —		45,907 -
Mortgage banking derivative – asset		—		474		—		474
Mortgage banking derivative – liability		—		—		—		—


December 31, 2009	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	$	—	$	14,251	$	—	$	14,251
Mortgage-backed – residential		—		31,504		—		31,504
REMICs		—		3,923		—		3,923
Collateralized mortgage obligations		—		41,371		—		41,371
Trust preferred stock		—		—		1,589		1,589
Preferred stock		87		—		—		87
Obligations of state and political subdivisions		—		44,733		—		44,733
Mortgage banking derivative – asset		—		380		—		380
Mortgage banking derivative – liability		—		—		—		—

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2010 and March 31, 2009:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2010	$	1,588
Total gains or losses (realized/unrealized)
Included in earnings		(70	)
Included in other comprehensive income (presented gross of taxes)		82
Purchases, issuances, and settlements		4
Sales		(25	)
Transfers in and/or out of Level 3		—

Ending balance, March 31, 2010	$	1,579


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2009	$	3,873
Total gains or losses (realized/unrealized)
Included in earnings		(672	)
Included in other comprehensive income (presented gross of taxes)		(824	)
Purchases, issuances, and settlements		(6	)
Transfers in and/or out of Level 3		—

Ending balance, March 31, 2009	$	2,371

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


March 31, 2010	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans	$	—	$	—	$	33,057	$	33,057
Mortgage servicing rights		—		9,283		—		9,283
Real estate held for sale		—		—		1,865		1,865


December 31, 2009	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans	$	—	$	—	$	28,336	$	28,336
Mortgage servicing rights		—		8,958		—		8,958
Real estate held for sale		—		—		935		935

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $33,057,000, with a valuation allowance of $15,321,000 at March 31, 2010. A provision expense of $5,891,000 for the three months ended March 31, 2010 was included in earnings.

Mortgage servicing rights which are carried at lower of cost or fair value had a fair value of $9,283,000 at March 31, 2010, resulting in a valuation allowance of $1,157,000. A recovery of $321,000 for the three months ended March 31, 2010 was included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and estimated costs to sell. The change in fair value of real estate held for sale was $421,000 for the three months ended March 31, 2010 which was recorded directly as an adjustment to current earnings through non-interest expense.

In accordance with FASB ASC Topic 825, the following table is a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of March 31, 2010 and December 31, 2009. 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, term notes payable and advance payments by borrowers for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value.

Fair value for available for sale securities is as previously described. For investment securities held to maturity, fair value has been based on current market quotations. If market prices are not available, fair value has been estimated based upon the quoted price of similar instruments.

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

The fair value of loans which reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on discounted cash flow analysis, using interest rates currently being offered for loans with similar terms. The allowance for loan losses is considered to be a reasonable adjustment for credit risk.

FASB ASC Topic 825 requires that the fair value of demand, savings, NOW and certain money market accounts be equal to their carrying amount. The Company believes that the fair value of these deposits may be greater or less than that prescribed by FASB ASC Topic 825.

The carrying value of subordinated debentures and deposits with fixed maturities is estimated based on interest rates currently being offered on instruments with similar characteristics and maturities. 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. The cost or value of any call or put options is based on the estimated cost to settle the option at March 31, 2010.


	March 31, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Values		Value		Fair Values
	(*In Thousands)*
Assets:
Cash and cash equivalents	$	154,658	$	154,658	$	121,116	$	121,116
Investment securities		148,335		148,368		139,378		139,416
Federal Home Loan Bank Stock		21,376		N/A		21,376		N/A
Loans, net, including loans held for sale		1,549,979		1,549,137		1,590,921		1,586,101
Mortgage banking derivative asset		474		474		380		380
Accrued interest receivable		7,405		7,405		6,851		6,851

		1,882,227	$	1,860,042		1,880,022	$	1,853,864

Other assets		176,548				177,501

Total assets	$	2,058,775			$	2,057,523


Liabilities and stockholders’ equity:
Deposits	$	1,599,584	$	1,606,288	$	1,580,226	$	1,586,466
Advances from Federal Home Loan Bank		126,917		132,602		146,927		152,643
Securities sold under repurchase agreements		44,883		44,883		48,398		48,398
Subordinated debentures		36,083		31,805		36,083		32,057
Accrued interest payable		1,095		1,095		1,234		1,234
Advance payments by borrowers for taxes and insurance		397		397		665		665

		1,808,959	$	1,817,070		1,813,533	$	1,821,463

Other liabilities		14,161				9,904

Total liabilities		1,823,120				1,823,437
Stockholders’ equity		235,655				234,086

Total liabilities and stockholders’ equity	$	2,058,775			$	2,057,523

5. Stock Compensation Plans

First Defiance has established incentive stock option plans for its directors and employees and has reserved 1,727,485 shares of common stock for issuance under the plans. A total of 1,467,204 shares are reserved for employees and 260,281 shares are reserved for directors. As of March 31, 2010, 439,650 options (417,650 for employees and 22,000 for directors) have been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s five most-highly compensated employees, which vest 40% in 2011 and then 20% annually, subject to certain other limitations. There are 13,150 options granted under the 1996 plan of which 13,100 are fully vested and currently exercisable, 175,400 options granted under the 2001 plan of which 168,650 are fully vested and currently exercisable and 251,100 options granted under the 2005 plan of which 78,100 are fully vested and currently exercisable. All options expire ten years from date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. There were no options granted during the three months ended March 31, 2010 or 2009.

Following is activity under the plans:


	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Options outstanding, beginning of period	467,500		$	19.41
Forfeited or cancelled	(27,850	)		21.33
Exercised	—			—
Granted	—			—

Options outstanding, end of period	439,650		$	19.29	5.52	$	49,000

Vested or expected to vest at period end	439,650		$	19.29	5.52	$	49,000

Exercisable at period end	259,850		$	20.66	3.81	$	—

As of March 31, 2010, there was $359,000 of total unrecognized compensation costs related to unvested stock options granted under the Company Stock Option Plans. The cost is expected to be recognized over a weighted-average period of 2.75 years.

6. Dividends on Common Stock

No common stock dividends were declared by First Defiance in the first quarter of 2010. A quarterly cash dividend of $.17 per common share was declared for the first quarter of 2009.

As a result of its participation in the U.S. Department of the Treasury Troubled Assets Relief Program Capital Purchase Program (“CPP”), First Defiance is prohibited without prior approval of the U.S. Treasury, from paying a quarterly cash dividend of more than $0.26 per share until the earlier of December 5, 2011 or the date the U.S. Treasury’s preferred stock is redeemed or transferred to an unaffiliated third party. Further, First Defiance has agreed with its primary regulator to obtain approval of cash dividends prior to declaration.

7. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share data):


	Three months ended March 31,
	2010		2009
Numerator for basic and diluted earnings per common share – Net income applicable to common shares	$	1,003	$	2,907
Denominator:
Denominator for basic earnings per common share – weighted average common shares		8,117		8,117
Effect of warrants		25		—
Effect of employee stock options		—		—


Denominator for diluted earnings per common share share		8,142		8,117

Basic earnings per common share	$	0.12	$	0.36


Diluted earnings per common share	$	0.12	$	0.36

There were 439,650 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three months ended March 31, 2010. Shares under option of 437,550 and the 550,595 shares issuable related to warrants granted under the CPP were excluded from the diluted earnings per common share calculations as they were anti-dilutive for the three months ended March 31, 2009.

8. Investment Securities

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At March 31, 2010
Available-for-Sale Securities:

Obligations of U.S. government corporations and agencies	$	15,014	$	208	$	—		$	15,222
Mortgage-backed securities – residential		31,870		1,321		(26	)		33,165
REMICs		3,597		195		—			3,792
Collateralized mortgage obligations		45,536		1,201		(56	)		46,681
Trust preferred securities and preferred stock		4,031		—		(2,350	)		1,681
Obligations of state and political subdivisions		44,950		1,164		(207	)		45,907

Totals	$	144,998	$	4,089	$	(2,639	)	$	146,448


Held-to-Maturity Securities*:
FHLMC certificates	$	104	$	7	$	—		$	111
FNMA certificates		292		6		—			298
GNMA certificates		101		3		—			104
Obligations of state and political subdivisions		1,390		17		—			1,407

Totals	$	1,887	$	33	$	—		$	1,920


At December 31, 2009
Available-for-Sale Securities:

Obligations of U.S. government corporations and agencies	$	14,038	$	252	$	(39	)	$	14,251
Mortgage-backed securities – residential		30,341		1,194		(31	)		31,504
REMICs		3,718		205		—			3,923
Collateralized mortgage obligations		40,878		824		(331	)		41,371
Trust preferred securities and preferred stock		4,122		—		(2,446	)		1,676
Obligations of state and political subdivisions		43,640		1,251		(158	)		44,733

Totals	$	136,737	$	3,726	$	(3,005	)	$	137,458

Held-to-Maturity Securities*:
FHLMC certificates	$	119	$	7	$	—		$	126
FNMA certificates		304		9		—			313
GNMA certificates		107		3		—			110
Obligations of state and political subdivisions		1,390		19		—			1,409

Totals	$	1,920	$	38	$	—		$	1,958

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

The amortized cost and fair value of securities at March 31, 2010 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage

obligations (“CMO”) and real estate mortgage investment conduits (“REMICs”), which are not due at a single maturity date, have not been allocated over the maturity groupings. The MBS, CMO and REMIC securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

Available-for-Sale

Held-to-Maturity

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

(In Thousands)

Due in one year or less

3,069

3,117

960

963

Due after one year through five years

10,491

10,687

120

134

Due after five years through ten years

9,765

10,057

310

Due after ten years

40,670

38,949

—

MBS/CMO/REMIC

81,003

83,638

497

513

144,998

146,448

1,887

1,920

Investment securities with a carrying amount of $119.1 million at March 31, 2010 were pledged as collateral on public deposits, securities sold under repurchase agreements and FHLB advances.

As of March 31, 2010, the Company’s investment portfolio consisted of 292 securities, 34 of which were in an unrealized loss position.

The following table summarizes First Defiance’s securities that were in an unrealized loss position at March 31, 2010:

Duration of Unrealized Loss Position

Less than 12 Months

12 Month or Longer

Total

Fair
Value

Gross
Unrealized
Loss

Fair
Value

Gross
Unrealized
Loss

Fair
Value

Unrealized
Losses

(In Thousands)

At March 31, 2010

Available-for-sale securities:

Mortgage-backed -residential

3,908

(26

)

—

3,908

(26

)

Collateralized mortgage obligations and REMICs

3,972

(27

)

562

(29

)

4,534

(56

)

Trust preferred stock and preferred stock

—

1,681

(2,350

)

1,681

(2,350

)

Obligations of state and political subdivisions

4,452

(74

)

1,152

(133

)

5,604

(207

)

Total temporarily impaired securities

12,332

(127

)

3,395

(2,512

)

15,727

(2,639

)

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

Management evaluates securities for OTTI at least on 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 are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

Beginning January 1, 2009, 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.

The Company held nine CDOs at March 31, 2010. Four of those CDOs were written down in full prior to January 1, 2010. The remaining five CDOs have a total amortized cost of $3.9 million at March 31, 2010. Of these, two, with a total amortized cost of $948,000, were identified as OTTI in prior periods and a third, with an amortized cost of $943,000, was identified as OTTI during the first quarter of 2010. The final two CDOs, with a total amortized cost of $2.0 million, continue to pay principal and interest payments in accordance with the contractual terms of the securities and no credit loss impairment has been identified in management’s analysis. Therefore, these two CDO investments have not been deemed by management to be other-than-temporarily impaired. The Company held three additional CDOs at December 31, 2009 with a total amortized cost of $25,000. These CDOs were classified as held for sale at December 31, 2009 and were sold during the first quarter of 2010.

Management’s analysis for the first three months of 2010 deemed that OTTI write-downs were necessary on two CDOs. In the first quarter of 2010, the Company recorded OTTI write-downs of $(70,000) compared to $(672,000) for the same period in 2009.

As required under FASB ASC Topic 320, beginning January 1, 2009, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.

Given the conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, the Company’s CDOs are classified within Level 3 of the fair value hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

The Company’s CDO valuations were supported by analysis prepared by an independent third party and supported by management’s analyses. Their approach to determining fair value involved several steps: 1) detailed credit and structural evaluation of each piece of collateral in the CDO; 2) collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities) and 3) discounted cash flow modeling.

Trust Preferred CDOs Discount Rate Methodology

First Defiance uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific CDO instruments. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for trust preferred CDOs, however, First Defiance looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific CDOs. Importantly, as part of the analysis described above, First Defiance considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

Fundamental to this evaluation is an assessment of the likelihood of CDO coverage test failures that would have the effect of diverting cash flow away from the relevant CDO bond for some period of time. Generally speaking, the Company adjusts indicative credit spreads upwards in the case of CDOs that have relatively weaker collateral and/or less cushion with respect to overcollateralization and interest coverage test ratios and downwards if the reverse is true. This aspect of the Company’s discount rate methodology is important because there is frequently a great difference in the risks present in CDO instruments that are otherwise very similar (i.e. CDOs with the same basic type of collateral, the same manager, the same vintage, etc., may exhibit vastly different performance characteristics). With respect to this last point, First Defiance notes that given today’s credit environment, characterized by high default and deferral rates, it is typically the case that deal-specific credit performance (determined on the basis of the credit characteristics of remaining collateral) is the best indicator of what a willing market participant would pay for an instrument.

The Company uses the same methodology for all of its CDOs and believes its valuation methodology is appropriate for all of its CDOs in accordance with FASB ASC Topic 320 as well as other related guidance.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already deferred, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% for insurance companies. Although there is a possibility that the deferring collateral will become current at some point in the future, First Defiance has conservatively assumed that it will continue to defer and gradually will default.

The following table details the seven securities with OTTI, their lowest credit rating at March 31, 2010 and the related credit losses recognized in earnings for the three month period ended March 31, 2010 (In Thousands):


	Preferred Term VI		TPREF Funding II		Alesco VIII		Preferred Term Security XXVII		Trapeza CDO I		Alesco Preferred Funding VIII		Alesco Preferred Funding IX

	Rated Caa1		Rated Caa3		Rated Ca		Rated Ca		Rated Ca		Not Rated		Not Rated		Total
Cumulative OTTI related to credit loss at January 1, 2010	$	17	$	243	$	1,000	$	—	$	857	$	453	$	465	$	3,035

Addition – Qtr 1		48		—		—		22		—		—		—		70

Cumulative OTTI related to credit loss at March 31, 2010	$	65	$	243	$	1,000	$	22	$	857	$	453	$	465	$	3,105


CDO	Class	Amortized Cost		Fair Value		Unrealized Loss			OTTI Losses 2010			Lowest Rating	Current Number of Banks and Insurance Companies	Actual Deferrals and Defaults as a % of Current Collateral		Expected Deferrals and Defaults as a % of Remaining Performing Collateral		Excess Subordination as a % of Current Performing Collateral

Preferred Term VI	Mezz	$	196	$	116	$	(80	)	$	(48	)	Caa1	5	71.57	%	—	%	—	%

TPREF Funding II	B		751		295		(456	)		—		Caa3	20	33.31	%	24.99	%	—

I-Preferred Term Sec I	B-1		1,000		519		(481	)		—		B+	16	9.04	%	20.57	%	21.66	%

Dekania II CDO	C-1		989		489		(500	)		—		BB+	36	—		16.17	%	28.71	%

Preferred Term Sec XXVII	C-1		943		160		(783	)		(22	)	Ca	36	23.54	%	23.63	%	—


Total		$	3,879	$	1,579	$	(2,300	)	$	(70	)

The following table provides additional information related to the five CDO investments for which a balance remains as of March 31, 2010 (dollars in thousands):

The increase in OTTI in the first quarter of 2010 was the result of deterioration in the performance of the underlying collateral. Specifically, depreciation was driven by both realized credit events (i.e. defaults and deferrals) and weakening credit fundamentals in some of the performing collateral, which led to an increased probability of default going forward. On a positive note, the Company’s assumed average lifetime default rate declined from 36.1% at the end of the fourth quarter 2009 to a rate of 35.4% at the end of the first quarter 2010.

The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for the period ended March 31, 2010 (in thousands):


Beginning balance, January 1, 2010	$	2,521
Additions for amounts related to credit loss for which an other- than-temporary impairment was not previously recognized		22
Reductions for amounts realized for securities sold during the period		(2,262	)
Reductions for amounts related to securities for which the Company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		—
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security		—
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized		48

Ending balance, March 31, 2010	$	329

Sales and write-downs of available for sale securities were as follows:


	Three Months Ended March 31,
	2010		2009
	(In thousands)
Proceeds	$	28	$	—
Gross realized gains		3		—
Gross realized losses		—		—

The Company also recognized gross gains of $3,000 and $0 on calls during the three months ended March 31, 2010 and 2009, respectively.

9. Loans

Loans receivable consist of the following (in thousands):


	March 31, 2010			December 31, 2009
Real Estate:
Secured by single family residential	$	222,099		$	227,592
Secured by multi-family residential		99,217			103,169
Secured by non-residential real estate		698,232			703,721
Construction		46,369			48,625

		1,065,917			1,083,107
Other Loans:
Commercial		352,923			379,408
Automobile		19,879			21,661
Home equity and improvement		144,826			147,977
Other		11,839			12,444

		529,467			561,490

Total loans		1,595,384			1,644,597
Deduct:
Undisbursed loan funds		(17,794	)		(26,494	)
Net deferred loan origination fees and costs		(988	)		(981	)
Allowance for loan loss		(38,980	)		(36,547	)

Totals	$	1,537,622		$	1,580,575

Changes in the allowance for loan losses were as follows (in thousands):


	Three Months ended March 31,
	2010		2009
Balance at beginning of period	$	36,547	$	24,592
Provision for loan losses		6,889		2,746
Charge-offs:
Residential		326		148
Commercial real estate		3,191		669
Commercial		735		702
Home equity and improvement		399		130
Consumer finance		25		123

Total charge-offs		4,676		1,772
Recoveries		220		128

Net charge-offs		4,456		1,644

Ending allowance	$	38,980	$	25,694

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


	March 31, 2010		December 31, 2009
	*(in thousands)*
Non-accrual loans	$	33,567	$	41,191
Loans over 90 days past due and still accruing		—		—
Troubled debt restructuring, still accruing		7,023		6,715

Total non-performing loans		40,590	$	47,906
Real estate and other assets held for sale		12,768		13,527

Total non-performing assets	$	53,358	$	61,433

Impaired loans were as follows as of March 31, 2010 (in thousands):


Period-end impaired loans with no allowance for loan losses allocated	$	16,998
Period-end impaired loans with allowance for loan losses allocated		48,378

Total	$	65,376
Amount of the allowance allocated to impaired loans	$	15,321

Impaired loans were as follows as of December 31, 2009 (in thousands):


Period-end impaired loans with no allowance for loan losses allocated	$	18,239
Period-end impaired loans with allowance for loan losses allocated		40,585

Total	$	58,824
Amount of the allowance allocated to impaired loans	$	12,249


	Three Months Ended March 31,
	2010		2009
	*(in thousands)*
Average of impaired loans during the period	$	61,976	$	27,792
Interest income recognized during the period		536		183
Cash-basis interest income recognized		452		149

The Company has no outstanding commitments to lend additional funds to borrowers whose loans have been modified in a troubled debt restructuring.

10. Mortgage Banking

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


	Three Months Ended March 31,
	2010			2009
	*(in thousands)*
Gain from sale of mortgage loans	$	1,164		$	2,813
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		748			689
Amortization of mortgage servicing rights		(426	)		(957	)
Mortgage servicing rights valuation adjustments		321			169

		643			(99	)


Net revenue from sale and servicing of mortgage loans	$	1,807		$	2,714

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.2 billion for March 31, 2010 and $1.1 billion for March 31, 2009.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three months ended March 31, 2010 and 2009:


	March 31, 2010			March 31, 2009
	*(in thousands)*
Mortgage servicing assets:
Balance at beginning of period	$	10,436		$	9,403
Loans sold, servicing retained		430			1,134
Amortization		(426	)		(957	)

Carrying value before valuation allowance at end of period		10,440			9,580

Valuation allowance:
Balance at beginning of period		(1,478	)		(2,792	)
Impairment recovery (charges)		321			169

Balance at end of period		(1,157	)		(2,623	)

Net carrying value of MSRs at end of period	$	9,283		$	6,957

Fair value of MSRs at end of period	$	9,283		$	6,957

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

11. Deposits

A summary of deposit balances is as follows (in thousands):


	March 31, 2010		December 31, 2009
Non-interest-bearing checking accounts	$	187,231	$	189,132
Interest-bearing checking and money market accounts		525,311		499,575
Savings accounts		138,364		130,156
Retail certificates of deposit less than $100,000		539,313		550,710
Retail certificates of deposit greater than $100,000		161,071		163,300
Brokered or national certificates of deposit		48,294		47,353

	$	1,599,584	$	1,580,226

12. Borrowings

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


	March 31, 2010		December 31, 2009
	*(in thousands)*
FHLB Advances:
Overnight borrowings	$	—	$	—
Single maturity fixed rate advances		35,000		35,000
Single maturity LIBOR based advances		—		20,000
Putable advances		64,000		64,000
Strike-rate advances		27,000		27,000
Amortizable mortgage advances		917		927

Total	$	126,917	$	146,927


Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083

The putable advances can be put back to the Company at the option of the FHLB on a quarterly basis. $14.0 million of the putable advances with a weighted average rate of 2.69% are not yet callable by the FHLB. The call dates for these advances range from April 14, 2010 to February 11, 2011 and the maturity dates range from February 11, 2013 to March 12, 2018. The FHLB has the option to call the remaining $50.0 million of putable advances with a weighted average rate of 5.01%. The maturity dates of these advances range from September 1, 2010 to January 14, 2015. The strike-rate advances are putable at the option of the FHLB only when the three month LIBOR rates exceed the agreed upon strike-rate in the advance contract which ranges from 7.5% to 8.0%. The three month LIBOR rate at March 31, 2010 was 0.29%. The weighted average rate of the strike-rate advances is 4.18% and the maturity dates range from March 8, 2011 to February 25, 2013.

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a fixed rate equal to 6.441% for the first five years and a floating interest rate based on three-month LIBOR plus 1.50% points, repricing quarterly, thereafter.

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 1.67% and 1.63% on March 31, 2010 and December 31, 2009 respectively.

The Trust Preferred Securities issued by Trust Affiliates I and II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into agreements that fully and unconditionally guarantee the Trust Preferred Securities subject to the terms of the guarantees. The Trust Preferred Securities and Subordinated Debentures issued by Trust Affiliate I mature on December 15, 2035 but may be redeemed by the issuer at par after October 28, 2010. The Trust Preferred Securities issued by Trust Affiliate II mature on June 15, 2037, but may be redeemed at the Company’s option at any time on or after June 15, 2012, or at any time upon certain events. Due to the Company’s participation in the CPP, permission must be obtained from the U.S. Treasury in order to call these securities.

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.

13. Commitments, Guarantees and Contingent Liabilities

Loan commitments are made to accommodate the financial needs of First Federal’s customers; however, there are no long-term, fixed-rate loan commitments that result in market risk. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate customers’ trade transactions.

Both arrangements have credit risk, essentially the same as that involved in extending loans to customers, and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained based on Management’s credit assessment of the customer.

The Company’s maximum obligation to extend credit for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding as of the periods stated below were as follows (in thousands):


	March 31, 2010				December 31, 2009
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	31,566	$	71,383	$	29,206	$	64,243
Unused lines of credit		35,269		214,238		36,772		195,692
Standby letters of credit		283		22,090		263		21,036

Total	$	67,118	$	307,711	$	66,241	$	280,971

Commitments to make loans are generally made for periods of 60 days or less.

In addition to the above commitments, First Defiance had commitments to sell $22.8 million and $23.8 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at March 31, 2010 and December 31, 2009, respectively.

14. Income Taxes

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2006. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

15. 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 $15.4 million and $18.7 million of interest rate lock commitments at March 31, 2010 and December 31, 2009, respectively. There were $22.8 million and $23.8 million of forward commitments for the future delivery of residential mortgage loans at March 31, 2010 and December 31, 2009, respectively.

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


	March 31, 2010						December 31, 2009
	Assets		(Liabilities)				Assets		(Liabilities)
	Carrying Value		Carrying Value		Derivative Net Carrying Value		Carrying Value		Carrying Value		Derivative Net Carrying Value
	(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives	$	474	$	—	$	474	$	380	$	—	$	380

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


	Three Months Ended March 31,
	2010		2009
	*(In Thousands)*
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives – Gain (Loss)	$	94	$	288

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

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

General - First Defiance Financial Corp. (“First Defiance” or “the Company”) is a unitary thrift holding company that conducts business through its two wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”) and First Insurance and Investments, Inc. (“First Insurance”). First Federal is a federally chartered savings bank that provides financial services through 33 full-service branches in communities based in northwest Ohio, northeast Indiana, and southeastern Michigan. First Federal provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust services. First Insurance sells a variety of property and casualty, group health and life, and individual health and life insurance products and investment and annuity products. Insurance products are sold through First Insurance’s offices in Defiance and Bowling Green, Ohio while investment and annuity products are sold through registered investment representatives located at certain First Federal banking center locations.

Business Strategy - First Defiance’s primary objective is to be a high performing community banking organization, well regarded in its market areas. First Defiance accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. First Defiance believes in a “Customer First” philosophy that is strengthened by its Trusted Advisor initiative. First Defiance also has a tagline of “Bank with the people you know and trust” 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 segments of First Defiance’s business strategy is 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. Management remains concerned about increases in interest rates, inflation, and the unintended consequences of increased government intervention. In 2010, management intends to continue to focus on asset quality, core deposit growth, expense control as well as other opportunities to further service our customers.

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 with 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 were 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, NOW, money market, certificates of deposits, 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, installment loans and education loans. First Federal also offers online banking services, which include online bill pay along with debit cards.

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

Deposit Growth - First Federal’s focus has been to grow core deposits with an emphasis on total relationship banking with both our retail and commercial customers. First Federal has initiated a pricing strategy that considers the whole relationship of the customer. First Federal will continue to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service, business development strategies and branch expansion. First Federal will look to grow its footprint in areas believed to further compliment its overall market share and compliment 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 on loan types and markets that it knows well and in which it has historically been successful in. First Federal strives to have loan relationships that are well diversified in both size and industry, and monitor 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, including FDIC-assisted transactions. 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 has successfully integrated acquired institutions in the past with the most recent acquisition completed in 2008. 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.

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

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of $1.9 million at March 31, 2010. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of $146.4 million at March 31, 2010. The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($15.2 million), certain municipal obligations ($45.9 million), CMOs and REMICs ($50.4 million), mortgage backed securities ($33.2 million) and trust preferred and preferred stock ($1.7 million).

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

Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where 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 their determination of value.

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

When a collateral dependent loan is downgraded to classified status, First Federal reviews the most current appraisal on file and if necessary, based on First Federal’s assessment of the appraisal, such as age, market, etc, First Federal will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s estimation of the carrying and selling costs. Finally, First Federal assesses whether there is any collateral short fall, considering guarantor support, and determines if a reserve is necessary.

When a collateral dependent loan moves to non-performing status, First Federal generally gets a new third party appraisal and adjusts the reserve as necessary 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 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 on classified loans, appraisal values may be discounted downward based upon First Federal’s experience with liquidating similar properties.

All collateral dependent loans over 90 days past due and or on non-accrual as well as all troubled debt restructured collateral dependent loans are classified as non-performing loans. Non-performing status automatically occurs in the month in which the 90 day delinquency occurs. For Troubled Debt Restructured collateral dependent loans, the loans are put into non-performing status in the month in which the restructure occurs.

As stated above, once a collateral dependent loan is identified as non-performing, First Federal generally gets an appraisal. Troubled debt restructured collateral dependent loans receive an appraisal as part of the restructure credit decision.

Appraisals are received within approximately 60 days after they are requested. The First Federal Loan Loss Reserve Committee reviews each new appraisal and makes any necessary adjustment to the reserve 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. If the loan maintains a rate at restructuring that is lower than the market rate for similar credits, the loan will remain classified as a troubled debt restructuring until such time as it is paid off or restructured at prevailing rates and terms. First Federal may consider moving the loan to an accruing status after six months of satisfactory payment performance.

For loans where First Federal determines that an updated appraisal is not necessary, other means are used to verify the value of the real state, such as recent sales of similar properties on which First Federal had loans as well as calls to appraisers, brokers, realtors, and investors. First Federal monitors and tracks its reserves quarterly to determine accuracy. Based on these results, changes may occur in specific reserves assigned. The recent analysis indicates that First Federal is within its target range of the ultimate losses on liquidated loans being on average within 10% of the specific reserves established for these loans.

Loan modifications constitute a troubled debt restructuring 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 troubled debt restructurings, First Federal either computes the present value of expected future cash flows discounted at the original loan’s effective interest rate or, as a practical expedient, it may measure impairment based on the observable market price of the loan or the fair value of the collateral even though troubled debt restructurings are not expected to be deemed collateral dependent. The difference between the carrying value and fair value of the loan is recorded as a valuation allowance.

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

Participation in the U.S. Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which creates the Troubled Asset Relief Program (“TARP”) and provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. The Capital Purchase Program (“CPP”) was announced by the U.S. Treasury on October 14, 2008 as part of TARP. Pursuant to the CPP, the U.S. Treasury will purchase up to $250 billion of senior preferred shares on standardized terms from qualifying financial institutions. The purpose of the CPP is to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.

The CPP is voluntary and requires a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. The standard terms of the CPP require that a participating financial institution limit the payment of dividends to the most recent quarterly amount prior to October 14, 2008, which is $0.26 per share in the case of First Defiance. This dividend limitation will remain in effect until such time that the preferred shares are no longer outstanding.

First Defiance was approved by the U.S. Treasury to participate in the CPP and on December 5, 2008, First Defiance issued $37.0 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (“Senior Preferred Shares”). The Senior Preferred Shares constitute Tier 1 capital and rank senior to First Defiance’s common shares. The Senior Preferred Shares pay cumulative dividends at a rate of 5% per annum for the first five years and will reset to a rate of 9% per annum after five years.

As part of its participation in the CPP, First Defiance also issued a warrant to the U.S. Treasury to purchase 550,595 common shares having an exercise price of $10.08 per share. The initial exercise price for the warrant and the market price for determining the number of common shares subject to the warrant was determined by reference to the market price of the common shares on the date of the investment by the U.S. treasury in the Senior Preferred Shares (calculated on a 20-day trailing average). The warrant has a term of 10 years.

Forward-Looking Information

Certain statements contained in this quarterly report are not historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, or “continue” or the negative thereof or other variations thereon or comparable terminology are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Act of 1934, as amended. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of market and other factors.

Changes in Financial Condition

At March 31, 2010, First Defiance’s total assets, deposits and stockholders’ equity amounted to $2.06 billion, $1.60 billion and $235.7 million, respectively, compared to $2.06 billion, $1.58 billion and $234.1 million, respectively, at December 31, 2009.

Net loans receivable (excluding loans held for sale) declined $43.0 million to $1.54 billion from $1.58 billion at December 31, 2009. The variances in loans receivable between March 31, 2010 and December 31, 2009 include decreases in commercial real estate loans (down $9.4 million), commercial loans (down $26.5 million), home equity and improvement loans (down $3.2 million), construction loans (down $2.3 million), consumer loans (down $2.4 million) and one to four family residential real estate (down $5.5 million).

The investment securities portfolio increased $9.0 million to $148.3 million at March 31, 2010 from $139.4 million at December 31, 2009. The increase is the result of $14.8 million of securities being purchased during the first three months of 2010 partially offset by $2.3 million of securities being matured or called in the period, principal pay downs of $4.1 million in CMOs and mortgage-backed securities, and $22,000 of securities being sold. There was an unrealized gain in the investment portfolio of $1.5 million at March 31, 2010 compared to an unrealized gain of $721,000 at December 31, 2009.

Deposits increased from $1.58 billion at December 31, 2009 to $1.60 billion as of March 31, 2010. Of the $19.4 million increase, interest-bearing demand deposits and money market accounts increased $25.7 million to $525.3 million, savings accounts increased $8.2 million to $138.4 million and broker/national certificates of deposit increased $941,000 to $48.3 million. These increases were partially offset by a decline in retail time deposits of $13.6 million to $700.4 million and non-interest-bearing demand deposits decreased $1.9 million to $187.2 million.

FHLB advances decreased $20.0 million to $126.9 million at March 31, 2010 from $146.9 million at December 31, 2009. The decrease is the result of paying off a $20.0 million LIBOR advance in the first quarter of 2010.

Stockholders’ equity increased from $234.1 million at December 31, 2009 to $235.7 million at March 31, 2010. The increase is primarily the result of recording net income of $1.5 million and a $474,000 unrealized gain on available-for-sale securities partially offset by $463,000 of accrued dividends on preferred stock.

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

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


	Three Months Ended March 31,
	2010						2009
	Average Balance		Interest(1)		Yield/ Rate(2)		Average Balance		Interest(1)		Yield/ Rate(2)
Interest-earning assets:
Loans receivable	$	1,560,405	$	22,436	5.83	%	$	1,596,592	$	23,405	5.95	%
Securities		141,646		1,711	4.96			119,314		1,721	5.78
Interest-earning deposits		108,440		61	0.23			44,737		14	0.13
FHLB stock and other		21,376		219	4.15			21,376		239	4.53

Total interest-earning assets		1,831,867		24,427	5.41			1,782,019		25,379	5.77
Non-interest-earning assets		216,639						202,966

Total assets	$	2,048,506					$	1,984,985


Interest-bearing liabilities:
Deposits	$	1,391,945	$	5,398	1.57	%	$	1,348,178	$	7,183	2.16	%
FHLB advances		141,759		1,218	3.48			147,091		1,319	3.64
Subordinated debentures		36,229		323	3.62			36,251		426	4.77
Notes payable		44,280		105	0.96			39,532		157	1.61

Total interest-bearing liabilities		1,614,213		7,044	1.77			1,571,052		9,085	2.35
Non-interest bearing deposits		184,195		—				165,881		—

Total including non-interest bearing demand deposits		1,798,408		7,044	1.59			1,736,933		9,085	2.12
Other non-interest-bearing liabilities		14,606						17,953

Total liabilities		1,813,014						1,754,886
Stockholders’ equity		235,492						230,099

Total liabilities and stock-holders’ equity	$	2,048,506					$	1,984,985

Net interest income; interest rate spread			$	17,383	3.64	%			$	16,294	3.42	%

Net interest margin (3)					3.85	%					3.71	%

Average interest-earning assets to average interest-bearing liabilities					113	%					113	%

(1)

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

(2)	Annualized

(3)	Net interest margin is net interest income divided by average interest-earning assets.

Results of Operations

Three Months Ended March 31, 2010 and 2009

On a consolidated basis, First Defiance’s net income for the quarter ended March 31, 2010 was $1.5 million compared to net income of $3.4 million for the comparable period in 2009. Net income applicable to common shares was $1.0 million for the first quarter of 2010 compared to $2.9 million for the comparable period in 2009. On a per share basis, basic and diluted earnings per common share for the three months ended March 31, 2010 were both $0.12, compared to basic and diluted earnings per common share of $0.36 for the quarter ended March 31, 2009.

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.

As demand for new lending opportunities remained soft in 2009 and into 2010, the Company invested some of its liquidity into investment securities.

Net interest income was $17.1 million for the quarter ended March 31, 2010 compared to $16.0 million for the same period in 2009. The tax-equivalent net interest margin was 3.85% for the quarter ended March 31, 2010 compared to 3.71% for the same period in 2009. The increase in margin between the 2009 and 2010 first quarters is due to a widening of the interest rate spread, which increased to 3.64% for the quarter ended March 31, 2010 compared to 3.42% for the same period in 2009. The increase in spread between the 2009 and 2010 first quarters occurred due to interest-earning asset yields decreasing by 36 basis points (to 5.41% in the first quarter of 2010 from 5.77% in the same period in 2009) which was more than offset by the cost of interest bearing liabilities between the two periods decreasing by 58 basis points (to 1.77% in the first quarter of 2010 from 2.35% in the same period in 2009).

Total interest income decreased by $993,000 or 4.0% to $24.1 million for the quarter ended March 31, 2010 from $25.1 million for the same period in 2009. The decrease in interest income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable which declined 12 basis points to 5.83% at March 31, 2010. Interest income from loans decreased to $22.4 million for the quarter ended March 31, 2010 compared to $23.4 million for the same period in 2009 which represents a decline of 4.2%.

Interest expense decreased by $2.0 million in the first quarter of 2010 compared to the same period in 2009, to $7.0 million from $9.1 million. This decrease was due to a 58 basis point decline in the average cost of interest-bearing liabilities in the first quarter of 2010 which more than offset the $43.2 million increase in the average balance of those liabilities in the first quarter of 2010. Interest expense related to interest-bearing deposits was $5.4 million in the first quarter of 2010 compared to $7.2 million for the same period in 2009. Expenses on FHLB advances and notes payable were $1.2 million and $105,000 respectively in the first quarter of 2010 compared to $1.3 million and $157,000 respectively for the same period in 2009. Interest expense recognized by the Company related to subordinated debentures was $323,000 in the first quarter of 2009 compared to $426,000 for the same period in 2009.

Provision for Loan Losses.

The allowance for loan losses represents management’s assessment of the estimated probable credit losses in the loan portfolio at each balance sheet date. 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 all commercial loan and commercial real estate loan relationships that exceed $250,000 of aggregate exposure. Management utilizes the results of this outside loan review to assess the 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 provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable credit losses within the existing loan portfolio in the normal course of business. The allowance for loan loss is made up of two basic components. The first component is the specific allowance in which the company sets aside reserves based on the analysis of individual credits. The second component is the general reserve. The general reserve is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolios based on quantitative and qualitative factors. Due to the uncertainty of risks in the loan portfolio, the Company’s judgment on the amount of the allowance necessary to adsorb loans losses is approximate. Table 3 below presents the allocation of the specific and general components of the allowance by signification loan types.

In establishing specific reserves, First Federal analyzes all loans on its classified and special mention lists at least 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 guarantor in determining the amount of impairment of individual loans and the specific reserve to be recorded.

For purpose of the general reserve analysis, the loan portfolio is stratified into ten different loan pools based on loan type and by market area to allocate historic loss experience. The loss experience factor applied to the non-impaired loan portfolio was based upon historical losses of the most recent four quarters.

The stratification of the loan portfolio resulted in a quantitative general allowance of $11.6 million at March 31, 2010 compared to $10.5 million at December 31, 2009. The increase in the quantitative allowance was due to the increase in the historical loss factors relating to commercial and commercial real estate loans.

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 that have a bearing on its loss content, including but not limited to the following:

•

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

•

Changes in the nature and volume of the loan portfolio

•

Changes in the trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications

•

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

•

Changes in the value of underlying collateral for collateral dependent loans

•

Changes in the political and regulatory environment

•

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

•

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

•

Changes in the quality and breadth of the loan review process

The qualitative analysis at March 31, 2010 indicated a general reserve of $7.9 million compared with $8.7 million at December 31, 2009. Management believes that the overall economy and operating environment has stabilized in our markets but still stresses that high unemployment and declining real estate values in the Midwest remain a concern. Out of the fifteen counties that represent the footprint of the Company, only one county in Michigan, Hillsdale, has seen an improvement in its unemployment rate in 2010 from December 2009. The following are the unemployment rates for February 2010 and December 2009. The unemployment rates in February 2010 for the following counties in Ohio were; Allen 12.5%, Defiance 14.4%, Fulton 15.7%, Hancock 10.5%, Henry 15.9%, Lucas 13.0%, Ottawa 19.1%, Paulding 13.8%, Putnam 12.6%, Seneca 13.9%, Williams 16.1% and Wood 11.8%, compared to December 2009 in Allen 11.6%, Defiance 12.8%, Fulton 14.3%, Hancock 9.6%, Henry 13.9%, Lucas 12.3%, Ottawa 17.3%, Paulding 12.7%, Putnam 11.0%, Seneca 13.0%, Williams 14.9% and Wood 11.1%. The Company operates in two counties in Michigan, Hillsdale and Lenawee. The unemployment rate in Hillsdale county was 17.9% in February 2010 compared to 18.2% in December 2009 and the unemployment rate in Lenawee county was 16.9% in February 2010 compared to 16.6% in December 2009. The Company operates in one county in Indiana, Allen, which had an unemployment rate of 11.0% in March 2010 compared to 10.0% in December 2009. February 2010 was the latest census information available for Ohio and Michigan.

As a result of the quantitative and qualitative analyses, the Company’s provision for loan losses for the first quarter of 2010 was $6.9 million, compared to $2.7 million for the same period in 2009. The allowance for loan losses was $39.0 million and $36.5 million and represented 2.47% and 2.26% of loans, net of undisbursed loan funds and deferred fees and costs, as of March 31,

2010 and December 31, 2009, respectively. That increase was mainly the result of the deterioration of economic conditions that continued throughout 2009 and into 2010, that started in 2008 that posed many challenges for the banking industry. Real estate values have declined and some collateral dependent loans no longer have enough collateral value to support the outstanding balance. Management has expanded its credit monitoring functions even further beyond its traditionally strong focus. Additional asset review functions and more delinquent loan reporting requirements have been added to assist in this monitoring. Management will continually review credit concentrations by industry and has placed lower limits on lending within certain types of loan categories. Management has also segmented the commercial real estate portfolio to track the general performance of these segments to further refine the predictive process of identifying potential problem loans. The provision was offset by charge offs of $4.3 million against specific reserves and $391,000 against general reserves and recoveries of $220,000 resulting in an increase to the overall allowance for loan loss of $2.4 million from December 31, 2009. In management’s opinion, the overall allowance for loan losses of $39.0 million as of March 31, 2010 is adequate.

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. In the first quarter of 2010, First Defiance recorded OREO write-downs that totaled $421,000 compared to write-downs of $289,000 for the same period in 2009. These write-downs are primarily due to decreasing the liquidation values in order to spur interest in our market areas to sell these properties. These amounts are included in other non-interest expense. Management believes that the values recorded at March 31, 2010 for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans decreased to $126.7 million at March 31, 2010, compared to $128.9 million at December 31, 2009. At March 31, 2010, a total of $53.0 million of loans are classified as substandard for which a specific reserve is required. A total of $71.0 million in additional credits were classified as substandard at March 31, 2010 for which no reserve is required because of factors such as the level of collateral or the strength of guarantors. First Defiance also has classified $2.7 million of loans doubtful at March 31, 2010. By contrast, at December 31, 2009, a total of $46.3 million of loans were classified as substandard for which a specific reserve is required. A total of $78.0 million in additional credits were classified as substandard at December 31, 2009 for which no reserve is required because of factors such as the level of collateral or the strength of guarantors. First Defiance also had classified $4.6 million of loans doubtful at December 31, 2009.

First Defiance’s ratio of allowance for loan losses to non-performing loans was 96.03% at March 31, 2010 compared with 76.29% at December 31, 2009. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at March 31, 2010 are appropriate.

At March 31, 2010, First Defiance had total non-performing assets of $53.4 million, compared to $61.4 million at December 31, 2009. Non-performing assets include loans that are 90 days past due, restructured loans and real estate and other assets held for sale. Non-performing assets at March 31, 2010 and December 31, 2009 by category were as follows:

Table 1 – Nonperforming Asset


	March 31, 2010		December 31, 2009
	*(In thousands)*
Non-performing loans:
Residential	$	6,572	$	5,349
Construction		175		675
Commercial real estate		18,241		24,042
Commercial		7,498		10,615
Consumer		59		59
Home Equity and improvement		1,022		451
Restructured loans, still accruing		7,023		6,715

Total non-performing loans		40,590		47,906
Real estate owned and repossessed assets		12,768		13,527

Total non-performing assets	$	53,358	$	61,433

The decrease in non-performing loans between December 31, 2009 and March 31, 2010 is primarily in commercial real estate and commercial loans. The combined balance of these types of non-performing loans was $8.9 million lower at March 31, 2010 compared to December 31, 2009.

Non-performing loans in the residential, commercial real estate and commercial loan categories represent 2.96%, 2.29% and 2.12% of the total loans in those categories respectively at March 31, 2010 compared to 2.35%, 2.98% and 2.80% respectively for the same categories at December 31, 2009. With the level of non-performing loans decreasing, quarter over quarter, management believes that the current allowance for loan losses is appropriate and that the provision for loan losses recorded in the first quarter of 2010 is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.

Asset quality ratios for First Defiance were as follows at March 31, 2010 and December 31, 2009:

Table 2 – Nonperforming Asset Ratios


	March 31, 2010		December 31, 2009
Allowance for loans losses as a percentage of total loans*	2.47	%	2.26	%
Allowance for loan losses as a percentage of non-performing assets	73.05	%	59.49	%
Allowance for loan losses as a percentage of non-performing loans	96.03	%	76.29	%
Total non-performing assets as a percentage of total assets	2.59	%	2.99	%
Total non-performing loans as a percentage of total loans*	2.57	%	2.96	%

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

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 required allowances and proposed charge-offs which are approved by the Senior Loan Committee (in the case of charge-offs) or the Loan Loss Reserve Committee (in the case of specific allowances).

The following table discloses charge-offs, recoveries and provision expense for the quarter ended March 31, 2010 by loan category ($ in thousands).

Table 3 – Charge-offs, Recoveries and Provision by Category


Quarter Ended March 31, 2010	Commercial Real Estate and Commercial Construction			Commercial			Consumer			Residential and Residential Construction			Home Equity and improvement			Total
Allowance for loans individually evaluated
Beginning Specific Allocations	$	8,577		$	4,825		$	91		$	3,513		$	308		$	17,314
Charge-Offs		(3,071	)		(700	)		(6	)		(189	)		(319	)		(4,285	)

Recoveries		—			—			—			—			—			—
Provisions		3,825			1,969			(17	)		367			311			6,455

Ending Specific Allocations	$	9,331		$	6,094		$	68		$	3,691		$	300		$	19,484

Allowance for loans collectively evaluated
Beginning General Allocations	$	10,299		$	4,619		$	424		$	2,535		$	1,356		$	19,233
Charge-Offs		(120	)		(35	)		(19	)		(137	)		(80	)		(391	)
Recoveries		1			88			32			58			41			220
Provisions		413			(94	)		(103	)		93			125			434

Ending General Allocations	$	10,593		$	4,578		$	334		$	2,549		$	1,442		$	19,496

The following table details net charge-offs and nonaccrual loans by loan type. For the three months ended and as of March 31, 2010, commercial real estate, which represented 49.98% of total loans, accounted for 71.59% of net charge-offs and 54.34% of nonaccrual loans, and commercial loans, which represented 22.12% of total loans, accounted for 14.51% of net charge-offs and 22.34% of nonaccrual loans. For the three months ended and as of March 31, 2009, Commercial real estate, which represented 47.75% of total loans, accounted for 40.69% of net charge-offs and 62.60% of nonaccrual loans, and commercial loans, which represented 21.85% of total loans, accounted for 38.14% of net charge-offs and 13.60% of nonaccrual loans.

Table 4 – Net Charge-offs and Non-accruals by Loan Type


	For the Three Months Ended March 31, 2010					As of March 31, 2010
	Net Charge-offs			% of Total Net Charge-offs		Nonaccrual Loans		% of Total Non- Accrual Loans
	*(in thousands)*					*(in thousands)*
Residential	$	268		6.02	%	$	6,572	19.58	%

Construction		—		0.00	%		175	0.52	%
Commercial real estate		3,190		71.59	%		18,241	54.34	%
Commercial		647		14.51	%		7,498	22.34	%
Consumer		(7	)	(0.16	)%		59	0.18	%
Home equity and improvement		358		8.04	%		1,022	3.04	%

Total	$	4,456		100.00	%	$	33,567	100.00	%


	For the Three Months Ended March 31, 2009				As of March 31, 2009
	Net Charge-offs		% of Total Net Charge-offs		Nonaccrual Loans		% of Total Non- Accrual Loans
	*(in thousands)*				*(in thousands)*
Residential	$	145	8.82	%	$	6,167	20.92	%

Construction		—	0.00	%		125	0.42	%
Commercial real estate		669	40.69	%		18,450	62.60	%
Commercial		627	38.14	%		4,008	13.60	%
Consumer		75	4.56	%		57	0.19	%
Home equity and improvement		128	7.79	%		666	2.26	%

Total	$	1,644	100.00	%	$	29,473	100.00	%

Credit Quality Profile

The following table discloses the period end balances for the loan portfolio by payment status as of March 31, 2010 and December 31, 2009.

Table 5 – Credit Quality Profile


	Total Balance		Current and Performing		30 to 89 days past due*		Non Accrual Loans		Troubled Debt Restructuring		Non Accrual %		> 30 Days Past Due and Non Accrual %
	(dollars in thousands)

March 31, 2010

Residential	$	222,099	$	207,733	$	4,749	$	6,572	$	3,045	2.96	%	5.10	%

Construction		46,369		46,129		65		175		—	0.38	%	0.52	%

Commercial real estate		797,449		768,335		6,962		18,241		3,911	2.29	%	3.16	%

Commercial		352,923		338,513		6,866		7,498		46	2.12	%	4.07	%

Consumer finance		31,718		31,489		170		59		—	0.19	%	0.72	%

Home equity and improvement		144,826		142,598		1,185		1,022		21	0.71	%	1.52	%


Total loans	$	1,595,384	$	1,534,797	$	19,997	$	33,567	$	7,023	2.10	%	3.36	%


Total Number of Loans		21,448		20,995		194		218		41

December 31, 2009

Residential	$	227,592	$	215,209	$	4,333	$	5,349	$	2,701	2.35	%	4.25	%

Construction		48,625		47,950		—		675		—	1.39	%	1.39	%

Commercial real estate		806,890		775,604		3,280		24,042		3,964	2.98	%	3.39	%

Commercial		379,408		367,592		1,151		10,615		50	2.80	%	3.10	%

Consumer finance		34,105		33,669		377		59		—	0.17	%	1.28	%

Home equity and improvement		147,977		145,481		2,045		451		—	0.30	%	1.69	%


Total loans	$	1,644,597	$	1,585,505	$	11,186	$	41,191	$	6,715	2.51	%	3.18	%


Total Number of Loans		22,109		21,504		281		283		41

*	There are 11 residential loans totaling $820,000 that are not included in the 30 to 89 days past due column as they are classified as troubled debt and are included in that category at March 31, 2010. At December 31, 2009, there was one such loan with a balance of $385,000.

The table below is the credit risk profile trend for the last five quarters using the Company’s internally assigned loan grades. This table was created using data required to be compliant with the Company’s reporting on the thrift financial report.

Table 6 – Credit Risk Profile Trend


Commercial Real Estate
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	690,172	$	698,903	$	695,848	$	650,573	$	652,615
Special Mention		41,401		35,780		30,672		38,429		49,247

Substandard/Doubtful		65,876		72,207		75,914		79,634		62,979

Total by Exposure	$	797,449	$	806,890	$	802,434	$	768,636	$	764,841


Commercial
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	294,765	$	322,152	$	333,797	$	338,026	$	313,369
Special Mention		23,029		22,441		12,479		17,102		21,125

Substandard/Doubtful		35,129		34,815		25,605		27,306		15,576

Total by Exposure	$	352,923	$	379,408	$	371,881	$	382,434	$	350,070


Residential
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	196,452	$	203,649	$	212,140	$	214,982	$	217,765
Special Mention		5,372		3,897		3,769		4,585		6,052

Substandard/Doubtful		20,275		20,046		18,049		18,433		17,302

Total by Exposure	$	222,099	$	227,592	$	233,958	$	238,000	$	241,119


Construction
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	42,129	$	45,091	$	50,655	$	40,985	$	50,434
Special Mention		403		2,768		2,850		2,850		100

Substandard/Doubtful		3,837		766		100		835		—

Total by Exposure	$	46,369	$	48,625	$	53,605	$	44,670	$	50,534


Consumer
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	31,600	$	33,935	$	36,132	$	37,924	$	38,589
Special Mention		—		—		—		—		—

Substandard/Doubtful		118		170		284		150		87

Total by Exposure	$	31,718	$	34,105	$	36,416	$	38,074	$	38,676


Home Equity and Improvement
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	143,371	$	147,076	$	148,805	$	149,839	$	155,221
Special Mention		—		—		—		—		—

Substandard/Doubtful		1,455		901		1,574		1,374		1,447

Total by Exposure	$	144,826	$	147,977	$	150,379	$	151,213	$	156,668


Total
	1^st Qtr 2010		4^th Qtr 2009		3^rd Qtr 2009		2^nd Qtr 2009		1^st Qtr 2009
Grade
Pass	$	1,398,489	$	1,450,806	$	1,477,377	$	1,432,329	$	1,427,993
Special Mention		70,205		64,886		49,770		62,966		76,524

Substandard/Doubtful		126,690		128,905		121,526		127,732		97,391

Total by Exposure	$	1,595,384	$	1,644,597	$	1,648,673	$	1,623,027	$	1,601,908

The following table sets forth the activity in First Defiance’s allowance for loan losses during the periods indicated.

Table 7 – Allowance for Loan Loss Activity


	For the Quarter Ended
	1st 2010		4th 2009		3rd 2009		2nd 2009		1st 2009
	*(Dollars in Thousands)*
Allowance at beginning of period	$	36,547	$	31,248	$	25,840	$	25,694	$	24,592
Provision for credit losses		6,889		8,470		8,051		3,965		2,746
Charge-offs:
Residential		326		884		744		505		148
Commercial real estate		3,191		1,912		1,152		2,066		669
Commercial		735		354		658		950		702
Consumer finance		25		75		39		83		123
Home equity and improvement		399		135		196		301		130

Total charge-offs		4,676		3,360		2,789		3,905		1,772
Recoveries		220		189		146		86		128

Net charge-offs		4,456		3,171		2,643		3,819		1,644

Ending allowance	$	38,980	$	36,547	$	31,248	$	25,840	$	25,694

The following table sets forth information concerning the allocation of First Defiance’s allowance for loan losses by loan categories at the dates indicated.

Table 8 – Allowance for Loan Loss Allocation by Loan Category


	March 31, 2010				December 31, 2009				September 30, 2009				June 30, 2009				March 31, 2009
	Amount		Percent of total loans by category		Amount		Percent of total loans by category		Amount		Percent of total loans by category		Amount		Percent of total loans by category		Amount		Percent of total loans by category
Residential	$	6,093	13.92	%	$	5,827	13.84	%	$	5,395	14.19	%	$	4,735	14.66	%	$	4,364	15.05	%
Construction		717	2.91	%		221	2.96	%		113	3.25	%		101	2.75	%		154	3.15	%
Commercial real estate		19,354	49.98	%		18,876	49.06	%		16,107	48.67	%		12,918	47.36	%		13,538	47.75	%
Commercial		10,672	22.12	%		9,444	23.07	%		7,183	22.56	%		5,808	23.56	%		5,613	21.85	%
Consumer		402	1.99	%		515	2.07	%		618	2.21	%		672	2.35	%		681	2.41	%
Home equity and improvement		1,742	9.08	%		1,664	9.00	%		1,832	9.12	%		1,606	9.32	%		1,344	9.78	%

	$	38,980	100.00	%	$	36,547	100.00	%	$	31,248	100.00	%	$	25,840	100.00	%	$	25,694	100.00	%

Key Asset Quality Ratio Trends

Table 9 – Key Asset Quality Ratio Trends


	1st Qtr 2010		4th Qtr 2009		3rd Qtr 2009		2nd Qtr 2009		1st Qtr 2009
Allowance for loan losses / loans*	2.47	%	2.26	%	1.92	%	1.60	%	1.62	%
Allowance for loan losses to net charge-offs	874.78	%	1,152.54	%	1,182.29	%	676.62	%	1,562.90	%
Allowance for loan losses / non-performing assets	73.05	%	59.49	%	63.23	%	52.80	%	57.73	%
Allowance for loan losses / non-performing loans	96.03	%	76.29	%	78.00	%	64.00	%	70.06	%
Non-performing assets / loans plus REO*	3.36	%	3.77	%	3.03	%	3.02	%	2.79	%
Non-performing assets / total assets	2.59	%	2.99	%	2.45	%	2.42	%	2.21	%
Net charge-offs / average loans (annualized)	1.14	%	0.79	%	0.66	%	0.96	%	0.41	%

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

Non-Interest Income.

Total non-interest income decreased $38,000 to remain relatively flat at $6.8 million in the first quarter of 2010 compared to the same period in 2009.

Service Fees. Service fees and other charges increased by $72,000 or 2.3% in the 2010 first quarter compared to the same period in 2009. The increase can be attributed to customers utilizing their debit cards more routinely resulting in an increase in debit card fee income.

First Federal’s overdraft privilege program generally provides for the automatic payment of modest overdraft limits on all accounts deemed to be in good standing when the account is accessed using paper-based check processing, a teller withdrawal, a point-of-sale terminal, an ACH transaction, or an ATM. To be in good standing, an account must be brought to a positive balance within a 30-day period. Overdraft limits are established for all customers without discrimination using a risk assessment approach for each account classification. The approach includes a systematic review and evaluation of the normal deposit flows made to each account classification to establish reasonable and prudent negative balance limits that would be routinely repaid by normal, expected and reoccurring deposits. The risk assessment by portfolio approach assumes a minimal degree of undetermined credit risk associated with unidentified individual accounts that are overdrawn for 30 or more days. Accounts overdrawn for more than 60 days are automatically charged off. Fees are charged as a one-time fee per occurrence and the fee charged for an item that is paid is equal to the fee charged for a non-sufficient fund item that is returned.

Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s balance sheet. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a service to the customer and therefore deemed to be noninterest income rather than interest income. Beginning on July 1, 2010 for new customers and August 15, 2010 for existing customers, federal rules will prohibit a financial institution from assessing a fee to complete an ATM withdrawal or one-time debit card transaction which will cause an overdraft unless the

customer consents in advance (“opts-in”). Fee income recorded for the quarters ending March 31, 2010 and 2009 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were $1.8 million and $1.9 million, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was established June 30, 2006 with a balance of $156,000. The allowance for uncollectible overdrafts was $63,000 at March 31, 2010, $114,000 at December 31, 2009 and $78,000 at March 31, 2009.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans decreased $907,000 to $1.8 million for the first quarter of 2010 compared to $2.7 million for the same period of 2009. This decrease was primarily due to lower loan origination volume for the quarter, the result of lower refinancing activity due to higher interest rates on conforming saleable mortgage-based products in the first quarter of 2010 compared to the same period in 2009. Gains realized from the sale of mortgage loans declined drastically in the first quarter of 2010 to $1.2 million from $2.8 million in the first quarter of 2009. Mortgage loan servicing revenue increased $59,000 in the first quarter of 2010 compared to the first quarter of 2009. The decrease in gains were partially offset by expense decreases of $531,000 for the amortization of mortgage servicing rights due to the lower refinance activity during the first quarter of 2010. The Company recorded a positive valuation adjustment of $321,000 on mortgage servicing rights in the first quarter of 2010 compared to a positive valuation adjustment of $169,000 in the first quarter of 2009. This was driven by a steady increase in market mortgage rates during the first quarters of 2010 and 2009. This increase in rates decreased the assumed prepayment speed of the mortgage servicing rights.

Loss on Sale or Write-Down of Securities. Non-interest income also includes investment securities gains or losses. In the first quarter of 2010, First Defiance recognized other-than-temporary impairment (“OTTI”) charges of $70,000 for certain impaired investment securities, where in management’s opinion, the value of the investment will not be fully recovered. The OTTI charge related to two Trust Preferred Collateralized Debt Obligation (“CDO”) investments with a remaining book value of $1.1 million. In the first quarter of 2009, First Defiance recognized OTTI charges of $672,000 for certain impaired investment securities, where in management’s opinion, the value of the investment will not be recovered. The OTTI charge related to seven CDO investments, including charges of $418,600 on three CDO investments which resulted in the total write-off of those investments that had an original cost of $2.0 million. The remaining OTTI charges of $253,400 were recorded on four CDOs with a remaining book value of $2.4 million at March 31, 2009.

Non-Interest Expense.

Non-interest expense decreased to $14.8 million for the first quarter of 2010 compared to $15.0 million for the same period in 2009.

Compensation and Benefits. Compensation and benefits decreased to $6.5 million for the quarter ended March 31, 2010 from $7.4 million for the same period in 2009. The decrease is mainly attributable to a reduction in variable compensation due to the first quarter 2010 performance of the Company not meeting its target as well as a reduction in employees.

FDIC insurance premium. FDIC insurance expense increased to $1.0 million in the first quarter of 2010 from $567,000 in the same period of 2009. This was the result of the FDIC rate increase and special assessment in 2009 and higher insured deposits.

Other Non-Interest Expenses. Other non-interest expenses (including state franchise tax, data processing, amortization of intangibles and other) increased by $554,000 to $5.5 million for the quarter ended March 31, 2010 from $4.9 million for the same period in 2009. Increases between the 2010 and 2009 first quarters include an increase in credit, collection and OREO expenses of $434,000 for other real estate owned and repossessed assets and an increase in management consulting of $98,000 relating mainly to the core conversion process. These costs were partially offset by a decrease in office supply expense (down $31,000) and country club memberships (down $8,000) as a direct result of management’s cost control initiative.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the first quarter of 2010 was 61.26% compared to 63.09% for the first quarter of 2009.

Income Taxes.

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of 29.30% for the quarter ended March 31, 2010 compared to 33.16% for the same period in 2009. The decline in the effective tax rate for the quarter ended March 31, 2010 is due to the increase in nontaxable life insurance income in the current period.

Liquidity

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

First Defiance had $10.1 million of cash provided by operating activities during the first three months of 2010. The Company’s cash used in operating activities resulted from the origination of loans held for sale mostly offset by the proceeds on the sale of loans.

At March 31, 2010, First Defiance had $102.9 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $271.9 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Defiance had commitments to sell $22.8 million of loans held-for-sale. Also, the total amount of certificates of deposit that are scheduled to mature by March 31, 2011 is $412.1 million. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

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

ALCO uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -300 basis points to +300 basis points. The likelihood of a decrease in rates as of March 31, 2010 was considered to be remote given the current interest rate environment and therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the three months ended March 31, 2010 and the year-ended December 31, 2009.


March 31, 2010 Economic Value of Equity
Change in Rates	$ Amount	$ Change		% Change
	*(Dollars in Thousands)*
+ 300 bp	253,713	(20,372	)	(7.43	)%
+ 200 bp	261,751	(12,334	)	(4.50	)%
+ 100 bp	268,541	(5,544	)	(2.02	)%
0 bp	274,085	—		—


December 31, 2009 Economic Value of Equity
Change in Rates	$ Amount	$ Change		% Change
	*(Dollars in Thousands)*
+ 300 bp	263,012	(9,820	)	(3.60	)%
+ 200 bp	267,908	(4,924	)	(1.80	)%
+ 100 bp	270,927	(1,905	)	(0.70	)%
0 bp	272,932	—		—

Capital Resources

First Federal is required to maintain specified amounts of capital pursuant to regulations promulgated by the OTS. The capital standards generally require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement, and a risk-based capital requirement. The following table sets forth First Federal’s compliance with each of the capital requirements at March 31, 2010 (in thousands).


	Core Capital						Risk-Based Capital
	Adequately Capitalized			Well Capitalized			Adequately Capitalized			Well Capitalized
Regulatory capital	$	209,824		$	209,824		$	231,446		$	231,446
Minimum required regulatory capital		79,812			99,765			137,645			172,057

Excess regulatory capital	$	130,012		$	110,059		$	93,801		$	59,389

Regulatory capital as a percentage of assets (1)		10.52	%		10.52	%		13.45	%		13.45	%
Minimum capital required as a percentage of assets		4.00	%		5.00	%		8.00	%		10.00	%

Excess regulatory capital as a percentage of assets		6.52	%		5.52	%		5.45	%		3.45	%

(1)	Core capital is computed as a percentage of adjusted total assets of $2.0 billion. Risk-based capital is computed as a percentage of total risk-weighted assets of $1.7 billion.

Critical Accounting Policies

First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company’s Annual Report on Form 10-K include the Allowance for Loan Losses, Valuation of Securities, and the Valuation of Mortgage Servicing Rights. There have been no material changes in assumptions or judgments relative to those critical policies during the first three months of 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the 2009 Annual Report on Form 10-K, First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

First Defiance monitors its exposure to interest rate risk on a monthly basis through simulation analysis which measures the impact changes in interest rates can have on net income. The simulation technique analyzes the effect of a presumed 100 basis point shift in interest rates (which is consistent with management’s estimate of the range of potential interest rate fluctuations) and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, non-maturity deposit assumptions and capital requirements. The results of the simulation indicate that in an environment where interest rates rise or fall 100 basis points over a 12 month period, using March 31, 2010 amounts as a base case, First Defiance’s net interest income would be impacted by less than the board mandated guidelines of 10%.

Item 4. Controls and Procedures

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

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2010. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. No changes occurred in the Company’s internal controls over financial reporting during the quarter ended March 31, 2010 that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

FIRST DEFIANCE FINANCIAL CORP.

PART II-OTHER INFORMATION

Item 1.

Legal Proceedings

First Defiance is not engaged in any legal proceedings of a material nature.

Item 1A.

Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The risk factors described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. Moreover, the Company undertakes no obligation and disclaims any intention to publish revised information or updates to forward looking statements contained in such risk factors or in any other statement made at any time by the Company or any of its directors, officers, employees or other representatives, unless and until any such revisions or updates are expressly required to be disclosed by securities laws or regulations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

First Defiance did not have any common stock repurchases during the first quarter of 2010, but has 93,124 shares that may be purchased under a plan announced by the Board of Directors on July 18, 2003. Participation in the Capital Purchase Program prohibits the Company from repurchasing any of its common shares without the prior approval of the U.S. Treasury until the earlier of December 5, 2011 or the date the U.S. Treasury’s preferred stock is redeemed or transferred to an unaffiliated third party.

Item 3.

Defaults upon Senior Securities

Not applicable.

Item 4.

(Removed and Reserved)

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

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

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

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

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

FIRST DEFIANCE FINANCIAL CORP.

SIGNATURES

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


	First Defiance Financial Corp. (Registrant)

Date: May 5, 2010	By:	/s/ William J. Small
		William J. Small
		Chairman, President and Chief Executive Officer
Date: May 5, 2010
	By:	/s/ Donald P. Hileman
		Donald P. Hileman
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)