SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year Ended December 31, 2011

or

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

Commission File Number 0-26850

FIRST DEFIANCE FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

OHIO	34-1803915
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
601 Clinton Street, Defiance, Ohio	43512
(Address of principal executive offices)	(Zip code)

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

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

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

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

None

(Title of Class)

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

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of February 29, 2012, there were issued and outstanding 9,726,454 shares of the Registrant’s common stock.

The aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the average bid and ask price of such stock as of June 30, 2011 was approximately $137.4 million

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2012 Annual Shareholders’ Meeting

First Defiance Financial Corp.

Annual report on Form 10-k

Table of Contents

		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		23
Item 1B.	Unresolved Staff Comments		31
Item 2.	Properties		31
Item 3.	Legal Proceedings		34
Item 4.	Reserved		34
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		34
Item 6.	Selected Financial Data		36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		37
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		61
Item 8.	Financial Statements and Supplementary Data		63
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures		137
Item 9A.	Controls and Procedures		137
Item 9B.	Other Information		137
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		137
Item 11.	Executive Compensation		137
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		138
Item 13.	Certain Relationships and Related Transactions, and Director Independence		138
Item 14.	Principal Accounting Fees and Services		138
PART IV
Item 15.	Exhibits, Financial Statement Schedules		139
SIGNATURES			140

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PART I

Item 1. Business

First Defiance Financial Corp. (“First Defiance” or “the Company”) is a unitary thrift holding company that, through its subsidiaries, First Federal Bank of the Midwest (“First Federal”) and First Insurance Group of the Midwest, Inc., formerly known as First Insurance and Investments, Inc. (“First Insurance”) (collectively, “the Subsidiaries”), focuses on traditional banking and property and casualty and life and group health insurance products. The Company’s banking activities include originating and servicing residential, commercial, and consumer loans and providing a broad range of depository services. The Company’s insurance activities consist primarily of commissions relating to the sale of property and casualty and life and group health insurance products.

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

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

At December 31, 2011, the Company had consolidated assets of $2.07 billion, consolidated deposits of $1.60 billion, and consolidated stockholders’ equity of $278.1 million. The Company was incorporated in Ohio in June of 1995. Its principal executive offices are located at 601 N. Clinton Street, Defiance, Ohio 43512, and its telephone number is (419) 782-5015.

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

The Subsidiaries

The Company’s core business operations are conducted through the Subsidiaries:

First Federal Bank of the Midwest: First Federal is a federally chartered stock savings bank headquartered in Defiance, Ohio. It conducts operations through 26 full service banking center offices in Allen, Defiance, Fulton, Hancock, Henry, Lucas, Ottawa, Paulding, Putnam, Seneca, Williams and Wood counties in northwest Ohio, 1 full service banking center office in Allen county in northeast Indiana and 6 full service banking center offices in Lenawee county in southeast Michigan.

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On March 14, 2008, First Defiance completed the acquisition of Pavilion Bancorp, Inc (“Pavilion”) and its subsidiary, Bank of Lenawee. That acquisition added eight banking branch offices located in Lenawee and Hillsdale counties in Michigan. The one branch in Hillsdale county that was acquired in the Pavilion acquisition was closed in January 2010. On January 21, 2005, First Defiance completed the acquisition of ComBanc, Inc. (“ComBanc”) and its subsidiary, the Commercial Bank, Delphos, Ohio. That acquisition added four branch offices located in Allen County, Ohio, which is adjacent to First Defiance’s existing footprint. On April 8, 2005, First Defiance completed the acquisition of the Genoa Savings and Loan Company, (“Genoa”) which added three offices in the metropolitan Toledo, Ohio area.

First Federal is primarily engaged in community banking. It attracts deposits from the general public through its offices and uses those and other available sources of funds to originate residential real estate loans, non-residential real estate loans, commercial loans, home improvement and home equity loans and consumer loans. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities which are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and collateralized mortgage obligations (“CMOs”), and corporate bonds. First Federal’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is a member of the Federal Home Loan Bank (“FHLB”) System.

First Insurance Group: First Insurance is a wholly owned subsidiary of First Defiance. First Insurance is an insurance agency that conducts business in the Defiance, Archbold, Maumee, Oregon, Bryan and Bowling Green, Ohio areas. First Insurance offers property and casualty insurance, life insurance and group health insurance. On July 1, 2011 First Insurance acquired Payak-Dubbs Insurance Agency, Inc. (“PDI”) headquartered in Maumee and Oregon, Ohio. In May 2010, First Insurance acquired a group medical benefits business line from Andres O’Neil & Lowe Insurance Agency. See Note 4 – Acquisitions in the Notes to the financial statements for additional information.

Securities

First Defiance’s securities portfolio is managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. The Chief Financial Officer, the Chief Operating Officer, and the Chief Executive Officer of First Federal can each approve transactions up to $3 million. Two of the three officers are required to approve transactions between $3 million and $5 million. All transactions in excess of $5 million must be approved by the Board of Directors.

First Defiance’s investment portfolio includes 45 CMO and REMIC issues totaling $61.9 million, all of which are fully amortizing securities. Management does not believe the risks associated with any of its CMO or REMIC investments are significantly different from risks associated with other pass-through mortgage-backed securities. First Defiance did not have any off-balance sheet derivative securities at December 31, 2011.

Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity and equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value.

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The carrying value of securities at December 31, 2011 by contractual maturity is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Contractually Maturing																				Total
	Under 1 Year		Weighted Average Rate			1 - 5 Years		Weighted Average Rate			6-10 Years		Weighted Average Rate			Over 10 Years		Weighted Average Rate			Amount			Yield
	(Dollars in Thousands)
Mortgage-backed securities	$	17,732		3.75	%	$	33,421		3.67	%	$	15,287		3.52	%	$	3,496		3.31	%	$	69,936			3.64	%
REMICs and CMOs		20,732		4.51			34,277		4.02			6,370		3.75			443		3.62			61,822			4.15
U.S. treasury bonds		1,000		0.63			1,000		0.63			—		—			—		—			2,000			0.63
U.S. government and federal agency obligations		—		—			3,000		1.83			14,000		2.24			—		—			17,000			2.16
Obligations of states and political subdivisions (1)		670		3.85			1,885		4.76			18,143		3.73			45,260		4.08			65,958			4.00
Trust preferred stock and preferred stock		—		—			—		—			17		—			3,830		2.45			3,847			2.44
Corporate bonds		—		—			7,000		1.03			2,000		0.82			—		—			9,000			0.98
Total	$	40,134				$	80,583				$	55,817				$	53,029				$	229,563
Unamortized premiums/ (discounts)																						(3,220	)
Unrealized gain on securities available for sale																						7,237
Total																					$	233,580

(1) Tax exempt yield based on effective tax rate of 35%. Actual coupon rate is approximately equal to the weighted average rate disclosed in the table times 65%.

The carrying value of investment securities is as follows:

	December 31
	2011		2010		2009
	(In Thousands)
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	17,085	$	11,985	$	14,251
U.S. treasury bonds		2,010		—		—
Obligations of state and political subdivisions		71,503		52,750		44,733
CMOs, REMICS and mortgage-backed securities		132,619		95,174		76,798
Trust preferred stock and preferred stock		1,450		1,546		1,676
Corporate bonds		8,252		3,797		—
Total	$	232,919	$	165,252	$	137,458
Held-to-maturity securities:
Mortgage-backed securities	$	353	$	440	$	530
Obligations of state and political subdivisions		308		399		1,390
Total	$	661	$	839	$	1,920

For additional information regarding First Defiance’s investment portfolio refer to Note 6 – Investment Securities to the consolidated financial statements.

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Interest-Bearing Deposits

The Company had $143.0 million at both December 31, 2011 and 2010 in overnight investments with the Federal Reserve, which amount is included in interest-bearing deposits. First Defiance had interest-earning deposits in the FHLB of Cincinnati and other financial institutions amounting to $1.6 million and $1.2 million at December 31, 2011 and 2010, respectively.

Residential Loan Servicing Activities

Servicing mortgage loans for investors involves a contractual right to receive a fee for processing and administering loan payments on mortgage loans that are not owned by the Company and are not included on the Company’s balance sheet. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. At December 31, 2011, First Federal serviced 13,576 loans totaling $1.27 billion. The vast majority of the loans serviced for others are fixed rate conventional mortgage loans. The Company primarily sells its loans to Freddie Mac, Fannie Mae and FHLB. In 2011, 58.54%, 38.89% and 2.45% of the Company’s sold loans were to Freddie Mac, Fannie Mae and FHLB, respectively.

As compensation for its mortgage servicing activities, the Company receives servicing fees, usually 0.25% per annum of the loan balances serviced, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of a default by the borrower, the Company receives no servicing fees until the default is cured.

The following table sets forth certain information regarding the number and aggregate principal balance of the mortgage loans serviced by the Company, including both fixed and adjustable rate loans, at various interest rates:

	December 31
	2011							2010							2009
Rate	Number of Loans		Aggregate Principal Balance		Percentage of Aggregate Principal Balance			Number of Loans		Aggregate Principal Balance		Percentage of Aggregate Principal Balance			Number of Loans		Aggregate Principal Balance		Percentage of Aggregate Principal Balance
	(Dollars in Thousands)
Less than 5.00%		6,287	$	696,666		54.84	%		5,074	$	576,628		45.22	%		3,183	$	355,467		29.10	%
5.00% - 5.99%		4,457		370,355		29.15			5,059		437,984		34.35			5,675		515,795		42.22
6.00% - 6.99%		2,383		177,353		13.96			2,923		229,524		18.00			3,688		310,368		25.41
7.00% - 7.99%		402		24,288		1.91			468		29,047		2.28			567		37,410		3.06
8.00% - 8.99%		42		1,523		0.12			49		1,719		0.13			56		2,140		0.18
9.00% and over		5		202		0.02			7		278		0.02			10		375		0.03
Total		13,576	$	1,270,387		100.00	%		13,580	$	1,275,180		100.00	%		13,179	$	1,221,555		100.00	%

Loan servicing fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens. The following table sets forth certain information regarding the remaining maturity of the mortgage loans serviced by the Company as of the dates shown.

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	2011										2010										2009
Maturity	Number of Loans		% of Number of Loans			Unpaid Principal Amount		% of Unpaid Principal Amount			Number of Loans		% of Number of Loans			Unpaid Principal Amount		% of Unpaid Principal Amount			Number of Loans		% of Number of Loans			Unpaid Principal Amount		% of Unpaid Principal Amount
	(Dollars in Thousands)
1–5 years		375		2.76	%	$	6,267		0.49	%		400		2.95	%	$	12,692		1.00	%		659		5.00	%	$	37,562		3.07	%
6–10 years		1,677		12.35			72,700		5.72			1,961		14.44			90,706		7.11			2,181		16.55			111,117		9.10
11–15 years		3,326		24.50			310,369		24.43			2,944		21.68			273,714		21.46			2,382		18.07			210,332		17.22
16–20 years		1,026		7.56			99,650		7.84			865		6.37			84,865		6.66			682		5.17			62,182		5.09
21–25 years		2,347		17.29			220,429		17.35			2,426		17.86			231,232		18.13			2,239		16.99			213,477		17.48
More than 25 years		4,825		35.54			560,972		44.17			4,984		36.70			581,971		45.64			5,036		38.22			586,885		48.04
Total		13,576		100.00	%	$	1,270,387		100.00	%		13,580		100.00	%	$	1,275,180		100.00	%		13,179		100.00	%	$	1,221,555		100.00	%

Lending Activities

General – A savings bank generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable collateral. Real estate is not considered “readily marketable collateral.” Certain types of loans are not subject to these limits. In applying these limits, loans to certain borrowers may be aggregated. Notwithstanding the specified limits, a savings bank may lend to one borrower up to $500,000 “for any purpose.” At December 31, 2011, First Federal’s limit on loans-to-one borrower was $39.8 million and its five largest loans (including available lines of credit) or groups of loans to one borrower, including related entities, were $28.1 million, $20.9 million, $19.4 million, $19.2 million and $16.5 million. All of these loans or groups of loans were performing in accordance with their terms at December 31, 2011.

Loan Portfolio Composition – The net increase or (decrease) in net loans receivable over the prior year was ($24.6 million), ($102.2 million) and ($12.1 million) in 2011, 2010, and 2009, respectively. The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated geographically in its northwest Ohio, northeast Indiana and southeast Michigan market areas. Management has identified lending for income generating rental properties as an industry concentration. Total loans for income generating property totaled $373.6 million at December 31, 2011, which represents 26% of the Company’s loan portfolio.

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

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	December 31
	2011					2010					2009					2008					2007
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
	(Dollars in Thousands)
Real estate:
Single family residential	$	203,401		13.6	%	$	205,938		13.5	%	$	227,592		13.8	%	$	251,807		15.4	%	$	231,921		17.9	%
Five or more family residential		126,246		8.4			120,534		7.9			103,169		6.3			78,427		4.8			56,774		4.4
Nonresidential real estate		649,746		43.3			646,478		42.2			703,721		42.8			677,313		41.3			545,077		42.1
Construction		31,552		2.1			30,340		2.0			48,625		3.0			72,938		4.4			13,146		1.0
Total real estate loans		1,010,945		67.4			1,003,290		65.6			1,083,107		65.9			1,080,485		65.9			846,918		65.4
Other:
Consumer finance		18,887		1.3			22,848		1.5			34,105		2.0			41,012		2.5			37,743		2.9
Commercial		349,053		23.2			369,959		24.2			379,408		23.1			356,574		21.8			283,072		21.8
Home equity and improvement		122,143		8.1			133,593		8.7			147,977		9.0			161,106		9.8			128,080		9.9
Total non-real estate loans		490,083		32.6			526,400		34.4			561,490		34.1			558,692		34.1			448,895		34.6
Total loans		1,501,028		100.0	%		1,529,690		100.0	%		1,644,597		100.0	%		1,639,177		100.0	%		1,295,813		100.0	%
Less:
Loans in process		13,243					9,267					26,494					20,892					5,085
Deferred loan origination fees		709					920					981					1,050					1,032
Allowance for loan losses		33,254					41,080					36,547					24,592					13,890
Net loans	$	1,453,822				$	1,478,423				$	1,580,575				$	1,592,643				$	1,275,806

In addition to the loans reported above, First Defiance had $13.8 million, $18.1 million, $10.3 million, $11.0 million, and $5.8 million in loans classified as held for sale at December 31, 2011, 2010, 2009, 2008 and 2007, respectively. The fair value of such loans, which are all single-family residential mortgage loans, approximated their carrying value for all years presented.

Contractual Principal, Repayments and Interest Rates – The following table sets forth certain information at December 31, 2011 regarding the dollar amount of gross loans maturing in First Defiance’s portfolio, based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

	Years After December 31, 2011
	Due Less than 1		Due 1-2		Due 3-5		Due 5-10		Due 10-15		Due 15+		Total
	(In Thousands)
Real estate	$	270,985	$	228,118	$	373,555	$	69,335	$	22,610	$	46,342	$	1,010,945
Non-real estate:
Commercial		241,586		47,505		55,541		4,418		3		—		349,053
Home equity and improvement		63,252		15,684		38,514		4,257		203		233		122,143
Consumer finance		9,132		4,881		4,532		301		35		6		18,887
Total	$	584,955	$	296,188	$	472,142	$	78,311	$	22,851	$	46,581	$	1,501,028

The schedule above does not reflect the actual life of the Company’s loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which give First Defiance the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid.

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The following table sets forth the dollar amount of gross loans due after one year from December 31, 2011 which have fixed interest rates or which have floating or adjustable interest rates.

	Fixed Rates		Floating or Adjustable Rates		Total
	(In Thousands)
Real estate	$	270,821	$	469,139	$	739,960
Commercial		87,464		20,003		107,467
Other		67,302		1,344		68,646
	$	425,587	$	490,486	$	916,073

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

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

A commercial loan application is first reviewed and underwritten by one of the commercial loan officers, who may approve credits within their lending limit. Another loan officer with limits sufficient to cover the exposure must approve credits exceeding an individual’s lending limit. All credits which exceed $100,000 in aggregate exposure must be presented for review or approval to the Senior Loan Committee comprised of senior lending personnel. Credits which exceed $1,000,000 in aggregate exposure must be presented for approval to the Executive Loan Committee, a committee of First Federal’s Board of Directors.

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

Retail lenders and branch managers are authorized to originate and approve direct consumer loan requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess of the lender’s approved lending limit may be approved by retail lending managers up to their approved lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy must be approved by Senior Loan Committee and, if necessary, by the Executive Loan Committee. Indirect consumer loans originated by auto dealers are underwritten and approved by a designated underwriter in accordance with company policy and lending limits.

First Defiance offers adjustable-rate loans in order to decrease the vulnerability of its operations to changes in interest rates. The demand for adjustable-rate loans in First Defiance’s primary market area has been a function of several factors, including customer preference, the level of interest rates, the

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expectations of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

Adjustable-rate loans represented 5.4% of First Defiance’s total originations of one-to-four family residential mortgage loans in 2011 compared to 6.6% and 1.4% during 2010 and 2009, respectively.

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

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

	Years Ended December 31
	2011			2010			2009
	(In Thousands)
Loan originations:
Single family residential	$	282,321		$	420,644		$	572,500
Multi-family residential		11,401			44,173			75,632
Non-residential real estate		125,884			149,717			197,320
Construction		29,189			11,821			10,241
Commercial		186,338			290,501			341,477
Home equity and improvement		19,063			15,289			16,956
Consumer finance		10,216			12,230			16,530
Total loans originated		664,412			944,375			1,230,656
Loans Purchased:		25,842			—			—
Loan reductions:
Loan pay-offs		227,812			254,537			317,239
Loans sold		266,580			390,908			518,453
Periodic principal repayments		228,810			406,056			390,158
		723,202			1,051,501			1,225,850
Net (decrease) increase in total loans and loans held for sale	$	(32,948	)	$	(107,126	)	$	4,806

Asset Quality

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

Delinquent Loans – The following table sets forth information concerning delinquent loans at December 31, 2011, in dollar amount and as a percentage of First Defiance’s total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts that are past due.

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	30 to 59 Days					60 to 89 Days					90 Days and Over and Non accrual					Total
	Amount		Percentage			Amount		Percentage			Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
Single family residential and construction	$	2,014		0.14	%	$	106		0.01	%	$	3,890		0.26	%	$	6,010		0.41	%
Nonresidential and Multi-family residential		2,489		0.17			952		0.06			28,150		1.90			31,591		2.13
Home equity and improvement		2,576		0.17			265		0.02			394		0.03			3,235		0.22
Consumer finance		129		0.01			35		0.00			10		0.00			174		0.01
Commercial		276		0.02			58		0.00			6,884		0.47			7,218		0.49
Total	$	7,484		0.51	%	$	1,416		0.09	%	$	39,328		2.66	%	$	48,228		3.26	%

Overall, the level of delinquencies at December 31, 2011 has decreased from the levels at December 31, 2010, when First Defiance reported that 3.41% of its outstanding loans were at least 30 days delinquent. The level of total loans 90 or more days delinquent has decreased to 2.66% at December 31, 2011 from 2.68% at December 31, 2010. The level of total loans 60-89 days delinquent has decreased to 0.09% at December 31, 2011 from 0.36% at December 31, 2010. Overall, the level of loans that were 30 to 59 days past due past due increased from 0.37% at December 31, 2010 to 0.51% at December 31, 2011. Management has assessed the collectability of all loans that are 90 days or more delinquent as part of its procedures in establishing the allowance for loan losses.

Nonperforming Assets – All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collectability of additional interest is deemed insufficient to warrant further accrual. Generally, First Defiance places all loans more than 90 days past due on non-accrual status. First Defiance also places loans on non-accrual when the loan is paying as agreed but the Company believes the financial condition of the borrower is such that this classification is warranted. When a loan is placed on non-accrual status, total unpaid interest accrued to date is reversed. Subsequent payments are generally applied to the outstanding principal balance but may be recorded as interest income, depending on the assessment of the ultimate collectability of the loan. First Defiance considers that a loan is impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. First Defiance measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if collateral dependent. If the estimated recoverability of the impaired loan is less than the recorded investment, First Defiance will recognize impairment by allocating a portion of the allowance for loan losses.

Impaired loans acquired in the ComBanc, Genoa and Pavilion acquisitions have been accounted for under the provisions of FASB ASC Topic 310 Subtopic 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Such loans were recorded at their fair value, which was estimated based on the expected cash flow of the acquired loan. In the Genoa acquisition, 10 loan relationships with a stated value of $1.5 million were recorded at $721,000. In the ComBanc acquisition, 12 loan relationships with a stated value of $3.4 million were recorded at $2.0 million. In the Pavilion acquisition, 12 loan relationships with a stated value of $6.4 million were recorded at $4.4 million. Of all these impaired loans that were acquired in an acquisition, as of December 31, 2011, 11 loan relationships remained with

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a contractual balance of $2.2 million and were recorded at $1.2 million. If management’s expectations about the cash flow of those loans changes over time, the difference will be recognized as a yield adjustment over the remaining life of the respective loan. In 2011, $33,000 of impairment was recognized as a yield adjustment. There were no significant changes in the expected cash flows of the remaining loan relationships in 2011.

Loans originated by First Federal having principal balances of $47.9 million, $70.9 million and $58.8 million were considered impaired as of December 31, 2011, 2010 and 2009, respectively. These amounts exclude large groups of small-balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage, consumer installment and credit card loans. There was $1.6 million of interest received and recorded in income during 2011 related to impaired loans. There was $2.0 million and $913,000 recorded in 2010 and 2009, respectively. Unrecorded interest income based on the loan’s contractual terms on these impaired loans and all non-performing loans in 2011, 2010 and 2009 was $2.3 million, $2.0 million, and $2.7 million, respectively. The average recorded investment in impaired loans during 2011, 2010 and 2009 (excluding loans accounted for under Topic 310 Subtopic 30) was $61.0 million, $64.4 million and $38.9 million, respectively. The total allowance for loan losses related to these loans was $7.2 million, $16.6 million, and $12.2 million at December 31, 2011, 2010 and 2009, respectively.

Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. First Defiance also repossesses other assets securing loans, consisting primarily of automobiles. When such property is acquired it is recorded at fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and a write-down of the value is recorded with a corresponding charge to operations if it is determined that the carrying value of property exceeds its estimated net realizable value. During 2011, First Defiance recognized $1.0 million of expense related to write-downs in value of real estate acquired by foreclosure. The balance of real estate owned at December 31, 2011 was $3.6 million.

As of December 31, 2011, First Defiance’s total non-performing loans amounted to $42.7 million or 2.87% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $47.0 million or 3.10% of total loans, at December 31, 2010. Non-performing loans are loans which are more than 90 days past due or on nonaccrual or loans which have been restructured and identified as troubled debt restructurings. The nonperforming loan balance includes $32.4 million of loans originated by First Federal also considered impaired or acquired loans accounted for under Topic 310 Subtopic 30.

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

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	December 31
	2011			2010			2009			2008			2007
	(Dollars in Thousands)
Nonperforming loans:
Single family residential, construction and home improvement	$	4,284		$	7,742		$	6,475		$	5,088		$	2,608
Nonresidential and multi-family residential real estate		28,150			21,737			24,042			19,979			5,917
Commercial		6,884			11,547			10,615			2,881			675
Consumer finance		10			14			59			69			17
Troubled debt restructurings		3,380			6,001			6,715			6,250			—
Total nonperforming loans		42,708			47,041			47,906			34,267			9,217
Real estate owned		3,608			9,591			13,413			6,973			2,410
Other repossessed assets		20			—			114			27			50
Total repossessed assets		3,628			9,591			13,527			7,000			2,460
Total nonperforming assets	$	46,336		$	56,632		$	61,433		$	41,267		$	11,677
Total nonperforming assets as a percentage of total assets		2.24	%		2.78	%		2.99	%		2.11	%		0.73	%
Total nonperforming loans as a percentage of total loans*		2.87	%		3.10	%		2.96	%		2.12	%		0.71	%
Allowance for loan losses as a percent of total nonperforming assets		71.77	%		72.54	%		59.49	%		59.59	%		118.95	%

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

In addition to the $42.7 million of non-performing loans reported above and $15.5 million of loans considered impaired (including loans accounted for under Topic 310 Subtopic 30), which are not included in the non-performing loans reported above, there are approximately $67.9 million of performing nonresidential real estate and commercial loans where known information about possible credit problems of the borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in the inclusion of such loans in non-performing loans at some future date. In analyzing these loans for the purpose of determining the adequacy of the allowance for loan losses, management has determined that these loans generally have significant collateral, strong guarantors, or both.

Allowance for Loan Losses – First Defiance maintains an allowance for loan losses to absorb probable incurred credit losses in the loan portfolio. The allowance for loan loss is made up of two components. The first is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolio based on quantitative and qualitative factors. Quantitative factors are primarily the historical loss experience of the portfolio for the most recent weighted two years. Qualitative factors that may lead the Company to add additional general reserves on the non-impaired loan portfolio include such things as: changes in international, national and local economic business conditions, changes in the value of underlying collateral for collateral dependent loans, changes in the political and regulatory environment and changes in the trends of the loan portfolio.

The second component of the allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual credits. In evaluating the adequacy of its allowance each quarter, management grades all loans in the commercial portfolio. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes

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judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. The Company also considers the impacts of any Small Business Association or Farm Service Agency guarantees. An internal loan review of all loan relationships between $250,000 and $750,000 is performed annually. Management also engages a third-party to do an annual review of all loan relationships in excess of $750,000. Both of these loan reviews, among other things, independently assess management’s loan grades.

Loans charged-off are charged against the allowance when such loans meet the Company’s established policy on loan charge-offs and the allowance itself is adjusted quarterly by recording a provision for loan losses. As such, actual losses and losses provided for should be approximately the same if the overall quality, composition and size of the portfolio remained static. To the extent that the portfolio grows at a rapid rate or overall quality deteriorates, the provision generally will exceed charge-offs, as happened in 2008 through 2010. However, in certain circumstances, as happened in 2011, net charge-offs may exceed the provision for loan losses when management determines that loans previously provided for in the allowance for loan losses are uncollectible and should be charged off. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowances may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.

At December 31, 2011, First Defiance’s allowance for loan losses amounted to $33.3 million compared to $41.1 million at December 31, 2010. The following table sets forth the activity in First Defiance’s allowance for loan losses during the periods indicated.

	Years Ended December 31
	2011			2010			2009			2008			2007
	(Dollars in Thousands)
Allowance at beginning of year	$	41,080		$	36,547		$	24,592		$	13,890		$	13,579
Provision for credit losses		12,434			23,177			23,232			12,585			2,306
Allowance acquired in acquisitions		—			—			—			4,258			—
Charge-offs:
Single family residential real estate		(2,753	)		(3,092	)		(2,281	)		(1,185	)		(256	)
Commercial real estate		(13,150	)		(9,928	)		(5,799	)		(3,758	)		(1,803	)
Commercial		(4,398	)		(5,118	)		(2,664	)		(813	)		(99	)
Consumer finance		(95	)		(124	)		(320	)		(380	)		(161	)
Home equity and improvement		(1,052	)		(1,066	)		(762	)		(363	)		(81	)
Total charge-offs		(21,448	)		(19,328	)		(11,826	)		(6,499	)		(2,400	)
Recoveries		1,188			684			549			358			405
Net charge-offs		(20,260	)		(18,644	)		(11,277	)		(6,141	)		(1,995	)
Ending allowance	$	33,254		$	41,080		$	36,547		$	24,592		$	13,890
Allowance for loan losses to total non-performing loans at end of year		77.86	%		87.33	%		76.29	%		71.77	%		150.70	%
Allowance for loan losses to total loans at end of year*		2.24	%		2.70	%		2.26	%		1.52	%		1.08	%
Allowance for loan losses to net charge-offs for the year		164.14	%		220.34	%		324.08	%		400.46	%		696.24	%
Net charge-offs for the year to average loans		1.41	%		1.21	%		0.70	%		0.41	%		0.16	%

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

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The provision for credit losses, as well as charge-offs, has increased significantly from 2008 through 2011 due mainly to continued deteriorating national and local economic conditions and the declining values of the underlying collateral of collateral dependent loans. The increase is due to some large relationships in the commercial real estate and commercial portfolios that were charged off due to the effect of the slowing economy. Management anticipates a lower level of net charge-offs in 2012 compared to 2011 and feels that the level of the allowance for loan losses at December 31, 2011 is sufficient to cover the estimated losses incurred but not yet recognized in the loan portfolio.

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

	December 31
	2011					2010					2009					2008					2007
	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
	(Dollars in Thousands)
Single family residential and construction	$	4,158		15.7	%	$	6,029		15.5	%	$	6,048		16.8	%	$	3,678		19.8	%	$	2,112		18.9	%
Nonresidential and Multi-family residential real estate		20,490		51.7			22,355		50.1			18,876		49.1			13,436		46.1			7,750		46.5
Other:
Commercial loans		6,576		23.2			10,871		24.2			9,444		23.1			6,351		21.8			3,420		21.8
Consumer and home equity and improvement loans		2,030		9.4			1,825		10.2			2,179		11.0			1,127		12.3			608		12.8
	$	33,254		100.0	%	$	41,080		100.0	%	$	36,547		100.0	%	$	24,592		100.0	%	$	13,890		100.0	%

Sources of Funds

General – Deposits are the primary source of First Defiance’s funds for lending and other investment purposes. In addition to deposits, First Defiance derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the FHLB may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes. During 2007, First Defiance issued $15.0 million of trust preferred securities through an unconsolidated affiliated trust. Proceeds from the offering were used for general corporate purposes including funding of dividends and stock buybacks as well as bolstering regulatory capital at the First Federal level. First Defiance also issued $20.0 million of similar trust preferred securities in 2005.

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

To supplement its funding needs, First Defiance also utilizes the national market for Certificates of Deposit. Such deposits have maturities ranging from one to thirty-five months. These deposits are issued at the current rates available to customers in our market areas. The total balance of national certificates of deposit was $10.6 million and $41.8 million at December 31, 2011 and 2010, respectively.

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

	Years Ended December 31
	2011					2010					2009
	Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in Thousands)
Non-interest-bearing demand deposits	$	231,343		—		$	200,864		—		$	176,513		—
Interest bearing demand deposits		592,093		0.36	%		529,078		0.59	%		447,858		0.77	%
Savings deposits		153,318		0.16			139,049		0.26			132,589		0.35
Time deposits		613,374		1.60			721,203		2.18			790,379		2.81
Totals	$	1,590,128		0.77	%	$	1,590,194		1.21	%	$	1,547,339		1.69	%

The following table sets forth the maturities of First Defiance’s retail certificates of deposit having principal amounts of $100,000 or more at December 31, 2011 (in thousands):

Retail certificates of deposit maturing in quarter ending:
March 31, 2011	$	35,193
June 30, 2011		22,636
September 30, 2011		25,681
December 31, 2011		17,807
After December 31, 2011		86,596
Total retail certificates of deposit with balances of $100,000 or more	$	187,913

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

	2011		2010
	(In Thousands)
Interest bearing demand deposits and money market accounts	$	26	$	40
Certificates of deposit		92		211
	$	118	$	251

For additional information regarding First Defiance’s deposits see Note 12 to the financial statements.

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

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

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	December 31
	2011			2010			2009
	(Dollars in Thousands)
Long-term:
FHLB advances	$	81,841		$	116,885		$	146,927
Weighted average interest rate		3.66	%		3.68	%		3.36	%
Short-term:
FHLB advances	$	—		$	—		$	—
Weighted average interest rate		—			—			—
Securities sold under agreement to repurchase	$	60,386		$	56,247		$	48,398
Weighted average interest rate		0.92	%		0.98	%		1.05	%

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

	Years Ended December 31
	2011			2010			2009
	(Dollars in Thousands)
Long-term:
FHLB advances:
Maximum balance	$	116,882		$	146,927		$	146,967
Average balance		93,652			127,281			146,946
Weighted average interest rate		3.43	%		3.70	%		3.48	%

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

	Years Ended December 31
	2011			2010			2009
	(Dollars in Thousands)
Short-term:
FHLB advances:
Maximum balance	$	—		$	—		$	—
Average balance		16			—			33
Weighted average interest rate		0.17	%		—			0.84	%
Revolving credit agreements:
Maximum balance	$	—		$	—		$	—
Average balance		—			—			—
Weighted average interest rate		—			—			—
Securities sold under agreement to repurchase:
Maximum balance	$	61,240		$	56,247		$	50,920
Average balance		56,495			47,088			44,287
Weighted average interest rate		0.94	%		0.97	%		1.29	%

First Defiance borrows funds under a variety of programs at the FHLB. As of December 31, 2011, there was $81.8 million outstanding under various long-term FHLB advance programs. First Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term

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investment purposes. At December 31, 2011 and December 31, 2010, no outstanding balances existed under First Defiance’s Cash Management Advance Line of Credit. The total available under this line is $15.0 million. Additionally, First Defiance has $100.0 million available under a REPO line of credit. Amounts are generally borrowed under these lines on an overnight basis. First Federal’s total borrowing capacity at the FHLB is limited by various collateral requirements. Eligible collateral includes mortgage loans, home equity loans, non-mortgage loans, cash, and investment securities. At December 31, 2011, other than amounts available on the REPO and Cash Management line, First Federal had additional borrowing capacity with the FHLB of $147.9 million as a result of these collateral requirements.

As a member of the FHLB of Cincinnati, First Federal must maintain a minimum investment in the capital stock of that FHLB in an amount defined in the FHLB’s regulations. First Federal is permitted to own stock in excess of the minimum requirement and is in compliance with the minimum requirement with an investment in stock of the FHLB of Cincinnati of $19.3 million at December 31, 2011. First Federal also acquired $2.0 million in stock of the FHLB of Indianapolis from the Pavilion acquisition, which had a balance of $1.3 million at December 31, 2011. This stock is required to be held for a minimum of five years from the date the stock was acquired by First Federal, March 14, 2008.

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

For additional information regarding First Defiance’s FHLB advances and other debt see Notes 13 and 15 to the financial statements.

Subordinated Debentures – In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (“Trust Affiliate II”) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with the transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. Trust Affiliate II was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of the trust. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a fixed rate equal to 6.441% for the first five years and a floating rate of three-month LIBOR plus 1.50%, repricing quarterly, thereafter.

The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on 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.

In October 2005, the Company formed an affiliated trust, First Defiance Statutory Trust I (“Trust Affiliate I”) that issued $20 million of Trust Preferred Securities. In connection with the transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate I are the sole assets of the trust. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%, or 1.73% as of December 31, 2011. The rate was 1.67% at December 31, 2010.

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The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures may be redeemed by the issuer at par after October 28, 2010. The Subordinated Debentures mature on December 15, 2035.

Due to the Company’s participation in the U.S. Treasury’s Capital Purchase Program, permission must be obtained from the U.S. Treasury in order to call these securities.

Participation in the Capital Purchase Program

In December 2008, First Defiance participated in the U.S. Treasury’s Capital Purchase Program (“CPP”). Under the CPP, First Defiance issued $37.0 million of First Defiance non-voting preferred stock and a warrant to purchase 550,595 shares of First Defiance’s common stock at an exercise price of $10.08 per share, subject to certain anti-dilution and other adjustments. The $37.0 million of preferred stock issued by First Defiance under the CPP qualifies as Tier 1 capital. The cash received from the preferred stock issuance is reflected in the financing activities section of the Consolidated Statements of Cash Flows in Item 8 of this Form 10-K. The general purpose of the funds was to maintain and create lending opportunities in our market area.

Employees

First Defiance had 581 employees at December 31, 2011. None of these employees are represented by a collective bargaining agent, and First Defiance believes that it maintains good relationships with its personnel.

Competition

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

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

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Regulation

General – Provisions of The Dodd-Frank Wall Street Reform and Consumer Protections Act (the “Dodd-Frank Act”) required the transfer of Office of Thrift Supervision functions to the Office of the Comptroller of the Currency (“OCC”), the FDIC, the Federal Reserve Board (“Federal Reserve”) and the Bureau of Consumer Financial Protection on July 21, 2011. As a result, First Defiance and First Federal are subject to regulation, examination and oversight by the Federal Reserve and the OCC, respectively. Because the FDIC insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. First Defiance and First Federal must file periodic reports with the Federal Reserve and the OCC and examinations are conducted periodically by the Federal Reserve, OCC and the FDIC to determine whether First Defiance and First Federal are in compliance with various regulatory requirements and are operating in a safe and sound manner. First Federal is subject to various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, and, in the case of First Federal, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of First Federal to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent First Federal lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.

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

Regulatory Capital Requirements – First Federal Bank is required by regulations to meet certain minimum capital requirements. Current capital requirements call for core capital of 4.0% of adjusted total assets, except for associations with the highest examination rating and acceptable levels of risk, and risk-based capital of 8.0% of risk-weighted assets.

The following table sets forth the amount and percentage level of regulatory capital of First Federal Bank at December 31, 2011, and the amount by which it exceeds the minimum capital requirements. Tier 1 capital is reflected as a percentage of adjusted total assets. Tier 1 capital to risk-weighted assets and total (or risk-based) capital, which consists of core and supplementary capital, is reflected as a percentage of risk-weighted assets. Assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk.

	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Capital (1)
First Federal Bank	$	231,787		11.62	%	$	79,757		4.0	%	$	99,697		5.0	%
Tier 1 Capital (to Risk Weighted Assets) (1)
First Federal Bank	$	231,787		14.16	%	$	65,492		4.0	%	$	98,238		6.0	%
Total Capital (to Risk Weighted Assets) (1)
First Federal Bank	$	252,411		15.42	%	$	130,984		8.0	%	$	163,730		10.0	%

(1) Core capital is computed as a percentage of adjusted total assets of $1.99 billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $1.64 billion for the Bank.

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To be categorized as a well-capitalized institution, institutions need to maintain a tier 1 (core) capital ratio of 5%, a tier 1 capital to risk-weighted assets ratio of 6%, and a risk-based capital ratio of 10%. First Federal Bank’s capital at December 31, 2011 meets the standards for a well-capitalized institution. There are no conditions or events since the most recent notification from any of the regulatory agencies regarding those capital standards that management believes have changed any of the well-capitalized categorizations of First Federal Bank.

Dividends – First Defiance’s payment of dividends to its shareholders is generally funded by the payment of dividends by the Subsidiaries. Dividends paid by First Federal to First Defiance are subject to various regulatory restrictions. First Federal can initiate dividend payments equal to its net profits (as defined by statute) for the current year plus the preceding two calendar years. First Federal is required to receive prior approval from its primary regulator, the OCC, before it can pay any dividends to First Defiance, its parent company. First Federal did not pay any dividends in 2011 and 2010. As a result of its participation in the CPP, First Defiance is prohibited, without prior approval from the U.S. Treasury, from paying a quarterly cash dividend of more than $0.26 per share until the U.S. Treasury’s preferred stock is redeemed or transferred to an unaffiliated third party.

Transactions with Insiders and Affiliates – Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limits. Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the “disinterested” members of board of directors of the association with any “interested” director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program. Loans to executive officers are subject to additional restrictions. In addition, all related party transactions must be approved by the Company’s audit committee pursuant to NASDAQ Rule 5630, including loans made by financial institutions in the ordinary course of business. All transactions between savings associations and their affiliates must comport with Sections 23A and 23B of the Federal Reserve Act (FRA) and the Federal Reserve Board’s (FRB) Regulation W. An affiliate of a savings association is any company or entity that controls, is controlled by or is under common control with the savings association. First Defiance and First Insurance are affiliates of First Federal.

Holding Company Regulation – First Defiance is a unitary thrift holding company and is subject to the Federal Reserve regulations, examination, supervision and reporting requirements. Federal law generally prohibits a thrift holding company from controlling any other savings association or thrift holding company, without prior approval of the Federal Reserve, or from acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof, which is not a subsidiary.

Deposit Insurance – First Federal is a member of the Deposit Insurance Fund (“DIF”), which is administered by the FDIC. Deposit accounts at First Federal are insured by the FDIC, generally up to a maximum of $250,000. Further, from December 31, 2010 through December 31, 2012, deposits held in noninterest-bearing transaction accounts will be fully insured by the FDIC regardless of the amount in the account. The Bank has opted to participate in the FDIC’s Transaction Account Guarantee Program. See “Temporary Liquidity Guarantee Program” below.

During 2008, there were higher levels of bank failures which dramatically increased resolution costs of the FDIC and depleted the DIF. In order to maintain a strong funding position and restore reserve ratios of the DIF, on December 16, 2008, the FDIC issued a final rule that raised the then current

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assessment rates of insured institutions uniformly by 7 basis points (7 cents for every $100 of deposits), beginning with the first quarter of 2009. Further, beginning April 1, 2009, the FDIC required higher risk institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels. On May 22, 2009, the FDIC issued a final rule that imposed a special assessment for the second quarter of 2009 of 5 basis points on each insured depositary institution’s assets minus its Tier 1 capital as of June 30, 2009, which was collected on September 30, 2009 in the amount of $906,000 for First Federal. On November 12, 2009, the FDIC issued a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments for these periods were collected on December 30, 2009, along with the regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate was based on each institution’s total base assessment rate in effect on September 30, 2009, modified to assume that the assessment rate in effect for the institution on September 30, 2009, was in effect for the entire third quarter of 2009. As of December 31, 2011, $2.4 million in prepaid deposit insurance assessments is included in other assets in the accompanying consolidated balance sheet.

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will maintain the current schedule of assessment rates for all depository institutions. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

Insurance of deposits may be terminated by the FDIC upon finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management does not currently know of any practice, condition or violation that might lead to termination of the deposit insurance.

Temporary Liquidity Guarantee Program – On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program. This program has two components – The Debt Guarantee Program and the Transaction Account Guarantee Program. The Debt Guarantee Program guarantees newly issued senior unsecured debt of a participating organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest in accordance with the terms of the instrument. The guarantee will remain in effect until June 30, 2012. In return for the FDIC’s guarantee, participating institutions will pay the FDIC a fee based on the amount and maturity of the debt. The Company opted to participate in the Debt Guarantee Program.

The Transaction Account Guarantee Program provides full deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2012, which was extended twice from December 31, 2009 and June 30, 2010, respectively. An annualized 25 basis point assessment (increased from 10 basis points) on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to insured depository institutions that have not opted out of this component of the Temporary Liquidity Guarantee Program. The Company has opted to participate in the Transaction Account Guarantee Program.

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Item 1A. Risk Factors

An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are the not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

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

Local Economic Conditions – First Defiance conducts its banking and insurance business primarily in northwest Ohio, northeast Indiana and southeast Michigan. Unemployment rates for most of the counties within our geographic market area are above the median rate for the United States and above the median rates for the States of Ohio, Indiana, and Michigan. As reported for December 2011, the 14 counties in which our offices are located had unemployment rates between 7.2% and 13.3%, and all experienced an improvement in their unemployment rate in 2011 compared to 2010. In addition, real estate values in First Defiance’s markets have declined and may continue to decline. High unemployment and declining real estate values have a negative impact on the Company’s earnings and financial condition because:

• more borrowers are unable to make payments on their loans;

• the value of collateral securing loans has declined; and

• the overall quality of the loan portfolio has declined.

General Economic Conditions – Dramatic declines in real estate values, along with high unemployment, have disrupted the national credit and capital markets over the last several years. As a result, many financial institutions have had to seek additional capital, to merge with larger and stronger institutions, to seek government assistance or bankruptcy protection and, in some cases; they have been forced into a sale or closed by the bank regulatory agencies. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including to other financial institutions, because of concern about the stability of the financial markets and the strength of counterparties. It is difficult to predict how long these economic conditions will exist, which of our markets, products or other businesses will ultimately be affected, and whether management’s actions will effectively mitigate these external factors. The reduced availability of credit, the lack of confidence in the financial sector, decreased consumer confidence, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

As a result of the challenges presented by economic conditions, First Defiance faces the following risks:

• inability of borrowers to make timely repayments of their loans, or decreases in value of real estate collateral securing the payment of such loans resulting in significant credit losses, which could result in increased delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on our operating results;

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• increased regulation of the financial services industry, including heightened legal standards and regulatory requirements or expectations; compliance with such regulation will likely increase costs and may limit the Company’s ability to pursue business opportunities;

• further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions;

• increased competition among financial services companies due to the consolidation of financial institutions, which may adversely affect our ability to market the Company’s products and services; and

• further increases in FDIC insurance premiums due to the market developments which have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

Declining Real Estate Values – Approximately 75.5% of the loans in First Federal’s portfolio are secured in whole or in part by real estate. As residential real estate prices have declined in the last three years, defaults and foreclosures have increased. Commercial real estate values have also declined, and the owners of many income-producing properties are experiencing declines in their revenue, which may adversely affect their ability to repay their loans. Foreclosures and resolutions of nonperforming loans require significant personnel resources and involve other costs that may increase our operating expenses. Properties acquired through foreclosure or by deed in lieu of foreclosure are taking longer to sell in the current economy, which increases the Company’s expenses for managing, maintaining and insuring real estate owned. If First Federal is unable to sell properties at a price that will cover its expenses as well as the unpaid principal and interest on the loan, the resulting write-downs and losses will adversely affect First Defiance’s net income.

Volatile Capital Markets – The capital and credit markets have been experiencing volatility and disruption for more than a year. In some cases, the markets have produced downward pressure on credit availability for certain issuers. Continuing market disruption and volatility could have an adverse effect on the Company’s ability to access capital and on its business, financial condition and results of operations.

First Defiance’s stock price may fluctuate significantly in the future and these fluctuations may be unrelated to the underlying performance of First Defiance. General market price declines and overall market volatility in the future could adversely affect the price of its common stock, and the current market price of the stock may not be indicative of future market prices.

First Defiance’s stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include:

• Actions by government regulators;

• First Defiance’s announcements of developments related to its business;

• Fluctuation in our results of operation;

• Sales of substantial amounts of our securities into the marketplace;

• New reports of trends, concerns and other issues related to the financial services industry.

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

At December 31, 2011, First Federal’s portfolio of commercial real estate loans totaled $776.0 million, or approximately 51.7% of total loans. First Federal’s commercial real estate loans typically have higher principal amounts than residential real estate loans, and many of our commercial real estate borrowers have more than one loan outstanding. As a result, an adverse development on one loan can expose First Defiance to greater risk of loss on other loans. Additionally, repayment of the loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic conditions and events outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

At December 31, 2011, First Federal’s portfolio of commercial loans totaled $349.1 million, or approximately 23.2% of total loans. Commercial loans generally expose First Defiance to a greater risk of nonpayment and loss than commercial real estate or residential real estate loans since repayment of such loans often depends on the successful operations and income stream of the borrowers. First Federal’s commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower such as accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.

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

Increases to the allowance for loan losses may cause First Defiance’s earnings to decrease.

First Defiance makes a number of assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, First Defiance relies on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If its assumptions prove to be incorrect, First Defiance’s allowance for loan losses may not be sufficient to cover actual losses, resulting in additions to the allowance. Material additions to the allowance and any loan losses that exceed First Defiance’s reserves would materially adversely affect our results of operations and financial condition.

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

First Defiance’s earnings and financial condition are dependent to a large degree upon net interest income, which is the difference, or spread, between interest earned from loans and investments and interest paid on deposits and borrowings. Interest rates are highly sensitive to many factors, including:

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• the rate of inflation;

• economic conditions;

• federal monetary policies; and

• stability of domestic and foreign markets.

Because First Defiance’s interest-bearing liabilities may reprice or mature more quickly than its interest-earning assets, an increase in interest rates could result in a decrease in First Defiance’s net interest income.

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

Laws and regulations may affect First Defiance’s results of operations.

The earnings of financial institutions are affected by the regulations and policies of various regulatory authorities, including the Federal Reserve Board, which regulates the money supply, and the Federal Reserve which regulates the Company and OCC which regulates First Federal, and the FDIC, which regulates First Federal. The Federal Reserve has extensive supervisory authority over the Company, affecting a comprehensive range of matters relating to ownership and control of First Defiance’s shares, First Defiance’s acquisition of other companies and businesses, permissible activities for the Company to engage in, maintenance of adequate capital levels and other aspects of operations. These supervisory and regulatory powers are intended primarily for the protection for First Defiance’s depositors and customers and the deposit insurance fund, rather than First Defiance’s shareholders.

In connection with its supervision of First Defiance, it’s former primary regulator, the Office of Thrift Supervision (“OTS”), which was eliminated and replaced by the Federal Reserve, and the Company entered into a memorandum of understanding (“MOU”), which is a tool employed by bank regulatory agencies to address areas of concern to the regulator. The memorandum for the Company requires that it submit to the Federal Reserve specific strategies for increasing and maintaining capital at targets, to be established by First Defiance’s board of directors that are commensurate with First Defiance’s risk profile. At December 31, 2011, The Company and First Federal’s capital ratios exceed all the regulatory thresholds to be considered “well-capitalized.” The memorandum also requires that First Defiance obtain approval from the Federal Reserve before it pays any dividends, including dividends on common shares, or incur, issue, renew, or rollover any debt. First Federal also agreed to a memorandum of understanding with the OTS, which was eliminated and replaced by the OCC, the principal terms of which relate to First Federal’s risk profile and asset quality. Compliance with the First Federal memorandum may restrict First Defiance’s operations and adversely affect its financial results.

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First Defiance issued $37.0 million of our Series A Preferred Shares to the U.S. Treasury pursuant to the CPP. The rules and policies applicable to CPP participants continue to evolve and their scope, timing and effect cannot be predicted. Current restrictions include limits on First Defiance’s ability to pay retention awards, bonuses and other incentive compensation during the period in which it has any outstanding securities held by the U.S. Treasury that were issued under the CPP. These limitations may adversely affect First Defiance’s ability to recruit and retain key personnel, especially if it is competing for talent against institutions that are not subject to the same restrictions.

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

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

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

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

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

Competition affects First Defiance’s earnings.

First Defiance’s continued profitability depends on its ability to continue to effectively compete to originate loans and attract and retain deposits. Competition for both loans and deposits is intense in the financial services industry. The Company competes in its market area by offering superior service and competitive rates and products. The type of institutions First Defiance competes with include large regional commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their size and ability to achieve economies of scale, certain of First Defiance’s competitors can offer a

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broader range of products and services than the Company can offer. To stay competitive in its market area, First Defiance may need to adjust the interest rates on its products to match rates of its competition, which could have a negative impact on net interest margin.

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

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

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

First Defiance’s operations are also dependent on its existing infrastructure, including equipment and facilities. Extended disruption of vital infrastructure as a result of fire, power loss, natural disaster, telecommunications failures, computer hacking or viruses, terrorist activity or the domestic response to such activity, or other events outside of the control of management could have a material adverse impact on its business, results of operations, cash flows and financial condition. First Defiance has a business recovery plan, but there are no assurances that such a plan will work as intended or that it will prevent significant interruptions to operations.

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

In the normal course of business, First Defiance collects, processes and retains sensitive and confidential client and customer information on behalf of First Defiance and other third parties. Despite the security measures the Company has in place, First Defiance’s facilities and systems, and those of the Company’s third party service providers, may be vulnerable to security breaches, act of vandalism, computer viruses, lost or misplace data, or other similar events. Any security breach involving the unauthorized disclosure or loss of confidential customer information, whether by First Defiance or by the Company’s third party vendors, could severely damage First Defiance’s reputation, expose the Company to risks of litigation and liability, disrupt First Defiance’s operations and have a material adverse effect on First Defiance’s business.

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The issuance of Series A Preferred Shares and Warrants to the U. S. Government may adversely affect the holders of First Defiance’s Common Shares.

First Defiance issued 37,000 Series A Preferred Shares and warrants to purchase 550,595 shares of First Defiance common stock (the “Common Shares”) to the U.S. Department of the Treasury under the Capital Purchase Program. The dividends accrued and the accretion on discount on the Series A Preferred Shares issued to the U.S. Treasury reduce the net income available to the holders of our Common Shares and our earnings per Common Share. Because the Series A Preferred Shares are cumulative, any dividends not declared or paid will accumulate and will be payable when the payment of dividends is resumed. If the Series A Preferred Shares are not redeemed within five years after their original date of issuance, the annual dividend rate on the Series A Preferred Shares will increase from 5.0% per annum to 9.0% per annum. If First Defiance is unable to redeem the Series A Preferred Shares by December 5, 2013, the increase in the annual dividend rate on the Series A Preferred Shares could have a material adverse effect on the Company’s earnings and could also adversely affect its ability to declare and pay dividends on its Common Shares. Series A Preferred Shares will also receive preferential treatment in the event of a liquidation, dissolution or winding up of First Defiance.

The Common Shares underlying the Warrant represent approximately 5.4% of the Common Shares outstanding as of December 31, 2011 (including the shares issuable upon exercise of the Warrant in our total outstanding Common Shares). If the Warrant is exercised, the interest of the existing holders of Common Shares will be diluted. Although the Treasury Department has agreed not to vote any of the Common Shares acquired upon exercise of the Warrant, a transferee of the Warrant or of any Common Shares acquired upon exercise of the Warrant is not bound by this restriction. Finally, the terms of the Series A Preferred Shares allow the U.S. Treasury to impose additional restrictions, including those on dividends and to unilaterally amend the terms of the Series A Preferred Shares to comply with changes in applicable federal law.

If First Defiance fails to pay dividends on the Series A Preferred Shares for six quarterly dividend periods (whether or not consecutive), the Treasury Department will have the right to appoint two directors to the Company’s Board of Directors until all accrued but unpaid dividends have been paid. As long as the Series A Preferred Shares are outstanding, in addition to any other vote or consent of shareholders required by law or our Articles of Incorporation, as amended (the “Articles”), the vote or consent of holders owning at least 66 2/3% of the Series A Preferred Shares outstanding is required for:

• any authorization or issuance of shares ranking senior to the Series A shares;

• any amendments to the rights of the Series A Preferred Shares that would adversely affect the rights, preferences, privileges or voting power of the Series A shares; or

• the consummation of any merger, share exchange or similar transaction unless the Series A shares remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the Series A shares remaining outstanding or such preference securities have the rights, preferences, privileges and voting power of the Series A shares.

The holders of Series A Preferred Shares, including the U.S. Treasury, may have different interests from the holders of the Common Shares, and could vote to block transactions that may be in the best interest of the present holders of the Common Shares.

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First Defiance may need to raise additional capital in the future, which may result in significant dilution to holders of the Common Shares.

There can be no assurance that First Defiance will not in the future determine that it is advisable, or that it will not encounter circumstances where the Company determines that it is necessary, to issue additional Common Shares, securities convertible into or exchangeable for Common Shares or common-equivalent securities to fund strategic initiatives or other business needs or to build additional capital. In addition, if the Company decides to repurchase the Series A Preferred Stock issued to the U.S. Treasury, it may elect or be required by its regulators to increase the amount of our Tier 1 common equity through the sale of additional Common Shares. Further, there can be no assurance that the regulators will not require the Company to generate additional capital, including Tier 1 common equity, in the future in the event of further negative economic circumstances, in order for First Defiance to redeem the Series A Preferred Stock held by the U.S. Treasury under the CPP or otherwise. The market price of the Common Shares could decline as a result of such exchange offerings, as well as other sales of a large block of the Common Shares or similar securities in the market thereafter, or the perception that such sales could occur. These factors could have a material adverse effect on the Company.

The Company may not be permitted to repurchase the U.S. Treasury’s CPP investment if and when it requests approval to do so.

While it is the Company’s plan to repurchase the Series A Preferred Stock as soon as practicable, in order to repurchase such securities, in whole or in part, it must establish to its regulators’ satisfaction that all of the conditions to repurchase have been met and must obtain the approval of its primary federal regulator and the U.S. Treasury. There can be no assurance that the Company will be able to repurchase the U.S. Treasury’s CPP investment in the Series A Preferred Stock subject to conditions that the Company finds acceptable, or at all. In addition to limiting First Defiance’s ability to return capital to its shareholders, the U.S. Treasury’s investment could limit the Company’s ability to retain key executives and other key employees because of the limits on compensation that may be paid to employees of CPP participants, and limit the Company’s ability to develop business opportunities.

If the Company is unable to redeem the Series A Preferred Stock within five years from the issuance date, the cost of this capital will increase substantially.

If the Company is unable to redeem the Series A Preferred Stock prior to December 5, 2013, the cost of this capital will increase substantially on that date, from 5.0% per annum (approximately $1.9 million annually) to 9.0% per annum (approximately $3.3 million annually). Depending on our financial condition at the time, this increase in the annual dividend rate could have a material negative effect on the Company’s liquidity.

Regulatory restriction on dividends and First Defiance’s ability to repurchase shares may adversely affect its shareholders and the market price of the Common Shares.

As long as the Series A shares are outstanding and held by the Treasury Department, the Company cannot increase the quarterly dividend on the Common Shares above $.26 per share without prior approval from the Treasury Department. In addition to this restriction, the Federal Reserve has directed First Defiance to seek approval of the Federal Reserve before paying any dividends on the Common Shares.

The Company’s principal source of funds to pay dividends on the Common Shares is distributions from First Federal, which require the prior approval of the OCC. The OCC has advised

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First Defiance that it is not likely to approve any distributions from First Federal for this purpose in the foreseeable future. The Federal Reserve and the OCC have also advised the Company that it should not pay dividends utilizing borrowings or other sources of funds that it may have access to.

As long as the Series A shares are outstanding and held by the Treasury Department, the Company cannot repurchase Common Shares without the consent of the Treasury Department (other than repurchases in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice and certain other exemptions). Further, the Federal Reserve has directed First Defiance to seek approval of the Federal Reserve before repurchasing any Common Shares.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At December 31, 2011, First Federal conducted its business from its main office at 601 Clinton Street, Defiance, Ohio, and thirty-two other full service banking centers in northwest Ohio, northeast Indiana and southeast Michigan. First Insurance conducted its business from leased office space at 419 5^th Street, Suite 1200, Defiance, Ohio; 209 West Poe Road, Bowling Green, Ohio; 214 N. Defiance Street, Archbold, Ohio; 926 East High Street, Bryan, Ohio; 1755 Indian Wood Circle, Maumee, Ohio and 4350 Navarre Ave, Oregon, Ohio.

In 2009, the Company closed two branch locations, the Cole Street branch in Lima, Ohio which was owned, and the Hillsdale, Michigan branch which was leased. As of December 31, 2009, the Cole Street branch in Lima, Ohio was transferred at its fair value of $300,000 to other real estate owned and is currently held for sale. As of December 31, 2011, the value in other real estate owned was $250,000. Also, the Hillsdale branch leasehold improvements were written down to a value of $0. These two branches were closed on January 22, 2010.

First Defiance maintains its headquarters in the main office of First Federal at 601 Clinton Street, Defiance, Ohio. Back-office operation departments, including information technology, loan processing and underwriting, deposit processing, accounting and risk management are headquartered in an operations center located at 25600 Elliott Road, Defiance, Ohio.

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The following table sets forth certain information with respect to the office and other properties of the Company at December 31, 2011. See Note 10 to the Consolidated Financial Statements.

Description/address	Leased/Owned	Net Book Value of Property		Deposits
	(In Thousands)
Main Office, First Federal
601 Clinton St., Defiance, OH	Owned	$	4,311	$	225,669
Operations Center
25600 Elliott Rd., Defiance, OH	Owned		5,646		N/A
Mobile Banking
1011 W. Beecher St., Adrian, MI	Owned		204		N/A
Branch Offices, First Federal
204 E. High St., Bryan, OH*	Owned		724		128,378
211 S. Fulton St., Wauseon, OH	Owned		498		54,527
625 Scott St., Napoleon, OH	Owned		1,095		69,751
1050 East Main St., Montpelier, OH	Owned		372		39,580
926 East High St., Bryan, OH*	Owned		88		—
1800 Scott St., Napoleon, OH	Owned		1,364		26,505
1177 N. Clinton St., Defiance, OH	Owned, Land Lease Leased		971		38,145
905 N. Williams St., Paulding, OH	Owned		801		44,625
201 E. High St., Hicksville, OH	Owned		385		26,071
3900 N. Main St., Findlay, OH	Owned		1,020		47,226
11694 N. Countyline St., Fostoria, OH	Owned		663		34,338
1226 W. Wooster, Bowling Green, OH	Owned		1,047		84,354
301 S. Main St., Findlay, OH	Owned		1,076		45,282
405 E. Main St., Ottawa, OH	Owned		354		77,539
124 E. Main St., McComb, OH	Owned		204		21,397
7591 Patriot Dr., Findlay, OH	Owned		1,173		42,048
417 W Dussell Dr., Maumee, OH	Owned, Land Lease		912		47,135
230 E. Second St., Delphos, OH	Owned		1,075		94,715
105 S. Greenlawn Ave., Elida, OH	Owned		341		40,024
2600 Allentown Rd., Lima, OH	Owned		821		40,652
22020 W. State Rt. 51, Genoa, OH	Owned		892		31,295
3426 Navarre Ave., Oregon, OH	Owned		977		28,849
1077 Louisiana Ave., Perrysburg, OH	Owned		1,117		27,690
2565 Shawnee Rd., Lima, OH	Owned		1,508		27,944
7437 Coldwater Rd., Fort Wayne, IN	Leased		120		10,062
135 South Main St., Glandorf, OH	Leased		—		14,796
300 N. Main St., Adrian, MI	Owned		765		64,455
1701 W. Maumee St., Adrian, MI	Owned		162		54,737
211 W. Main St., Morenci, MI	Owned		171		27,224
539 S. Meridian, Hudson, MI	Owned		596		40,348
1449 W. Chicago Blvd., Tecumseh, MI	Owned		1,530		25,125
501 E. Chicago Blvd., Tecumseh, MI	Leased		9		15,755
First Insurance Group
419 5th Street, Suite 1200, Defiance, OH	Leased		94		N/A
209 West Poe Road, Bowling Green, OH	Leased		13		N/A
214 N. Defiance St., Archbold, OH	Leased		—		N/A
926 E. High St., Bryan, OH**	Leased		—		N/A
1755 Indian Wood Circle, Maumee, OH	Leased		—		N/A
4350 Navarre Ave, Oregon, OH	Leased		—		N/A
		$	33,099	$	1,596,241

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* The Bryan East (926 East High St.) deposits are now included in the Bryan Main (204 E. High Street) totals.

** Located in the Bryan East branch.

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Item 3. Legal Proceedings

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

Item 4. Reserved

PART II

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

The Company’s common stock trades on The NASDAQ Global Select Market under the symbol “FDEF.” As of February 29, 2012, the Company had 2,205 shareholders of record.

The table below shows the reported high and low sales prices of the common stock and cash dividends declared per share of common stock during the periods indicated in 2011 and 2010.

	Years Ending
	December 31, 2011						December 31, 2010
	High		Low		Dividend		High		Low		Dividend
Quarter ended:
March 31	$	14.64	$	11.89	$	—	$	12.33	$	9.20	$	—
June 30		15.00		13.22		—		14.85		8.53		—
September 30		15.51		12.60		—		10.63		8.55		—
December 31		15.39		13.00		0.05		12.32		9.94		—

First Defiance’s ability to pay dividends to its shareholders is primarily dependent on the ability of the Subsidiaries to pay dividends to First Defiance. The OCC advised the Company that prior approval would be required to pay dividends utilizing borrowings or other sources of funds to which the Company may have access to. Capital distributions include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association.

Even if the OCC approves a distribution from First Federal to First Defiance, as a result of participating in the 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 as long as the Series A shares are outstanding and held by the Treasury Department.

First Federal paid $4.8 million in dividends to First Defiance during 2010. First Insurance paid $1.0 million in dividends to First Defiance during 2010. There were no dividends paid by First Federal or First Insurance in 2011.

The line graph below compares the yearly percentage change in cumulative total shareholder return on First Defiance common stock and the cumulative total return of the NASDAQ Composite Index, the SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31, 2006, and the reinvestment of all dividends are assumed. The performance graph represents past performance and should not be considered to be an indication of future performance.

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	Period Ending
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
First Defiance Financial Corp.		100.00		75.48		28.37		43.56		45.92		56.49
NASDAQ Composite		100.00		110.66		66.42		96.54		114.06		113.16
SNL Bank NASDAQ Index		100.00		78.51		57.02		46.25		54.57		48.42
SNL Midwest Thrift Index		100.00		84.47		75.06		63.22		51.25		45.21

First Defiance did not purchase any of its common shares during 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 CPP prohibits the Company from repurchasing any of its common shares without the prior approval of the U.S. Treasury as long as the Series A shares are outstanding and held by the Treasury Department.

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Item 6. Selected Financial Data

The following table is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2011. The following consolidated selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this Form 10-K. The operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition.

	As of and For the Year Ended December 31
	2011			2010			2009			2008			2007
	(Dollars in Thousands, Except Per Share Data
Financial Condition:
Total assets	$	2,068,190		$	2,035,517		$	2,057,523		$	1,957,400		$	1,609,404
Investment securities		233,580			166,091			139,378			118,461			113,487
Loans receivable, net		1,453,822			1,478,423			1,580,575			1,592,643			1,275,806
Allowance for loan losses		33,254			41,080			36,547			24,592			13,890
Nonperforming assets (1)		46,336			56,632			61,433			41,267			11,677
Deposits and borrowers’ escrow balances		1,597,643			1,576,356			1,580,891			1,470,564			1,218,620
FHLB advances		81,841			116,885			146,927			156,067			139,536
Stockholders’ equity		278,127			240,331			234,086			229,159			165,954
Share Information:
Basic earnings per share		1.44			0.75			0.64			0.91			1.96
Diluted earnings per share		1.42			0.75			0.63			0.91			1.94
Book value per common share		24.74			25.00			24.26			23.67			23.51
Tangible book value per common share		17.78			17.16			16.44			15.67			17.79
Cash dividends per common share		0.05			—			0.295			0.95			1.01
Dividend payout ratio		3.47	%		NM			46.09	%		10.44	%		51.53	%
Weighted average diluted shares outstanding		9,540			8,153			8,196			7,919			7,178
Shares outstanding end of period		9,726			8,118			8,118			8,117			7,059
Operations:
Interest income	$	87,067		$	95,865		$	100,579		$	103,463		$	98,751
Interest expense		17,186			25,702			33,257			41,268			50,089
Net interest income		69,881			70,163			67,322			62,195			48,662
Provision for loan losses		12,434			23,177			23,232			12,585			2,306
Non-interest income		27,516			27,590			26,295			19,069			22,130
Non-interest expense		62,764			63,463			60,524			57,794			48,113
Income before tax		22,199			11,113			9,861			10,885			20,373
Federal income tax		6,665			3,005			2,667			3,528			6,469
Net Income		15,534			8,108			7,194			7,357			13,904
Performance Ratios:
Return on average assets		0.75	%		0.39	%		0.36	%		0.40	%		0.90	%
Return on average equity		5.89	%		3.40	%		3.09	%		3.85	%		8.48	%
Interest rate spread (2)		3.69	%		3.68	%		3.50	%		3.51	%		3.17	%
Net interest margin (2)		3.88	%		3.89	%		3.76	%		3.80	%		3.55	%
Ratio of operating expense to average total assets		3.05	%		3.09	%		2.99	%		3.12	%		3.12	%
Efficiency ratio (3)		63.62	%		63.89	%		61.50	%		67.74	%		67.29	%
Capital Ratios:
Equity to total assets at end of period		13.45	%		11.81	%		11.38	%		11.71	%		10.31	%
Tangible common equity to tangible assets at end of period		8.65	%		7.06	%		6.69	%		6.72	%		8.00	%
Average equity to average assets		12.82	%		11.62	%		11.49	%		10.30	%		10.62	%
Asset Quality Ratios:
Nonperforming assets to total assets at end of period (1)		2.24	%		2.78	%		2.99	%		2.11	%		0.73	%
Allowance for loan losses to total loans*		2.24	%		2.70	%		2.26	%		1.52	%		1.08	%
Net charge-offs to average loans		1.41	%		1.21	%		0.70	%		0.41	%		0.16	%

(1) Nonperforming assets consist of non-accrual loans that are contractually past due 90 days or more; loans that are deemed impaired under the criteria of FASB ASC Topic 310; loans that have been restructured; and real estate, mobile homes and other assets acquired by foreclosure or deed-in-lieu thereof.

(2) Interest rate spread represents the difference between the weighted average yield on interest-earnings assets and the weighted average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earnings assets. Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%.

(3) Efficiency ratio represents non-interest expense divided by the sum of tax-equivalent net interest income plus non-interest income, excluding securities gain or losses, net.

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

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

Forward-Looking Statements and Factors that Could Affect Future Results

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

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

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

• Volatility and disruption in national and international financial markets.

• Government intervention in the U.S. financial system.

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

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

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

• Inflation, interest rate, securities market and monetary fluctuations.

• Political instability.

• Acts of God or of war or terrorism.

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

• Changes in consumer spending, borrowing and saving habits.

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

• Technological changes including core system conversions.

• Acquisitions and integration of acquired businesses.

• The ability to increase market share and control expenses.

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

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

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

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

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

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

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

The following section presents information to assess the financial condition and results of operations of First Defiance. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this Annual Report on Form 10-K.

Overview

First Defiance is a unitary thrift holding company which conducts business through its subsidiaries, First Federal and First Insurance.

First Federal is a federally chartered stock savings bank that provides financial services to communities based in northwest Ohio, northeast Indiana, and southeastern Michigan where it operates 33 full service banking centers in 12 northwest Ohio counties, 1 northeast Indiana county, and 1 southeastern Michigan county.

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

First Insurance sells a variety of property and casualty, group health and life and individual health and life insurance products. Insurance products are sold through First Insurance is an insurance agency that does business in the Defiance, Archbold, Bryan, Bowling Green, Maumee and Oregon, Ohio areas, offering property and casualty, and group health and life insurance products. On July 1, 2011, the Company completed its acquisition of Payak-Dubbs Insurance Agency, Inc. (“PDI”), an independent property and casualty insurance agency with two office locations based in Maumee, Ohio and Oregon, Ohio for a cash price of $4.8 million. PDI was merged into First Insurance. In May 2010, First Insurance acquired a group medical benefits business line from Andres O’Neil & Lowe Insurance Agency. See Note 4 – Acquisitions in the Notes to the Financial Statements.

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

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exists for a balance between acquisition and organic growth. The primary elements First Defiance’s business strategy is commercial banking, consumer banking, including the origination and sale of single family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.

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

Consumer Banking – First Federal offers customers a full range of deposit and investment products including demand, NOW, money market, certificates of deposits, CDARS and savings accounts. First Federal offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, installment loans and education loans. First Federal also offers online banking services, which include online bill pay along with debit cards.

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

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

Asset Quality – Maintaining a strong credit culture is of the utmost importance to First Federal. First Federal has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. First Federal is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. First Federal has directed its attention on loan types and markets that it knows well and in which its 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.

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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. First Defiance completed its acquisition of PDI, on July 1, 2011, which was merged into First Insurance with offices located in Maumee and Oregon, Ohio.

Common Stock Offering

During the first quarter of 2011, the Company completed an 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 $19.9 million.

Financial Condition

Assets at December 31, 2011 totaled $2.07 billion compared to $2.04 billion at December 31, 2010, an increase of $32.7 million or 1.6%. Cash and equivalents increased $5.8 million to $174.9 million at December 31, 2011 from $169.2 million at December 31, 2010. The increase in assets was a result of the Company’s continued strategy to increase security purchases selectively deploying lower yielding overnight deposits into securities on the short to intermediate end of the yield curve until loan demand becomes consistent.

Securities

The securities portfolio increased $67.5 million to $233.6 million at December 31, 2011. The 2011 activity in the portfolio included $120.5 million of purchases, $25.8 million of amortization and maturities, $27.0 million of principal pay-downs and $8.5 million of securities being sold. There was a net increase of $7.2 million in market value on available-for-sale securities. The Company also recorded $2,000 of other-than-temporary impairment on one collateralized debt obligation in 2011. See Note 6 – Investment Securities in the Notes to the financial statements for additional information.

Loans

Gross loans receivable declined $32.4 million to $1.49 billion at December 31, 2011. For more details on the loan balances, see Note 8 – Loans Receivable in the Notes to the Financial Statements.

The majority of First Defiance’s non-residential real estate and commercial loans are to small and mid-sized businesses. The combined commercial, non-residential real estate and multi-family real estate loan portfolios totaled $1.13 billion and $1.14 billion at December 31, 2011 and 2010 respectively and accounted for approximately 75.0% and 74.3% of First Defiance’s loan portfolio at the end of those respective periods. First Defiance believes it has been able to establish itself as a leader in its market area in the commercial and commercial real estate lending area by hiring experienced lenders and providing a high level of customer service to its commercial lending clients.

The one-to-four family residential portfolio totaled $203.4 million at December 31, 2011, compared with $205.9 million at the end of 2010. At the end of 2011, those loans comprised 13.6% of the total loan portfolio, down from 13.5% at December 31, 2010.

Construction loans, which include one to four family and commercial real estate properties, increased to $31.6 million at December 31, 2011 compared to $30.3 million at December 31, 2010. These loans accounted for approximately 2.1% and 2.0% of the total loan portfolio at December 31, 2011 and 2010, respectively.

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Home equity and home improvement loans declined to $122.1 million at December 31, 2011, from $133.6 million at the end of 2010. At the end of 2011, those loans comprised 8.1% of the total loan portfolio, down from 8.7% at December 31, 2010.

Consumer finance and mobile home loans were just $18.9 million at December 31, 2011, down from $22.8 million at the end of 2010. These loans comprised just 1.3% and 1.5% of the total portfolio at December 31, 2011 and 2010, respectively.

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

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

When a collateral dependent loan is downgraded to classified status, First Federal reviews the most current appraisal on file and if necessary, based on First Federal’s assessment of the appraisal, such as age, market, etc, First Federal will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s estimation of the carrying and selling costs. In some instances, we may require a new appraisal. 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 lower of cost or fair value, which is determined based on appraised value less First Federal’s estimate of the liquidation costs.

First Federal does not adjust any appraisals upward without written documentation of this valuation change from the appraiser. When setting reserves 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 Restructure 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 the amount of each new appraisal and makes any necessary adjustment to the reserve at its meeting prior to the end of each quarter.

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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 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 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 the processes used. The most recent analysis indicates that our actual charge-offs are on average within 10% of the specific reserves previously 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.

Allowance 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

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.

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For 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 weighted rolling eight quarters ending December 31, 2011.

The stratification of the loan portfolio resulted in a quantitative general allowance of $19.5 million at December 31, 2011 compared to $18.3 million at December 31, 2010. The increase in the quantitative allowance was due to the increase in the historical loss factors relating to commercial, commercial real estate, residential and credit card loans.

In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on the non-impaired loan portfolio for various factors that have a bearing on its loss content, including but not limited to the following:

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

• Changes in the nature and volume of the loan portfolio

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

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

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

• Changes in the political and regulatory environment

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

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

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

The qualitative analysis at December 31, 2011 indicated a general reserve of $6.5 million compared with $6.2 million at December 31, 2010. All 14 counties that represent the footprint of the Company have seen improvements in their unemployment rates in 2011, with six falling below the national average of 8.3%. The unemployment rates in December 2011 range from a low of 7.4% to a high of 13.3% compared to the unemployment rates in 2010 ranging from a low of 8.1% to a high of 16.3%. First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from 0.20% for construction loans to 2.04% for nonresidential real estate loans.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves, the Company’s provision for loan losses for 2011 was $12.4 million compared to $23.2 million for 2010. The allowance for loan losses was $33.3 million at December 31, 2011 and $41.1 million at December 31, 2010 and represented 2.24% and 2.70% of loans, net of undisbursed loan funds and deferred fees and costs, respectively. That decrease was mainly the result of higher charge off activity and improvement in overall credit risk profile. The pace of the decline in real estate values has slowed and in some markets has stabilized. While some collateral dependent loans no longer have enough collateral value to support the outstanding balance Management believes it has processes in place to identify and assess market values. Management has expanded its credit monitoring functions even further beyond its traditionally strong focus. Additional asset review functions and more delinquent loan reporting requirements have been added to assist in this monitoring. Management will continually review credit concentrations by industry and has placed lower limits on lending within certain types of loan

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categories. Management has also segmented the commercial real estate portfolio to track the general performance of these segments to further refine the predictive process of identifying potential problem loans. The provision was offset by charge offs of $15.5 million against specific reserves and $5.9 million against general reserves and recoveries of $1.2 million resulting in a decrease to the overall allowance for loan loss of $7.8 million. In management’s opinion, the overall allowance for loan losses of $33.3 million as of December 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 2011, First Defiance recorded OREO write-downs that totaled $1.0 million. These amounts were included in other non-interest expense. Management believes that the values recorded at December 31, 2011 for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans decreased to $122.5 million at December 31, 2011, compared to $133.1 million at December 31, 2010. At December 31, 2011, a total of $18.9 million of loans were classified as substandard for which a specific reserve is required. A total of $103.6 million in additional credits were classified as substandard at December 31, 2011 for which no specific reserve is required because of factors such as the level of collateral or the strength of guarantors. First Defiance also classified $10,000 of loans doubtful at December 31, 2011. By contrast, at December 31, 2010, a total of $47.5 million of loans were classified as substandard for which some level of specific reserve was required and $83.2 million were classified as substandard which did not require any reserve. At December 31, 2010, $2.4 million of loans were classified as doubtful.

First Defiance’s ratio of allowance for loan losses to non-performing loans was 77.9% at December 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 December 31, 2011 are appropriate.

At December 31, 2011, First Defiance had total non-performing assets of $46.3 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 December 31, 2011 and 2010 by category were as follows:

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Table 1 – Nonperforming Asset

	December 31
	2011			2010
	(In thousands)
Non-performing loans:
Single-family residential	$	3,890		$	7,161
Construction		—			64
Non-residential and multi-family residential real estate		28,150			21,737
Commercial		6,884			11,547
Consumer finance		10			14
Home equity and improvement		394			517
Troubled debt restructured loans, accruing		3,380			6,001
Total non-performing loans		42,708			47,041
Real estate owned and repossessed assets		3,628			9,591
Total non-performing assets	$	46,336		$	56,632
Allowance for loan losses as a percentage of total loans*		2.24	%		2.70	%
Allowance for loan losses as a percentage of non-performing assets		71.77	%		72.54	%
Allowance for loan losses as a percentage of non-performing loans		77.86	%		87.33	%
Total non-performing assets as a percentage of total assets		2.24	%		2.78	%
Total non-performing loans as a percentage of total loans*		2.87	%		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 December 31, 2011 is primarily in single family residential as well as in the commercial loans. The balance of single family residential loans and commercial loans was $3.3 million and $4.7 million higher at December 31, 2010 compared to December 31, 2011, respectively. Approximately $20.0 million of 2010 non-performing loans are still considered non-performing loans at December 31, 2011 and $2.8 million of real estate owned at December 31, 2011 was in real estate owned at December 31, 2010. The commercial and non-residential real estate and multi-family real estate loans that are non-performing at December 31, 2011 are comprised of 82 relationships, with 9 relationships making up $20.8 million of the $35.0 million total. The allowance for loan losses includes $2.9 million for those 9 relationships. By comparison, at December 31, 2010, 8 relationships made up the $22.2 million of commercial and non-residential real estate and multi-family real estate loans total of $33.3 million.

Non-performing loans in the single-family residential, non-residential and multi-family residential real estate and commercial loan categories represent 1.91%, 3.63% and 1.97% of the total loans in those categories respectively at December 31, 2011 compared to 3.48%, 2.83% and 3.12% respectively for the same categories at December 31, 2010. Management believes that the current allowance for loan losses is appropriate and that the provision for loan losses recorded in 2011 is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.

Non-performing assets, which include non-accrual loans, accruing troubled debt restructured loans and real estate owned, decreased to $46.3 million at December 31, 2011 from $56.6 million at December 31, 2010.

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).

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The following table details net charge-offs and nonaccrual loans by loan type. For the twelve months ended and as of December 31, 2011, commercial real estate, which represented 51.70% of total loans, accounted for 62.28% of net charge-offs and 71.58% of nonaccrual loans, and commercial loans, which represented 23.25% of total loans, accounted for 19.77% of net charge-offs and 17.50% of nonaccrual loans. For the twelve months ended and as of December 31, 2010, Commercial real estate, which represented 50.14% of total loans, accounted for 52.98% of net charge-offs and 52.96% of nonaccrual loans, and commercial loans, which represented 24.19% of total loans, accounted for 26.06% of net charge-offs and 28.14% of nonaccrual loans.

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

	For the Twelve Months Ended December 31, 2011					As of December 31, 2011
	Net Charge-offs		% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(in thousands)					(in thousands)
Residential	$	2,626		12.96	%	$	3,890		9.89	%
Construction		—		0.00	%		—		0.00	%
Commercial real estate		12,617		62.28	%		28,150		71.58	%
Commercial		4,005		19.77	%		6,884		17.50	%
Consumer finance		25		0.12	%		10		0.03	%
Home equity and improvement		987		4.87	%		394		1.00	%
Total	$	20,260		100.00	%	$	39,328		100.00	%

	For the Twelve Months Ended December 31, 2010					As of December 31, 2010
	Net Charge-offs		% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(in thousands)					(in thousands)
Residential	$	2,922		15.67	%	$	7,161		17.45	%
Construction		—		0.00	%		64		0.16	%
Commercial real estate		9,878		52.98	%		21,737		52.96	%
Commercial		4,859		26.06	%		11,547		28.14	%
Consumer finance		17		0.09	%		14		0.03	%
Home equity and improvement		968		5.19	%		517		1.26	%
Total	$	18,644		100.00	%	$	41,040		100.00	%

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Table 3 – Allowance for Loan Loss Activity

	For the Quarter Ended
	4th 2011		3rd 2011		2nd 2011		1st 2011		4th 2010
	(dollars in thousands)
Allowance at beginning of period	$	38,110	$	40,530	$	40,798	$	41,080	$	41,343
Provision for credit losses		4,099		3,097		2,405		2,833		5,652
Charge-offs:
Residential		666		647		893		547		467
Commercial real estate		6,738		2,622		1,517		2,274		4,806
Commercial		1,423		2,533		107		335		388
Consumer finance		27		36		20		11		55
Home equity and improvement		251		290		310		201		363
Total charge-offs		9,105		6,128		2,847		3,368		6,079
Recoveries		150		611		174		253		164
Net charge-offs		8,955		5,517		2,673		3,115		5,915
Ending allowance	$	33,254	$	38,110	$	40,530	$	40,798	$	41,080

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

	December 31, 2011					September 30, 2011					June 30, 2011					March 31, 2011					December 31, 2010
			Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans
	Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category
	(dollars in thousands)
Residential	$	4,095		13.55	%	$	4,023		12.86	%	$	5,930		14.62	%	$	6,163		14.76	%	$	5,956		13.46	%
Construction		63		2.10	%		69		2.39	%		47		1.64	%		70		1.65	%		73		1.98	%
Commercial real estate		20,490		51.70	%		24,523		51.96	%		24,397		50.46	%		23,390		50.42	%		22,355		50.14	%
Commercial		6,576		23.25	%		7,804		22.99	%		8,290		23.10	%		9,518		23.06	%		10,871		24.19	%
Consumer		174		1.26	%		219		1.34	%		227		1.40	%		207		1.41	%		297		1.49	%
Home equity and improvement		1,856		8.14	%		1,472		8.47	%		1,639		8.78	%		1,450		8.70	%		1,528		8.74	%
	$	33,254		100.00	%	$	38,110		100.00	%	$	40,530		100.00	%	$	40,798		100.00	%	$	41,080		100.00	%

Key Asset Quality Ratio Trends

Table 5 – Key Asset Quality Ratio Trends

	4th Qtr  2011			3rd Qtr  2011			2nd Qtr  2011			1st Qtr  2011			4th Qtr  2010
Allowance for loan losses / loans*		2.24	%		2.61	%		2.80	%		2.77	%		2.70	%
Allowance for loan losses to net charge-offs		371.35	%		690.77	%		1,526.30	%		1,309.73	%		694.51	%
Allowance for loan losses / non-performing assets		71.77	%		66.82	%		84.16	%		74.56	%		72.54	%
Allowance for loan losses / non-performing loans		77.86	%		74.39	%		99.41	%		89.53	%		87.33	%
Non-performing assets / loans plus REO*		3.11	%		3.89	%		3.31	%		3.70	%		3.70	%
Non-performing assets / total assets		2.24	%		2.77	%		2.35	%		2.65	%		2.78	%
Net charge-offs / average loans (annualized)		2.49	%		1.55	%		0.75	%		0.85	%		1.58	%

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

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Loans Acquired with Impairment

Certain loans acquired in the ComBanc, Genoa, and Pavilion acquisitions had evidence that the credit quality of the loan had deteriorated since its origination and in management’s assessment at the acquisition date it was probable that First Defiance would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic 310 Subtopic 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans were recorded based on management’s estimate of the fair value of the loans. At the acquisition date of January 21, 2005, loans with a contractual receivable of $3.4 million were acquired from ComBanc and were deemed impaired. Those loans were recorded at a net realizable value of $2.0 million. On April 8, 2005, loans with a contractual receivable of $1.5 million were acquired from Genoa and were deemed impaired. Those loans were recorded at a net realizable value of $721,000. On March 14, 2008, loans with a contractual receivable of $6.4 million were acquired from Pavilion and were deemed impaired. Those loans were recorded at a net realizable value of $4.4 million.

As of December 31, 2011, the total contractual receivable for those loans was $2.2 million and the recorded value was $1.2 million.

High Loan-to-Value Mortgage Loans

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

First Federal originates and retains a limited number of residential mortgage loans with loan-to-value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be approved by First Federal’s senior loan committee. Management monitors the balance of one-to-four family residential loans, including home equity loans and committed lines of credit that exceed certain loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences and one-to-four family construction loans, 75% for developed land and 65% for raw land). During 2011, management purchased two groups of single family loans to medical professionals that had LTV’s greater than 90%. These loans were primarily variable rate loans originated in Ohio in 2011. These purchases led to the growth in the high loan to value mortgage pool. Total loans that exceed those standards described above at December 31, 2011 totaled $51.7 million, compared to $25.9 million at December 31, 2010. These loans are generally paying as agreed.

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

Goodwill and Intangible Assets

Goodwill at December 31, 2011 was $61.5 million compared to $57.6 million at December 31, 2010. The change in goodwill is due to the acquisition of PDI in July 2011 resulting in an addition to goodwill of $4.0 million. No impairment of goodwill was recorded in 2011 or 2010. Core deposit intangibles and other intangible assets remained relatively flat at $6.2 million in 2011 compared to 2010. During 2011, changes to the core deposit intangibles and other intangibles included the recognition of $1.4 million of amortization expense which was offset by the addition of $947,000 to the customer relationship intangible asset and $518,000 to the non-compete intangible asset as a result of the July 2011 acquisition mentioned above.

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Deposits

Total deposits at December 31, 2011 were $1.596 billion compared to $1.575 billion at December 31, 2010, an increase of $20.8 million or 1.3%. Non-interest bearing deposits increased $29.2 million or 13.5% while interest bearing deposits decreased $8.4 million or 0.6%. Non-interest bearing checking accounts grew by $29.2 million, money market and interest bearing checking accounts grew by $53.6 million, savings grew by $10.6 million while retail certificates of deposit declined by $41.5 million. Management periodically utilizes the national market for certificates of deposit to supplement its funding needs. The balance of national CD’s decreased to $10.6 million at December 31, 2011, from $41.8 million at December 31, 2010. For more details on the deposit balances in general see Note 12 – Deposits.

Borrowings

FHLB advances totaled $81.8 million at December 31, 2011 compared to $116.9 million at December 31, 2010. The balance at the end of 2011 includes $44.0 million of convertible advances with rates ranging from 2.35% to 5.44%. These advances are all callable by the FHLB, at which point they would convert to a three-month LIBOR advance if not paid off. Those advances have final maturity dates ranging from 2013 to 2018. In addition, First Defiance has advances totaling $17.0 million that are callable by the FHLB only if the three-month LIBOR rate exceeds a strike rate ranging from 7.5% to 8.0%. The rate on those advances ranges from 3.48% to 3.85%. Lastly, First Defiance has $20.8 million of fixed-rate advances with rates ranging from 2.60% to 4.10%. The change in FHLB advances is the result of paying off a $10.0 million putable advance and a $10.0 million strike-rate advance in the first quarter of 2011 at maturity and a $15.0 million single maturity fixed rate advance at maturity in the third quarter of 2011.

Fat December 31, 2011, First Defiance also had $60.4 million of securities that were sold with agreements to repurchase, compared to $56.2 million of repurchase funding at December 31, 2010.

Capital Resources

Total shareholders’ equity increased $37.8 million to $278.1 million at December 31, 2011. This increase is primarily the result of the Company’s underwritten public common stock offering in the first quarter of 2011 that increased equity a net $19.9 million, net income of $15.5 million and a $4.7 million unrealized gain on available-for-sale securities. These increases were slightly offset by $1.9 million of preferred stock dividends at December 31, 2011. In 2003, the Company’s Board of Directors authorized the repurchase of 640,000 shares, 93,124 of which remain available for repurchase. During 2011, no shares were repurchased but a total of 850 stock options were exercised by four employees, resulting in a $11,000 increase in shareholders equity. During 2010, no shares were repurchased but a total of 250 stock options were exercised by three employees, resulting in a $3,000 increase in shareholders equity. Participation in the CPP prohibits the Company from buying back any of its common shares during the period it has CPP funds outstanding.

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Results of Operations

Summary

First Defiance reported net income of $15.5 million for the year ended December 31, 2011 compared to $8.1 million and $7.2 million for the years ended December 31, 2010 and 2009, respectively. Net income applicable to common shares was $13.5 million in 2011 compared with $6.1 million in 2010 and $5.2 million in 2009. On a diluted per common share basis, First Defiance earned $1.42 in 2011, $0.75 in 2010 and $0.63 in 2009.

First Defiance’s 2011 net income of $15.5 million included $234,000 of acquisition related costs resulting from the PDI acquisition in July 2011. The 2011 net income included $234,000 of acquisition related costs resulting from the PDI acquisition. The 2010 net income included $63,000 of acquisition related costs resulting from the Andres O’Neil & Lowe Insurance Agency (“AOL”) acquisition. The 2009 net income did not include any acquisition related costs. Excluding these items, core earnings were $15.7 million, $8.1 million and $7.2 million for the years ended December 31, 2011, 2010 and 2009 respectively. On a diluted per share basis, core earnings amounted to $1.43, $0.75 and $0.63 for those same three periods. Management believes that the presentation of the non-GAAP financial measures assists when comparing results period-to-period in a meaningful and consistent manner and provides a better measure of results for First Defiance’s ongoing operations. A reconciliation of GAAP earnings to core earnings is as follows:

	Year Ended December 31
	2011			2010			2009
	(in thousands)
GAAP Net Income	$	15,534		$	8,108		$	7,194
One-time acquisition related charges		234			63			—
Tax effect		(82	)		(22	)		—
Core Operating Earnings	$	15,686		$	8,149		$	7,194
Basic earnings per common share:
GAAP	$	1.44		$	0.75		$	0.64
Core Operating Earnings	$	1.46		$	0.75		$	0.64
Diluted earnings per common share:
GAAP	$	1.42		$	0.75		$	0.63
Core Operating Earnings	$	1.43		$	0.75		$	0.63

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 2011, the Company invested some of its liquidity into investment securities. This may continue into 2012 as management deems it appropriate within its liquidity strategy and consideration of overall loan demand.

Net interest income was $69.9 million for the year ended December 31, 2011 compared to $70.2 million and $67.3 million for the years ended December 31, 2010 and 2009 respectively. The tax-equivalent net interest margin was 3.88%, 3.89% and 3.76% for the years ended December 31, 2011, 2010 and 2009 respectively. The margin was relatively flat between 2010 and 2011. Interest-earning asset yields decreased 49 basis points (to 4.80% in 2011 from 5.29% in 2010) and the cost of interest bearing liabilities between the two periods decreased 49 basis points (to 1.12% in 2011 from 1.61% in 2010).

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The increase in margin between 2009 and 2010 is due to a widening of the interest rate spread, which increased to 3.68% for the year ended December 31, 2010 compared to 3.50% for 2009. The increase in spread between 2009 and 2010 occurred due to interest-earning asset yields decreasing by 29 basis points (to 5.29% in 2010 from 5.58% in 2009) which was more than offset by the cost of interest bearing liabilities between the two periods decreasing by 47 basis points (to 1.61% in 2010 from 2.08% in 2009).

Total interest income decreased by $8.8 million or 9.2% to $87.1 million for the year ended December 31, 2011 from $95.9 million for the year ended December 31, 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 28 basis points to 5.49% at December 31, 2011. Interest income from loans decreased to $78.6 million for 2011 compared to $88.6 million in 2010 which represents a decline of 11.3%.

During the same period the average balance of investment securities increased to $205.6 million for 2011 from $154.6 million for the year ended December 31, 2010. Interest income from the investment portfolio increased $1.0 million from 2010 to 2011. The tax-equivalent yield on the investment portfolio was 4.19% in 2011 compared to 4.71% in 2010. The investment portfolio yield decreased coupled by a narrowing of the overall duration of investments to 3.7 years at December 31, 2011 from 3.9 years at December 31, 2010.

Interest expense decreased by $8.5 million in 2011 compared to 2010, to $17.2 million from $25.7 million. This decrease was due to a 49 basis point decline in the average cost of interest-bearing liabilities in 2011. Interest expense related to interest-bearing deposits was $12.2 million in 2011 and $19.2 million in 2010. Expenses on FHLB advances and other interest bearing funding sources were $3.2 million and $530,000 respectively in 2011 and $4.7 million and $455,000 respectively in 2010. Interest expense recognized by the Company related to subordinated debentures was $1.3 million in 2011 and 2010.

Total interest income decreased by $4.7 million or 4.7% to $95.9 million for the year ended December 31, 2010 from $100.6 million for the year ended December 31, 2009. The decrease in interest income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable which declined 9 basis points to 5.77% at December 31, 2010. Interest income from loans decreased to $88.6 million for 2010 compared to $93.7 million in 2009 which represents a decline of 5.4%.

During the same period the average balance of investment securities increased to $154.6 million for 2010 from $128.8 million for the year ended December 31, 2009. Interest income from the investment portfolio increased $282,000 from 2009 to 2010. The tax-equivalent yield on the investment portfolio was 4.71% in 2010 compared to 5.23% in 2009. The investment portfolio yield decreased coupled by a narrowing of the overall duration of investments to 3.9 years at December 31, 2010 from 4.3 years at December 31, 2009.

Interest expense decreased by $7.6 million in 2010 compared to 2009, to $25.7 million from $33.3 million. This decrease was due to a 47 basis point decline in the average cost of interest-bearing liabilities in 2010 which more than offset the $1.6 million increase in the average balance of those liabilities in 2010. The average balance of interest-bearing deposits increased by $18.5 million at December 31, 2010 compared to December 31, 2009. Interest expense related to interest-bearing deposits was $19.2 million in 2010 and $26.1 million in 2009. Expenses on FHLB advances and other interest bearing funding sources were $4.7 million and $455,000 respectively in 2010 and $5.1 million and $570,000 respectively in 2009. Interest expense recognized by the Company related to subordinated debentures was $1.3 million in 2010 compared to $1.5 million in 2009.

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The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2011, 2010 and 2009:

Table 6 – Net Interest Margin

	Year Ended December 31
	(In Thousands)
	2011							2010							2009
	Average Balance		Interest (1)		Yield/ Rate (2)			Average Balance		Interest (1)		Yield/ Rate			Average Balance		Interest (1)		Yield/ Rate
	(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable	$	1,437,588	$	78,773		5.49	%	$	1,538,388	$	88,775		5.77	%	$	1,600,725	$	93,850		5.86	%
Securities		205,609