PREMIER FINANCIAL CORP - Quarter Report: 2011 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, 2011

¨	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 of principal executive office)		(Zip Code)

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

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

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 – 9,723,774 shares outstanding at April 29, 2011.

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, 2011 and December 31, 2010		2

	Consolidated Condensed Statements of Income - Three months ended March 31, 2011 and 2010		4

	Consolidated Condensed Statements of Changes in Stockholders’ Equity - Three months ended March 31, 2011 and 2010		5

	Consolidated Condensed Statements of Cash Flows - Three months ended March 31, 2011 and 2010		6

	Notes to Consolidated Condensed Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		63

Item 4.	Controls and Procedures		63

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings		64

Item 1A.	Risk Factors		64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64

Item 3.	Defaults upon Senior Securities		64

Item 4.	(Removed and Reserved)		64

Item 5.	Other Information		64

Item 6.	Exhibits		64

	Signatures		66

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, 2011		December 31, 2010
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	28,317	$	24,977
Interest-bearing deposits		207,000		144,187

		235,317		169,164
Securities:
Available-for-sale, carried at fair value		179,510		165,252
Held-to-maturity, carried at amortized cost (fair value $842 and $865 at March 31, 2011 and December 31, 2010, respectively)		818		839

		180,328		166,091
Loans held for sale		13,421		18,127
Loans receivable, net of allowance of $40,798 at March 31, 2011 and $41,080 at December 31, 2010, respectively		1,430,411		1,478,423
Accrued interest receivable		6,534		6,374
Federal Home Loan Bank stock		21,012		21,012
Bank owned life insurance		35,216		34,979
Premises and equipment		40,862		41,743
Real estate and other assets held for sale		9,150		9,591
Goodwill		57,556		57,556
Core deposit and other intangibles		5,784		6,128
Mortgage servicing rights		9,556		9,477
Deferred taxes		5,447		5,805
Other assets		11,358		11,047

Total assets	$	2,061,952	$	2,035,517

(continued)

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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


	March 31, 2011			December 31, 2010
Liabilities and stockholders’ equity
Liabilities:
Deposits	$	1,592,046		$	1,575,419
Advances from the Federal Home Loan Bank		96,874			116,885
Securities sold under repurchase agreements		60,736			56,247
Subordinated debentures		36,083			36,083
Advance payments by borrowers		825			937
Other liabilities		12,243			9,615

Total liabilities		1,798,807			1,795,186

Stockholders’ equity:

Preferred stock, $.01 par value per share: 37,000 shares authorized and issued with a liquidation preference of $37,231, net of discount		36,506			36,463

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 9,723,774 and 8,117,770 shares outstanding, respectively		127			127
Common stock warrant		878			878
Additional paid-in capital		135,470			140,845
Accumulated other comprehensive income (loss), net of tax of $222 and $(184), respectively		411			(342	)
Retained earnings		137,143			134,988
Treasury stock, at cost, 3,015,722 and 4,621,726 shares respectively		(47,390	)		(72,628	)

Total stockholders’ equity		263,145			240,331

Total liabilities and stockholders’ equity	$	2,061,952		$	2,035,517

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,
	2011			2010
Interest Income
Loans	$	20,224		$	22,397
Investment securities:
Taxable		1,029			990
Non-taxable		569			462
Interest-bearing deposits		101			61
FHLB stock dividends		235			219

Total interest income		22,158			24,129
Interest Expense
Deposits		3,594			5,398
FHLB advances and other		906			1,218
Subordinated debentures		326			323
Notes payable		130			105

Total interest expense		4,956			7,044

Net interest income		17,202			17,085
Provision for loan losses		2,833			6,889

Net interest income after provision for loan losses		14,369			10,196
Non-interest Income
Service fees and other charges		2,617			3,158
Insurance commission income		1,655			1,109
Mortgage banking income		1,288			1,807
Gain on sale of non-mortgage loans		104			37
Gain on sale or call of securities		49			6
Other-than-temporary impairment (OTTI) losses on investment securities
Total impairment losses on investment securities		(13	)		(70	)
Losses recognized in other comprehensive income		11			—

Net impairment loss recognized in earnings		(2	)		(70	)
Trust income		148			122
Income from Bank Owned Life Insurance		237			212
Gain on life insurance		—			268
Other non-interest income		(151	)		117

Total non-interest income		5,945			6,766
Non-interest Expense
Compensation and benefits		7,834			6,457
Occupancy		1,852			1,828
FDIC insurance premium		913			1,046
State franchise tax		542			563
Data processing		1,061			1,196
Amortization of intangibles		344			437
Other non-interest expense		4,080			3,305

Total non-interest expense		16,626			14,832

Income before income taxes		3,688			2,130
Federal income taxes		1,028			624

Net Income	$	2,660		$	1,506

Dividends accrued on preferred shares	$	(462	)	$	(463	)
Accretion on preferred shares	$	(43	)	$	(40	)

Net income (loss) applicable to common shares	$	2,155		$	1,003

Earnings per common share (Note 7)
Basic	$	0.25		$	0.12
Diluted	$	0.25		$	0.12
Dividends declared per share (Note 6)	$	—		$	—
Average common shares outstanding (Note 7)
Basic		8,519			8,117
Diluted		8,671			8,142

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, 2011	$	36,463	$	127	$	878	$	(72,628	)	$	140,845		$	(342	)	$	134,988		$	240,331
Comprehensive income:
Net income		—		—		—		—			—			—			2,660			2,660
Change in net unrealized gains and losseson available-for-sale securities, netof income taxes of $407		—		—		—		—			—			753			—			753

Total comprehensive income																				3,413
Stock option expense		—		—		—		—			39			—			—			39
Capital stock issuance		—		—		—		25,156			(5,338	)		—			—			19,818
Purchase of treasury stock, restricted share award		—		—		—		75			(75	)		—			—			—
Purchase of treasury stock, Directors		—		—		—		7			(1	)		—			—			6
Preferred Stock Dividends		—		—		—		—			—			—			(462	)		(462	)
Accretion on preferred shares		43		—		—		—			—			—			(43	)		—

Balance at March 31, 2011	$	36,506	$	127	$	878	$	(47,390	)	$	135,470		$	411		$	137,143		$	263,145


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

See Accompanying Notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)


	Three Months Ended March 31,
	2011			2010
Operating Activities
Net income	$	2,660		$	1,506
Items not requiring (providing) cash
Provision for loan losses		2,833			6,889
Depreciation		866			881
Amortization of mortgage servicing rights, net of impairment recoveries		283			105
Amortization of core deposit and other intangible assets		344			438
Net amortization of premiums and discounts on loans and deposits		256			200
Amortization of premiums and discounts on securities		(60	)		100
Change in deferred taxes		(48	)		(492	)
Proceeds from the sale of loans held for sale		53,483			56,329
Originations of loans held for sale		(55,626	)		(57,606	)
Gain from sale of loans		(830	)		(1,201	)
OTTI losses on investment securities		2			70
Gain from sale or call of securities		(49	)		(6	)
Loss on sale or write-down of real estate and other assets held for sale		581			557
Stock option expense		39			52
Income from bank owned life insurance		(237	)		(212	)
Gain on life insurance		—			(268	)
Changes in:
Accrued interest receivable		(160	)		(554	)
Other assets		(19	)		(793	)
Other liabilities		2,628			4,118

Net cash provided by (used in) operating activities		6,946			10,113

Investing Activities
Proceeds from maturities of held-to-maturity securities		21			33
Proceeds from maturities, calls and pay-downs of available-for-sale securities		7,083			6,358
Proceeds from sale of real estate and other assets held for sale		1,638			1,739
Proceeds from the sale of available-for-sale securities		1,982			28
Proceeds from sale of non-mortgage loans		1,976			2,973
Purchases of available-for-sale securities		(22,057	)		(14,810	)
Proceeds from bank owned life insurance		—			729
Proceeds from sale of office properties and equipment		12			—
Purchases of portfolio mortgage loans		(10,696	)		—
Purchases of premises and equipment, net		(226	)		(114	)
Net decrease in loans receivable		59,111			31,287

Net cash provided by investing activities		38,844			28,223

Financing Activities
Net increase in deposits and advance payments by borrowers		16,523			19,194
Repayment of Federal Home Loan Bank advances		(20,011	)		(20,010	)
Increase (decrease) in securities sold under repurchase agreements		4,489			(3,515	)
Net cash received from common stock issuance		19,824			—
Cash dividends paid on preferred stock		(462	)		(463	)

Net cash provided by (used in) financing activities		20,363			(4,794	)

Increase (decrease) in cash and cash equivalents		66,153			33,542
Cash and cash equivalents at beginning of period		169,164			121,116


Cash and cash equivalents at end of period	$	235,317	$	154,658


Supplemental cash flow information:
Interest paid	$	5,047	$	7,183

Income taxes paid	$	—	$	—

Transfers from loans to real estate and other assets held for sale	$	1,778	$	3,059

Transfers from loans held for sale to loans	$	7,213	$	—

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements

(Unaudited at March 31, 2011 and 2010)

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, Archbold, Bryan 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, 2010 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, 2011 and for the three month periods ended March 31, 2011 and 2010 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 2010 Annual Report on Form 10-K for the year ended December 31, 2010. 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, 2011 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 of America 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 computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, warrants and stock grants.

Newly Issued But Not Yet Effective Accounting Standards

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, updated to amend previous guidance with respect to troubled debt restructurings. This updated guidance is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring. In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the update are effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The provisions of this update are not expected to have a material impact on the Company’s financial position, results or operations or cash flows.

3. Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss) (“OCI”). OCI 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 OCI are reported net of tax. Following is a summary of OCI for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
	2011			2010
	*(In thousands)*
Net income	$	2,660		$	1,506
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on securities AFS arising during the period		1,207			666
Reclassification adjustment for (gains) losses realized in income		(49	)		(6	)
Other-than-temporary impairment losses on securities AFS realized in income		2			70


Net unrealized gains (losses)		1,160			730

Income tax effect		(407	)		(256	)

Other comprehensive income (loss)		753			474

Comprehensive income	$	3,413		$	1,980

The following table summarizes the changes within each classification of accumulated other comprehensive income for the three months ended March 31, 2011 and 2010:


	Unrealized gains (losses) on available for sale securities		Postretirement Benefit			Accumulated other comprehensive income (loss), net
	*(In thousands)*
Balance at December 31, 2010	$	32	$	(374	)	$	(342	)
Other comprehensive income (loss), net		753		—			753

Balance at March 31, 2011	$	785	$	(374	)	$	411


	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

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, corporate bonds 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, 2011	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	$	—	$	14,928		$	—	$	14,928
Mortgage-backed – residential		—		47,375			—		47,375
REMICs		—		3,435			—		3,435
Collateralized mortgage obligations		—		51,694			—		51,694
Trust preferred stock		—		—			1,566		1,566
Preferred stock		137		—			—		137
Corporate bonds		—		3,860			—		3,860
Obligations of state and political subdivisions		—		56,515			—		56,515
Mortgage banking derivative – asset		—		256			—		256
Mortgage banking derivative – liability		—		(63	)		—		(63	)


December 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	$	—	$	11,985	$	—	$	11,985
Mortgage-backed – residential		—		40,576		—		40,576
REMICs		—		3,541		—		3,541
Collateralized mortgage obligations		—		51,057		—		51,057
Trust preferred stock		—		—		1,498		1,498
Preferred stock		48		—		—		48
Corporate bonds				3,797				3,797
Obligations of state and political subdivisions		—		52,750		—		52,750
Mortgage banking derivative – asset		—		265		—		265

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, 2011 and March 31, 2010:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2011	$	1,498
Total gains or losses (realized/unrealized)
Included in earnings (unrealized)		(2	)
Included in other comprehensive income (presented gross of taxes)		66
Amortization		4
Sales		—
Transfers in and/or out of Level 3		—

Ending balance, March 31, 2011	$	1,566


	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 (unrealized)		(70	)
Included in other comprehensive income (presented gross of taxes)		82
Amortization		4
Sales		(25	)

Ending balance, March 31, 2010	$	1,579

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, 2011	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	*(In Thousands)*
Impaired loans
Residential Loans	$	—	$	—	$	1,296	$	1,296
Commercial Loans						6,145		6,145
Multi Family Loans						1,081		1,081
CRE loans						18,827		18,827

Total Impaired loans						27,349		27,349
Mortgage servicing rights		—		9,556		—		9,556
Real estate held for sale
Residential Loans						5		5
CRE loans						810		810

Total Real Estate held for sale						815		815


December 31, 2010	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	*(In Thousands)*
Impaired loans
Residential Loans	$		$		$	2,541	$	2,541
Commercial Loans						7,236		7,236
Multi Family Loans						962		962
CRE loans						16,835		16,835

Total Impaired loans						27,574		27,574
Mortgage servicing rights		—		9,477		—		9,477
Real estate held for sale		—		—		3,449		3,449

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $27,349,000, with a valuation allowance of $17,078,000 at March 31, 2011. A provision expense of $2,412,000 for the three months ended March 31, 2011 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $9,556,000 at March 31, 2011, resulting in a valuation allowance of $953,000. A recovery of $171,000 for the three months ended March 31, 2011 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 $292,000 for the three months ended March 31, 2011 which was recorded directly as an adjustment to current earnings through non-interest expense.

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $27.6 million, with a valuation allowance of $16.6 million at December 31, 2010. A provision expense of $18.0 million for year ended December 31, 2010 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $9,477,000 at December 31, 2010, resulting in a valuation allowance of $1,125,000. A recovery of $353,000 was included in the earnings for the year ended December 31, 2010.

Real estate held for sale is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. The change in fair value of real estate held for sale was $3,196,000 for the year ended December 31, 2010 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, 2011 and December 31, 2010. 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.

As disclosed in more detail in Note 8, investment securities 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 or based on observable and unobservable data. It was not practicable to determine the fair value of 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, 2011.


	March 31, 2011				December 31, 2010
	Carrying Value		Estimated Fair Values		Carrying Value		Estimated Fair Values
	*(In Thousands)*
Assets:
Cash and cash equivalents	$	235,317	$	235,317	$	169,164	$	169,164
Investment securities		180,328		180,352		166,091		166,117
Federal Home Loan Bank Stock		21,012		N/A		21,012		N/A
Loans, net, including loans held for sale		1,443,832		1,444,307		1,496,550		1,498,990
Mortgage banking derivative asset		256		256		265		265
Accrued interest receivable		6,534		6,534		6,374		6,374

		1,887,279	$	1,866,766		1,859,456	$	1,840,910

Other assets		174,673				176,061

Total assets	$	2,061,952			$	2,035,517


Liabilities and stockholders’ equity:
Deposits	$	1,592,046	$	1,598,182	$	1,575,419	$	1,582,539
Advances from Federal Home Loan Bank		96,874		100,873		116,885		121,504
Securities sold under repurchase agreements		60,736		60,736		56,247		55,443
Subordinated debentures		36,083		35,544		36,083		32,258
Accrued interest payable		633		633		724		724
Mortgage banking derivative liability		63		63		—		—
Advance payments by borrowers for taxes and insurance		825		825		937		937

		1,787,260	$	1,796,856		1,786,295	$	1,793,405

Other liabilities		11,547				8,891

Total liabilities		1,798,807				1,795,186
Stockholders’ equity		263,145				240,331

Total liabilities and stockholders’ equity	$	2,061,952			$	2,035,517

5. Stock Compensation Plans

First Defiance has established incentive stock option plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaces all existing plans. All awards currently outstanding under the prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 option or restricted share awards.

As of March 31, 2011, 409,650 options (387,650 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. 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, 2011 or 2010.

Following is activity under the plans during the three months ended March 31, 2011:

Options
Outstanding

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term (in years)

Aggregate
Intrinsic
Value

Options outstanding, January 1, 2011

415,000

19.17

Forfeited or cancelled

(5,350

)

20.99

Exercised

—

Granted

—

Options outstanding, March 31, 2011

409,650

19.15

4.65

338,080

Vested or expected to vest at

March 31, 2011

409,650

19.15

4.65

338,080

Exercisable at March 31, 2011

283,370

20.60

3.46

79,398

As of March 31, 2011, there was $209,000 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 2.3 years.

In March 2011, First Defiance granted restricted stock awards (“RSA’s) under the 2010 Equity Plan, which provides for the issuance of shares to directors, officers and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.

The fair value of the stock was determined using the closing price of First Defiance common stock on the date of the grant. The restricted stock shares fully vest on the second anniversary of the grant date.


Unvested Shares	Shares		Weighted-Average Grant Date Fair Value
Unvested at January 1, 2011		—	$	—
Granted		4,738		66,332
Vested		—		—
Forfeited		—		—

Unvested at March 31, 2011		4,738	$	66,332

As of March 31, 2011, there was $64,000 of total unrecognized compensation cost related to unvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.93 years.

6. Dividends on Common Stock

No common stock dividends were declared by First Defiance in the first quarter of 2011 or 2010.

As a result of its participation in the 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,
	2011		2010
Numerator for basic and diluted earnings per common share – Net income applicable to common shares	$	2,155	$	1,003
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities		8,519		8,117
Effect of warrants		140		25
Effect of employee stock options		12		—


Denominator for diluted earnings per common share		8,671		8,142


Basic earnings per common share	$	0.25	$	0.12


Diluted earnings per common share	$	0.25	$	0.12

There were 355,538 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, 2011. Shares under option of 439,650 were excluded from the diluted earnings per common share calculations as they were anti-dilutive for the three months ended March 31, 2010.

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, 2011
Available-for-Sale Securities:

Obligations of U.S. government corporations and agencies	$	14,982	$	59	$	(113	)	$	14,928
Mortgage-backed securities – residential		46,444		1,195		(264	)		47,375
REMICs		3,304		131		—			3,435
Collateralized mortgage obligations		50,513		1,339		(158	)		51,694
Trust preferred securities and preferred stock		3,789		102		(2,188	)		1,703
Corporate bonds		3,794		66		—			3,860
Obligations of state and political subdivisions		55,475		1,419		(379	)		56,515

Totals	$	178,301	$	4,311	$	(3,102	)	$	179,510


Held-to-Maturity Securities*:
FHLMC certificates	$	91	$	7	$	—		$	98
FNMA certificates		245		5		—			250
GNMA certificates		83		4		—			87
Obligations of state and political subdivisions		399		8		—			407

Totals	$	818	$	24	$	—		$	842


At December 31, 2010
Available-for-Sale Securities:

Obligations of U.S. government corporations and agencies	$	11,980	$	80	$	(75	)	$	11,985
Mortgage-backed securities – residential		39,561		1,244		(229	)		40,576
REMICs		3,378		163		—			3,541
Collateralized mortgage obligations		49,862		1,364		(169	)		51,057
Trust preferred securities and preferred stock		3,787		13		(2,254	)		1,546
Corporate bonds		3,782		15		—			3,797
Obligations of state and political subdivisions		52,853		779		(882	)		52,750

Totals	$	165,203	$	3,658	$	(3,609	)	$	165,252

Held-to-Maturity Securities*:
FHLMC certificates	$	95	$	7	$	—		$	102
FNMA certificates		259		6		—			265
GNMA certificates		86		3		—			89
Obligations of state and political subdivisions		399		10		—			409

Totals	$	839	$	26	$	—		$	865

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

The amortized cost and fair value of the investment securities portfolio at March 31, 2011 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

Available-for-Sale

Held-to-Maturity

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

(In Thousands)

Due in one year or less

2,637

2,665

Due after one year through five years

7,275

7,411

Due after five years through ten years

21,269

21,699

279

Due after ten years

46,859

45,231

—

MBS/CMO/REMIC

100,261

102,504

419

435

178,301

179,510

818

842

Investment securities with a carrying amount of $126.9 million at March 31, 2011 were pledged as collateral on public deposits, securities sold under repurchase agreements and FHLB advances.

As of March 31, 2011, the Company’s investment portfolio consisted of 328 securities, 55 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, 2011:

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, 2011

Available-for-sale securities:

Obligations of U.S. govt. corps. And agencies

8,880

(113

)

—

8,880

(113

)

Mortgage-backed -residential

15,405

(264

)

—

15,405

(264

)

Collateralized mortgage obligations and REMICs

10,020

(158

)

—

10,020

(158

)

Trust preferred stock and preferred stock

—

1,566

(2,188

)

1,566

(2,188

)

Obligations of state and political subdivisions

10,137

(261

)

1,151

(118

)

11,288

(379

)

Total temporarily impaired securities

44,442

(796

)

2,717

(2,306

)

47,159

(3,102

)

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.

Realized gains from the sales of investment securities totaled $49,000 ($32,000 after tax) in the first quarter of 2011 while there were realized gains of $6,000 ($4,000 after tax) in the first quarter of 2010.

Management evaluates securities for other-than-temporary impairment (“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.

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.

In the first quarter of 2011, management determined OTTI on one collateralized debt obligation (“CDO”) resulting in a write-down of $2,200 ($1,400 after tax). In the first quarter of 2010, management determined OTTI on two CDOs resulting in a write-down of $70,000 ($46,000 after tax) on impaired investments.

The Company held nine CDOs at March 31, 2011. Four of those CDOs were written down in full prior to January 1, 2010. The remaining five CDOs have a total amortized cost of $3.8 million at March 31, 2011. Of these, three, with a total amortized cost of $1.8 million, were identified as OTTI in prior periods. 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 OTTI.

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 will be 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.

As required under FASB 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 Company’s CDO valuations were supported by analysis prepared by an independent third party. 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 other-than-temporary impairment, their lowest credit rating at March 31, 2011 and the related credit losses recognized in earnings for the three month period ended March 31, 2011 (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 C		Rated Ca		Not Rated		Not Rated		Total
Cumulative OTTI related to credit loss at January 1, 2011	$	80	$	318	$	1,000	$	76	$	857	$	453	$	465	$	3,249

Addition – Qtr 1		—		—		—		2		—		—		—		2

Cumulative OTTI related to credit loss at March 31, 2011	$	80	$	318	$	1,000	$	78	$	857	$	453	$	465	$	3,251

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was $808,000 for the above securities at March 31, 2011. There was $820,000 recognized in AOCI at December 31, 2010.

The following table provides additional information related to the five CDO investments for which a balance remains as of March 31, 2011 (dollars in thousands):


CDO	Class		Amortized Cost		Fair Value		Unrealized Loss			OTTI Losses 2011			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 Sub-ordination as a % of Current Performing Collateral

Preferred Term VI		Mezz	$	185	$	47	$	(138	)	$	—			Caa1		5		71.57	%		—	%		—	%

TPREF Funding II		B		677		311		(366	)		—			Caa3		19		36.50	%		25.36	%		—

I-Preferred Term Sec I		B-1		1,000		529		(471	)		—			CCC		15		16.80	%		13.57	%		25.30	%

Dekania II CDO		C-1		990		515		(475	)		—			CCC		36		3.65	%		12.43	%		29.61	%

Preferred Term Sec XXVII		C-1		902		164		(738	)		(2	)		C		34		27.07	%		23.50	%		—


Total			$	3,754	$	1,566	$	(2,188	)	$	(2	)

The increase in OTTI in the first quarter of 2011 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. Excluding the Preferred Term VI, the Company’s assumed average lifetime default rate declined from 35.4% at the end of the first quarter 2010 to a rate of 30.3% at the end of the first quarter 2011.

The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for the period ended March 31, 2011 and March 31, 2010 (in thousands):


	Three Months Ended March 31,
	2011		2010
Beginning balance, January 1	$	474	$	2,521
Additions for amounts related to credit loss for which an OTTI 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		2		48

Ending balance, March 31	$	476	$	329

The proceeds from the sales and calls of securities and the associated gains are listed below:


	Three Months Ended March 31,
	2011		2010
	*(In thousands)*
Proceeds	$	1,982	$	28
Gross realized gains		49		6
Gross realized losses		—		—

9. Loans

Loans receivable consist of the following (in thousands):


	March 31, 2011			December 31, 2010
Real Estate:
Secured by 1-4 family residential	$	218,599		$	205,938
Secured by multi-family residential		112,228			120,534
Secured by non-residential real estate		634,671			646,478
Construction		24,437			30,340

		989,935			1,003,290
Other Loans:
Commercial		341,614			369,959
Home equity and improvement		128,810			133,593
Consumer Finance		20,862			22,848

		491,286			526,400

Total loans		1,481,221			1,529,690
Deduct:
Undisbursed loan funds		(9,160	)		(9,267	)
Net deferred loan origination fees and costs		(852	)		(920	)
Allowance for loan loss		(40,798	)		(41,080	)

Totals	$	1,430,411		$	1,478,423

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


	Three Months ended March 31,
	2011		2010
Balance at beginning of period	$	41,080	$	36,547
Provision for loan losses		2,833		6,889
Charge-offs:
Residential		547		326
Commercial real estate		2,274		3,191
Commercial		335		735
Home equity and improvement		201		399
Consumer finance		11		25

Total charge-offs		3,368		4,676
Recoveries		253		220

Net charge-offs		3,115		4,456

Ending allowance	$	40,798	$	38,980

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

The following table discloses allowance for loan loss activity for the quarter ended March 31, 2011 by portfolio segment and impairment method ($ in thousands):


Quarter Ended March 31, 2011	1-4 Family Residential Real Estate			Construction			Multi- Family Residential Real Estate		Commercial Real Estate			Commercial			Home Equity and Improvement			Consumer			Total
Allowance for loans individually evaluated
Beginning Specific Allocations	$	1,741		$	13		$	230	$	10,213		$	4,362		$	36		$	—		$	16,595
Charge-Offs		(145	)		—			—		(1,777	)		(206	)		—			—			(2,128	)
Recoveries		—			—			—		—			—			—			—			—
Provisions		180			(13	)		20		2,261			163			—			—			2,611

Ending Specific Allocations	$	1,776		$	—		$	250	$	10,697		$	4,319		$	36		$	—		$	17,078

Allowance for loans collectively evaluated
Beginning General Allocations	$	4,215		$	60		$	1,917	$	9,995		$	6,509		$	1,492		$	297		$	24,485
Charge-Offs		(402	)		—			—		(497	)		(129	)		(201	)		(11	)		(1,240	)
Recoveries		5			—			—		211			8			—			29			253
Provisions		569			10			16		801			(1,189	)		123			(108	)		222

Ending General Allocations	$	4,387		$	70		$	1,933	$	10,510		$	5,199		$	1,414		$	207		$	23,720

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011:

(In Thousands)


	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity & Improvement		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,776	$	—	$	250	$	10,292	$	4,209	$	36	$	—	$	16,563
Collectively evaluated for impairment		4,387		70		1,933		10,510		5,199		1,414		207		23,720
Acquired with deteriorated credit quality		—		—		—		405		110		—		—		515

Total ending allowance balance	$	6,163	$	70	$	2,183	$	21,207	$	9,518	$	1,450	$	207	$	40,798

Loans:
Loans individually evaluated for impairment	$	6,830	$	60	$	1,333	$	40,166$	$	16,873	$	317	$	—	$	65,579
Loans collectively evaluated for impairment		212,143		24,387		111,046		595,082		325,282		129,074		20,931		1,417,945
Loans acquired with deteriorated credit quality		81		—		—		1,376		681		—		—		2,138

Total ending loans balance	$	219,054	$	24,447	$	112,379	$	636,624	$	342,836	$	129,391	$	20,931	$	1,485,662

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:

(In Thousands)


	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity & Improvement		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,741	$	13	$	230	$	9,843	$	4,252	$	36	$	—	$	16,115
Collectively evaluated for impairment		4,215		60		1,917		9,995		6,509		1,492		297		24,485
Acquired with deteriorated credit quality		—		—		—		370		110		—		—		480

Total ending allowance balance	$	5,956	$	73	$	2,147	$	20,208	$	10,871	$	1,528	$	297	$	41,080


Loans:
Loans individually evaluated for impairment	$	8,994	$	64	$	1,333	$	41,290$	$	17,189	$	317	$	—	$	69,187
Loans collectively evaluated for impairment		197,296		30,275		119,444		605,882		353,386		133,881		22,942		1,463,106
Loans acquired with deteriorated credit quality		84		—		—		1,388		729		—		—		2,201

Total ending loans balance	$	206,374	$	30,339	$	120,777	$	648,560	$	371,304	$	134,198	$	22,942	$	1,534,494

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, 2011		December 31, 2010
	*(in thousands)*
Non-accrual loans	$	40,948	$	41,040
Loans over 90 days past due and still accruing		—		—
Troubled debt restructuring, still accruing		4,619		6,001

Total non-performing loans		45,567	$	47,041
Real estate and other assets held for sale		9,150		9,591

Total non-performing assets	$	54,717	$	56,632


	Three Months Ended March 31,
	2011		2010
	*(in thousands)*
Average of impaired loans during the period	$	69,249	$	61,976
Interest income recognized during the period		535		536
Cash-basis interest income recognized		491		452

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

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011: (In Thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Balance		Interest Recognition		Cash Basis
With no allowance recorded:
Residential Owner Occupied	$	941	$	942	$	—	$	1,532	$	14	$	14
Residential Non Owner Occupied		2,345		2,351		—		3,207		32		36

Total Residential Real Estate		3,286		3,293		—		4,739		46		50
Construction		60		60		—		62		—		—
Multi-Family Residential Real Estate		—		—		—		—		—		—
CRE Owner Occupied		3,239		3,247		—		3,104		25		26
CRE Non Owner Occupied		7,028		7,045		—		8,530		68		61
Agriculture Land		1,482		1,485		—		1,818		7		8
Other CRE		936		934		—		942		1		1

Total Commercial Real Estate		12,685		12,711		—		14,394		101		96
Commercial Working Capital		2,189		2,193		—		2,399		23		27
Commercial Other		4,878		4,895		—		4,773		51		49

Total Commercial		7,067		7,088		—		7,172		74		76
Consumer		—		—		—		—		—		—
Home Equity and Home Improvement		34		34		—		34		1		1

Total loans with no allowance recorded	$	23,132	$	23,186	$	—	$	26,401	$	222	$	223


With an allowance recorded:
Residential Owner Occupied	$	1,963	$	1,964	$	924	$	1,658	$	6	$	6
Residential Non Owner Occupied		1,654		1,653		852		1,633		1		1

Total Residential Real Estate		3,617		3,617		1,776		3,291		7		7
Construction		—		—		—		—		—		—
Multi-Family Residential Real Estate		1,331		1,333		250		1,330		12		10
CRE Owner Occupied		7,908		7,948		2,822		7,851		90		68
CRE Non Owner Occupied		13,702		13,756		5,895		12,500		165		142
Agriculture Land		551		553		213		553		4		4
Other CRE		6,572		6,575		1,767		6,563		11		12

Total Commercial Real Estate		28,733		28,832		10,697		27,467		270		226
Commercial Working Capital		2,789		2,789		1,773		2,776		—		—
Commercial Other		7,675		7,677		2,546		7,704		21		22

Total Commercial		10,464		10,466		4,319		10,480		21		22
Consumer		—		—		—		—		—		—
Home Equity and Home Improvement		281		283		36		281		3		3

Total loans with an allowance recorded	$	44,426	$	44,531	$	17,078	$	42,848	$	313	$	268

Impaired loans have been recognized in conformity with FASB ASC Topic 310.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010: (In Thousands)


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	1,679	$	1,685	$	—
Residential Non Owner Occupied		3,300		3,311		—

Total Residential Real Estate		4,979		4,996		—
Construction		—		—		—
Multi-Family Residential Real Estate		137		139		—
CRE Owner Occupied		4,530		4,534		—
CRE Non Owner Occupied		6,909		6,921		—
Agriculture Land		2,394		2,401		—
Other CRE		1,639		1,645		—

Total Commercial Real Estate		15,472		15,501		—
Commercial Working Capital		1,713		1,718		—
Commercial Other		4,435		4,454		—

Total Commercial		6,148		6,172		—
Consumer		—		—		—
Home Equity and Home Improvement		35		35		—

Total loans with no allowance recorded	$	26,771	$	26,843	$	—


With an allowance recorded:
Residential Owner Occupied	$	800	$	803	$	259
Residential Non Owner Occupied		3,185		3,195		1,482

Total Residential Real Estate		3,985		3,998		1,741
Construction		64		64		13
Multi-Family Residential Real Estate		1,193		1,194		230
CRE Owner Occupied		6,436		6,451		2,860
CRE Non Owner Occupied		13,743		13,789		5,554
Agriculture Land		315		316		163
Other CRE		6,554		6,558		1,636

Total Commercial Real Estate		27,048		27,114		10,213
Commercial Working Capital		3,658		3,660		1,763
Commercial Other		7,940		7,968		2,599

Total Commercial		11,598		11,628		4,362
Consumer		—		—		—
Home Equity and Home Improvement		281		282		36

Total loans with an allowance recorded	$	44,169	$	44,280	$	16,595

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 by class of loans: (In Thousands)


	Current		30-59 days		60-89 days		Non Accrual		TDR		Total Past Due & TDR
Residential Owner Occupied	$	121,829	$	483	$	1,197	$	3,274	$	1,033	$	5,987
Residential Non Owner Occupied		87,472		119		89		2,085		1,473		3,766

Total residential real estate		209,301		602		1,286		5,359		2,506		9,753
Construction		24,387		—		—		60		—		60
Multi-Family		111,469		—		—		911		—		911
CRE Owner Occupied		197,151		795		801		6,516		815		8,927
CRE Non Owner Occupied		310,104		152		525		6,836		142		7,655
Agriculture Land		68,310		554		292		1,444		163		2,453
Other Commercial Real Estate		35,312		6		—		6,197		508		6,711

Total Commercial Real Estate		610,877		1,507		1,618		20,993		1,628		25,746
Commercial Working Capital		129,034		402		—		3,277		—		3,679
Commercial Other		199,446		592		14		9,884		186		10,676

Total Commercial		328,480		994		14		13,161		186		14,355
Consumer		20,712		194		8		18		—		220
Home Equity / Home Improvement		128,092		296		234		452		317		1,299

Total Loans	$	1,433,318	$	3,593	$	3,160	$	40,954	$	4,637	$	52,344

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans: (In Thousands)


	Current		30-59 days		60-89 days		Non Accrual		TDR		Total Past Due & TDR
Residential Owner Occupied	$	106,249	$	298	$	1,420	$	1,933	$	1,775	$	5,426
Residential Non Owner Occupied		86,680		842		393		5,295		1,489		8,019

Total residential real estate		192,929		1,140		1,813		7,228		3,264		13,445
Construction		30,275		—		—		64		—		64
Multi-Family		119,606		257		228		686		—		1,171
CRE Owner Occupied		204,590		607		718		5,764		671		7,760
CRE Non Owner Occupied		308,278		247		518		7,519		142		8,426
Agriculture Land		73,650		108		176		1,971		166		2,421
Other Commercial Real Estate		36,378		—		85		5,793		1,179		7,057

Total Commercial Real Estate		622,896		962		1,497		21,047		2,158		25,664
Commercial Working Capital		148,116		—		10		3,287		—		3,297
Commercial Other		209,328		413		1595		8,264		291		10,563

Total Commercial		357,444		413		1,605		11,551		291		13,860
Consumer		22,642		233		53		14		—		300
Home Equity / Home Improvement		130,281		2,738		335		527		317		3,917

Total Loans	$	1,476,073	$	5,743	$	5,531	$	41,117	$	6,030	$	58,421

Specific reserves in the amount of $1.6 million and $2.3 million have been allocated to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and December 31, 2010, respectively. First Defiance is not committed to lend additional funds to customers whose loans have been modified.

Credit Quality Indicators

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis

includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings:

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)


Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	6,460	$	1,143	$	5,495	$	693	$	114,024	$	127,815
Residential Non Owner Occupied		71,135		3,116		10,095		106		6,787		91,239

Total residential real estate		77,595		4,259		15,590		799		120,811		219,054
Construction		17,675		363		60		—		6,349		24,447
Multi Family		108,574		475		1,491		662		1,177		112,379
CRE Owner Occupied		169,490		10,209		26,189		—		190		206,078
CRE Non Owner Occupied		271,767		12,071		33,737		—		185		317,760
Agriculture Land		65,379		2,734		2,651		—		—		70,764
Other CRE		23,805		4,413		12,604		—		1,200		42,022

Total Commercial Real Estate		530,441		29,427		75,181		—		1,575		636,624
Commercial Working Capital		110,282		9,998		12,433		—		—		132,713
Commercial Other		173,815		11,964		24,344		—		—		210,123

Total Commercial		284,097		21,962		36,777		—		—		342,836
Consumer		—		—		70		81		20,780		20,931
Home Equity/Improvement		—		—		917		227		128,247		129,391

Total	$	1,018,382	$	56,486	$	130,086	$	1,769	$	278,939	$	1,485,662

As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)


Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	6,462	$	1,055	$	5,302	$	794	$	98,063	$	111,676
Residential Non Owner Occupied		71,339		4,131		12,279		106		6,843		94,698

Total residential real estate		77,801		5,186		17,581		900		104,906		206,374
Construction		22,794		363		64		—		7,118		30,339
Multi Family		111,042		7,089		787		661		1,198		120,777
CRE Owner Occupied		174,468		12,308		25,081		295		198		212,350
CRE Non Owner Occupied		270,243		12,603		33,663		—		195		316,704
Agriculture Land		68,842		2,536		4,693		—		—		76,071
Other CRE		26,685		2,654		12,903		—		1,193		43,435

Total Commercial Real Estate		540,238		30,101		76,340		295		1,586		648,560
Commercial Working Capital		113,962		26,206		11,245		—		—		151,413
Commercial Other		181,506		14,138		24,247		—		—		219,891

Total Commercial		295,468		40,344		35,492		—		—		371,304
Consumer		—		—		60		56		22,826		22,942
Home Equity/Improvement		—		—		852		546		132,800		134,198

Total	$	1,047,343	$	83,083	$	131,176	$	2,458	$	270,434	$	1,534,494

10. Mortgage Banking

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


	Three Months Ended March 31,
	2011			2010
	*(in thousands)*
Gain from sale of mortgage loans	$	726		$	1,164
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		845			748
Amortization of mortgage servicing rights		(454	)		(426	)
Mortgage servicing rights valuation adjustments		171			321

		562			643

Net revenue from sale and servicing of mortgage loans	$	1,288		$	1,807

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.3 billion for March 31, 2011 and $1.2 billion for March 31, 2010.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three months ended March 31, 2011 and 2010:


	March 31, 2011			March 31, 2010
	*(in thousands)*
Mortgage servicing assets:
Balance at beginning of period	$	10,602		$	10,436
Loans sold, servicing retained		362			430
Amortization		(454	)		(426	)

Carrying value before valuation allowance at end of period		10,510			10,440
Valuation allowance:
Balance at beginning of period		(1,125	)		(1,478	)
Impairment recovery		171			321

Balance at end of period		(954	)		(1,157	)

Net carrying value of MSRs at end of period	$	9,556		$	9,283

Fair value of MSRs at end of period	$	9,556		$	9,283

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, 2011		December 31, 2010
Non-interest-bearing checking accounts	$	219,374	$	216,699
Interest-bearing checking and money market accounts		581,622		555,434
Savings accounts		153,629		144,491
Retail certificates of deposit less than $100,000		453,997		465,774
Retail certificates of deposit greater than $100,000		150,859		151,258
Brokered or national certificates of deposit		32,565		41,763

	$	1,592,046	$	1,575,419

12. Borrowings

First Defiance’s debt, Federal Home Loan Bank (“FHLB”) advances and junior subordinated debentures owed to unconsolidated subsidiary trusts are comprised of the following:


	March 31, 2011		December 31, 2010
	*(in thousands)*
FHLB Advances:
Overnight borrowings	$	—	$	—
Single maturity fixed rate advances		35,000		35,000
Putable advances		44,000		54,000
Strike-rate advances		17,000		27,000
Amortizable mortgage advances		874		885

Total	$	96,874	$	116,885


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, 2011 to June 13, 2011 and the maturity dates range from February 11, 2013 to March 12, 2018. The FHLB has the option to call the remaining $30.0 million of putable advances with a weighted average rate of 4.76%. The maturity dates of these advances range from October 28, 2013 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, 2011 was 0.30%. The weighted average rate of the strike-rate advances is 3.61% and the maturity dates range from October 15, 2012 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 1.68% and 1.67% on March 31, 2011 and December 31, 2010 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.

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, 2011				December 31, 2010
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	25,235	$	57,183	$	26,382	$	48,801
Unused lines of credit		31,948		189,247		34,735		193,092
Standby letters of credit		0		21,606		0		21,533

Total	$	57,183	$	268,036	$	61,117	$	263,426

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 $16.9 million and $34.7 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at March 31, 2011 and December 31, 2010, 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 2007. 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 $11.3 million and $24.9 million of interest rate lock commitments at March 31, 2011 and December 31, 2010, respectively. There were $16.9 million and $34.7 million of forward commitments for the future delivery of residential mortgage loans at March 31, 2011 and December 31, 2010, 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, 2011

December 31, 2010

Assets

(Liabilities)

Assets

(Liabilities)

Carrying
Value

Derivative
Net Carrying
Value

Carrying
Value

Derivative
Net Carrying
Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

256

193

265

—

265

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,
	2011			2010
	*(In Thousands)*
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives – Gain (Loss)	$	(162	)	$	94

The above amounts are included in mortgage banking income with gain on sale of mortgage loans. During the first quarter of 2011, management determined that a group of loans, previously classified as held for sale, were no longer sellable and were transferred back into the portfolio. As a result, a $90,000 loss related to a fair value adjustment on those loans was recorded in the first quarter of 2011.

16. Common Stock Offering

During the first quarter of 2011, the Company completed its previously announced underwritten public common stock offering by issuing 1,600,800 shares of the Company’s common stock, including 208,800 shares issued pursuant to the exercise of the underwriter’s over-allotment option, at a price of $13.25 per share for gross proceeds of $21.2 million. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $19.8 million.

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

General - First Defiance is a unitary thrift holding company that conducts business through its two wholly owned subsidiaries, First Federal and First Insurance. First Federal is a federally chartered savings bank that provides financial services through 33 full service banking centers 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, Archbold, Bryan 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 are commercial banking, consumer banking, including the origination and sale of single family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization. In 2011, 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 deposit, 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 complement its overall market share and complement its strategy of being a high performing community bank.

Asset Quality - Maintaining a strong credit culture is of the utmost importance to First Federal. First Federal has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. First Federal is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. First Federal has focused 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 $818,000 at March 31, 2011. 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 $179.5 million at March 31, 2011. The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($14.9 million), certain municipal obligations ($56.5 million), CMOs and REMICs ($55.1 million), corporate bonds ($3.9 million), mortgage backed securities ($47.4 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 loans over 90 days past due and or on non-accrual as well as all troubled debt restructured 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 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 estate, such as recent sales of similar properties on which First Federal had loans as well as calls to appraisers, brokers, realtors, and investors. First Federal monitors and tracks its 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.

Common Stock Offering

Participation in the U.S. Treasury Capital Purchase Program

On December 5, 2008, as part of the CPP, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the U.S. Treasury, pursuant to which the Company sold $37.0 million shares of newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.01 per share and liquidation value $1,000 per share (“Senior Preferred Shares”) and also issued warrants (the “Warrants”) to the U.S. Treasury to acquire an additional 550,595 of common shares having an exercise price of $10.08 per share. The Warrants have a term of 10 years.

The Senior Preferred Shares qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Senior Preferred Shares may be redeemed by the Company after three years. The Senior Preferred Shares are not subject to any contractual restrictions on transfer, except that the U.S. Treasury or any its transferees may not affect any transfer that, as a result of such transfer, would require the Company to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, its common shares will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share of $0.26 declared on the common stock prior to October 14, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also will be restricted. These restrictions will terminate on the earlier of (a) the third anniversary of the date of issuance of the Senior Preferred Shares and (b) the date on which the Senior Preferred Shares have been redeemed in whole or the U.S. Treasury has transferred all of the Senior Preferred Shares to third parties, except that, after the third anniversary of the date of issuance of the Senior Preferred Shares, if the Senior Preferred Shares remain outstanding at such time, the Company may not increase its common dividends per share without obtaining consent of the U.S. Treasury.

The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”). As a condition to the closing of the transaction, the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the CPP and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the U.S. Treasury owns the Senior Preferred Shares of the Company; and (ii) entered into a letter agreement with the Company amending the Benefit Plans with respect to such Senior Executive Officers as may be necessary, during the period that the U.S. Treasury owns the Senior Preferred Shares, as necessary to comply with Section 111(b) of the EESA.

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, 2011, First Defiance’s total assets, deposits and stockholders’ equity amounted to $2.06 billion, $1.59 billion and $263.1 million, respectively, compared to $2.04 billion, $1.58 billion and $240.3 million, respectively, at December 31, 2010.

Net loans receivable (excluding loans held for sale) declined $48.0 million to $1.43 billion from $1.48 billion at December 31, 2010. The variances in loans receivable between March 31, 2011 and December 31, 2010 include decreases in commercial real estate loans (down $20.1 million), commercial loans (down $28.3 million), home equity and improvement loans (down $4.8 million), construction loans (down $6.0 million), consumer loans (down $2.0 million) while one to four family residential real estate increased $12.7 million. Included in net loans receivable are $10.7 million of one to four family residential real estate loans purchased in the first quarter of 2011. Also included in net loans receivable are $7.2 million of mortgage loans transferred from loans held for sale in the first quarter of 2011. These loans were identified by management as having rates too low to sell into the secondary market.

The investment securities portfolio increased $14.2 million to $180.3 million at March 31, 2011 from $166.1 million at December 31, 2010. The increase is the result of $22.1 million of securities being purchased during the first three months of 2011, offset by $515,000 of securities maturing or being called in the period, principal pay downs of $6.6 million in CMOs and mortgage-backed securities, and $1.9 million of securities being sold. There was an unrealized gain in the investment

portfolio of $1.2 million at March 31, 2011 compared to an unrealized gain of $49,000 at December 31, 2010.

Deposits increased from $1.58 billion at December 31, 2010 to $1.59 billion as of March 31, 2011. Of the $16.6 million increase, interest-bearing demand deposits and money market accounts increased $26.2 million to $581.6 million, savings accounts increased $9.1 million to $153.6 million and non-interest-bearing demand deposits increased $2.7 million to $219.4 million. These increases were partially offset by a decline in retail time deposits of $12.2 million to $604.9 million and broker/national certificates of deposit decreasing by $9.2 million to $32.6 million.

FHLB advances decreased $20.0 million to $96.9 million at March 31, 2011 from $116.9 million at December 31, 2010. The decrease is the result of paying off a $10.0 million putable advance and a $10.0 million strike-rate advance, both at maturity, in the first quarter of 2011.

Stockholders’ equity increased from $240.3 million at December 31, 2010 to $263.1 million at March 31, 2011. First Defiance completed an underwritten public common stock offering in the first quarter of 2011 by issuing 1,600,800 shares of the Company’s common stock, including 208,800 shares issued pursuant to the exercise of the underwriter’s over-allotment option. As a result of the common stock offering, total equity increased a net $19.8 million. The other increases were recording net income of $2.7 million and a $753,000 unrealized gain on available-for-sale securities partially offset by $462,000 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,
	2011							2010
	Average Balance		Interest(1)		Yield/ Rate(2)			Average Balance		Interest(1)		Yield/ Rate(2)
Interest-earning assets:
Loans receivable	$	1,457,736	$	20,257		5.64	%	$	1,560,405	$	22,436		5.83	%
Securities		171,089		1,908		4.54			141,646		1,711		4.96
Interest-earning deposits		179,079		101		0.23			108,440		61		0.23
FHLB stock and other		21,012		235		4.54			21,376		219		4.15

Total interest-earning assets		1,828,916		22,501		4.99			1,831,867		24,427		5.41
Non-interest-earning assets		215,471							216,639

Total assets	$	2,044,387						$	2,048,506


Interest-bearing liabilities:
Deposits	$	1,370,007	$	3,594		1.06	%	$	1,391,945	$	5,398		1.57	%
FHLB advances		107,750		906		3.41			141,759		1,218		3.48
Notes payable		54,079		130		0.97			44,280		105		0.96
Subordinated debentures		36,231		326		3.65			36,229		323		3.62

Total interest-bearing liabilities		1,568,067		4,956		1.28			1,614,213		7,044		1.77
Non-interest bearing deposits		220,610		—					184,195		—

Total including non-interest bearing demand deposits		1,788,677		4,956		1.12			1,798,408		7,044		1.59
Other non-interest-bearing liabilities		14,185							14,606

Total liabilities		1,802,862							1,813,014
Stockholders' equity		241,525							235,492

Total liabilities and stock-holders’ equity	$	2,044,387						$	2,048,506

Net interest income; interest rate spread			$	17,298		3.71	%			$	17,383		3.64	%

Net interest margin (3)						3.89	%						3.85	%

Average interest-earning assets to average interest-bearing liabilities						117	%						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, 2011 and 2010

On a consolidated basis, First Defiance’s net income for the quarter ended March 31, 2011 was $2.7 million compared to net income of $1.5 million for the comparable period in 2010. Net income applicable to common shares was $2.2 million for the first quarter of 2011 compared to $1.0 million for the comparable period in 2010. On a per share basis, basic and diluted earnings per common share for the three months ended March 31, 2011 were both $0.25, compared to basic and diluted earnings per common share of $0.12 for the quarter ended March 31, 2010.

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 2010 and the first quarter of 2011, the Company invested some of its liquidity in investment securities.

Net interest income was $17.2 million for the quarter ended March 31, 2011 compared to $17.1 million for the same period in 2010. The tax-equivalent net interest margin was 3.89% for the quarter ended March 31, 2011 compared to 3.85% for the same period in 2010. The increase in margin between the 2010 and 2011 first quarters is mainly due to a widening of the interest rate spread, which increased to 3.71% in the first quarter of 2011 from 3.64% for the same period in 2010. The increase in spread occurred due to interest-earning asset yields decreasing by 42 basis points (to 4.99% in the first quarter of 2011 from 5.41% for the same period in 2010) which was offset by the cost of interest-bearing liabilities between the two periods decreasing 49 basis points (to 1.28% in the first quarter of 2011 from 1.77% in the same period in 2010).

Total interest income decreased by $2.0 million or 8.2% to $22.2 million for the quarter ended March 31, 2011 from $24.1 million for the same period in 2010. 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 19 basis points to 5.64% at March 31, 2011. Interest income from loans decreased to $20.2 million for the quarter ended March 31, 2011 compared to $22.4 million for the same period in 2010 which represents a decline of 9.7%.

Interest expense decreased by $2.0 million in the first quarter of 2011 compared to the same period in 2010, to $5.0 million from $7.0 million. This decrease was due to a 49 basis point decline in the average cost of interest-bearing liabilities in the first quarter of 2011. Interest expense related to interest-bearing deposits was $3.6 million in the first quarter of 2011 compared to $5.4 million for the same period in 2010. Expenses on FHLB advances and other borrowings were $906,000 and $130,000 respectively in the first quarter of 2011 compared to $1.2 million and $105,000 respectively for the same period in 2010. Interest expense recognized by the Company related to subordinated debentures was $326,000 in the first quarter of 2011 compared to $323,000 for the same period in 2010.

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 $750,000 of aggregate exposure over a twelve month period. 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 absorb loans losses is approximate. See Note 9 - Loans for 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 the purpose of the general reserve analysis, the loan portfolio is stratified into nine 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 rolling eight quarters ending March 31, 2011.

The stratification of the loan portfolio resulted in a quantitative general allowance of $13.8 million at March 31, 2011 compared to $14.0 million at December 31, 2010.

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, 2011 indicated a general reserve of $9.9 million compared with $10.5 million at December 31, 2010. Management believes that the overall economy and operating environment has stabilized in our markets but still stress that high unemployment and declining real estate values in the Midwest remain a concern. Ten out of 14 counties that represent the footprint of the Company have seen improvements in their unemployment rates from December 31, 2010, with four being below the national average of 9.2% at March 31, 2011. February was the latest census information available for Michigan.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves, the Company’s provision for loan losses for the first quarter of 2011 was $2.8 million, compared to $6.9 million for the same period in 2010. The allowance for loan losses was $40.8 million and $41.1 million and represented 2.77% and 2.70% of loans, net of undisbursed loan funds and deferred fees and costs, as of March 31, 2011 and December 31, 2010, respectively. The provision of $2.8 million was offset by charge offs of $2.1 million against specific reserves and $1.2 million against general reserves and recoveries of $253,000 resulting in a slight decrease to the overall allowance for loan loss at March 31, 2011. In management’s opinion, the overall allowance for loan losses of $40.8 million as of March 31, 2011 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 2011, First Defiance recorded OREO write-downs that totaled $292,000 compared to write-downs of $421,000 for the same period in 2010. 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, 2011 for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans decreased to $131.9 million at March 31, 2011, compared to $133.1 million at December 31, 2010. At March 31, 2011, a total of $46.8 million of loans are classified as substandard for which a specific reserve is required. A total of $83.3 million in additional credits were classified as substandard at March 31, 2011 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 $1.8 million of loans doubtful at March 31, 2011. By contrast, at December 31, 2010, a total of $47.5 million of loans were classified as substandard for which a specific reserve is required. A total of $83.2 million in additional credits were classified as substandard at December 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 had classified $2.4 million of loans doubtful at December 31, 2010.

First Defiance’s ratio of allowance for loan losses to non-performing loans was 89.5% at March 31, 2011 compared with 87.3% at December 31, 2010. 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, 2011 are appropriate.

At March 31, 2011, First Defiance had total non-performing assets of $54.7 million, compared to $56.6 million at December 31, 2010. Non-performing assets include loans that are 90 days past due, troubled debt restructured loans and real estate owned and other assets held for sale. Non-performing assets at March 31, 2011 and December 31, 2010 by category were as follows:

Table 1 – Nonperforming Asset


	March 31, 2011			December 31, 2010
	*(In thousands)*
Non-performing loans:
Single-family residential	$	5,366		$	7,161
Construction		60			64
Non-residential and multi-family residential real estate		21,909			21,737
Commercial		13,156			11,547
Consumer finance		18			14
Home equity and improvement		439			517
Troubled debt restructured loans, accruing		4,619			6,001

Total non-performing loans		45,567			47,041
Real estate owned and repossessed assets		9,150			9,591

Total non-performing assets	$	54,717		$	56,632

Allowance for loan losses as a percentage of total loans*		2.77	%		2.70	%
Allowance for loan losses as a percentage of non-performing assets		74.56	%		72.54	%
Allowance for loan losses as a percentage of non-performing loans		89.53	%		87.33	%
Total non-performing assets as a percentage of total assets		2.65	%		2.78	%
Total non-performing loans as a percentage of total loans*		3.10	%		3.10	%

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

The decrease in non-performing loans between December 31, 2010 and March 31, 2011 is primarily in single-family residential and troubled debt restructured loans. The combined balance

of these types of non-performing loans was $3.2 million lower at March 31, 2011 compared to December 31, 2010.

Non-performing loans in the single-family residential, non-residential and multi-family and commercial loan categories represent 2.45%, 2.93% and 3.85% of the total loans in those categories respectively at March 31, 2011 compared to 3.48%, 2.83% and 3.12% respectively for the same categories at December 31, 2010. 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 2011 is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.

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 details net charge-offs and nonaccrual loans by loan type. For the three months ended and as of March 31, 2011, commercial real estate, which represented 50.42% of total loans, accounted for 66.20% of net charge-offs and 53.51% of nonaccrual loans, and commercial loans, which represented 23.06% of total loans, accounted for 10.50% of net charge-offs and 32.13% of nonaccrual loans. 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.

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


	For the Three Months Ended March 31, 2011						As of March 31, 2011
	Net Charge-offs			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
		*(in thousands)*						*(in thousands)*
Residential	$	542			17.40	%	$	5,366		13.10	%

Construction		—			0.00	%		60		0.15	%
Commercial real estate		2,062			66.20	%		21,909		53.51	%
Commercial		327			10.50	%		13,156		32.13	%
Consumer		(17	)		(0.55	%)		18		0.04	%
Home equity and improvement		201			6.45	%		439		1.07	%

Total	$	3,115			100.00	%	$	40,948		100.00	%


	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	%

Table 3 – Allowance for Loan Loss Activity


	For the Quarter Ended
	1st 2011		4th 2010		3rd 2010		2nd 2010		1st 2010
	*(Dollars in Thousands)*
Allowance at beginning of period	$	41,080	$	41,343	$	38,852	$	38,980	$	36,547
Provision for credit losses		2,833		5,652		5,196		5,440		6,889
Charge-offs:
Residential		547		467		1,164		1,135		326
Commercial real estate		2,273		4,806		688		1,243		3,191
Commercial		335		388		842		3,153		735
Consumer finance		12		55		28		16		25
Home equity and improvement		201		363		148		156		399

Total charge-offs		3,368		6,079		2,870		5,703		4,676
Recoveries		253		164		165		135		220

Net charge-offs		3,115		5,915		2,705		5,568		4,456

Ending allowance	$	40,798	$	41,080	$	41,343	$	38,852	$	38,980

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 4 – Allowance for Loan Loss Allocation by Loan Category


	March 31, 2011					December 31, 2010					September 30, 2010					June 30, 2010					March 31, 2010
	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	$	6,163		14.76	%	$	5,956		13.46	%	$	6,161		13.69	%	$	6,585		13.72	%	$	6,093		13.92	%
Construction		70		1.65	%		73		1.98	%		189		2.03	%		214		2.73	%		717		2.91	%
Commercial real estate		23,390		50.42	%		22,355		50.14	%		22,294		49.82	%		19,939		49.86	%		19,354		49.98	%
Commercial		9,518		23.06	%		10,871		24.19	%		10,679		23.89	%		10,381		22.97	%		10,672		22.12	%
Consumer		207		1.41	%		297		1.49	%		527		1.74	%		494		1.83	%		402		1.99	%
Home equity and improvement		1,450		8.70	%		1,528		8.74	%		1,493		8.83	%		1,239		8.89	%		1,742		9.08	%

	$	40,798		100.00	%	$	41,080		100.00	%	$	41,343		100.00	%	$	38,852		100.00	%	$	38,980		100.00	%

Key Asset Quality Ratio Trends

Table 5 – Key Asset Quality Ratio Trends


	1st Qtr 2011			4th Qtr 2010			3rd Qtr 2010			2nd Qtr 2010			1st Qtr 2010
Allowance for loan losses / loans*		2.77	%		2.70	%		2.67	%		2.47	%		2.47	%
Allowance for loan losses to net charge-offs		1,309.73	%		694.51	%		1,528.39	%		697.77	%		874.78	%
Allowance for loan losses / non-performing assets		74.56	%		72.54	%		72.17	%		72.68	%		73.05	%
Allowance for loan losses / non-performing loans		89.53	%		87.33	%		89.56	%		95.41	%		96.03	%
Non-performing assets / loans plus REO*		3.70	%		3.70	%		3.67	%		3.37	%		3.36	%
Non-performing assets / total assets		2.65	%		2.78	%		2.81	%		2.62	%		2.59	%
Net charge-offs / average loans (annualized)		0.85	%		1.58	%		0.70	%		1.44	%		1.14	%

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

Non-Interest Income.

Total non-interest income decreased $821,000 in the first quarter of 2011 to $5.9 million from $6.8 million for the same period in 2010.

Service Fees. Service fees and other charges decreased by $541,000 or 17.1% in the 2011 first quarter compared to the same period in 2010. The decrease can be attributed to regulation changes which resulted in lower NSF 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. Fee income recorded for the quarters ending March 31, 2011 and 2010 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were $1.2 million and $1.8 million, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $126,000 at March 31, 2011, $83,000 at December 31, 2010 and $63,000 at March 31, 2010.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans decreased $519,000 to $1.3 million for the first quarter of 2011 compared to $1.8 million for the same period of 2010. 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 2011 compared to the same period in 2010. Gains realized from the sale of mortgage loans declined in the first quarter of 2011 to $726,000 from $1.2 million in the first quarter of 2010. Mortgage loan servicing revenue increased $97,000 in the first quarter of 2011 compared to the first quarter of 2010. The increase in servicing revenue was partially offset by expense increases of $28,000 for the amortization of mortgage servicing rights in the first quarter of 2011. The Company recorded a positive valuation adjustment of $171,000 on mortgage servicing rights in the first quarter of 2011 compared to a positive valuation adjustment of $321,000 in the first quarter of 2010. This was driven by a steady increase in market mortgage rates during the first quarters of 2011 and 2010. This increase in rates decreased the assumed prepayment speed of the mortgage servicing rights.

Insurance and Investment Sales Commissions. Income from the sale of insurance and investment products increased $546,000 in the first quarter of 2011 to $1.7 million from $1.1 million in the same period of 2010. First Defiance’s insurance subsidiary, First Insurance, typically recognizes contingent revenues during the first quarter. These revenues are bonuses paid by insurance carriers when the Company achieves certain loss rations or growth targets. In the first quarter of 2011, First Insurance earned $329,000 of contingent income compared to $91,000 for the first quarter of 2010. In May 2010, First Insurance acquired a group medical benefits business line from Andres O’Neil & Lowe Insurance Agency. This acquired group medical benefits business line added approximately $208,000 in revenue in the first quarter of 2011.

Loss on Sale or Write-Down of Securities. Non-interest income also includes investment securities gains or losses. In the first quarter of 2011, First Defiance recognized other-than-temporary impairment (“OTTI”) charges of $2,200 for one impaired investment security, where in management’s opinion, the value of the investment will not be fully recovered. The OTTI charge related to one Trust Preferred Collateralized Debt Obligation (“CDO”) investments with a

remaining book value of $902,000. In the first quarter of 2010, First Defiance recognized 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 CDO investments with a remaining book value of $1.1 million.

Other non-interest income. Other non-interest income decreased $268,000 in the first quarter of 2011 from $117,000 in the same period in 2010. This decrease was the result of a higher level of real estate owned sales that resulted in losses of $311,000 in the first quarter of 2011 compared to losses of $142,000 in the same period of 2010.

Non-Interest Expense.

Non-interest expense increased to $16.6 million for the first quarter of 2011 compared to $14.8 million for the same period in 2010.

Compensation and Benefits. Compensation and benefits increased to $7.8 million for the quarter ended March 31, 2011 from $6.5 million for the same period in 2010. The increase is mainly attributable to the Company freezing pay in 2010 coupled with no bonuses being paid in the first quarter of 2010 due to the Company not meeting certain performance targets. The Company accrued for bonuses in the first quarter of 2011 as a result of the Company meeting certain performance targets as well as granted annual increases in the first quarter of 2011. The accrued bonuses are expected to be paid early in the second quarter of 2011.

Other Non-Interest Expenses. Other non-interest expenses increased by $775,000 to $4.1 million for the quarter ended March 31, 2011 from $3.3 million for the same period in 2010. Increases between the 2011 and 2010 first quarters include secondary market buy-back losses of $228,000 as a result of underwriting issues identified after the loan has been sold, increase in charge-offs of checking, ATM and debit card accounts of $133,000 and an increase in audit and examinations of $168,000. These costs were partially offset by a decrease in credit, collection and OREO expenses of $236,000 and a decrease in management consulting of $123,000.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the first quarter of 2011 was 70.92% compared to 61.26% for the first quarter of 2010.

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 27.87% for the quarter ended March 31, 2011 compared to 29.30% for the same period in 2010. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax.

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 $6.9 million of cash provided by operating activities during the first three months of 2011. 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, 2011, First Defiance had $82.4 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $242.8 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 $16.9 million of loans held-for-sale. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

Liquidity risk arises from the possibility that we may not be able to meet our financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to mange this risk, our 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 our 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 -400 basis points to +400 basis points. The likelihood of a decrease in rates as of March 31, 2011 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, 2011 and the year-ended December 31, 2010.


March 31, 2011 Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	*(Dollars in Thousands)*
+ 400 bp		268,913		(15,212	)		(5.35	%)
+ 300 bp		272,680		(11,445	)		(4.03	%)
+ 200 bp		277,881		(6,244	)		(2.20	%)
+ 100 bp		282,351		(1,774	)		(0.62	%)
0 bp		284,125		—			—


December 31, 2010 Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	*(Dollars in Thousands)*
+400 bp		264,330		(13,549	)		(4.88	%)
+ 300 bp		269,417		(8,462	)		(3.05	%)
+ 200 bp		272,867		(5,012	)		(1.80	%)
+ 100 bp		276,234		(1645	)		(0.590	%)
0 bp		277,879		—			—

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, 2011 (in thousands).


	Core Capital						Risk-Based Capital
	Adequately Capitalized			Well Capitalized			Adequately Capitalized			Well Capitalized
Regulatory capital	$	216,780		$	216,780		$	236,988		$	236,988
Minimum required regulatory capital		79,980			99,765			128,596			160,745

Excess regulatory capital	$	136,800		$	110,059		$	108,392		$	76,243

Regulatory capital as a percentage of assets (1)		10.84	%		10.84	%		14.74	%		14.74	%
Minimum capital required as a percentage of assets		4.00	%		5.00	%		8.00	%		10.00	%

Excess regulatory capital as a percentage of assets		6.84	%		5.84	%		6.74	%		4.74	%

(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 $1.6 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 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the 2010 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, 2011 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, 2011. 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, 2011 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, 2010.

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 2011, 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 3.1 Articles of Incorporation (1)

Exhibit 3.2 Code of Regulations (1)

Exhibit 3.3 Bylaws (1)

Exhibit 3.4 Amendment to Articles of Incorporation (2)

Exhibit 10.1 Form of Restricted Stock Award Agreement (with TARP Limitations) (3)

Exhibit 10.2 Underwriting Agreement dated March 23, 2011 (4)

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

(1)	Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-1 (File No. 33-93354)

(2)	Incorporated herein by reference to exhibit 3 in Form 8-K filed December 8, 2008 (Film No. 081236105)

(3)	Incorporated herein by reference to exhibit 10.1 in Form 8-K filed March 4, 2011 (Film No. 11664601)

(4)	Incorporated herein by reference to exhibit 1in Form 8-K filed March 29, 2011 (Film No. 11719267)

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 3, 2011	By:	/s/ William J. Small
		William J. Small
		Chairman, President and Chief Executive Officer

Date: May 3, 2011	By:	/s/ Donald P. Hileman
		Donald P. Hileman
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)